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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17937
PINNACLE FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Michigan 38-2671129
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
830 Pleasant Street, St. Joseph, Michigan 49085
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (616) 983-6311
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting shares held by non-affiliates of
the registrant as of March 20, 1998 (based on the closing price of those shares
listed on the Nasdaq National Market) was $586,589,350.
The number of common shares, no par value, outstanding as of March 20, 1998,
was 12,653,454.
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DOCUMENTS INCORPORATED BY REFERENCE
None
2
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PINNACLE FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
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Page
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PART I
Item 1. Business.................................................................................... 4
Item 2. Properties.................................................................................. 10
Item 3. Legal Proceedings........................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 13
Item 6. Selected Financial Data..................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 33
Item 8. Financial Statements and Supplementary Data................................................. 33
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure........ 75
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 76
Item 11. Executive Compensation...................................................................... 79
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 85
Item 13. Certain Relationships and Related Transactions.............................................. 86
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 87
Signatures................................................................................................. 91
</TABLE>
3
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PART I
Item 1. Business
General
Pinnacle Financial Services, Inc. ("Pinnacle") is a registered bank holding
company that was organized under the laws of the State of Michigan in 1986 in
connection with the June 30, 1986 reorganization of Pinnacle Bank, a Michigan
state banking corporation then known as "Peoples State Bank of St. Joseph"
("Pinnacle Bank"), into a wholly-owned subsidiary of Pinnacle. Pinnacle's
principal executive offices are located at 830 Pleasant Street, St. Joseph,
Michigan 49085, and its telephone number is (616) 983-6311.
Pinnacle Bank, which is headquartered in St. Joseph, Michigan, currently
operates through 14 branch offices located throughout southwestern Michigan, 30
branch offices located throughout northwestern Indiana, and 2 loan production
offices located in Merrillville and Indianapolis, Indiana.
Through Pinnacle Bank, Pinnacle offers financial service products which
include domestic banking services such as consumer, commercial and real estate
loans, personal and business checking accounts, savings accounts, time deposits,
safe deposit services, cash management services, and transmission of funds, as
well as trust and other fiduciary services, full-service brokerage services and
insurance products. Commercial customers include retailers, commercial
developers, professionals, and small manufacturers. Retail customers cover a
broad spectrum with focus on providing personalized, high quality and
comprehensive service in order to develop and maintain long-term, multiple
account relationships with customers.
Pinnacle's market, which is adjacent to metropolitan Chicago, Illinois and
is bisected by Interstate 94 (the primary highway between Chicago and Detroit),
currently consists of northern Indiana and southwestern Michigan. The region's
location has facilitated the development of a diverse economy based primarily on
manufacturing, service and agriculture. The region's proximity to Chicago and
the southeastern expansion of metropolitan Chicago into Lake County, Indiana,
have led to significant commercial and residential development and a strong
second-home housing market. The region's popularity as a year-round recreational
area also has led to tourism-driven economic growth.
Pinnacle had $2.1 billion in total assets as of December 31, 1997.
Pinnacle returned 0.48% on average assets for the year ended December 31,
1997. This compares to 0.83% and 1.15% for each of the years in the two year
period ended December 31, 1996. For the year ended December 31, 1997,
Pinnacle's return on average equity was 5.83%. Annual returns on average
equity since 1993 have ranged from 5.83% to 13.87%.
Pinnacle believes its success is in part attributable to a growth strategy
that, since the beginning of 1993, has (i) increased assets by more than 86%
(with total assets growing to $2.1 billion by December 31, 1997), and (ii)
increased loans by more than 94% (with total loans growing to approximately $1.5
billion at December 31, 1997). Pinnacle's loan to deposit ratio was
approximately 105.3% at December 31, 1997. Pinnacle's growth has been generated
internally through customer retention and cross-selling programs and externally
through acquisitions. Since 1988, Pinnacle has consummated seven acquisitions,
four of which involved thrifts.
Merger Agreement with CNB Bancshares, Inc.
Pinnacle has entered into an Agreement and Plan of Merger dated as of
October 14, 1997 (the "CNB Merger Agreement"), with CNB Bancshares, Inc., an
Indiana corporation ("CNB"), pursuant to and subject to the terms and conditions
of which Pinnacle would be merged with and into CNB. The CNB Merger Agreement is
subject to, among other conditions, approval by the respective shareholders of
Pinnacle and CNB. As an inducement for CNB to enter into the CNB
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Merger Agreement, Pinnacle entered into a Stock Option Agreement dated as of
October 14, 1997, pursuant to which Pinnacle granted to CNB the right to
purchase from Pinnacle, under the terms and conditions provided therein, at a
purchase price of $37.00 per share, up to 2,000,000 shares of Pinnacle Common
Stock (subject to adjustment in certain circumstances), which constituted
approximately 16.2% of the issued and outstanding shares of Pinnacle Common
Stock as of the date of the CNB Merger Agreement, without giving effect to the
exercise of said purchase option.
Strategies to Achieve Growth
Acquisitions. In recent years, Pinnacle's growth has occurred primarily
through mergers and acquisitions. Since its formation as a bank holding company
in 1986, Pinnacle has successfully integrated seven significant acquisitions. In
February 1988, Pinnacle acquired $37 million in assets and assumed certain
liabilities of First State Bank of White Cloud, which thereafter became a branch
office of Pinnacle Bank. In December 1990, the majority of the assets of
Pinnacle's White Cloud branch office were sold to, and the liabilities
associated with that branch office were assumed by, another unaffiliated bank.
In February 1990, the Resolution Trust Corporation transferred to Pinnacle $84
million in assets and certain liabilities of the insolvent Peoples Savings
Association of St. Joseph, Michigan. In December 1992, Pinnacle acquired all of
the outstanding stock of Harbor Country Banking Company of Three Oaks, Michigan,
an $82 million state bank.
On December 1, 1995, Pinnacle acquired all of the outstanding capital stock
of Maco Bancorp, Inc., a Delaware corporation and a registered savings and loan
holding company ("Maco"), through the merger of Maco with and into Pinnacle (the
"Maco Acquisition"). As a result of the Maco Acquisition, Pinnacle became the
sole stockholder of First Federal Savings Bank of Indiana, a federal savings
bank that was renamed "Pinnacle Bank" in 1996 and was merged with and into
Pinnacle Bank effective December 31, 1996, and Mr. Cyrus A. Ansary, sole
shareholder of Maco, became the largest single Pinnacle stockholder. Mr. Ansary
currently holds approximately 9.4% of the shares of Pinnacle Common Stock
outstanding.
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, with Pinnacle being the surviving corporation.
Coincident with those mergers, Indiana Federal Bank for Savings, a subsidiary of
IFC with assets of $835 million, and Community Bank, A Federal Savings Bank, a
subsidiary of CB with assets of $288 million, were merged with and into Pinnacle
Bank, with Pinnacle Bank being the surviving corporation.
As a result of these acquisitions and growth generated by its own
operations, Pinnacle's assets increased from $231 million at the beginning of
1990 to $2.1 billion at December 31, 1997.
On October 14, 1997, Pinnacle entered into the CNB Merger Agreement. The CNB
Merger Agreement contemplates the merger of Pinnacle with and into CNB, with CNB
being the surviving entity. The transaction is expected to qualify as
"pooling-of-interests" for accounting and financial reporting purposes.
Consummation of the transaction is subject to shareholder approval.
Customer Development. Pinnacle believes that it can increase profitability
by expanding the number and types of accounts and relationships with its
existing customers. To achieve that goal, Pinnacle is continuing to explore
technologies that facilitate cross-selling of financial products to existing
customers and deliver services more efficiently. In 1995 Pinnacle initiated a
telephone marketing program utilizing personnel trained to survey customer
satisfaction and needs and to cross-sell additional products offered by it.
Customer Retention. Pinnacle focuses on providing personalized, high
quality and comprehensive service in order to develop and maintain long-term,
multiple account relationships with customers. Through its subsidiaries,
Pinnacle offers a wide range of banking services, including consumer,
commercial and real estate loans, personal and business checking accounts,
savings accounts, time deposits, safe deposit services, cash management
services, and transmission of funds, as well as trust and other fiduciary
services, and full-service brokerage services and insurance products. To
facilitate the retention of customers, Pinnacle has designed and implemented
a system of quality controls and initiatives known as its "Quality in the
Banking Environment" program.
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Pinnacle utilizes alternative delivery systems that include electronic funds
transfer systems (such as direct deposit of payroll services and ATMs) and
telephone banking systems. Pinnacle is also expanding its delivery of financial
services in non-traditional settings. Pinnacle Bank has also established
full-service branch offices in supermarkets located in Stevensville, Michigan,
and Portage and Valparaiso, Indiana.
Pinnacle has attempted to increase customer convenience, and thereby
increase customer loyalty, through, among other things, enhanced financial
services, extended banking hours, and the development of products targeted to
the needs of particular segments of its customer base. For example, some of
Pinnacle's branch offices now offer Saturday lobby hours. Pinnacle has also
developed a low-cost basic checking service, private banking services,
commercial cash management services, and special products targeted to the senior
citizen market. Finally, Pinnacle now offers its customers full-service
brokerage services that include a wide range of investment opportunities and a
combination of research and financial planning that are suited to individual
customer needs.
Lending Practices
Loan Portfolio. In accordance with its loan policies, Pinnacle strives to
maintain a diversified loan portfolio. The following table presents loans
outstanding according to loan category at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial..................................... $ 491,932 $ 421,948 $ 314,562 $ 287,709 $ 243,552
Real Estate.................................... 588,046 650,624 632,664 457,743 398,664
Consumer....................................... 238,427 238,321 178,720 143,375 113,917
Tax-exempt loans............................... 10,240 9,686 4,295 6,392 6,307
Morgage loans purchased under
agreements to resell.......................... 179,720 95,276 80,031 25,179 34,193
------------ ------------ ------------ ---------- ----------
Loans, net of unearned income.................. 1,508,365 1,415,855 1,210,272 920,398 796,633
Allowance for loan losses...................... (20,528) (14,909) (13,853) (11,787) (11,165)
------------ ------------ ------------ ---------- ----------
Net loans...................................... $ 1,487,837 $ 1,400,946 $ 1,196,419 $ 908,611 $ 785,468
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
</TABLE>
The following table presents loans outstanding at December 31, 1997, which,
based on remaining scheduled repayments of principal, are due in the period
indicated.
<TABLE>
<CAPTION>
Mortgage
Loans Purchased
Under Agreements Total Loans
Commercial Real Estate Consumer Tax-Exempt to Resell Receivable
----------- ----------- ---------- ---------- ---------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in 1 year or less........ $ 139,884 $ 23,280 $ 34,578 $ 2,785 $ 179,720 $ 380,247
Due in 1 through 5 years..... 157,920 91,471 106,100 4,001 0 359,492
Due after 5 years............ 194,128 473,295 97,749 3,454 0 768,626
----------- ----------- ---------- ---------- ---------------- ------------
Total...................... $ 491,932 $ 588,046 $ 238,427 $ 10,240 $ 179,720 $ 1,508,365
----------- ----------- ---------- ---------- ---------------- ------------
----------- ----------- ---------- ---------- ---------------- ------------
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1998
------------------------------------
Fixed Variable Total
---------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Commercial................................................................. $ 95,137 $ 256,911 $ 352,048
Real Estate................................................................ 166,588 398,178 564,766
Consumer................................................................... 148,839 55,010 203,849
Tax-exempt................................................................. 7,064 391 7,455
---------- ---------- ------------
Total.................................................................... $ 417,628 $ 710,490 $ 1,128,118
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
6
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The following table presents information concerning certain nonperforming
loans at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis(1)................. $ 10,767 $ 11,129 $ 10,469 $ 5,832 $ 3,712
Accruing loans contractually past due 90 days or more as to
principal or interest payments............................. 7,038 6,201 2,555 1,378 1,583
Restructured loans........................................... 174 684 820 945 3,933
--------- --------- --------- --------- ---------
Total nonperforming loans.................................. $ 17,979 $ 18,014 $ 13,844 $ 8,155 $ 9,228
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) 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 is likely. If nonaccrual loans had been
maintained current in accordance with their original terms, additional
interest income of $840,000, $1,100,000, $449,000, $207,000, and $149,000
would have been recorded during the years ended December 31, 1997, 1996,
1995, 1994, and 1993, respectively.
Pinnacle closely monitors other loans of concern, which are loans now
current (i.e., not included in non-accrual and past-due loan disclosures
above) but where doubts exist as to the ability of the borrower to comply
with present loan repayment terms. These loans totaled approximately $21.5
million at December 31, 1997 and approximately $11.1 million at December 31,
1996. The classification of these loans, however, does not mean that
Pinnacle's management expects losses on these loans. Such classification
relates to specific concerns relating to each individual borrower and does
not relate to any concentrated risk elements common to all the loans. The
increase in such loans during 1995 is attributable to the Maco Acquisiton.
Pinnacle has no loans for which the terms have been renegotiated to less than
market rates due to weakening of a borrower's financial condition.
Pinnacle's loans outstanding to borrowers in foreign countries as of
December 31, 1997, 1996 and 1995 did not exceed 1% of its total assets. As of
December 31, 1997, 1996 and 1995 Pinnacle had no concentrations of loans to
individual borrowers that exceeded 10% of total loans.
COMMERCIAL LOANS. Through 15 experienced lending officers, Pinnacle provides
cash management services and secured and unsecured loans for business purposes
to individuals, companies and governmental units primarily within southwestern
Michigan and northern Indiana.
Pinnacle originates commercial loans for general business purposes,
including working capital requirements, inventory and accounts receivable
financing, and fixed asset financing for various equipment and plant expansions.
Pinnacle's commercial customers include, among others, professionals,
durable-goods manufacturers, service-related companies and retail
establishments.
Pinnacle also originates mortgage loans for the acquisition and refinancing
of commercial real estate properties. The majority of Pinnacle's commercial real
estate loans are secured by first liens on office buildings, small retail
establishments and small manufacturing facilities located in its primary market
area.
Although conditions vary from loan to loan, commercial loans for working
capital purposes are typically written for less than one year and renewals are
reviewed on an annual basis. Loans provided for non-real estate fixed assets
generally have terms between four and six years and are fully amortizing over
the period. Commercial real estate loans are generally written with a three to
five year term with payments typically amortizing over 15 years. In addition to
a first lien on the
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collateral asset, Pinnacle seeks to secure its loans by obtaining a security
interest in all of the other assets of the borrower's business, an assignment of
rents, if applicable, and personal guaranties. Commercial real estate loans
generally have interest rates which are set at a regional national bank's prime
rate plus a margin and which adjust each time the designated prime rate adjusts.
Pinnacle also encourages commercial real estate borrowers to open or maintain a
deposit account at Pinnacle to facilitate the automatic withdrawal of the loan
payment based on the terms of the loan.
Pinnacle evaluates all aspects of commercial loan transactions in order to
mitigate risk to the extent possible. In underwriting these loans, consideration
is given to the stability of the borrower's cash flow and operating history,
future operating projections, comparable financial ratios for like businesses,
and collateral asset evaluations. The underwriting analysis also includes credit
checks and a review of the financial condition of the borrower and guarantor, if
applicable. A narrative appraisal report is prepared by an appraiser who is
either a member of the Appraisal Institute or state-certified and commissioned
by Pinnacle to substantiate property values for substantially all commercial
real estate loan transactions.
Commercial real estate lending entails more risks than single-family
residential lending because such loans typically involve large loan balances to
single borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's business.
These risks can also be significantly affected by supply and demand conditions
in the local market for retail establishments, offices or other commercial
space. Pinnacle attempts to minimize its risk exposure by limiting such lending
to proven business owners, and considering properties with an existing operating
performance which can be analyzed, and continually monitoring the financial
condition of the borrower and the operation and physical condition of the
collateral.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. Pinnacle originates loans secured
by first lien mortgages on completed one- to four-family residences in its
market area for retention in its portfolio, if the loan has an adjustable rate
of interest, and for sale in the secondary market, if the loan has a fixed rate
of interest. Pinnacle originates fixed-rate and adjustable-rate residential
mortgage loans with terms of up to 30 years; although a large number of the
loans held in its portfolio have maturities that are less than the contractual
terms due to prepayments, due-on-sale clauses and bi-weekly payments.
The adjustable-rate mortgages currently offered by Pinnacle have interest
rates which adjust commencing on the first, third or fifth anniversary of the
loan, and are based upon an index tied to the weekly average yield on U.S.
Treasury securities (adjusted to a constant comparable maturity), as made
available by the Federal Reserve Board, plus a margin.
When Pinnacle sells the residential loans it has originated, it may either
retain or sell the rights to service those loans and to receive the related
fees. Pinnacle currently receives servicing fees ranging generally from 0.25% to
0.375% per annum on its mortgage loan servicing portfolio. While the aggregation
of a servicing portfolio can create a substantial continuing source of income,
there is an active market for mortgage loan servicing rights (which are
generally valued in relation to the present value of the cash flow generated by
the servicing rights). Subject to market conditions, Pinnacle currently plans to
increase the size of its mortgage loan servicing portfolio by retaining some
servicing rights associated with wholesale residential loan purchases, making
bulk purchases of servicing rights and increasing retained servicing rights on
residential loans it originates.
MORTGAGE REPURCHASE PROGRAM. Pinnacle has entered into agreements with mortgage
companies in which Pinnacle purchases, at its discretion, mortgage 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. Pinnacle
records interest income on the loans during the funding period and records fee
income (recorded as noninterst 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) during the
funding period, and not the rates based on individual loans. Such loans are
reveiwed, prior to purchase, for evidence that the loans are of secondary market
quality or meet internal underwriting guidelines. An assignment of the mortgage
to Pinnacle is required. In additon, Pinnacle either takes possession of the
original note and forwards such note to the end investor or Pinnacle receives a
certified copy of the note and subsequently receives acknowledgment from the end
investor of receiving the original note.
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CONSUMER LOANS. Pinnacle originates consumer loans, which are primarily for
personal, family or household purposes, in order to provide a wide range of
financial services to its customers. Consumer loans made by Pinnacle include
home equity lines of credit, home improvement loans, and loans to finance the
purchase of new and used automobiles and boats. Pinnacle makes unsecured
consumer loans on a case-by-case basis based upon a detailed review of the
applicant's credit history. Pinnacle has begun purchasing home equity loans from
correspondents located outside of its southwestern Michigan and northern Indiana
market areas. Pinnacle also purchases retail installment loans from certain
automobile dealerships in its market areas.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for the home equity lines of credit,
usually involve more credit risk than mortgage loans because of the type and
nature of the collateral. These loans are generally repaid on a monthly
repayment schedule with the source of repayment tied to the borrower's periodic
income. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and are thus likely to be adversely
affected by job loss, illness and personal bankruptcy. In many cases,
repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of
depreciation of the underlying collateral. Pinnacle believes that the generally
higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to serve the credit needs of the communities and customers that it serves.
Pinnacle's consumer loan lending territory approximates the markets served by
its retail branches. Consumer loan customers are typically individuals who have
a pre-existing banking relationship with Pinnacle.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management of Pinnacle considers adequate to provide for potential
losses based upon an evaluation of known and inherent risks in the loan
portfolio. Allowances for loan losses are based on estimated net realizable
value, unless it is probable that loans will be foreclosed, in which case
allowances for loan losses are based on fair value. The allowance is reviewed by
management on a monthly basis and its evaluation is based upon examination of
the portfolio, past loss experience, the level and trends of classified assets,
the current level of the allowance as it relates to non-performing loans, the
current level of provisions for loan losses and how such levels relate to total
loans receivable, net, non-performing loans and recent and projected
charge-offs, current economic conditions, the results of the most recent
regulatory examinations and other relevant factors. While management of Pinnacle
uses its best efforts to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
LOAN LOSS EXPERIENCE. The following table summarizes the loan loss
experience and provides a breakdown of the allowance for loan losses at December
31, of each year.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period, net of
unearned income.............................. $ 1,508,365 $ 1,415,855 $ 1,210,272 $ 920,398 $ 796,633
------------ ------------ ------------ ---------- ----------
Average loans for the period, net.............. 1,478,238 1,316,487 1,052,995 806,823 799,841
------------ ------------ ------------ ---------- ----------
Allowance for loan losses, beginning of
period....................................... $ 14,909 $ 13,853 $ 11,787 $ 11,165 $ 10,768
Conform CB fiscal year to December 31, 1996
calendar year................................ 501 -- -- -- --
Charge-offs for period:
Commercial loans............................. 4,634 281 85 284 1,037
Real Estate loans............................ 93 69 50 34 91
Consumer loans............................... 1,991 1,509 1,190 460 590
Mortgage loans purchased under agreements to
resell..................................... 1,999 501 221 -- --
------------ ------------ ------------ ---------- ----------
Total charge-offs.............................. 8,717 2,360 1,546 778 1,718
------------ ------------ ------------ ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Recoveries for period:
Commercial loans............................. 8 249 160 130 174
Real Estate loans............................ 47 286 23 42 136
Consumer loans............................... 204 200 152 191 245
Mortgage Loans purchased under agreements to
resell...................................... 256 -- -- -- --
------------ ------------ ------------ ---------- ----------
Total recoveries............................... 515 735 335 363 555
------------ ------------ ------------ ---------- ----------
Net charge-offs for the period................. 8,202 1,625 1,211 415 1,163
------------ ------------ ------------ ---------- ----------
Allowance recorded for acquired loans.......... -- -- 1,855 655 --
Provision for loan losses...................... 13,320 2,681 1,422 382 1,560
------------ ------------ ------------ ---------- ----------
Allowance for loan losses, end of
period....................................... $ 20,528 $ 14,909 $ 13,853 $ 11,787 $ 11,165
------------ ------------ ------------ ---------- ----------
Ratio of net charge-offs during the period to
average loans outstanding.................... .55% .12% .12% .05% .15%
------------ ------------ ------------ ---------- ----------
Allocation of allowance for loan losses:
Commercial loans............................. $ 9,145 $ 8,740 $ 8,511 $ 7,270 $ 6,650
Real Estate.................................. 4,394 2,234 2,409 1,928 1,919
Consumer loans............................... 4,475 2,731 2,533 2,387 2,448
Mortgage loans purchased under agreements to
resell..................................... 2,514 1,204 400 202 148
------------ ------------ ------------ ---------- ----------
Total allowance for loan losses................ $ 20,528 $ 14,909 $ 13,853 $ 11,787 $ 11,165
------------ ------------ ------------ ---------- ----------
Percentage of loans to total gross loans:
Commercial loans.............................. 32% 30% 26% 31% 31%
Real Estate loans............................. 39 46 52 49 50
Consumer loans................................ 16 17 15 16 14
Tax-exempt loans.............................. 1 1 -- 1 1
Mortgage loans purchased under agreements to
resell....................................... 12 6 7 3 4
------------ ------------ ------------ ---------- ----------
Total.......................................... 100% 100% 100% 100% 100%
------------ ------------ ------------ ---------- ----------
</TABLE>
The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the above categories of loans at the dates indicated. The
allowance is based on management's periodic evaluation of the loan portfolio and
reflects an amount that, in management's opinion, is adequate to absorb losses
in the existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio and management's
evaluation of the probability of collection of specific loans.
INVESTMENT ACTIVITIES
GENERAL. Financial institutions such as Pinnacle have authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various Federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings and loan
associations, certain bankers' acceptances and Federal funds. Subject to various
restrictions, Pinnacle may also invest a portion of its assets in commercial
paper, corporate debt securities and mutual funds (so long as the assets of such
mutual funds conform to the investments that financial institutions such as
Pinnacle are otherwise authorized to make directly).
Pinnacle's investment securities are comprised of securities
held-to-maturity and securities available-for-sale. Securities which management
believes could be sold prior to maturity in order to manage interest rate risk,
prepayments,
<PAGE>
liquidity risk, or other corporate purposes are classified as
securities available-for-sale and are carried at fair value with unrealized
gains and losses, net of applicable income taxes, reported as a component of
stockholders' equity. Securities, other than the foregoing, which management has
the ability and positive intent to hold until maturity, are classified as
securities held-to-maturity and are accounted for using historical amortized
cost. Pinnacle has no trading account securities.
INVESTMENT PORTFOLIO. At December 31, 1997 and 1995, Pinnacle did not
have any securities held-to-maturity. The following table presents the
amortized cost basis of securities held-to-maturity as of December 31, 1996.
<TABLE>
<CAPTION>
At December 31,1996
-------------------
(dollars in thousands)
<S> <C>
U.S. Treasury and agency securities........................................................ $ 3,000
Corporate securities....................................................................... 2,789
Mortgage-backed securities................................................................. 8,510
-------
Total................................................................................... $ 14,299
-------
</TABLE>
On December 1, 1995, securities held-to-maturity including those securities
acquired from First Federal 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.
On August 1, 1997, securities held-to-maturity were reclassified to
available-for-sale upon consummation of the CB merger to conform to
Pinnacle's classification of investment securities. At the date of transfer,
the securities has amortized cost and net unrealized gain of $14.0 million and
$200,000, respectively.
The following table presents the carrying value of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and agency securities........................................ $ 157,483 $ 205,183 $ 125,868
Obligations of states and political subdivisions........................... 33,103 22,447 21,602
Corporate securities....................................................... 1,992 12,321 22,623
Equity securities.......................................................... 31,108 23,725 17,393
Mortgage-backed securities................................................. 195,598 249,810 210,537
---------- ---------- ----------
Total................................................................... $ 419,284 $ 513,486 $ 398,023
---------- ---------- ----------
</TABLE>
The following table summarizes the maturities of securities
available-for-sale at the date indicated and the weighted yield of such
securities:
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
Amount Yield
---------- -----
(dollars in thousands)
<S> <C> <C>
U.S. Treasury securities:
Within 1 year................................................................................. $ 9,046 5.75%
After 1 but within 5 years.................................................................... 5,017 5.69
After 5 but within 10 years................................................................... 11,393 5.79
---------- ---
Subtotal...................................................................................... 25,456 5.76
---------- ---
Obligations of other U.S. government agencies and corporations:
Within 1 year................................................................................. 1,522 5.67
After 1 but within 5 years.................................................................... 3,759 6.38
After 5 but within 10 years................................................................... 51,884 7.35
After 10 years................................................................................ 74,862 7.51
---------- ---
Subtotal...................................................................................... 132,027 7.39
---------- ---
Obligations of states and political subdivisions
Within 1 year................................................................................. 1,148 3.80
After 1 but within 5 years.................................................................... 5,996 4.19
After 5 but within 10 years................................................................... 5,920 4.72
After 10 years................................................................................ 20,039 5.12
---------- ---
Subtotal...................................................................................... 33,103 4.83
---------- ---
Corporate Securities:
After 1 but within 5 years.................................................................... 1,992 6.13
Equity securities:
Within 1 year................................................................................. 31,108 7.83
---------- ---
Mortgage-backed securities:
After 1 but within 5 years.................................................................... 9,302 6.70
After 5 but within 10 years................................................................... 5,029 6.76
After 10 years................................................................................ 181,267 7.17
---------- ---
Subtotal...................................................................................... 195,598 7.14
---------- ---
Total securities available-for-sale............................................................ $ 419,284 7.00%
---------- ---
</TABLE>
SOURCES OF FUNDS
GENERAL. Pinnacle's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the branch offices of its subsidiary. Pinnacle also derives funds from
the proceeds from operations, the sale of residential mortgage loans in the
secondary market, and the amortization and prepayments of outstanding loans and
mortgage-related securities. Pinnacle also borrows from the Federal Home Loan
Bank of Indianapolis.
DEPOSITS. Pinnacle's current deposit products include savings accounts,
checking accounts, money market deposit accounts and certificates of deposit
ranging in terms from 14 days to ten years. Pinnacle's deposits are obtained
primarily from residents in southwestern Michigan and northern Indiana. Pinnacle
attracts deposit accounts by offering a variety of accounts, competitive
interest rates, and convenient branch office locations and service hours.
Pinnacle primarily utilizes direct mail, newspaper and radio advertising to
attract new customers and deposits, but Pinnacle does not solicit brokered
deposits.
<PAGE>
The following table presents a breakdown by category of the average amount
of deposits (all in domestic offices) and the average rate paid for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- ----------- ------------ ----------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits............. $ 93,922 0.00% $ 92,987 0.00% $ 81,094 0.00%
Interest-bearing demand deposits................ 149,124 2.01 142,843 2.11 113,864 2.05
Savings deposits................................ 437,494 3.61 426,575 3.45 307,521 3.59
Time deposits................................... 776,474 5.66 757,158 5.66 566,595 5.33
------------ ------------ ------------
$ 1,457,014 $ 1,419,563 $ 1,069,074
------------ ------------ ------------
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
At December 31,1997
-------------------
(dollars in thousands)
<S> <C>
Three months or less....................................................................... $ 106,636
Three through six months................................................................... 9,862
Six through twelve months.................................................................. 4,494
Over twelve months......................................................................... 1,623
--------
Total................................................................................... $ 122,615
--------
</TABLE>
BORROWINGS. Pinnacle borrows from time to time for short-term funding
purposes. At December 31, 1997, total borrowings by Pinnacle were $483.9
million. Pinnacle has entered into an agreement which enables it to borrow funds
from the Federal Home Loan Bank of Indianapolis that are collateralized by a
blanket agreement on all unpledged assets equal to the amount of current assets.
Such advances are made pursuant to several credit programs, each of which has
its own interest rate and range of maturities, and are generally available to
fund loans held for sale and to meet seasonal and other withdrawals of deposit
accounts. At December 31, 1997, Pinnacle had $414.4 million of advances from the
Federal Home Loan Bank of Indianapolis and $69.5 million of securities sold
under repurchase agreements, and other borrowings.
TRUST SERVICES
Pinnacle's trust operations had 522 trust accounts under management as of
December 31, 1997. Pinnacle's trust operations provide a full complement of
asset management services for individuals and corporations, and are currently
emphasizing investment management for individuals and employee benefit plan
management. Since its formation in 1987, Pinnacle's trust operations have
experienced strong growth as assets under management grew to approximately
$182.8 million as of December 31, 1997. The growth of Pinnacle's trust
operations is attributable to concerted marketing efforts by Pinnacle, and
the addition of 176 trust accounts from Indiana Federal Bank for Savings,
representing approximately $32.3 million in assets. Its trust operations
competes for business primarily with other banks and brokerage companies in
its market area.
COMPETITION
The banking business is highly competitive. Pinnacle competes as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions, mortgage banking companies, securities brokerage companies, insurance
<PAGE>
companies, and money market mutual funds operating in Michigan, Indiana and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than Pinnacle and offer certain services that Pinnacle does not
currently provide. In addition, non-depository institutions are generally not
subject to the extensive regulation applicable to Pinnacle.
EMPLOYEES
Pinnacle does not have any employees that are not also full-time employees
of Pinnacle Bank or subsidiaries of Pinnacle Bank because virtually all of
Pinnacle's activities are conducted through Pinnacle Bank and its subsidiaries.
Pinnacle Bank had 643 full-time employees and 87 part-time employees at December
31, 1997. None of Pinnacle's employees are represented by a collective
bargaining agent. Pinnacle believes that it enjoys good relations with its
personnel.
REGULATION
GENERAL. Financial institutions such as bank holding companies, banks,
savings and loan holding companies, and thrifts are extensively regulated
under both federal and state law. Such regulations apply to, among other
things, acquisitions, permissible types and amounts of loans, investments and
other activities, capital adequacy, branching, interest rates on loans and on
deposits and the safety and soundness of banking practices. The policies and
regulations of financial institution regulatory authorities have had
significant effect on the operating results of financial institutions in the
past and are expected to have significant effects in the future. Such
policies and regulations, which generally are intended to protect depositors
and not stockholders, may be influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government. Regulation of
the financial institutions industry is undergoing continuous change and the
ultimate effect of such changes cannot be predicted. Periodically,
legislation is considered and adopted which has resulted in, or that could
result in, further regulation or deregulation of financial institutions. In
addition to the relaxation or elimination of geographic restrictions on banks
and bank holding companies, a number of regulatory and legislative
initiatives have the potential for eliminating many of the product line
barriers presently separating the services offered by commercial banks from
those offered by nonbanking institutions, including mutual funds, securities
brokerage firms and investment banking firms. No assurance can be given as to
whether any additional legislation will be adopted or as to the effect such
legislation would have on the business of Pinnacle and its subsidiaries.
As a bank holding company, Pinnacle is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and its examination and
reporting requirements and is subject to the supervision of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board").
Banking laws and regulations restrict transactions by insured banks owned by
a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal stockholders, officers, directors and their affiliates,
and investments by the subsidiary banks in the shares or securities of the
parent holding company (or of any other non-bank or bank affiliates), and
acceptance of such shares or securities as collateral security for loans to
any borrower. The regulators also review other payments, such as management
fees, made by subsidiary banks or affiliated companies.
Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiaries furnishing services to or
performing services for its subsidiaries, and other subsidiaries engaged in
activities which the Federal Reserve Board determines to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Pinnacle Bank is subject to regulation and examination by the Financial
Institutions Bureau of the State of Michigan (the "Michigan Financial
Institutions Bureau"). As an institution whose deposits are insured by the Bank
Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the
"SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"), Pinnacle Bank
is also subject to regulation and examination by the FDIC.
<PAGE>
PAYMENT OF DIVIDENDS. Pinnacle is a legal entity separate and distinct from
its subsidiaries. Substantially all of Pinnacle's revenues result from dividends
paid to it by Pinnacle Bank and from earnings on investments. There are
statutory and regulatory requirements applicable to the payment of dividends by
Pinnacle Bank as well as by Pinnacle to its stockholders. Under Michigan law,
Pinnacle Bank may not declare a cash dividend or a dividend in kind except out
of net profits then on hand after deducting all losses and bad debts, and then
only if it will have a surplus amounting to not less than 20% of its capital
after the payment of the dividend. Moreover, Pinnacle Bank may not declare or
pay any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of
Pinnacle Bank is at any time less than the amount of its capital, before the
declaration of a cash dividend or dividend in kind, it must transfer to surplus
not less than 10% of its net profits for the preceding half-year (in the case of
quarterly or semi-annual dividends) or the preceding two consecutive half-year
periods (in the case of annual dividends). Under the foregoing dividend
restrictions, Pinnacle Bank, without obtaining governmental approvals, could
declare aggregate dividends in 1997 of approximately $33.2 million from
retained net profits of the preceding two years, plus an amount approximately
equal to the net profits (as measured under current regulations), if any, earned
for the period from January 1, 1997 through the date of declaration less
dividends previously paid in 1997. During 1997, Pinnacle Bank paid $9.5 million
in dividends.
The payment of dividends by Pinnacle and its subsidiary may also be affected
or limited by other factors, such as the requirements to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank or thrift under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank or thrift, could include the
payment of dividends), such authority may require, after notice and hearing,
that such bank or thrift cease and desist from such practice or prohibit the
payment of future dividends. The Federal Reserve Board has indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an
unsafe and unsound banking practice. The Federal Reserve Board and the FDIC have
issued policy statements which provide that bank holding companies and insured
banks should generally only pay dividends out of current operating earnings.
CERTAIN TRANSACTIONS WITH AFFILIATES. There are legal restrictions on the
extent to which a bank holding company such as Pinnacle and its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries
(e.g., Pinnacle Bank). The "covered transactions" that an insured bank such
as Pinnacle Bank and its subsidiaries are permitted to engage in with their
nonbank affiliates are limited to the following amounts: (i) in the case of
any one such affiliate, the aggregate amount of "covered transactions" of the
insured bank and its subsidiaries cannot exceed 10% of the capital stock and
the surplus of the insured bank; and (ii) in the case of all affiliates, the
aggregate amount of "covered transactions" of the insured bank and its
subsidiaries cannot exceed 20% of the capital stock and surplus of the
insured bank. "Covered transactions" are defined by statute to include a loan
or extension of credit to the affiliate, a purchase of securities issued by
an affiliate, a purchase of assets from the affiliate (unless otherwise
exempted by the Federal Reserve Board), the acceptance of securities issued
by the affiliate as collateral for a loan and the issuance of a guarantee,
acceptance, or letter of credit for the benefit of an affiliate. Covered
transactions must also be collateralized. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of property or
furnishing of services.
CAPITAL. Bank regulators continue to indicate a desire to raise capital
requirements applicable to financial institutions beyond their current levels.
The Federal Reserve Board, FDIC, and state bank regulators require banks and
holding companies to maintain minimum ratios of primary and total capital to
total assets. Regulatory authorities may increase such minimum requirements for
all banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect
Pinnacle and Pinnacle Bank, including their ability to pay dividends.
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. Under these guidelines, the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) must meet a minimum of 8.00%. At
least half of Total Capital must be composed of common stockholders' equity,
minority interests in the equity accounts of consolidated subsidiaries and a
limited amount of perpetual preferred stock, less goodwill and certain other
intangible assets ("Tier 1 Capital"). The remainder may consist of
<PAGE>
subordinated debt, other preferred stock and a limited amount of loan loss
reserves. At December 31, 1997, Pinnacle's ratio of Tier 1 capital to
risk-weighted assets was 13.24%.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies which provide for a minimum leverage
ratio of Tier 1 Capital to total assets, less goodwill and certain other
intangible assets (the "Tier 1 Capital leverage ratio"), of 3% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies are required to maintain a
minimum Tier 1 Capital leverage ratio of 3% plus an additional cushion of 100 to
200 basis points. Pinnacle's Tier 1 Capital leverage ratio at December 31, 1997
was 7.31%. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier 1
Capital leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activities.
Pinnacle Bank is subject to similar capital requirements adopted by the
FDIC. At December 31, 1997, Pinnacle Bank had a Tier 1 Capital ratio and a
Total Capital ratio in excess of the minimum requirement, and a Tier 1
Capital to risk-weighted assets ratio of 10.96%. No regulatory agency has
advised Pinnacle Bank of any specific applicable minimum Tier 1 Capital
leverage ratio. Failure to meet capital guidelines could subject an insured
bank to a variety of enforcement remedies, including the termination of
deposit insurance by the FDIC and a prohibition on the acceptance of brokered
deposits.
In December, 1992, the Federal Reserve Board approved a final rule altering
the method of computation of Tier 1 Capital of bank holding companies. Subject
to certain exceptions, in calculating Tier 1 Capital under the revised rule,
bank holding companies would be required to deduct all intangible assets other
than purchased mortgage servicing rights and purchased credit card
relationships, each valued at least quarterly at the lesser of 90% of their
fair market value or 100% of their book value, in an aggregate amount not
exceeding 50% of Tier 1 Capital, with a separate sublimit of 25% of Tier 1
capital for purchased credit card relationships.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal bank regulatory agencies biannually to review risk-based
capital standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities. On
December 31, 1992, capital adequacy regulations adopted by the FDIC, the Federal
Reserve Board and the Office of the Comptroller of the Currency (the
"Comptroller") that incorporated (i) interest rate risk into the calculation of
risk-based capital and (ii) concentration of credit risk and risk from
non-traditional activities into bank capital requirements became effective.
Failure to meet the capital guidelines described above could subject an
insured financial institution to a variety of sanctions, including asset growth
restrictions and termination of deposit insurance by the FDIC.
SUPPORT OF SUBSIDIARY BANKS. Under Federal Reserve Board policy, Pinnacle
is expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each of such subsidiaries. This support
may be required at times when, absent such Federal Reserve Board policy,
Pinnacle would not otherwise be required to provide it. Any capital loans by a
bank holding company to any subsidiary bank are subordinate in right of payment
to deposits and to certain other indebtedness of such subsidiary bank. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a commonly controlled
FDIC-insured depository institution, or (ii) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory
<PAGE>
assistance. This right of recovery by the FDIC generally is superior to any
claim of the stockholders of the depository institution that is liable or of
any affiliate of such institution. Pinnacle's subsidiary bank is subject to
such provisions of FIRREA and such right of recovery by the FDIC.
Under Michigan law, if the capital of a Michigan-chartered bank is impaired
by losses or otherwise, the Michigan Financial Institutions Bureau is authorized
to require payment of the deficiency by assessment upon the bank's stockholders,
pro rata, and to the extent necessary, if any such assessment is not paid by any
stockholder after three months notice, to cause the sale of the stock of such
stockholder to make good the deficiency.
FDIC INSURANCE ASSESSMENTS. The deposits of Pinnacle Bank are currently
insured to a maximum of $100,000 per depositor, subject to certain aggregation
rules. The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts, such as Pinnacle Bank, for deposit insurance.
Separate insurance funds (the BIF and the SAIF) are maintained for commercial
banks and thrifts, with insurance premiums from the industry used to offset
losses from insurance payouts when banks and thrifts fail. Due to the high rate
of failures in recent years, the FDIC has adopted a risk-based deposit insurance
premium system for all insured depository institutions, including Pinnacle Bank,
which requires that a depository institution pay to BIF from $.04 to $.31 per
$100, or to SAIF from $.04 to $.31 per $100, of insured deposits depending on
its capital levels and risk profile, as determined by its primary federal
regulator on a semiannual basis. Under its risk-based assessment system, the
FDIC may place a member in one of nine assessment risk categories based on
certain capital and supervisory measures. The capital measures are "well
capitalized," "adequately capitalized" and "under capitalized." Within each
capital group a member may be assigned to one of three supervisory subgroups:
"healthy," "supervisory concern" and "substantial supervisory concern."
A financial institution is "well capitalized" if it has a Total Capital to
risk based assets of 10% or greater, a Tier 1 Capital ratio of 6% or greater,
and a leverage ratio of 5% or greater. A financial institution is "adequately
capitalized" if it does not meet the standards for "well capitalized" but has a
Total Capital to risk based assets of 8% or greater, a Tier 1 Capital ratio of
4% or greater, and a leverage ratio of 4% or greater. A financial institution is
"less than adequately capitalized" if it does not meet the standards for
"adequately capitalized."
A "healthy" financial institution is one that is financially sound with only
a few minor weaknesses. A financial institution raising "supervisory concern" is
one with weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk to the BIF or SAIF. A
financial institution raising "substantial supervisory concern" is one that
poses a substantial probability of loss to the BIF or SAIF unless effective
corrective action is taken.
The risk-related adjusted assessment schedule adopted by the FDIC with
respect to deposits insured by the BIF is as follows:
<TABLE>
<CAPTION>
Substantial
Supervisory Supervisory
Healthy Concern Concern
----------- --------------- ---------------
<S> <C> <C> <C>
Well Capitalized............................................................... .00% .03% .17%
Adequately Capitalized......................................................... .03% .10% .24%
Under Capitalized.............................................................. .10% .24% .27%
</TABLE>
The risk-related adjusted assessment schedule recently adopted by the FDIC
with respect to deposits insured by the SAIF is as follows:
<TABLE>
<CAPTION>
Substantial
Supervisory Supervisory
Healthy Concern Concern
----------- --------------- ---------------
<S> <C> <C> <C>
Well Capitalized............................................................... .00% .03% .17%
Adequately Capitalized......................................................... .03% .10% .24%
Under Capitalized.............................................................. .10% .24% .27%
</TABLE>
<PAGE>
The FDIC's adoption of risk-based insurance assessment schedules did not
result in a significant increase in the insurance assessment costs of Pinnacle.
As of December 31, 1997, Pinnacle Bank was classified as "well capitalized" and
"healthy."
Legislation was enacted during 1996 that resulted in, among other things,
the assessment of a one-time charge (the "Special Assessment") against
financial institutions with deposits insured by SAIF. The amount of the
charge equaled approximately .657% of the deposits of a financial institution
held on March 31, 1995 and subject to the SAIF premium. The Special
Assessment was due on September 30, 1996 and payable no later than November
27, 1996. As a result of the Special Assessment, Pinnacle paid an assessment
of $5.9 million on approximately $901.5 million of deposits held by it on
March 31, 1995 and insured by SAIF.
The FDIC determined not to levy any premium on healthy banks for 1997. As a
"well capitalized" and "healthy" institution, Pinnacle Bank did not pay (or
accrue) any premiums for FDIC coverage during 1997. BIF insured financial
institutions will, however, begin servicing Financing Corp. ("FICO") bonds,
which were funded by SAIF insured financial institutions. The FICO bonds were
issued in the late 1980s in connection with government efforts to bail out the
thrift industry. Beginning in 1997, interest payments for FICO bonds will be
borne by all FDIC insured institutions. FICO bond servicing will require BIF
members to pay 1.3 cents for every $100 in insured deposits, and SAIF members to
pay 6.48 cents for each $100 in insured deposits. The servicing payments were
collected electronically by the FDIC beginning January 2, 1997. Pinnacle paid
$681,000 for such servicing payments in 1997. The rates are expected to
remain in effect through 1999, after which banks and thrifts are expected to
pay the same rates.
REGULATION OF PROPOSED ACQUISITIONS. With certain limited exceptions, the
BHCA prohibits bank holding companies, such as Pinnacle, from acquiring direct
or indirect ownership or control of voting shares or assets of any company other
than a bank, unless the company involved is engaged solely in one or more
activities which the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Any such acquisition will require, except in certain limited cases, the
prior approval of the Federal Reserve Board.
In evaluating an application for its approval of such an acquisition, the
Federal Reserve Board will consider whether the performance by an affiliate of
Pinnacle of the activity can reasonably be expected to produce benefits to the
public (such as greater convenience, increased competition, or gains in
efficiency) that outweigh possible adverse effects (such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices). The Federal Reserve Board may apply different standards to
activities proposed to be commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern. The Federal Reserve
Board's consideration will also include an evaluation of the financial and
managerial resources of Pinnacle, including its existing subsidiaries, and of
any entity to be acquired, and the effect of the proposed transaction on those
resources. This required regulatory approval is subject to public notice and
comment procedures, and adverse public comments received, or adverse
considerations raised by regulatory agencies, may delay or prevent consummation
of such an acquisition.
FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
thrift as a non-bank subsidiary of such bank holding company. A bank holding
company such as Pinnacle may apply to the Federal Reserve Board for permission
to acquire and operate a thrift engaged only in deposit-taking, lending and
other activities that the Federal Reserve Board has determined to be permissible
for bank holding companies, in accordance with the procedures and standards
described in the preceding paragraph.
RECENT LEGISLATION. In September 1994, the Riegle Community Development and
Regulatory Improvement Act (the "Community Development Act") was enacted. The
Community Development Act consists of (i) Subtitle A, the "Community Development
and Financial Institutions Act," which establishes the "Community Development
Financial Institutions Fund" to promote economic revitalization and community
development through investment in "Community Development Financial
Institutions," and (ii) Subtitle B, "The Home Ownership and Equity Protection
Act of 1994," which seeks to increase the protections afforded to individuals
most at risk from abusive lending practices, particularly high-interest
mortgages secured by the borrowers' homes.
<PAGE>
The Community Development Act provides a number of initiatives to lessen the
regulatory burden placed upon depository institutions and also affects a number
of the consumer compliance laws by allowing streamlined disclosures for radio
advertising of consumer leases, providing consumers with information necessary
to challenge an "adverse characterization" due to a credit reporting agency
report and by clarifying the disclosure requirements under the Real Estate
Settlement Procedures Act regarding the transfer of serviced mortgaged loans.
The Community Development Act also reforms currency transaction reports to
increase their usefulness to the Federal Government and to various law
enforcement agencies in combating money laundering. The measure also calls for
improvement in the identification of money laundering schemes, better controls
over negotiable instruments drawn on foreign banks by making them subject to
reporting, and uniform licensing and registration of check cashing and money
transmitting businesses, which are often used to facilitate illegal currency
transactions.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was also enacted. The Interstate
Act facilitates the interstate expansion and consolidation of banking
organizations by permitting (i) beginning one year after enactment of the
legislation, bank holding companies that are adequately capitalized and managed
to acquire banks located in states outside their home states regardless of
whether such acquisitions are authorized under the law of the host state, (ii)
the interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority prior to such date,
(iii) banks to establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state, (iv) foreign
banks to establish, with approval of the appropriate regulators in the United
States, branches outside their home states to the same extent that national or
state banks located in such state would be authorized to do so and (v) beginning
September 29, 1995, banks to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for
any bank or thrift affiliate, whether the affiliate is located in the same or
different state.
The Federal Deposit Insurance Corporation Improvement Act of 1991
substantially revised the bank regulatory and funding provisions of the Federal
Deposit Insurance Act and revised several other federal banking statutes. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The critical capital level is defined as a ratio of tangible equity
to total assets of two percent or less. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances.
Among other things, FDICIA requires the federal bank regulatory authorities
to take "prompt corrective action" in respect of any depository institution
which does not meet specified minimum capital requirements. The scope and degree
of regulatory intervention is linked to the extent of the shortfall of the
depository institution's capital from required minimum standards. In the case of
a depository institution which is "critically undercapitalized" (a term defined
to include institutions which still have a positive net worth), the federal bank
regulatory authorities are generally required to appoint a conservator or
receiver. FDICIA also requires the holding company of any undercapitalized
depository institution to guarantee, in part, such depository institution's
capital plan in order for such plan to be acceptable. FDICIA also prohibits a
depository institution that is not well-capitalized from accepting brokered
deposits and paying deposit interest rates which significantly exceed the
prevailing rate in its own market or the national rate (as determined by the
FDIC) for similar deposits. Implementing regulations for these provisions of
FDICIA have not yet been adopted by the federal bank regulatory authorities.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized.
MORTGAGE REGULATION. In the origination of mortgage loans, Pinnacle and its
subsidiaries are subject to various federal statutes, such as the Equal Credit
Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate
Settlement
<PAGE>
Procedures Act, and Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination and specify disclosures
to be made to borrowers regarding credit and settlement costs.
As sellers and servicers of mortgage loans, Pinnacle and its subsidiaries
are participants in the secondary mortgage market with some or all of the
following: private institutional investors, Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association, Federal Home
Loan Mortgage Corporation ("FHLMC"), Veterans' Administration and Federal
Housing Authority. In its dealings with these agencies, Pinnacle and its
subsidiaries are subject to various eligibility requirements prescribed by
the agencies, including but not limited to net worth, quality control,
bonding, financial reporting and compliance reporting requirements. The
mortgage loans which Pinnacle and its subsidiaries originate are subject to
agency-prescribed procedures, including (without limitation) inspection and
appraisal of properties, maximum loan-to-value ratios,and obtaining credit
reports on prospective borrowers. On some types of loans, the agencies
prescribe maximum loan amounts, interest rates and fees. When selling
mortgage loans to FNMA and FHLMC, a seller must represent and warrant that
all such mortgage loans conform to the requirements of FNMA and FHLMC. If the
mortgage loans sold are found to be nonconforming mortgage loans, FNMA or
FHLMC may require the seller to repurchase the nonconforming mortgage loans.
Additionally, FNMA and FHLMC may require a seller/servicer to indemnify them
against all losses arising from the seller/servicer's failure to perform its
contractual obligations under the applicable selling or servicing contract.
FORWARD-LOOKING STATEMENTS
From time to time, Pinnacle may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects, new
products, and similar matters. Such information is often subject to risks and
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, Pinnacle notes that a variety of factors could cause its actual
results and experience to differ materially from the anticipated results or
other expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those discussed elsewhere herein (such
as competition and regulation); future economic conditions in the regional and
national markets in which the companies compete; financial market conditions;
inflation; changing competition; the ability to carry out business plans; the
ability to enter new markets successfully and capitalize on growth
opportunities; adverse changes in applicable law, regulations or rules governing
financial institutions and environmental, tax or accounting matters; and the
following:
INTEREST RATE SENSITIVITY. Prevailing economic conditions, particularly
changes in market interest rates, may significantly affect the operations of
financial institutions such as Pinnacle and Pinnacle Bank because the earnings
of a financial institution depend primarily on its net interest income, which is
the difference between the income earned on its loans and investments and the
interest paid on its deposits and borrowings. Changes in interest rates also can
affect the value of a financial institution's interest-earning assets, which are
comprised of fixed- and adjustable-rate instruments. Generally, the value of
fixed-rate instruments fluctuates inversely with changes in interest rates.
Changes in interest rates also can affect the average life of, and demand for,
loans and mortgage-related securities. A financial institution is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates which are comparable to the rates on the maturing loans or securities.
LOCAL ECONOMIC CONDITIONS. The success of Pinnacle is dependent to a
certain extent upon the general economic conditions in the geographic markets
served by it and its subsidiaries. No assurance can be given that favorable
economic conditions will exist in such markets.
9
<PAGE>
ITEM 2. PROPERTIES
Pinnacle owns or leases all of the properties in which its various offices
are located. Pinnacle owns its main office in St. Joseph, Michigan. Pinnacle has
14 additional branch offices in Michigan and 30 branch offices in Indiana.
Pinnacle also owns 43 automated teller machines, of which 31 are housed within
its banking offices and 12 are independently located. At December 31, 1997 and
1996, the properties and equipment of Pinnacle had an aggregate net book value
of $29.3 million and $26.1 million, respectively.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Pinnacle from time to time is subject to pending and threatened legal
action and proceedings arising in the normal course of business. Any such
litigation currently pending is incidental to such business and, based on
information currently available to management, management believes the
outcome of such actions or proceedings will not have a material adverse effect
on the operations or financial condition of Pinnacle. See also Note 18 to the
consolidated financial statement of Pinnacle Financial Services, Inc.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Pinnacle's shareholders during
the fourth quarter of 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of common stock, no par value per share, of Pinnacle ("Pinnacle
Common Stock") are traded in the over-the-counter market and listed for
quotation on the Nasdaq National Market under the symbol "PNFI." Although
transactions in Pinnacle Common Stock, have been, and are expected
to continue to be, facilitated by market-makers, there can be no assurance that
an established or liquid trading market will continue.
The following table sets forth, for the periods indicated, the high and low
sale prices per share of the Pinnacle Common Stock as reported by the Nasdaq
National Market. The information with respect to such Nasdaq National Market
quotations was obtained from the National Association of Securities Dealers,
Inc.
<TABLE>
<CAPTION>
Pinnacle Common Stock
----------------------
High Low
--------- ---------
<S> <C> <C>
1996 First Quarter................................. $20.50 $17.75
Second Quarter................................ 21.75 20.00
Third Quarter................................. 24.75 19.50
Fourth Quarter................................ 25.00 23.25
1997 First Quarter................................. 28.00 23.25
Second Quarter................................ 29.00 25.13
Third Quarter................................. 36.00 28.50
Fourth Quarter................................ 49.38 35.00
1988 First Quarter (Through March 20, 1998)........ 50.50 41.25
</TABLE>
As of March 20, 1998, there were 2,063 registered holders of shares of
Pinnacle Common Stock.
The holders of Pinnacle Common Stock are entitled to receive such
dividends as may be declared from time to time by the Board of Directors of
Pinnacle out of funds legally available therefor. Pinnacle (or its
predecessor) has paid cash dividends at least annually since the 1930's and
on a regular quarterly basis since April 1979. The table below presents the
cash dividends declared, as retroactively adjusted for the effect of stock
dividends, for the periods indicated.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Per Share Amounts)
<S> <C> <C>
First Quarter...................... $ 0.235 $ 0.19
Second Quarter..................... 0.235 0.21
Third Quarter...................... 0.235 0.21
Fourth Quarter..................... 0.235 0.21
</TABLE>
Any future dividends will depend upon, among other things, the earnings,
cash position and capital needs of Pinnacle and the future financial results
and requirements and contractual restrictions applicable to Pinnacle or its
subsidiaries. Under the terms of the Agreement and Plan of Merger dated as of
October 14, 1997, between CNB and Pinnacle, in the case of dividends payable
until June 30, 1998, Pinnacle may declare and pay its regular quarterly
dividend on the Pinnacle Common Stock in an amount not to exceed $0.235 per
share, at approximately the same times during each quarter during such period
which it has historically declared and paid such dividends, and in the case
of dividends payable on or after July 1, 1998, Pinnacle may declare and pay
its regular quarterly dividend on the Pinnacle Common Stock in an aggregate
amount equal to the aggregate amount that Pinnacle shareholders would have
received on their shares of CNB Common Stock received in the merger with CNB
had the effective time of the merger with CNB been immediately before the
record date or dates for the payment of each such dividend, at approximately
the same times during each quarter during such period which it has
historically declared and paid such dividends. The ability of Pinnacle to
fund its operations and to pay dividends on its common stock will be
dependent upon its receipt of dividends from its subsidiaries. The ability of
those subsidiaries to pay dividends is subject to regulatory restrictions.
13
<PAGE>
- -------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain consolidated historical financial
data of Pinnacle for each of the years in the five year period ended December
31, 1997. All information is presented in accordance with generally accepted
accounting principles, except for selected regulatory data, which are
presented in accordance with regulatory accounting practices. All information
has been restated to 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.
Selected Financial Data Five Year Summary of Operations
<TABLE>
<CAPTION>
As of And For The Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets............................... $2,115,495 $2,135,210 $1,841,351 $1,270,447 $1,194,724
Mortgage loans, held for sale.............. 12,750 11,485 26,740 1,391 7,077
Loans, net of unearned income.............. 1,508,365 1,415,855 1,210,272 920,398 796,633
Allowance for loan losses.................. 20,528 14,909 13,853 11,787 11,165
Securities................................. 419,284 527,785 413,890 256,859 240,113
Cash and cash equivalents.................. 55,609 76,707 61,556 36,546 28,186
Deposits................................... 1,433,108 1,478,711 1,373,307 974,416 908,719
Securities sold under repurchase
agreements and other borrowings........... 483,876 471,444 286,384 170,488 163,358
Total stockholders' equity................. 181,305 170,259 164,458 116,141 112,067
Selected Operations Data:
Interest income............................ $ 167,072 $ 147,903 $ 107,916 $ 82,067 $ 87,562
Interest expense........................... 91,486 79,599 55,069 38,371 43,414
Net interest income........................ 75,586 68,304 52,847 43,696 44,148
Provision for loan losses.................. 13,320 2,681 1,422 382 1,560
Net interest income after provision for
loan losses.............................. 62,266 65,623 51,425 43,314 42,588
Noninterest income......................... 18,520 12,853 9,809 9,071 9,727
Noninterest expense........................ 66,011 54,946 38,660 31,804 30,602
Income before income taxes, extraordinary
item and accounting change............... 14,775 23,530 22,574 20,581 21,713
Income tax expense......................... 4,559 7,443 6,353 6,369 6,737
Extraordinary items--early debt
extinguishment........................... -- -- -- -- 429
Net income............................... $ 10,216 $ 16,087 $ 16,221 $ 14,212 $ 14,547
Selected Operating Ratios:
Return on average assets................... .48% .83% 1.15% 1.24% 1.26%
Return on average stockholders' equity..... 5.83 9.83 12.85 12.39 13.87
Net interest margin........................ 3.75 3.77 4.01 4.05 3.94
Ratio of noninterest income to total
average assets............................ .86 .66 .69 .79 .82
Ratio of noninterest expense to total
average assets............................ 3.08 2.83 2.73 2.77 2.57
Efficiency ratio (1)....................... 56.25 58.40 60.44 59.33 56.73
Ratio of average earning assets to average
total assets.............................. 93.87 93.52 93.06 93.87 94.34
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Dividend payout ratio...................... 109% 62% 48% 45% 37%
Per Share Data: (2)
Basic net income per share................. $ .83 $ 1.33 $ 1.60 $ 1.39 $ 1.45
Diluted net income per share............... $ .83 $ 1.32 $ 1.58 $ 1.39 $ 1.45
Cash dividends per share................... .94 .82 .76 .62 .53
Book value per share....................... 14.37 14.01 13.67 11.68 11.25
Asset Quality Ratios:
Nonperforming loans to total loans......... 1.19% 1.27% 1.14% .89% 1.16%
Allowance for loan losses to total loans... 1.35 1.05 1.14 1.28 1.40
Allowance for loan losses to nonperforming
loans..................................... 114.18 82.76 100.07 144.54 120.99
Net charge-off loans to average loans...... .55 .12 .12 .04 .10
Capital Ratios:
Stockholders' equity to assets............. 8.57% 7.97% 8.93% 9.14% 9.38%
Tier I capital to risk-weighted assets..... 13.24 12.12 10.86 10.61 11.10
</TABLE>
- ------------------------
(1) Efficiency ratio is equal to noninterest expense less amortization of
intangible expenses less one time restructuring charge divided by net
interest income plus noninterest income less gain or loss on security
transactions.
(2) Per share data has been restated to reflect all stock dividends and stock
splits. Pinnacle's last stock split was in 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion provides information regarding Pinnacle's financial
condition and results of operations for each of the years ended December 31,
1997, 1996 and 1995. This discussion should be read in conjunction with the
consolidated financial statements of Pinnacle, and the notes thereto, which
appear elsewhere herein.
OVERVIEW AND FINANCIAL CONDITION
For the year ended December 31, 1997, net income was $10.2 million or
basic earnings per share of $.83 as compared to net income of $16.1 million
or basic earnings per share of $1.33 for the year ended December 31, 1996 and
$16.2 million or basic earnings per share of $1.60 per share for the year
ended December 31, 1995. The decrease from 1996 to 1997 was largely the
result of the restructuring charges of $8.2 million after tax and the $6.0
million after tax ($10.0 million pre-tax) increase in the provision for loan
losses in connection with conforming loan loss reserve methodologies as a
result of the acquisitions of IFC and CB in the third quarter of 1997, offset
by the one-time SAIF charge in the third quarter of 1996 of $3.6 million
after tax. On a diluted basis, earnings per share was $.83 for the year ended
December 31, 1997 as compared to $1.32 for the year ended December 31, 1996.
All per share income has been restated in accordance with the Financial
Accounting Standards Board's Statement No. 128 "Earnings per Share" which
requires the presentation of basic and diluted income per share in lieu of
primary income per share amounts previously reported by Pinnacle. Net income
without the restructuring charges of $8.4 million after tax would have been
$18.6 million or basic earnings per share of $1.52 for the year ended
December 31, 1997 as compared to $1.64 for the year ended December 31, 1996
without the $3.6 million after tax SAIF charge in 1996, a decrease of 6.1%.
During the fourth quarter of 1997 and continuing in the first quarter of
1998, Pinnacle devoted substantial attention to reconciling amounts and
resolving related items generated through the data processing conversion of
Community Bank and Indiana Federal Bank for Savings that were a result of the
CB and IFC mergers. Net income was reduced in the fourth quarter of 1997
through a charge to earnings of $1,341,000 to reserve for such items.
Pinnacle continues to work on clearing the reconciling items identified.
Pinnacle does not expect the ultimate resolution of the items to have a
further significant impact on the financial results of Pinnacle.
Due to the timing of the Maco Bancorp, Inc. acquisition, which was
consummated on December 1, 1995, and because of the application of purchase
accounting (which includes the earnings and assets of Maco from the date of
the Maco Acquisition), results for the year ended December 31, 1996 are not
necessarily comparable to results for years ended on or before December 31,
1995.
15
<PAGE>
Since 1995, average earning assets have equaled or exceeded 93.0% of
total average assets. The following table summarizes the components of
Pinnacle's total assets, total loans, total deposits and stockholders' equity
at the dates indicated.
OVERVIEW AND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At December 31,
--------------------------
1997 1996
------------ ------------
(dollars in thousands)
<S> <C> <C>
Loans, net.of unearned income............ $ 1,508,365 $ 1,415,855
Total assets............................. 2,115,495 2,135,210
Deposits................................. 1,433,108 1,478,711
Stockholders' equity..................... 181,305 170,259
</TABLE>
Net loans at December 31, 1997 were approximately $1.5 billion, which was
$92.5 million greater that net loans at December 31, 1996. The increase was
primarily attributable to commercial loan growth of $70.0 million or 16.6%, an
increase in Pinnacle's Mortgage Loan Reverse Repurchase Program of $84.4 million
or 88.6% offset by a decrease of $62.6 million in real estate loans as
management placed greater emphasis on commercial loans to adjust the loan mix in
the portfolio. Net loans at December 31, 1996 were approximately $1.4 billion,
which was $205.6 million greater than net loans at December 31, 1995 of $1.2
billion. The substantial growth in net loans from December 31, 1995 to December
31, 1996, was primarily related to Pinnacle's new presence in the northern
Indiana market and the moderate growth of the their southwestern Michigan
market. The remaining increase is attributable to a $15.2 million increase in
Pinnacle's Mortgage Loan Reverse Repurchase Program and due to Pinnacle Bank's
regular banking activities.
Total assets decreased by $19.8 million at December 31, 1997 to $2.1
billion as compared to December 31, 1996. The company's focus was mainly on
changing the asset mix, primarily in the loan portfolio while holding total
assets constant. However, average assets increased by $208.4 million for the
year ended December 31, 1997 to $2.1 billion as compared to $1.9 billion for
the year ended December 31, 1996, an increase of 10.7%. Total assets
increased by $294 million or 16%, from $1.8 billion, at December 31, 1995 to
$2.1 billion at December 31, 1996. The growth was primarily the result of
strong loan demand which was funded by strong deposit growth and increases in
Federal Home Loan Bank advances and securities sold under repurchase
agreements and other borrowings. Total deposits at December 31, 1997 were
$1.4 billion, a decrease of $45.6 million or 3.1% as compared to $1.5 billion
at December 31, 1996. The decrease was due primarily to a corresponding
decrease in non-interest bearing demand deposits of $22.0 million from $121.2
million at December 31, 1996 to $99.3 million at December 31, 1997. Total
deposits at December 31, 1996 increased by 7.7% or $105.4 million when
compard to the balance at December 31, 1995 of $1.4 million. The growth in
deposits was primarily in noninterest bearing demand deposits which increased
$23.3 million or 23.8% and time deposits which increased $65.8 million or
9.3%.
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings were approximately $483.9 million at December
31, 1997, an increase of $12.4 million or 2.6% from December 31, 1996 levels.
Federal Home Loan Bank advances, securities sold under repurchase agreements
and other borrowings were approximately $471.4 million at December 31, 1996,
an increase of $185.1 million, or 64.6%, from December 31, 1995 levels. The
increase was used primarily to fund strong loan growth and to match fund
specific investment security purchases with similar adjustable rate features
and maturities.
A majority of Pinnacle's revenue is generated by its average earning
assets. For 1997, average earning assets totaled $2.0 billion, an increase of
$202.4 million, or 11.2% , over 1996, which helped increase net interest
income by $7.3 million. The growth in average loans of $161.8 million
accounted for most of the average earning asset growth in 1997. The net
interest margin was stable for the year-ended December 31, 1997 at 3.75% as
compared to 3.77% for the year-ended December 31, 1996. The Maco Acquisition
on December 1, 1995 and the Mortgage Loan Reverse Repurchase Program
16
<PAGE>
provided the increase in average earning assets of $496 million for 1996 from
$1.3 billion in 1995 to $1.8 billion in 1996. The increase in average earning
assets was offset by a reduction in net interest margin to 3.77% in 1996 as
compared to 4.01% in 1995. This reduction was primarily the result of the
Maco Acquisition which experienced a lower net interest margin as compared to
Pinnacle's margin before the acquisition.
Stockholder's equity was approximately $181.0 million at December 31,
1997 as compared to $170.3 million at December 31, 1996, resulting in an
increase of $10.7 million or 6.3%. The increase was attributable to net
income of $10.2 million for the year ended December 31, 1997 offset by cash
dividends of $9.5 million in 1997. Common stock issued upon exercise of stock
options added $9.1 million to stockholders equity in 1997. Stockholders'
equity increased approximately $5.8 million or 3.5% at December 31, 1996, as
compared to $164.5 million at December 31, 1995. Retained earnings generated
primarily through net income added $7.4 million while net unrealized gains
decreased to $45,000 at December 31, 1996 resulting in a reduction of $1.9
million. Additional paid in capital increased $706,000. The return on average
assets for the year ended December 31, 1997 was .48% as compared to .83% for
the year ended December 31, 1996. Without the restructuring and SAIF charges,
return on average assets would have been .87% and 1.02%, respectively, for
the years ended December 31, 1997 and 1996. The return on average equity for
the year ended December 31, 1997 was 5.83% as compared to 9.83% for the year
ended December 31, 1996. Without the restructuring and SAIF charges, return
on average equity would have been 10.61% and 12.05%, respectively, for the
years ended December 31, 1997 and 1996.
RESULTS OF OPERATIONS
NET INCOME. For the year ended December 31, 1997, net income was $10.2
million or basic earnings per share of $.83 as compared to net income of
$16.1 million or basic earnings per share of $1.33. The decrease was largely
the result of the restructuring charges of $8.4 million after tax and the
$6.0 million after tax ($10.0 million pre-tax) increase in the provision for
loan losses in connection with conforming loan loss reserve methodologies as
a result of the acquisitions of IFC and CB in the third quarter of 1997,
offset by the one-time SAIF charge in the third quarter of 1996 of $3.6
million after tax. On a diluted basis, earnings per share was $.85 for the
year ended December 31, 1997 as compared to $1.32 for the year ended December
31, 1996. All per share income has been restated in accordance with the
Financial Standards Board's Statement No. 128 "Earnings per Share" whcih
requires the presentation of basic and diluted earnings per share in lieu of
primary income per share previously reported by Pinnacle. Net income without
the restructuring charges of $8.4 million after tax would have been $18.6
million or basic earnings per share of $1.52 for the year ended December 31,
1997 as compared to $1.64 for the year ended December 31, 1996 without the
$3.6 million after tax SAIF charges in 1996, a decrease of 7.3%.
NET INTEREST INCOME. Net interest income is Pinnacle's primary source of
earnings and represents the excess of interest earned on earning assets over
interest expense associated with the deposits and other funding sources used to
finance those assets. Net interest income is influenced primarily by changes in
the volume and mix of earning assets and sources of funding and market rates of
interest. Other external factors, such as the strength of credit demands by
customers, liquidity and maturity preferences of deposit customers, and
governmental monetary policy, also can have a significant impact on earnings.
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
The following table sets forth certain information with respect to
Pinnacle's consolidated net income for each of the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold.................. $ 3,053 $ 166 5.44% $ 7,728 $ 410 5.31%
<CAPTION>
1995
-----------------------------
Average Average
Balance Interest Rate
---------- -------- -------
<S> <C> <C> <C>
Assets
Federal funds sold.................. 4,458 257 5.76%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with
financial institutions............ 5,490 358 6.52 13,356 982 7.35
U.S. Treasury and goverment
agencies.......................... 358,928 25,905 7.22 254,299 17,125 6.73
Other Securities (1)................ 169,236 11,218 6.63 220,649 14,666 6.65
Loans (2)........................... 1,478,238 129,425 8.76 1,316,487 114,720 8.71
---------- -------- ------- ---------- -------- -------
Total interest earning assets....... 2,014,945 167,072 8.29 1,812,519 147,903 8.16
---------- -------- ------- ---------- -------- -------
Cash and due from banks............. 39,721 35,663
Premises and equipment, net......... 27,259 26,153
Allowance for loan losses........... (17,045) (14,122)
Other assets........................ 81,625 77,941
---------- ----------
Total assets........................ $2,146,505 $1,938,154
---------- ----------
Liabilities
Interest-bearing demand............. $ 149,124 $ 2,991 2.01% $ 142,843 $ 3,007 2.11%
Savings and money market accounts... 437,494 15,779 3.61 426,575 14,731 3.45
Time deposits....................... 776,474 43,925 5.66 757,158 42,829 5.66
---------- -------- ------- ---------- -------- -------
Total interest-bearing deposits..... 1,363,092 62,695 4.60 1,326,576 60,567 4.57
---------- -------- ------- ---------- -------- -------
Federal Home Loan Bank advances..... 414,421 24,286 5.86 278,391 15,928 5.72
Securities sold under repurchase
agreements and other borrowings... 85,220 4,505 5.29 59,835 3,104 5.19
---------- -------- ------- ---------- -------- -------
Total interest-bearing
<CAPTION>
1995
-----------------------------
Average Average
Balance Interest Rate
---------- -------- -------
<S> <C> <C> <C>
Interest-bearing deposits with
financial institutions............ 7,219 680 9.42
U.S. Treasury and goverment
agencies.......................... 106,552 6,792 6.37
Other Securities (1)................ 145,307 9,607 6.61
Loans (2)........................... 1,052,995 90,580 8.60
---------- -------- -------
Total interest earning assets....... 1,316,531 107,916 8.20
---------- -------- -------
Cash and due from banks............. 28,739
Premises and equipment, net......... 20,751
Allowance for loan losses........... (12,389)
Other assets........................ 61,090
----------
Total assets........................ $1,414,722
----------
Liabilities
Interest-bearing demand............. $ 113,864 $ 2,331 2.05%
Savings and money market accounts... 307,521 11,026 3.59
Time deposits....................... 566,595 30,199 5.33
---------- -------- -------
Total interest-bearing deposits..... 987,980 43,556 4.41
---------- -------- -------
Federal Home Loan Bank advances..... 159,055 8,821 5.55
Securities sold under repurchase
agreements and other borrowings... 42,280 2,692 6.37
---------- -------- -------
Total interest-bearing
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
liabilities....................... 1,862,733 91,486 4.91 1,664,802 79,599 4.78
---------- -------- ------- ---------- -------- -------
Noninterest-bearing deposits........ 93,922 92,987
Other liabilities................... 14,604 16,750
---------- -------- ------- ---------- -------- -------
<CAPTION>
1995
-----------------------------
Average Average
Balance Interest Rate
---------- -------- -------
<S> <C> <C> <C>
liabilities....................... 1,189,315 55,069 4.63
---------- -------- -------
Noninterest-bearing deposits........ 81,094
Other liabilities................... 14,251
---------- -------- -------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total liabilities................... 1,971,259 1,774,539
Stockholders' equity................ 175,246 163,615
Total liabilities and stockholders'
equity............................ $2,146,505 $1,938,154
Net interest income................. 75,586 68,304
Net interest rate margin (3)........ 3.75% 3.77%
<CAPTION>
1995
-----------------------------
Average Average
Balance Interest Rate
---------- -------- -------
<S> <C> <C> <C>
Total liabilities................... 1,248,660
Stockholders' equity................ 130,062
Total liabilities and stockholders'
equity............................ $1,414,722
Net interest income................. 52,847
Net interest rate margin (3)........ 4.01%
</TABLE>
- ------------------------
(1) Income from state and political subdivisions securities and loans are stated
on a tax equivalent basis.
(2) For purposes of these computations, nonaccrual loans and unearned income are
included in the daily average loan amounts outstanding.
(3) Net interest rate margin is equal to total interest income less total
interest expense divided by total average earning assets.
20
<PAGE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
effected Pinnacle's interest income and expense during the periods indicated.
For each category of interest-earnings assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (change in volume multiplied by prior year rate), (ii) changes in
rate (change in rate multiplied by prior year volume), (iii) changes in
volume and rate combined (change in rate multiplied by change in volume), and
(iv) total change in rate and volume.
<TABLE>
<CAPTION>
1997/1996 1996/1995
Change in Interest Due to: Change in Interest Due to:
--------------------------------- ---------------------------------
Rate & Net Rate & Net
Volume Rate Volume Change Volume Rate Volume Change
------- ------ ------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
ASSETS
Federal funds sold......................................... $ (248) $ 10 $ (6) $ (244) $ 188 $ (20) $ (15) $ 153
Interest-bearing deposits with financial institutions...... (578) (111) 65 (624) 578 (149) (127) 302
U.S. Treasury and government agencies...................... 7,042 1,246 492 8,780 9,411 384 538 10,333
Other Securities (1)....................................... (3,419) (44) 15 (3,448) 4,980 58 21 5,059
Loans (1).................................................. 14,089 658 (42) 14,705 22,661 1,158 321 24,140
------- ------ ------ ------- ------- ------ ------ ------
Total interest-earning assets............................ $16,886 $1,759 $524 $19,169 $37,818 $1,431 $ 738 $39,987
------- ------ ------ ------- ------- ------ ------ ------
LIABILITIES
Interest-bearing demand.................................... $ 133 $ (143) $ (6) $ (16) $ 594 $ 68 $ 14 $ 676
Savings and money market accounts.......................... 377 682 (11) 1,048 4,275 (431) (139) 3,705
Time deposits.............................................. 1,093 0 3 1,096 10,157 1,870 603 2,630
------- ------ ------ ------- ------- ------ ------ -----
Total interest-bearing deposits.............................. 1,603 539 (14) 2,128 15,026 1,507 478 17,011
------- ------ ------ ------- ------- ------ ------ ------
Federal Home Loan Bank advances............................ 7,769 390 199 8,358 6,624 270 213 7,107
Securities sold under repurchase agreements
and other borrowings..................................... 1,317 60 24 1,401 1,118 (499) (207) 412
Total interest-bearing liabilities........................... 10,689 989 209 11,887 22,768 1,278 484 24,530
------- ------ ------ ------- ------- ------ ------ ------
Net interest income.......................................... $ 6,197 $ 770 $315 $ 7,282 $15,050 $ 153 $ 254 $15,457
------- ------ ------ ------- ------- ------ ------ ------
</TABLE>
- --------------------------
(1) Income from state and political subdivisions securities and loans are stated
on a tax equivalent basis.
Net interest income on a tax equivalent basis was approximately $75.6
million for the year ended December 31, 1997 as compared to $68.3 million for
1996, an increase of $7.3 million. The increase was from the $202.4 million
increase in average earning assets for the year ended December 31, 1997 which
contributed $6.1 million to the increase in net interest
21
<PAGE>
income. Net interest income on a tax-equivalent basis was approximately $68.3
million for the year ended December 31, 1996, as compared to $52.8 million for
the year ended December 31, 1995. The substantial increase in net interest
income during 1996 over the same period in 1995 was due primarily to the
increase in average earning assets associated with the Maco Acquisition and the
Mortgage Loan Reverse Repurchase Program. An increase in average earning assets
for the year ended December 31, 1996 of $496.0 million increased net interest
income by $15.1 million.
Total loans as of December 31, 1997 were $1.5 billion, an increase of $92.5
million or 6.5% over total loans as of December 31, 1996 of $1.4 billion.
Commercial loans at December 31, 1997 totaled $491.9 million, an increase of
$70.0 million or 16.6% over the December 31, 1996 total of $421.9 million.
Mortgage repurchase loans were $179.7 million at December 31, 1997 as compared
to $95.3 million, an increase of $84.4 million or 88.6% as the increased level
of capital and alternative funding by way of a larger company, after the merger
of CB Bancorp into Pinnacle, allowed growth to accelerate in 1997. Real Estate
loans decreased $62.6 million to $588.0 million at December 31, 1997 as compared
to $650.6 million at December 31, 1996, as the company placed greater emphasis
on other loan types to reduce the loan mix of real estate lending into
commercial loans. Consumer loans were steady at $238.4 million at December 31,
1997 as compared to $238.3 million at December 31, 1996. The company decided to
manage consumer loan levels through the sale of home equity loans in 1997. Total
loans as of December 31, 1996 were $1.4 billion, an increase of $205.6 million
or 17% over total loans as of December 31, 1995 of $1.2 billion. Commercial
loans at December 31, 1996 totaled $421.9 million, an increase of $107.4 million
or 34.1% over the December 31, 1995 total of $314.6 million. Consumer loans,
including home equity loans, grew by 33.3% to $238.3 million at December 31,
1996 as compared to $178.7 million at December 31, 1995. Real estate loans at
December 31, 1996 increased slightly by 2.8%, or $18.0 million, to $650.6
million as compared to $632.7 million at December 31, 1995 as Pinnacle primarily
originated real estate loans for resale in the secondary market for fee income
and sought to control the level of real estate loans to manage interest rate
risk associated with these longer term assets.
Securities, federal funds sold and interest-bearing deposits with financial
institutions decreased by $129.5 million at December 31, 1997 or 23.3% to total
$427.2 million as compared to $556.7 million at December 31, 1996 as the company
placed more emphasis on the growth in higher yielding loans. Securities, federal
funds sold and interest-bearing deposits with financial institutions increased
by $91.0 million or 19.4% to approximately $556.7 million at December 31, 1996
when compared to $466.1 million at December 31, 1995. The increase in this item
in 1996 as compared to 1995 was attributable primarily to Pinnacle using
specific adjustable rate security investments to match against short-term
funding sources as a tool to manage interest rate risk.
The following table presents a breakdown by category of the average amount
of deposits (all in domestic offices) and the average rate paid for the years
indicated.
<TABLE>
<CAPTION>
1997 Average 1996 Average 1995 Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Noninterest-bearing demand deposits.......... $ 93,922 0.00% $ 92,987 0.00% $ 81,094 0.00%
Interest-bearing demand deposits............. 149,124 2.01 142,843 2.11 113,864 2.05
Savings deposits............................. 437,494 3.61 426,575 3.45 307,521 3.59
Time deposits................................ 776,474 5.66 757,158 5.66 566,595 5.33
---------- ---------- ----------
Total.................................... $1,457,014 $1,419,563 $1,069,074
---------- ---------- ----------
</TABLE>
Total deposits decreased by $45.6 million or 3.1% to $1.4 billion at
December 31, 1997. Non-interest bearing deposits decreased $22.0 million or
18.1% as lower levels of year end commercial deposits were experienced. Interest
bearing demand deposits increased $43.0 million or 29.9% as the company
continued to have success with its line of retail checking accounts in 1997.
Total deposits increased by $105.4 million or 7.7% to $1.5 billion at December
31, 1996 from $1.4 billion at December 31, 1995. Noninterest bearing demand
deposits increased $23.3 million or 23.8% as Pinnacle continued to have success
with a new line of checking accounts introduced in 1995.
22
<PAGE>
Time deposits decreased $62.2 million or 8.0% to $713.9 million at December
31, 1997 as compared to $776.1 million at December 31, 1996, primarily through
the decrease in reliance on funding the company with higher priced brokered time
deposits acquired with the acquisition of CB Bancorp on August 1, 1997. Time
deposits grew by $65.8 million, or 9.3%, to $776.1 million at December 31, 1996
as compared to $710.4 million at December 31, 1995, as interest rates on time
deposits remained attractive as compared to yields on products available from
non-bank competitors when compared to risk. Additionally, the increase is due to
management's decision to utilize the public fund and institutional deposit
markets to meet Pinnacle's funding needs. Management has found these markets to
be reliable and attractively priced funding sources and will continue to take
advantage of these funding sources as market conditions warrant.
SHORT-TERM BORROWINGS
<TABLE>
At or for the year
ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED:
Balance at end of period............................................. $ 0 $ 69,900 $ 7,000
Weighted average interest rate at end of year........................ 0% 6.24% 5.63%
Maximum amount outstanding (1)....................................... $ 61,375 $ 69,900 $ 33,150
Average amount outstanding........................................... $ 25,760 $ 22,100 $ 13,569
Weighted average interest rate during year........................... 5.81% 5.61% 5.96%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Balance at end of period............................................. $ 69,511 $ 32,103 $ 21,810
Weighted average interest rate at end of year........................ 5.59% 4.38% 4.26%
Maximum amount outstanding (1)....................................... 90,692 $ 52,861 $ 77,170
Average amount outstanding........................................... $ 58,910 $ 33,787 $ 29,031
Weighted average interest rate during year........................... 5.11% 4.36% 4.51%
</TABLE>
- --------------------------
(1) Based on amount outstanding at month end during each year
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowing increased $12.4 million or 2.6% to $483.9
million at December 31, 1997 when compared to December 31, 1996. Federal Home
Loan Bank advances, securities sold under repurchase agreements and other
borrowings increased $185.1 million, or 64.6%, to approximately $471.4
million at December 31, 1996 when compared to the balance at December 31,
1995 of $286.4 million. The increase was primarily used to match specific
adjustable rate security purchases of approximately $40 million, to the match
funding of approximately $30 million in longer term 15 year fixed rate home
equity loans, to purchase $30 million in fixed-rate home equity loans and to
fund a $25 million leveraging stratergy in fixed-rate investment securities.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
December 31, 1997 was $13.3 million as compared to $2.7 million for the year
ended December 31, 1996, an increase of $10.6 million as additional provisions
were made to conform loan loss reserve methodologies as a result of the
acquisitions of IFC and CB. Nonaccrual loans decreased to $10.8 million at
December 31, 1997 as compared to $11.1 million at December 31, 1996. Total
nonperforming loans to total loans decreased to 1.19% at December 31, 1997 as
compared to 1.27% at December 31, 1996. Total loans past due over 90 days
increased from $6.2 million at December 31, 1996 to $7.0 million at December 31,
1997. For the year ended December 31, 1996, the provision for loan losses
totaled $2.7 million, as compared to $1.4 million, for the same period in 1995.
Non-accrual loans increased to $11.1 million, at December 31, 1996 as compared
to $10.5 million at December 31, 1995. Total nonperforming loans to total loans
decreased to 1.27% as of December 31, 1996 compared to 1.14% as of December 31,
1995. Total past due loans over 90 days increased from $2.6 million in 1995 to
$6.2 million in 1996.
23
<PAGE>
Pinnacle's management believes these increases are attributable primarily to the
Maco Acquisition and to the significant increase in loans receivable and are not
due to any general decline in credit quality.
NONINTEREST INCOME. The following table reflects various components of
noninterest income for each time period reported.
NONINTEREST INCOME
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts...................................... $ 5,279 $ 4,341 $ 3,653
Trust income............................................................. 912 789 605
Brokerage fees........................................................... 1,927 1,982 1,263
Merchant and loan service fees........................................... 1,627 1,716 1,326
Recoveries on distressed assets.......................................... 479 250 296
Gain (loss) on sale of loans, net........................................ 3,411 1,019 545
Securities gains and losses, net......................................... 813 708 790
Fees related to loans purchased under agreement to resell................ 1,135 689 369
Other income............................................................. 2,937 1,359 962
--------- --------- ---------
Total noninterest income............................................. $ 18,520 $ 12,853 $ 9,809
--------- --------- ---------
--------- --------- ---------
</TABLE>
Noninterest income for the year ended December 31, 1997 was approximately
$18.5 million, an increase of $5.7 million or 44.1% as compared to $12.9 milion
for the year ended December 31, 1996. Gain on sale of loans increased $2.4
million or 234.7% as the company started selling home equity loans in 1997.
Additionally, fees related to loans purchased under agreements to resell
increased $446,000 or 64.7% as the company increased this line of business in
1997. Service charges on deposit accounts increased $938,000 or 21.6% primarily
from higher levels of NSF fees related to retail checking accounts. Trust fees
increased $123,000 or 15.6%. Other income increased $1.6 million primarily from
higher wire transfer fees associated with the mortgage repurchase program,
insurance income, check printing charges and increased lease income. Noninterest
income for the year ended December 31, 1996 was approximately $12.9 million and
approximately $9.8 million for the year ended December 31, 1995. Of this $3.0
million increase, $1.8 million was attributable to the Maco Acquisition
(including $315,000, attributable to security gains from the sale of securities
available-for-sale). Additionally, deposit service charges increased $688,000,
or 18.8%, trust income increased $184,000, or 30.4.%, and brokerage fees
increased $719,000 , or 56.9%.
NONINTEREST EXPENSE. The following table presents the major components of
noninterest expense for each period reported.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Salaries and benefits.............. $ 23,858 $ 21,690 $ 17,599
Occupancy.......................... 4,638 4,123 3,076
Equipment.......................... 3,748 3,473 2,813
Postage and delivery............... 1,378 1,202 900
Supplies........................... 1,573 1,434 973
Marketing and promotion............ 1,982 2,244 1,469
Professional services.............. 2,486 1,969 1,257
FDIC insurance premiums............ 681 7,858 1,965
Amortization of intangibles........ 2,021 2,037 1,269
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
Computer processing................ 1,934 1,972 1,702
Directors fees..................... 1,864 702 566
Restructuring costs................ 11,508 0 0
Other expense...................... 8,340 6,242 5,071
--------- --------- ---------
Total noninterest expense.......... $ 66,011 54,946 38,660
--------- --------- ---------
</TABLE>
Non-interest expense for the year ended December 31, 1997 was $66.0
million, an increase of $11.1 million or 20.1% over the $54.9 million for the
year ended December 31, 1996. The company incurred restructuring costs
associated with the acquistion of Indiana Federal Corp. and CB Bancorp on
August 1, 1997 of $11.5 million, offset by $6.0 million in charges related to
the SAIF assessment in the third quarter of 1996, which accounted for $5.5
million of the increase. Salary and benefits increased $2.2 million or 10.0%
for the year ended December 31, 1997 as compared to the year ended December
31, 1996, primarily related to compensation expense of the former IFC ESOP of
$728,000 in 1997. Professional services expense increased $517,000 or 26.3%
for the year ended December 31, 1997, primarily from consulting expenses
incurred to assist in organizational design to facilitate a larger
organization. Occupancy expense and equipment related expenses increased
$790,000 or 10.4% as additional space and equipment upgrades were needed to
facilitate growth in the combined entities. Non-interest expenses as a
percent of average assets was 2.54% for the year ended December 31, 1997 as
compared to 2.53% for the year ended December 31, 1996, before the one-time
restructuring charges and the SAIF special assessment.
Non-interest expense for the year ended December 31, 1996 was $54.9 million
as compared to $38.7 million for the same period in 1995. Of this $16.3 million
or 42.1% increase in non-interest expense, approximately $11.0 million was
attributable to the Maco Acquisition (including $2.0 million attributable to the
one-time Special Assessment against financial institutions with deposits insured
by SAIF). The balance of this increase, which was attributable primarily to the
activities of Pinnacle Bank and approximately $300,000, in costs associated with
changing of the name of First Federal, $3.9 million, for the Special Assessment
charged against Pinnacle's thrift deposits, $4.1 million for salaries and
benefits, $1.0 million for occupancy expenses and $775,000 for marketing and
promotion.
INCOME TAXES. Income taxes were approximately $4.6 million for the year
ended December 31, 1997 as compared to $7.4 million for the year ended December
31, 1996. The decrease was primarily the result of lower levels of earnings in
1997 as a result of the restructuring charges associated with the IFC and CB
acquisitons. Income taxes were approximately $7.4 million for the year ended
December 31, 1996 and approximately $6.4 million for the year ended December 31,
1995. The increase was the result of higher levels of earnings, including, in
substantial part, earnings associated with the Maco Acquisition and partially
offset by increasing tax credits received for investments in low and moderate
income housing by Pinnacle's subsidiary, IndFed Mortgage Company.
The effective tax rates for 1997, 1996 and 1995 were 30.9%, 31.6% and
28.1%, respectively. The increase in 1996 was primarily from the
non-deductibility of goodwill expenses associated with the Maco Acquisition
and a higher state income tax rate associated with income in the Indiana
market.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS. Average earning assets equaled 93.9%, 93.5% and 93.1% of
total average assets for the year ended December 31, 1997, 1996 and 1995,
respectively. Generally, the higher earning assets are to total assets, the
greater the contribution of Pinnacle's net interest margin to profitability.
Average loans outstanding for the year ended December 31, 1997 were $1.5
billion as compared to $1.3 billion for the year ended December 31, 1996 and
increase of $162,000 or 12.3%. This increase was primarily in average commercial
loans and average mortgage repurchase loans offset by a decrease in average
mortgage loans. Average loans outstanding for the year ended December 31, 1996
were $1.3 billion. Average loans outstanding at December 31, 1995 were $1.1
billion. The increase in this item was attributable to the Maco Acquisition
which added $222.5 million in loans.
25
<PAGE>
The following table presents the amortized cost of securities
held-to-maturity as of December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
(dollars in thousands)
<S> <C>
U.S. Treasury and agency securities.................... $ 3,000
Corporate securities................................... 2,789
Mortgage-backed securities............................. 8,510
-------
Total................................................ $ 14,299
-------
-------
</TABLE>
The following table presents the carrying value of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------
1997 1996
--------- ---------
(dollars in thousands)
<S> <C> <C>
U.S. Treasury and agency securities.......................... $ 157,483 $ 205,183
Obligations of states and political subdivisions............. 33,103 22,447
Corporate securities......................................... 1,992 12,321
Equity securities............................................ 31,108 23,725
Mortgage-backed securities................................... 195,598 249,810
--------- ---------
Total...................................................... $ 419,284 $ 513,486
--------- ---------
</TABLE>
The following table sets forth certain information regarding securities
available-for-sale at December 31, 1997.
<TABLE>
<CAPTION>
After 5 But
After 1 But Within 10 After
Within 1 Year Within 5 Years Years 10 Years
-------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities........................................ $ 9,046 5.75% $ 5,017 5.69% $11,393 5.79% 0 0%
Obligations of other U.S. government agencies and
corporations.................................................. 1,522 5.67 3,759 6.38 51,884 7.35 74,862 7.51
Obligations of states and political subdivisions (1)............ 1,148 3.80 5,996 4.19 5,920 4.72 20,039 5.12
Corporate securities............................................ 0 0 1,992 6.13 0 0 0 0
Equity securities............................................... 31,108 7.83 0 0 0 0 0 0
Mortgage-backed securities (2).................................. 0 0 9,302 6.70 5,029 6.76 181,267 7.17
------- ----- ------- ----- ------- ----- ------- -----
Total amount/yield.............................................. $42,824 7.21% $26,066 5.84% $74,226 6.86% $276,168 7.11%
------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
- --------------------------
(1) Weighted yields on tax-exempt obligations have not been computed on a fully
tax-equivalent basis.
(2) Maturities of mortgage backed securities are determined based on original
maturity dates.
Average securities for the year ended December 31, 1997 was approximately
$528.2 million as compared to $474.9 million for the year ended December 31,
1996, primarily in mortgage backed securities and tax-exempt obligations of
state and political subdivisions. Average securities for the year ended
December 31, 1996 was approximately $474.9 million as
26
<PAGE>
compared to $251.9 million at December 31, 1995, as the Maco Acquisition added
$185.6 million to average security balances.
Gross loan balances as of December 31, 1997 totaled $1.5 billion, an
increase of $92.5 million or 6.5%. Commercial loans increased $70.0 million or
16.6% at December 31, 1997 to $491.9 million. Mortgage repurchase loans
increased $84.4 million to $179.7 million at December 31, 1997 as compared to
$95.3 million at December 31, 1996. Real estate loans decreased $62.6 million or
9.6% to $588.0 million at December 31, 1997. Consumer loans were approximately
the same at $238.4 million on December 31, 1997 as compared to $238.3 million at
December 31, 1996. Gross loan balances as of December 31, 1996 totaled $1.4
billion, an increase of $205.6 million, or 17.0% as compared to the balance at
December 31, 1995 of $1.2 billion. Commercial loans increased by $107.4 million,
or 34.1%, at December 31, 1996 to $421.9 million. Consumer loans (primarily in
home equity loans) increased $59.6 million, or 33.3%, to $238.3 million. Real
estate loans grew slightly in 1996 by $18.0 million, or 2.8%, to $650.6 million
as Pinnacle originated real estate loans primarily for sale in the secondary
market in order to manage interest rate risk.
The following table presents loans outstanding, according to loan category
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial..................................................... $ 491,932 421,948 314,562 287,709 243,552
Real estate.................................................... 588,046 650,624 632,664 457,743 398,664
Consumer....................................................... 238,427 238,321 178,720 143,375 113,917
Tax exempt loans............................................... 10,240 9,686 4,295 6,392 6,307
Mortgage loans purchased under agreements to resell............ 179,720 95,276 80,031 25,179 34,193
--------- --------- --------- --------- ---------
Total Loans.................................................. 1,508,365 1,415,855 1,210,272 920,398 796,633
Less allowance for loan losses................................. (20,528) (14,909) (13,853) (11,787) (11,165)
--------- --------- --------- --------- ---------
Net Loans.................................................... $1,487,837 $1,400,946 $1,196,419 $ 908,611 $ 785,468
--------- --------- --------- --------- ---------
</TABLE>
The following table presents loans outstanding at December 31, 1997, which,
based on remaining scheduled repayments of principal, are due in the period
indicated.
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------
Mortgage Loans
Purchased Under
Real Tax- Agreements to Total Loans
Commercial Estate Consumer Exempt Resell Receivable
---------- -------- -------- ------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in 1 year or less.......... $ 139,884 $ 23,280 $ 34,578 $ 2,785 $ 179,720 $ 380,247
Due in 1 through 5 years....... 157,920 91,471 106,100 4,001 0 359,492
Due after 5 years.............. 194,128 473,295 97,749 3,454 0 768,626
----------- --------- ----------- --------- ----------- -----------
Total........................ $ 491,932 $ 588,046 $ 238,427 $ 10,240 $ 179,720 $1,508,365
----------- --------- ----------- --------- ----------- -----------
----------- --------- ----------- --------- ----------- -----------
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due after December 31, 1998
---------------------------------
Fixed Variable Total
--------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Commercial...................... $ 95,137 $ 256,911 $ 352,048
Real Estate..................... 166,588 398,178 564,766
Consumer........................ 148,839 55,010 203,849
Tax-exempt...................... 7,064 391 7,455
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total Loans................... $ 417,628 $ 710,490 $1,128,118
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The following table presents information concerning nonperforming loans
including nonaccrual, past due, and restructured loans at the indicated dates.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual
basis (1)............................. $10,767 $11,129 $10,469 $5,832 $3,712
Accruing loans contractually past due 90
days or more as to principal or
interest payments..................... 7,038 6,201 2,555 1,378 1,583
Restructured loans...................... 174 684 820 945 3,933
------- ------- ------- ------ ------
Total nonperforming loans............. $17,979 $18,014 $13,844 $8,155 $9,228
------- ------- ------- ------ ------
------- ------- ------- ------ ------
</TABLE>
- --------------------------
(1) 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 is likely. If nonaccrual loans had been
maintained current in accordance with their original terms, additional
interest income of $840,000, $1,100,000, $449,000, $207,000, and $149,000
would have been recorded during the periods ended December 31, 1997, 1996,
1995,1994, and 1993 respectively.
Effective January 1, 1995, Pinnacle adopted FASB Statement No. 114, (as
amended by Statement 118), "Accounting by Creditors for Impairment of a Loan".
For further discussion see Note 7 to consolidated financial statements of
Pinnacle's contained later in this document.
Pinnacle has no loans for which the terms have been renegotiated to less
than market rates due to weakening of a borrower's financial condition.
POTENTIAL PROBLEM LOANS
In addition to the loans classified as nonaccrual or greater than 90 days
delinquent and still accruing interest, there were other loans of approximately
$21.5 million and $11.1 million at December 31, 1997 and 1996, respectively,
where management is closely following the borrower's ability to continue to
comply with loan payment terms. Current conditions do not warrant classification
as nonperforming, nor is any principal loss on these loans considered likely at
this time.
FOREIGN LOANS
Pinnacle's loans outstanding to borrowers in foreign countries as of
December 31, 1997 and 1996 did not exceed 1% of its total assets.
LOAN CONCENTRATIONS
As of December 31, 1997, there were no concentrations of loans to individual
borrowers that exceeded 10% of total loans.
The following table summarizes the loan loss experience, and provides a
breakdown of the allowance for loan losses at December 31 of each year.
28
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans Outstanding at end of period, net of unearned discount... $1,508,365 $1,415,855 $1,210,272 $ 920,398 $ 796,633
---------- ---------- --------- --------- ---------
Average loans for the period................................... 1,478,238 1,316,487 1,052,995 806,823 799,841
---------- ---------- --------- --------- ---------
Allowance for loan losses, beginning of period................. $ 14,909 $ 13,853 $ 11,787 $ 11,165 $ 10,768
---------- ---------- --------- --------- ---------
Conform CB fiscal year to December 31, 1996 calendar year...... 501 -- -- -- --
Charge-offs for period:
Commercial loans............................................. 4,634 $ 281 85 284 1,037
Real Estate loans............................................ 93 69 50 34 91
Consumer loans............................................... 1,991 1,509 1,190 460 590
Mortgage loans purchased under agreements to resell.......... 1,999 501 221 -- --
---------- ---------- --------- --------- ---------
Total charge-offs.......................................... 8,717 2,360 1,546 778 1,718
---------- ---------- --------- --------- ---------
Recoveries for period:
Commercial loans............................................. 8 249 160 130 174
Real Estate loans............................................ 47 286 23 42 136
Consumer loans............................................... 204 200 152 191 245
Mortgage Loans purchased under agreements to resell.......... 256 -- -- -- --
---------- ---------- --------- --------- ---------
Total recoveries........................................... 515 735 335 363 555
---------- ---------- --------- --------- ---------
Net charge-offs for the period................................. 8,202 1,625 1,211 415 1,163
---------- ---------- --------- --------- ---------
Allowance recorded for acquired loans.......................... -- -- 1,855 655 --
Provision for loan losses...................................... 13,320 2,681 1,422 382 1,560
---------- ---------- --------- --------- ---------
Allowance for loan losses, end of period....................... $ 20,528 14,909 13,853 11,787 11,165
---------- ---------- --------- --------- ---------
Ratio of net charge-offs during the period to average loans
outstanding.................................................. .55% .12% .12% .05% .15%
---------- ---------- --------- --------- ---------
Allocation of allowance for loan losses:
Commercial loans............................................. $ 9,145 $ 8,740 $ 8,511 $ 7,270 $ 6,650
Real Estate loans............................................ 4,394 2,234 2,409 1,928 1,919
Consumer loans............................................... 4,475 2,731 2,533 2,387 2,448
Mortgage loans purchased under agreements to resell.......... 2,514 1,204 400 202 148
---------- ---------- --------- --------- ---------
Total allowance for loan losses............................ $ 20,528 14,909 13,853 11,787 11,165
---------- ---------- --------- --------- ---------
Percentage of loan to total gross loans:
Commercial loans............................................. 32% 30% 26% 31% 31%
Real Estate loans............................................ 39 46 52 49 50
Consumer loans............................................... 16 17 15 16 14
Tax-exempt loans............................................. 1 1 -- 1 1
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Mortgage loans purchased under agreements to resell......... 12 6 7 3 4
--------- --------- --------- --------- ---------
Total...................................................... 100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
</TABLE>
The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the above categories of loans at the dates indicated. The
allowance is based on management's periodic evaluation of the loan portfolio and
reflects an amount that, in management's opinion, is adequate to absorb losses
in the existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio, and management's
evaluation of the collectability of specific loans.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased by $5.6
million or 37.7% to approximately $20.5 million at December 31, 1997 from
approximately $14.9 million at December 31, 1996. The increase was largely the
result of an additional $10.0 million provision for loan losses recorded in the
third quarter of 1997 to conform loan loss reserve methodologies in connection
with the third quarter 1997 acquisitons of IFC and CB. In completing Pinnacle's
allowance for loan losses conformity review of IFC and CB, Pinnacle applied the
general reserve assumptions consistent with those utilized historically by
Pinnacle. The allowance for loan losses increased by $1.1 million or 7.62% to
approximately $14.9 million at December 31, 1996 from approximately $13.9
million at December 31, 1995. The allowance as a percentage of total loans was
1.05%, and 1.14%, respectively, for such dates indicated. The allowance for loan
losses increased primarily due to the $205.6 million increase in loans
receivable during the year.
Net charge-offs for the year ended December 31, 1997 were $8.2 million or
.55% of average loans outstanding as compared to $1.6 million, or .12% for the
year ended December 31, 1996. The increase in net charge-offs for the year ended
December 31, 1997 were primarily in the commercial real estate and commercial
loan portfolio which totaled $4.6 million in 1997 as compared to $32,000 in 1996
and the mortgage loan repurchase portfolio which totaled $2.0 million for the
year ended December 31, 1997 as compared to $501,000 for the year ended December
31, 1996. Pinnacle realized losses on those loans that had specific reserves
established. Net charge-offs for the year ended December 31, 1996 were $1.6
million, or .12%, of average loans outstanding as compared to $1.2 million, or
.12%, for the year ended December 31, 1995. Recoveries on previously charged-off
loans were $735,000, in 1996 and $335,000, in 1995. At December 31, 1996 and
1995, nonaccrual loans amounted to $11.1 million, and $10.5 million,
respectively. Pinnacle's management believes these increases are attributable
primarily to the Maco Acquisition and to the significant increase in loans
receivable and are not due to any general decline in credit quality.
Other loans of concern to Pinnacle management increased to approximately
$21.5 million as of December 31, 1997. Other loans of concern to Pinnacle
management increased to approximately $11.1 million as of December 31, 1996
as compared to approximately $10.5 million in 1995. In the opinion of
Pinnacle's management, the allowance for loan losses is adequate and
appropriately reflects the risk inherent in each of the period-end loan
portfolios. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on
economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Pinnacle's allowance for loan losses. Such agencies may
require Pinnacle to recognize additions to the allowance based on their
judgments regarding information available to them at the time of their
examination.
NONEARNING ASSETS. Premises and equipment increased $3.2 million to $29.3
million as of December 31, 1997 from $26.1 million as of December 31, 1996. The
increase was primarily from investment in technology and computer based systems
needed to support the consolidated operations after the acquistions of IFC and
CB. Premises and equipment increased $229,000 to $26.1 million as of December
31, 1996 from $25.9 million as of December 31, 1995. Capital improvements for
the year ended December 31, 1997 and 1996 totaled $6.3 and $1.7 million,
respectively.
Interest receivable and other assets increased $30.2 million to $109.2
million at December 31, 1997 as compared to $79.0 million at December 31, 1996.
The increase was primarily from the company's investment of $25.0 million in
bank owned life insurance purchased in 1997. Other real estate decreased
$618,000 to $4.5 million for the same time periods. Goodwill and other purchased
intangible assets decreased $1.7 million to $16.8 million at December 31, 1997,
primarily
30
<PAGE>
through expense provisions in 1997. Interest receivable and other assets
increased to $79.0 million from $73.9 million as of December 31, 1996 and 1995,
respectively. The increase was primarily from higher levels of accrued interest
associated with higher levels of earning assets. Other real estate decreased to
$5.2 million from $5.9 million for the same time periods. Goodwill and other
purchased intangible assets decreased $2.4 million to $18.5 million as of
December 31, 1996 as compared to $20.9 million at December 31, 1995, primarily
through expense provision in 1996 and through a favorable tax treatment in 1996
on the recapture of bad debt reserves for thrifts of approximately $600,000.
INTEREST-BEARING LIABILITIES. In 1997, average interest bearing liabilities
increased from $1.7 billion at December 31, 1996 to $1.9 billion at December 31,
1997, an increase of $197.9 million or 11.9%. The increase was primarily from
increased advances from the FHLB and securities sold under repurchase agreements
and other borrowing which increased $161.4 million or 47.7%. In 1996, average
interest-bearing liabilities increased from $1.2 million at December 31, 1995 to
$1.7 million at December 31, 1996. The Maco Acquisition was the primary reason
for the increase with the acquisition providing $393.6 million of the increase
and the increase of FHLB advances, securities sold under repurchase agreements
and other borrowings which increased $185.1 million or 64.6%.
OTHER LIABILITIES. At December 31, 1997, other liabilities increased $2.7
million or 18.4% to $17.5 million from $14.8 million as of December 31, 1996
which decreased $2.4 million, or 14.0% from $17.2 million as of December 31,
1995.
LIQUIDITY
Liquidity is the ability to satisfy demands for extensions of credit,
deposit withdrawals, and other customer and operational needs. Traditional
sources of liquidity include asset maturities and core deposit growth. Pinnacle
maintains a portion of its assets in liquid form to meet anticipated withdrawal
requirements and loan demand from customers. At December 31, 1997, cash and due
from banks, federal funds sold, and money market instruments equaled
approximately $57.2 million. Additional liquidity, is provided by the ability to
borrow from the Federal Reserve Bank and Federal Home Loan Bank of Indianapolis.
As of December 31, 1997, Pinnacle had borrowed $414.4 million from the Federal
Home Loan Bank of Indianapolis to match longer term loans and specific
securities with matching maturities.
Pinnacle identified securities totaling approximately $419.3 million and
$513.5 million, respectively, as being available-for-sale at December 31, 1997
and December 31, 1996, respectively. They also identified securities totaling
approximately $14.3 million as being held-to-maturity at December 31, 1996.
Consequently, this portfolio, which totaled $419.3 million at December 31, 1997,
is available to meet most any liquidity need of Pinnacle.
Proceeds from the sales of securities available-for-sale amounted to
$205.1 million in 1997 and $146.6 million in 1996, with resulting net gains
of $813,000 and $708,000, respectively. At December 31, 1997, gross
unrealized holding gains and gross unrealized holding losses in Pinnacle's
total security portfolio amounted to approximately $4.1 million and
approximately $723,000, respectively. At December 31, 1996 gross unrealized
holding gains and gross unrealized holding losses in Pinnacle's total
security portfolio amounted to approximately $2.9 million and $2.8 million
respectively.
The focus of liquidity management at Pinnacle is to satisfy general
operating expenses, to service existing debt, and to take advantage of
investment opportunities which Pinnacle's management believes will result in an
improved return to stockholders.
There are statutory and regulatory requirements applicable to the payment of
dividends by Pinnacle Bank as well as by Pinnacle to its stockholders. Under
applicable dividend restrictions, Pinnacle Bank, without obtaining government
approvals, could declare aggregate dividends in 1997 of approximately $ million
from retained net profits of the preceding two years, plus an amount
approximately equal to the net profits (as measured under current regulations),
if any, earned for the period from January 1, 1997 through the date of
declaration less dividends previously paid in 1997.
INTEREST RATE SENSITIVITY
31
<PAGE>
Interest rate sensitivity is measured by analyzing the maturity and timing
of interest rate changes on assets and liabilities. The "gap" is the amount by
which interest-sensitive assets exceed interest-sensitive liabilities for any
given period. In periods of increasing interest rates, a positive gap will
generally result in increased net interest income; conversely, a negative gap
will result in decreased net interest income in such periods. In periods of
decreasing interest rates, a positive gap will result in decreased net interest
income, and a negative gap will result in increased net interest income.
To manage Pinnacle's exposure to changes in interest rates, management of
Pinnacle closely monitors its interest rate risk. An asset/liability committee
consisting of senior officers meets regularly and reviews Pinnacle's interest
rate risk position and makes recommendations for adjustments to the position. In
addition, the Board of Directors of Pinnacle periodically reviews their
asset/liability position, including simulations of the effect on Pinnacle's
earnings and capital of various interest rate scenarios.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, Pinnacle may place somewhat greater emphasis on maximizing its net
interest margin than on matching the interest rate sensitivity of its assets and
liabilities in an effort to increase its net income. Management believes that
the increased net income resulting from a mismatch in the maturity of its asset
and liability portfolios can, during periods of declining or stable interest
rates, provide high enough returns to justify the increased exposure to sudden
and unexpected increases in interest rates which can result from such mismatch.
As a result, there may be relatively more exposure to rapid increases in
interest rates than some other institutions which concentrate principally on
matching the duration of their assets and liabilities.
Pinnacle is managing its current negative gap position by emphasizing
variable rate loans, investing in short-term securities, and encouraging longer
term deposit products through pricing strategies. The following table sets forth
management's estimate of the projected maturities and/or repricing of Pinnacle's
assets and liabilities as of December 31, 1997. In preparing the table,
management of Pinnacle has assumed that loans prepay to varying degrees based on
type, maturity and rate. Certificates of deposit have been entered into the
analysis based on contractual maturity.
INTEREST RATE SENSITIVITY/GAP ANALYSIS
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
December 31, 1997
----------------------------------------------------------------------------
0-3 4-6 7-9 10-12 1-5 Over
months months months months years 5 years Total
---------- --------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
ASSETS:
Fed funds sold................... $ 6,400 $ -- $ -- $ -- $ -- $ -- $ 6,400
Interest-bearing deposits with
financial institutions......... 1,548 -- -- -- -- -- 1,548
Securities available for sale.... 62,633 12,529 13,565 10,873 126,553 193,131 419,284
Loans and loans held for sale.... 241,116 68,585 33,241 37,304 359,493 781,376 1,521,115
Nonearning assets................ -- -- -- -- -- -- 167,148
---------- --------- --------- --------- --------- -------- ----------
Total Assets................... $ 311,697 $ 81,114 $ 46,806 $ 48,177 $ 486,046 $974,507 $2,115,495
---------- --------- --------- --------- --------- -------- ----------
FUNDING SOURCES:
Interest-bearing demand.......... $ 17,551 $ -- $ -- $ -- $ -- $169,257 $ 186,808
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Savings and time deposits................................. 196,143 140,267 101,310 98,315 372,017 238,986
Federal Home Loan Bank advances........................... 98,900 88,657 15,247 8,319 177,066 26,177
Securities sold under repurchase agreements
and other borrowings..................................... 69,511 -- -- -- -- --
Noninterest bearing sources............................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total funding sources................................... $ 382,105 $ 228,924 $ 116,557 $ 106,634 $ 549,083 $ 434,419
--------- --------- --------- --------- --------- ---------
REPRICING/MATURITY GAP
Period.................................................... $ (70,408) $(147,810) $ (69,751) $ (58,457) $ (63,027) $ 540,088
Cumulative.................................................. $ (70,408) $(218,218) $(287,969) $(346,426) $(409,463) $ 130,625
Cumulative rate sensitivity assets/ Cumulative rate
sensitivity funding sources............................. 81.6% 64.3% 60.4% 58.5% 70.4% 107.2%
<CAPTION>
Savings and time deposits................................. 1,147,038
<S> <C>
Federal Home Loan Bank advances........................... 414,365
Other borrowings.......................................... 69,511
Noninterest bearing sources............................... 297,773
---------
Total funding sources................................... $2,115,495
---------
REPRICING/MATURITY GAP
Period.................................................... $ --
Cumulative..................................................
Cumulative rate sensitivity assets/ Cumulative rate
sensitivity funding sources.............................
</TABLE>
Certain shortcomings are inherent in the above analysis. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of, or lag behind, changes in market rates. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in calculating the analysis.
Finally, in the event of rising interest rates, management may choose to
increase the rates paid on deposit accounts in order to retain those accounts.
Year 2000
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
year 2000. The Company developed a plan to deal with the year 2000 problem
and began a process to be year 2000 compliant. The plan provides for
conversion efforts to be completed by the end of 1998. The total cost of the
project cannot be estimated as of December 31, 1997. The Company is
expensing all costs associated with these changes as the costs are incurred.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of
Pinnacle are monetary in nature. As a result, interest rate have a more
significant impact on Pinnacle's performance than the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("Statement No. 130"). This
Statement establishes standards for reporting and displaying comprehensive
income and its components within the consolidated financial statements.
Comprehensive income is defined in FASB Concepts Statement 6 as the
"change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners." The Statement is effective for fiscal
years beginning after December 15, 1997 and is not expected to have a
material impact on the Pinnacle results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
which establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
This Statement requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
This Statement supersedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise." Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective
for financial statements for periods beginning after December 15, 1997 and is
not expected to have a material impact on Pinnacle.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises employers' disclosures about pension and
other postretirement benefit plans and standardizes the disclosure
requirements to the extent practicable, requires additional information on
Changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis and eliminates certain disclosures. This
statement is effective for fiscal years beginning after December 15, 1997 and
is not expected to have a material impact on Pinnacle.
RECENT LEGISLATION
Legislation was enacted in 1996 that resulted in, among other things, the
assessment of a one-time charge against financial institutions with deposits
insured by SAIF. The amount of the charge equaled approximately .657% of the
deposits of a financial institution held on March 31, 1995 and subject to the
SAIF premium. The Special Assessment was due on October 1, 1996 and payable
no later than November 27, 1996. As a result of the Special Assessment,
Pinnacle paid an assessment of $5.9 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Managing interest rate risk is fundamental to the financial services
industry. Pinnacle's policies are designed to manage the inherently different
maturity and repricing characteristics of the loan, investment security, and
deposit portfolios. In doing so, Pinnacle is able to achieve a desired
interest sensitivity position and to limit exposure to interest rate risk,
while optimizing interest income within the constraints of prudent capital
adequacy and liquidity needs. Principal maturities and repricing profiles are
monitored through static gap analysis and future operating results are
simulated through computer modeling.
The management of interest rate sensitivity includes monitoring the
maturities and repricing opportunities of interest earning assets and
interest bearing liabilities. The Corporation's interest rate sensitivity/GAP
analysis as of December 31, 1997 is included in the Liquidity section of
Management's Discussion and Analysis of this form 10-K. A rate sensitivity
position is computed for various repricing intervals by calculating rate
sensitivity gaps. Interest earning assets and interest bearing liabilities
have been distributed based on their repricing opportunities. The maturities
of certain investments, loans and deposits have been adjusted based on
projected prepayment patterns or historical relationships to changes in
market interest rates. Although rate sensitivity gaps constantly change as
funds are acquired and invested, Pinnacle's negative gap of $346,426 million
at one year or less at December 31, 1997, as approximately 16.4% of total
assets. This, in the opinion of management, represented a relatively balanced
position.
For further discussion regarding Quantitative and Qualitative Disclosure
about Market Risk, see Item 7 of this Form 10-K, "Management Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity.''
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pinnacle Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of Pinnacle
Financial Services, Inc. and subsidiaries (the Company) as of December 31,
1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pinnacle
Financial Services, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of
Pinnacle Financial Services, Inc. and subsidiaries as of december 31, 1996,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996, and 1995, prior
to their restatement for the 1997 pooling of interests. The contribution of
Pinnacle Financial Services, Inc. and subsidiaries to total assets and net
income represented 50% and 57% of the respective restated totals for the year
ended December 31, 1996 and the contribution of Pinnacle Financial Services,
Inc. and subsidiaries to total assets and net income represented 50% and 40%
of the respective restated totals for the year ended December 31, 1995.
Separate consolidated financial statements of the other companies included in
the December 31, 1996 restated consolidated balance sheet and consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995 were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995, after restatement for
the 1997 pooling of interests; in our opinion, such consolidated statements
have been properly combined on the basis described in note 1 of the notes to
the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 30, 1998
34
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks.................................................................. $ 49,209 $ 60,957
Federal funds sold....................................................................... 6,400 15,750
--------- ---------
Total cash and cash equivalents........................................................ 55,609 76,707
Interest-bearing deposits with financial institutions...................................... 1,548 13,171
Securities available-for-sale:
Taxable.................................................................................. 386,181 491,039
Tax-exempt............................................................................... 33,103 22,447
Securities held-to-maturity taxable........................................................ -- 14,299
Mortgage loans held for sale................................................................. 12,750 11,485
Loans, net of unearned income................................................................ 1,508,365 1,415,855
Less: allowance for loan losses............................................................ 20,528 14,909
--------- ---------
Net loans................................................................................ 1,487,837 1,400,946
Premises and equipment, net................................................................ 29,299 26,082
Interest receivable and other assets....................................................... 109,168 79,034
--------- ---------
Total assets........................................................................... $2,115,495 $2,135,210
--------- ---------
LIABILITIES:
Deposits:
Noninterest-bearing demand............................................................... $ 99,262 $ 121,235
Interest bearing demand.................................................................. 186,808 143,821
Savings.................................................................................. 433,121 437,513
Time..................................................................................... 713,917 776,142
--------- ---------
Total deposits......................................................................... 1,433,108 1,478,711
Federal Home Loan Bank advances............................................................ 414,365 369,238
Securities sold under repurchase agreements and other borrowings........................... 69,511 102,206
Interest payable and other liabilities..................................................... 17,516 14,796
--------- ---------
Total liabilities...................................................................... 1,934,500 1,964,951
STOCKHOLDERS' EQUITY:
Common stock; no par value; 15,000,000 shares authorized; 12,619,499 shares issued and
outstanding at December 31, 1997; and 12,151,514 shares issued and outstanding at December
31, 1996................................................................................... 19,110 19,110
Additional paid-in capital................................................................... 78,094 78,192
Retained earnings............................................................................ 81,764 83,599
Treasury stock............................................................................... -- (10,304)
Guaranteed ESOP obligation................................................................... -- (379)
Recognition and retention plan obligation.................................................... -- (4)
Net unrealized gain on securities available-for-sale......................................... 2,027 45
--------- ---------
Total stockholders' equity............................................................. 180,995 170,259
--------- ---------
Total liabilities and stockholders' equity............................................. $2,115,495 $2,135,210
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable....................................................................... $ 128,758 $ 114,316 $ 90,234
Tax-exempt.................................................................... 667 404 346
Interest and dividends on securities:
Available-for-sale
Taxable..................................................................... 35,643 29,424 12,867
Tax-exempt.................................................................. 1,480 1,140 159
Held-to-maturity
Taxable..................................................................... -- 1,227 2,500
Tax-exempt.................................................................. -- -- 873
Interest on federal funds sold.................................................. 166 410 257
Interest on interest-bearing deposits with financial institutions............... 358 982 680
--------- --------- ---------
TOTAL INTEREST INCOME....................................................... 167,072 147,903 107,916
INTEREST EXPENSE:
Interest on deposits............................................................ 62,695 60,567 43,556
Interest on Federal Home Loan Bank advances..................................... 24,286 15,928 8,821
Interest on securities sold under repurchase agreements and other borrowings.... 4,505 3,104 2,692
--------- --------- ---------
TOTAL INTEREST EXPENSE...................................................... 91,486 79,599 55,069
--------- --------- ---------
NET INTEREST INCOME......................................................... 75,586 68,304 52,847
Provision for loan losses......................................................... 13,320 2,681 1,422
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......................... 62,266 65,623 51,425
Noninterest income:
Service charges on deposit accounts............................................. 5,279 4,341 3,653
Trust income.................................................................... 912 789 605
Securities gains and losses, net................................................ 813 708 790
Other income.................................................................... 11,516 7,015 4,761
--------- --------- ---------
TOTAL NONINTEREST INCOME.................................................... 18,520 12,853 9,809
Noninterest expense:
Salaries and employee benefits.................................................. 23,858 21,690 17,599
Occupancy....................................................................... 4,638 4,123 3,076
Equipment....................................................................... 3,748 3,473 2,813
FDIC insurance premiums......................................................... 681 7,858 1,965
Other expense................................................................... 33,086 17,802 13,207
--------- --------- ---------
TOTAL NONINTEREST EXPENSES.................................................. 66,011 54,946 38,660
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE.................................................. 14,775 23,530 22,574
INCOME TAX EXPENSE................................................................ 4,559 7,443 6,353
--------- --------- ---------
NET INCOME........................................................................ 10,216 $ 16,087 $ 16,221
--------- --------- ---------
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C>
NET INCOME PER SHARE:
Basic..................................................$ .83 $ 1.33 $ 1.60
Diluted................................................ .83 1.32 1.58
AVERAGE SHARES OUTSTANDING:
Basic..................................................12,258,265 12,051,935 10,137,302
Diluted................................................12,311,957 12,171,221 10,244,326
CASH DIVIDENDS DECLARED PER COMMON SHARE.................$ 0.94 $ 0.82 $ 0.76
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
(Losses) on
Additional Guaranteed Securities
Common Paid-in Retained Treasury ESOP Available-for-
Stock Capital Earnings Stock Obligation RRP Sale Total
(in thousands) ------- ---------- -------- -------- ---------- ---- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995........... $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
Purchase of Maco................. -- 20,985 -- -- -- -- -- 20,985
Bancorp, Inc.
Purchase of treasury stock......... -- -- -- (957 ) -- -- -- (957)
Payments made on guaranteed ESOP
obligation....................... -- -- -- -- 125 -- -- 125
Amortization of RRP contribution... -- -- -- -- -- 27 -- 27
Issuance 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
Issuance 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
Net income......................... -- -- 10,216 -- -- -- 10,216
Common stock dividends declared:
Pinnacle Financial Services, Inc.
$.94 per share................. -- -- (8,675 ) -- -- -- -- (8,675)
Pooled companies prior to
merger......................... -- -- (2,583 ) -- -- -- -- (2,583)
Redemption of Shareholder's Rights
Plan............................. -- -- (48 ) -- -- -- -- (48)
Common stock issuance upon exercise
of options....................... -- 7,436 -- -- -- -- -- 7,436
Payments made on guaranteed ESOP
obligation....................... -- -- -- -- 379 -- -- 379
Tax Benefit Related to stock option
plans............................ -- 1,630 -- -- -- -- -- 1,630
Increase in fair value related to
allocation of ESOP shares........ -- 719 -- -- -- -- -- 719
Amortization of RRP contribution... -- -- -- -- -- 4 -- 4
Issuance of treasury stock......... -- (575) -- 1,000 -- -- -- 425
Retirement of treasury stock....... -- (9,304) -- 9,304 -- -- -- --
Cash paid in lieu of fractional
shares........................... -- (4) -- -- -- -- -- (4)
Adjustment for change in fiscal
year of pooled entity............ -- -- (745 ) -- -- -- -- (745)
Change in unrealized gain (loss)
for securities
available-for-sale, net of tax
effect of $...................... -- -- -- -- -- 1,982 1,982
------- ---------- -------- -------- ----- ---- ------- --------
Balance, December 31, 1997......... 19,110 78,094 81,764 -- -- -- 2,027 180,995
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 10,216 $ 16,087 $ 16,221
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................ 5,135 4,999 3,756
Net amortization on loans and securities..................................... 1,116 636 1,088
Provision for loan losses.................................................... 13,320 2,681 1,422
Deferred federal income taxes................................................ (2,029) (1,206) (446)
Proceeds from sales of trading securities.................................... -- 10,154 1,975
Purchases of trading securities.............................................. -- (10,171) (1,976)
Mortgage loans purchased under agreements to resell.......................... (1,448,565) (1,111,965) (795,862)
Proceeds from sale of mortgage loans purchased under agreements to resell.... 1,363,517 1,096,721 741,010
Mortgage loans originated for sale........................................... (84,502) (175,118) (58,845)
Proceeds from sales of loans................................................. 85,146 136,662 56,800
Gain on sale of securities................................................... (813) (708) (790)
Gain on sale of loans........................................................ (3,411) (1,019) (545)
Decrease(increase) in interest receivable and other assets................... (3,529) (1,331) (1,477)
Decrease in other liabilities................................................ 267 (1,920) (2,899)
---------- ---------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES................................. (64,132) (35,498) (40,568)
---------- --------- ---------
---------- ---------- ---------
Net increase in loans, excluding loan sales and purchases...................... 35,324 (67,920) (5,654)
Purchases of loans............................................................. (50,269) (79,642) (17,723)
Purchases of securities available-for-sale..................................... (148,974) (320,047) (145,617)
Purchases of securities held-to-maturity....................................... -- (4,237) (11,704)
Purchases of Company owned life insurance policies............................. (25,047) (1,366) (5)
Proceeds from sales of securities available-for-sale........................... 205,091 146,580 140,291
Proceeds from maturities and paydowns of securities available-for-sale......... 56,150 65,200 22,555
Proceeds from maturities and paydowns of securities held-to-maturity........... -- 5,803 31,036
Net (increase) decrease in interest-bearing deposits with financial
institutions................................................................. 11,623 29,825 (24,583)
Capital expenditures........................................................... (6,331) (3,086) (3,185)
Purchase of Forrest Holdings Inc. preferred stock.............................. -- (2,500) --
Purchase of MACO Bancorp, Inc., net of cash acquired and stock issued.......... -- -- (12,683)
Purchase of NCB Corp., net of cash acquired.................................... -- -- (6,841)
---------- ---------- ---------
NET CASH USED BY INVESTING ACTIVITIES............................................ 77,567 (231,390) (34,113)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................................................... (45,603) 105,144 39,740
Net increase in securities sold under repurchase agreements and other
borrowings................................................................... 12,432 85,207 53,789
Net change in obligation to limited partnership................................ -- 18 --
Common stock issued............................................................ 7,436 654 13,752
Contribution to fund ESOP...................................................... 379 211 125
Issuance of treasury stock..................................................... 425 7 68
Purchase of treasury stock..................................................... -- (612) (957)
Dividends paid................................................................. (9,550) (8,590) (6,826)
Redemption of shareholders' rights plan........................................ (48) -- --
Cash paid for fractional shares................................................ (4) -- --
---------- ---------- ---------
NET CASH USED BY FINANCING ACTIVITIES............................................ (34,533) 282,039 99,691
---------- ---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ (21,098) 15,151 25,010
Cash and cash equivalents at beginning of year................................... 76,707 61,556 36,546
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 55,609 $ 76,707 $ 61,556
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................................. $ 91,353 $ 78,987 $ 54,079
Income taxes paid.............................................................. $ 11,272 $ 7,921 $ 7,518
Loans transferred to other real estate owned................................... $ 4,099 $ 756 $ 738
Transfers of securities held-to-maturity to available-for-sale................. $ 14,299 $ -- $ 239,332
--------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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
from those estimates.
The following are significant accounting and reporting policies of Pinnacle
Financial Services, Inc. and subsidiaries.
(a) Consolidation
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
Starkeis, 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, the consolidated
financial statements as of and for the year ended December 31, 1997 reflect
transactions on a merged basis from January 1, 1997 through December 31, 1997.
Additionally, CB's financial statements as of March 31, 1997 and 1996 and for
each of the years in the two 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 two year period ended December 31, 1996. An
adjustment of $745,000 was recorded in the consolidated statement of changes in
stockholders' equity for the year ended December 31, 1997 to remove CB net
income from January 1 through March 31, 1997 from retained earnings, which
amount is included in December 31, 1996 retained earnings.
40
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. At December 31, 1997, the company had no
trading or held-to-maturity securities.
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) Mortgage 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 approved mortgage companies as of December 31, 1997. 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 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
approximates one year or less.
(d) Mortgage 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
41
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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) 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, 1997. At December 31,
1997 and 1996, goodwill of approximately $13,393,000 and $14,604,000,
respectively, is included in other assets in the accompanying consolidated
balance sheets.
42
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 approximately 7 to
10 years of such deposit liabilities, with a remaining life at December 31, 1997
of approximately 4 years. At December 31, 1997 and 1996, core deposit
intangibles of approximately $2,687,000 and $3,368,000, 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.
(i) Loan Servicing Rights
The Company recognizes as a separate asset the right to service loans for
others which are amortized over the estimated lives of the loans. The Company
also evaluates these 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. Loan servicing rights as of December
31, 1997 and 1996 totaled approximately $1,029,000 and $477,000, respectively.
(j) 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.
(k) Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the ESOP)
for the former employees of IFC and CB. The Company recognizes compensation
expense for the applicable ESOP shares based on the fair value of those
shares when committed to be released to employees, rather than based on their
original cost in accordance with the American Institute of Certified Public
Accountants & Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans (SOP93-6).
(l) Retirement Plans
Costs for the Company's defined benefit plans, which cover 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 Plan
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 plan.
(o) Income Taxes
Prior to the merger Pinnacle, IFC and CB and their respective
subsidiaries each filed consolidated U.S. income tax returns. The
consolidated tax liability is settled between companies generally as if each
company had filed a separate return. For the year ended December 31, 1997,
the Company and its subsidiaries will file consolidated tax returns.
43
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
Basic net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. The diluted net income per share calculation is adjusted for the effects
of options. Average shares have been increased for the assumed conversion of
outstanding options into common shares and is retroactively adjusted for stock
splits and stock dividends. Cash dividends declared 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 have been reclassified to conform to current year
presentation.
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.
44
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the primary
regulator of Pinnacle Bank categorized the Bank as WELL 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. This
notification occurred prior to the effective date of the pooling. There are
no conditions or events since that notification that management believes have
changed the institution's category.
45
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's and the Bank's actual capital amounts and ratios are also
presented in the tables for 1997 and 1996.
<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, 1997
Total Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 180,984 14.54% $ 99,611 8.00% $ 124,513 10.00%
Pinnacle Bank................................ 199,193 12.25% 97,412 8.00% 121,765 10.00%
Tier 1 Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 165,359 13.28% $ 49,805 4.00% $ 74,708 6.00%
Pinnacle Bank................................ 133,907 11.00% 48,706 4.00% 73,059 6.00%
Tier 1 Capital (to Average Assets):
CONSOLIDATED................................. $ 165,359 7.29% $ 90,682 4.00% $ 113,352 5.00%
Pinnacle Bank................................ 133,907 6.44% 83,198 4.00% 103,998 5.00%
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 were thrift holding companies located in
Valparaiso and Michigan City, Indiana, respectively. Total assets acquired of
IFC and CB were $835 million and $288 million 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.
46
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
<TABLE>
<CAPTION>
Six Months Years ended,
Ended June 30, December 31, December 31,
1997 1996 1995
--------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Net interest income:
Pinnacle.......................................................... 18,431 34,276 19,344
IFC............................................................... 13,546 25,674 26,141
CB................................................................ 4,628 8,354 7,362
------ ------ ------
Consolidated........................................................ 36,605 68,304 52,847
------ ------ ------
------ ------ ------
Net income:
Pinnacle.......................................................... 6,081 9,152 6,459
IFC............................................................... 4,251 4,623 7,304
CB................................................................ 1,619 2,312 2,458
------ ------ ------
Consolidated........................................................ 11,951 16,087 16,221
------ ------ ------
------ ------ ------
</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 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, creating goodwill in the amount of $1.5 million
which is being amortized on a straight line basis over 15 years.
47
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The estimated fair value of the Company's financial instruments at
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks.................................... $ 49,209 $ 49,209 $ 60,957 $ 60,957
Federal funds sold......................................... 6,400 6,400 15,750 15,750
Interest-bearing deposits with financial institutions...... 1,548 1,548 13,171 13,171
Securities available-for-sale.............................. 419,284 419,284 513,486 513,486
Securities held-to-maturity................................ -- -- 14,299 14,348
Mortgage loans held for sale............................... 12,750 12,750 11,485 11,491
Net loans.................................................. 1,487,837 1,494,377 1,400,946 1,405,485
Accrued interest receivable................................ 17,282 17,282 15,778 15,778
------------ ---------- ------------ ------------
Total financial assets................................... $ 1,994,310 $2,000,850 $ 2,045,872 $ 2,050,466
Financial Liabilities:
Noninterest-bearing deposits............................... $ 99,262 $ 99,262 $ 121,235 $ 121,235
Interest-bearing deposits.................................. 1,333,846 1,335,907 1,357,476 1,361,453
Federal Home Loan Bank advances, securities sold under
repurchase agreements, and other borrowings.............. 483,876 485,070 471,444 474,376
Accrued interest payable................................... 5,239 5,239 5,130 5,130
------------ --------- ------------ ------------
Total financial Liabilities.............................. $ 1,922,223 $1,925,478 $ 1,955,285 $ 1,962,174
</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.
MORTGAGE LOANS HELD FOR SALE: Fair value are estimated based on quoted
market prices.
NET LOANS: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer, including credit
card loans. Each loan category is further segmented into fixed and adjustable
rate interest terms.
48
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1997 and 1996. 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.
FEDEERAL HOME LOAN BANK ADVANCES, 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 uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
49
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 rights, 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, 1997 and 1996,
were $12,086,000 and $10,603,000, 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, 1997.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------- --------------- --------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury and agency securities........................ $ 156,978 $ 881 $ (376) $ 157,483
Obligations of states and political subdivisions........... 31,728 1,375 -- 33,103
Corporate securities....................................... 2,000 -- (8) 1,992
Equity securities.......................................... 31,130 -- (22) 31,108
Mortgage backed securities................................. 194,114 1,801 (317) 195,598
------------- ------ ----- ----------
Total securities......................................... $ 415,950 $ 4,057 $ (723) $ 419,284
------------- ------ ----- ----------
------------- ------ ----- ----------
</TABLE>
50
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses 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 securities held to maturity
at December 31, 1996.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------- ----------------- ----------------- ---------
<S> <C> <C> <C> <C>
(in thousands)
HELD-TO-MATURITY:
U.S. Treasury and agency securities......................... $ 3,000 $ -- $ (48) $ 2,952
Corporate securities........................................ 2,789 6 (2) 2,793
Mortgage backed securities.................................. 8,510 102 (9) 8,603
------------- ----- --- ---------
Total securities.......................................... $ 14,299 $ 108 $ (59) $ 14,348
------------- ----- --- ---------
------------- ----- --- ---------
</TABLE>
51
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of investment securities classified as available-for-sale at
December 31, 1997 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
-------------------------
<S> <C> <C>
Amortized Fair
Cost Value
------------- ----------
<CAPTION> (in thousands)
<S> <C> <C>
No maturity............................................................................ $ 31,130 $ 31,108
Due in one year or less................................................................ 11,664 11,716
Due after one year through five years.................................................. 16,498 16,763
Due after five years through ten years................................................. 68,309 69,198
Due after ten years.................................................................... 94,235 94,901
Mortgage-backed securities............................................................. 194,114 195,598
------------- ----------
Total securities....................................................................... $ 415,950 $ 419,284
------------- ----------
------------- ----------
</TABLE>
Proceeds from sales of securities (excluding trading securities) during
1997, 1996 and 1995 were $205,901,000, $146,580,000, and $140,291,000,
respectively. Gross gains of $1,236,000, $841,000, and $1,599,000 and gross
losses of $423,000, $150,000, and $809,000 were realized on those sales
for 1997, 1996, and 1995, respectively. During 1997, 1996, and 1995 there were
no sales of securities classified as held-to-maturity.
On August 1, 1997, securities held-to-maturity were reclassified to
available-for-sale upon consummation of the CB merger to conform to
Pinnacle's classification of investment securities. At the date of transfer,
the securities had an amortized cost and net unrealized gain of $14.0 million
and $200,000, respectively.
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 $40,206,000 and $356,602,000 at
December 31, 1997 and 1996, 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 that individually
exceeded 10% of stockholders' equity at December 31, 1997 and 1996.
52
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS
The following summarizes loans by classification at December 31 of each
year.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Commercial loans..................................... $ 491,932 $ 421,948
Real estate loans.................................... 588,046 650,624
Consumer loans....................................... 238,427 238,321
Tax exempt loans..................................... 10,240 9,686
Mortgage loans purchased under agreements to
resell............................................. 179,720 95,276
--------- ---------
Loans, net..................................... $1,508,365 $1,415,855
--------- ---------
--------- ---------
</TABLE>
MORTGAGE LOANS PURCHASED UNDER AGREEMENTS TO RESELL
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 generally
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 typically approximates
one year or less. The Company had approximately $21,566,000 and $25,407,000
of interim construction loans purchased under agreements to resell at
December 31, 1997 and 1996.
53
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS (CONTINUED)
The following summarizes nonaccrual loans and loans greater than 90 days
delinquent which are still accruing interest at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Non- 90 Days Non- 90 Days
Accrual Past Due Accrual Past Due
--------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Real estate loans....................................... $ 1,027 $ 4,040 $ 1,742 $ 3,459
Commercial loans........................................ 7,665 1,962 4,569 2,239
Consumer loans.......................................... 446 1,036 118 503
Tax exempt loans........................................ -- -- -- --
Mortgage repurchase loans............................... 1,629 -- 4,700 --
--------- ----------- --------- -----------
Total loans............................................. $ 10,767 $ 7,038 $ 11,129 $ 6,201
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, if nonaccrual loans
had been maintained current in accordance with their original terms, additional
interest income of $840,000, $1,100,000, and $449,000, respectively, would
have been realized.
54
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS (CONTINUED)
The recorded investment in impaired loans at December 31, 1997 and 1996
totaled $16.5 million and $13.3 million, respectively, for which a specific
allowance for loan losses of $2.9 million and $1.6 million, respectively, was
required as of and for the years then ended. As of December 31, 1997 and
1996, the average recorded investment in impaired loans approximated $15.4
million and $10.9 million, respectively. For the years ended December 31,
1997 and 1996, interest income recorded on such loans totaled $1,031,000 and
$688,000, respectively, of which $547,000 and $475,000 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, 1997 and 1996 aggregated approximately $19,413,000 and
$14,903,000, respectively. The net increase of $4,510,000 in such loans
resulted from new loans of $5,087,000 and collections on loans of $577,000.
55
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the activity in the allowance for loan losses for
the years ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year....................................................... $ 14,909 $ 13,853 $ 11,787
Adjustment due to change in fiscal year of pooled entity......................... 501 -- --
Provisions charged against income................................................ 13,320 2,681 1,422
Recoveries....................................................................... 515 735 335
Allowance of acquired financial institutions..................................... -- -- 1,855
--------- --------- ---------
29,245 17,269 15,399
Loans charged off................................................................ (8,717) (2,360) (1,546)
--------- --------- ---------
Balance, end of year............................................................. $ 20,528 $ 14,909 $ 13,853
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8 PREMISES AND EQUIPMENT, NET
The following summarizes premises and equipment by classification at
December 31.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Land and land improvements.................................................................. $ 4,637 $ 4,766
Buildings................................................................................... 26,704 25,746
Furniture, fixtures and equipment........................................................... 23,785 18,687
--------- ---------
Subtotal................................................................................ 55,126 49,199
Less accumulated depreciation............................................................... 25,827 23,117
--------- ---------
Premises and equipment, net................................................................. $ 29,299 $ 26,082
--------- ---------
--------- ---------
Depreciation expense charged to operations was $3,114,000, $2,856,000, and $2,252,000 in
1997, 1996, and 1995, respectively.
</TABLE>
56
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 TIME DEPOSITS
The following summarizes time deposits and their remaining maturities,
included in interest-bearing deposits at December 31.
<TABLE>
<CAPTION>
1997
-----------
(in
thousands)
<S> <C>
Due within one year.................................................... $ 535,391
From one to two years.................................................. 112,424
From two to three years................................................ 35,275
From three to four years............................................... 9,456
From four to five years................................................ 11,350
Over five years........................................................ 10,021
-----------
Total.............................................................. $ 713,917
-----------
-----------
</TABLE>
NOTE 10 BORROWINGS
The following is a schedule of securities sold under repurchase agreements
and other borrowings at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Securities sold under repurchase agreements............. $ 69,511 $ 32,103
Federal funds purchased................................. -- 69,900
Federal Home Loan Bank advances......................... 414,365 369,238
Other borrowings........................................ -- 203
--------- ---------
Total................................................... $ 483,876 $ 471,444
--------- ---------
--------- ---------
</TABLE>
Securities sold under repurchase agreements represent an indebtedness of the
Company secured by certain securities. At December 31, 1997 and 1996, the
interest cost with regard to daily averages was 5.11% and 4.36%, respectively.
Securities with an amortized cost of $31.8 million and $29.9 million and an
estimated fair value of approximately $ 31.9 million and $29.8 million were
pledged as collateral for these agreements at December 31, 1997 and 1996,
respectively.
57
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal funds purchased, which mature daily, had an interest cost of
6.24% at December 31, 1996. There were no federal funds purchased at
December 31, 1997.
Federal Home Loan Bank advances represent borrowings from Federal Home Loan
Bank. Advances of $927.0 million, and $728.9 million, were drawn upon during
1997, and 1996, respectively. At December 31, 1997, 1996, and 1995,
respectively, the interest cost with regard to daily averages was 5.67 %, 5.78%,
and 6.13%, with maturities of one to ninety-four months. These borrowings are
secured by Federal Home Loan Bank stock (carried at $30.9 million), by all
eligible first mortgage loans on one-to-four family dwellings held by the Bank
(approximately $553.0 million at December 31, 1997) and by specific
securities with a carrying value of approximately $269.9 million.
Other borrowings at December 31, 1996 consisted of the guaranteed ESOP
obligation. 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, 1997 and 1996 was $
0 and $203,000, respectively.
NOTE 11 INCOME TAXES
Income taxes (benefits) reported in the consolidated statements of
income for the years ended December 31, 1997, 1996, and 1995 include the
following components.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
U.S. Federal
Current........................................................... $ 7,048 $ 7,304 $ 5,811
Deferred.......................................................... (2,596) (1,267) (593)
State
Current........................................................... 217 1,443 1,190
Deferred.......................................................... (110) (37) (55)
--------- --------- ---------
Total........................................................... $ 4,559 $ 7,443 $ 6,353
--------- --------- ---------
--------- --------- ---------
</TABLE>
58
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax............................................. $ 5,171 $ 8,199 $ 7,755
Tax exempt interest, net............................................ (695) (478) (430)
Low income housing credit........................................... (1,476) (1,299) (1,225)
Amortization of goodwill............................................ 389 327 42
Acquisition cost.................................................... 1,323 -- --
State income tax, net of federal benefit............................ 70 860 768
Other, net.......................................................... (223) (166) (557)
--------- --------- ---------
Total........................................................... $ 4,559 $ 7,443 $ 6,353
--------- --------- ---------
--------- --------- ---------
</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.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses................................................. 7,595 4,740
Deferred directors compensation........................................... 1,308 395
Capital loss and tax credit carryforward.................................. -- 887
Other..................................................................... 882 1,520
--------- ---------
Total gross deferred tax assets......................................... 9,785 7,542
Less valuation allowance.................................................. -- (61)
--------- ---------
Net deferred tax assets................................................. 9,785 7,481
--------- ---------
--------- ---------
Deferred Tax Liabilities:
Deposit base premium...................................................... (736) (1,007)
Deferred loan fees and costs.............................................. (1,647) (992)
Depreciation.............................................................. (390) (372)
Pension................................................................... (463) (271)
Purchase discount......................................................... (1,255) (1,369)
Unrealized gains on securities available-for-sale......................... (1,307) (16)
Other..................................................................... (321) (1,273)
--------- ---------
Total gross deferred tax liabilities.................................... (6,119) (5,230)
--------- ---------
Net deferred tax assets................................................. 3,666 2,251
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets of $61,000 as of
December 31, 1996 was reduced to zero during 1997 due to the utilization of
the capital loss carry forward.
59
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 EMPLOYEE BENEFITS
The former Pinnacle, IFC and CB entities had various employee benefit
programs for which certain plans have remained in place upon consummation of the
merger transactions on August 1, 1997 and as of December 31, 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 1997, 1996, and 1995, the Company
contributions amounted to $128,000, $63,000, and $121,000, 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.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the year..................... $ 536 $ 463 $ 333
Interest cost on projected benefit obligation..................... 379 401 268
Actual return on plan assets...................................... (735) (923) (1,093)
Net amortization and deferral..................................... (157) 144 535
--------- --------- ---------
Net pension expense (income).................................... 23 $ 85 $ 43
--------- --------- ---------
--------- --------- ---------
</TABLE>
60
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested........................................................................ $ (3,754) $ (3,440) $ (2,837)
Nonvested..................................................................... (128) (118) (109)
Provision for future salary increases........................................... (1,976) (2,580) (1,969)
---------- --------- ---------
Projected benefit obligation.................................................... (5,858) (6,138) (4,915)
Plan assets at fair value......................................................... 8,625 8,048 7,253
--------- --------- ---------
Excess of plan assets over projected benefit obligation........................... 2,767 1,910 2,338
Unrecognized net transition asset................................................. (664) (731) (799)
Unrecognized net (gain)loss....................................................... (498) 16 (259)
Unrecognized prior service cost................................................... (468) (35) (36)
--------- --------- ---------
Prepaid pension cost, included in other assets.................................... 1,137 1,160 1,244
--------- --------- ---------
--------- --------- ---------
Major assumptions used:
Discount rate................................................................... 7.50% 7.50% 7.75%
Rate of increase in compensation levels......................................... 5.50% 5.50% 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, 1997, 1996, and 1995.
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, 1997, the latest actuarial valuation, the total
plan assets exceeded the actuarially determined value of total vested benefits.
The plan was terminated and assets transferred to participants in 1997. There
was no pension plan expense or contribution for the years ended December 31,
1997, 1996, and 1995. The administrative cost of the plan is charged to expense
and amounted to $1,600, 1,052, and $4,815 for the years ended December 31,
1997, 1996, and 1995, respectively.
61
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997, 1996 and 1995 net periodic
postretirement benefit cost are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Service cost............................................................... $ -- $ -- $ --
Interest cost.............................................................. 13 19 21
Net amortization and deferral.............................................. 23 33 33
--- --- ---
Net periodic postretirement benefit cost................................... 36 $ 52 $ 54
--- --- ---
--- --- ---
</TABLE>
The funded status of the plan and the amounts recognized in the consolidated
balance sheets are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Retired participants and beneficiaries................................ $ (160) $ (248) $ (281)
Active participants................................................... -- -- --
--------- --------- ---------
Accumulated postretirement benefit obligation....................... (160) (248) (281)
Plan assets at fair value............................................. -- -- --
Excess of accumulated postretirement benefit obligation over plan
assets.............................................................. (160) (248) (281)
Unrecognized transition obligation.................................... 160 193 226
Unrecognized loss(gain)............................................... (61) (6) 2
--------- --------- ---------
Accrued postretirement benefit obligation........................... $ (61) $ (61) $ (53)
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 8.00%, 9.00%, and 10.00% annual rate of
increase in the per capita cost of covered benefits (health care cost trend
rate) was assumed for 1997, 1996, and 1995, respectively; the rate was
further assumed to decline to 4.00% after 7 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 $18,500 and $25,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost by
$1,000, $2,000 and $2,000 for years ended December 31, 1997, 1996 and 1995,
respectively. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.50% for December 31,
1997 and 1996, and 7.25% for December 31, 1995.
62
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL RETIREMENT PLANS
The Company maintains a supplemental retirement plan for executives of
the former CB entity. The plan requires acceleration of funding of benefits
upon change of control of the former CB entity into the secular trusts
already established. The cost of the plan charged to expense was $265,000 for
the year ended December 31, 1997 which included the payments to fund the
remaining liability under the plan as the merger transaction as described in
Note 3 met the change in control provisions per the agreement. The cost of
the plan charged to expense was $39,000 and $44,000 for the years ended
December 31, 1996 and 1995, respectively. The Company has purchased
corporate-owned life insurance to partially fund its obligation under this
plan. The accrued liability to the company was $0 at December 31, 1997 and
1996.
The Company also maintains a supplemental retirement plan for certain
senior executives of the former IFC entity. The plan requires acceleration of
funding of benefits upon change of control of the former IFC entity for
certain executives. The cost of the plan charged to expense was $$1,157,000
for the year ended December 31, 1997 which included the payments to fund the
remaining liability under the plan for certain executives as the merger
transaction described in Note 3 met the change in control provisions per the
agreement as well as the annual, actuarially determined amounts for the
remaining IFC executives. The cost of the plan charged to expense was
$230,000 and $25,000 for the years ended December 31, 1996 and 1995,
respectively. The Company has purchased corporate-owned life insurance to
partially fund its obligation under this plan. The accrued liability to the
Company was $1,387,000 and $230,000 at December 31, 1997 and 1996,
respectively.
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 recorded compensation
expense related to the plan of $724,335 , $278,000, and $407,000 for the
years ended December 31, 1997, 1996, and 1995, respectively. The Company's
1997 contribution to the ESOP was $257,995 compared to $350,350 in 1996 and
$382,628 in 1995. The ESOP plan was terminated in 1997 upon repayment of the
ESOP loan and allocation of all remaining shares to participants.
63
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the outstanding ESOP loan balance was
$0 and $203,096, respectively. The interest incurred on the ESOP loan
amounted to $7,507 in 1997, $18,950 in 1996, and $31,250 in 1995.
Dividends paid on the unallocated ESOP shares totaled $14,536 in 1997, $45,519
in 1996, and $50,023 in 1995. The table below summarizes shares of Company Stock
held by the ESOP.
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Shares allocated to participants.......................... 225,549 185,171
--------- ---------
Unallocated shares:
Grandfathered under SOP 93-6............................ -- 10,672
Unearned ESOP shares.................................... -- 29,706
--------- ---------
Total................................................. -- 225,549
--------- ---------
</TABLE>
The Company also maintains an ESOP in which all former CB employees who
attain minimum age and service requirements are eligible to participate. The
Company recorded compensation expense of $192,634 for the year ended December
31, 1997 and $64,211 for each of the years ended December 31, 1996 and 1995.
The Company's contribution to the ESOP was $208,686, $82,993, and $88,772 for
the years ended December 31, 1997, 1996, and 1995, respectively. The ESOP
plan was terminated in 1997 upon repayment of the ESOP loan and the
allocation of all remaining shares to participants. At December 31, 1997 and
1996, the outstanding ESOP loan balance was $0 and $176,852, respectively.
The interest incurred on the ESOP loan amounted to $16,052, $18,782, and
$24,561 for the years ended December 31, 1997, 1996, and 1995, respectively.
The table below summarizes shares of Company stock held by the ESOP.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Shares allocated to participants........................... 108,729 62,260
Unallocated shares......................................... -- 46,469
--------- ---------
.......................................................... -- 108,729
--------- ---------
--------- ---------
</TABLE>
64
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $7,705, $16,475, and $26,968 was
recorded for these Plans for the years-ended December 31, 1997, 1996, and
1995.
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 $925,497, $156,839, and $162,199,
in 1997, 1996, and 1995, respectively. At December 31, 1997, the directors
had purchased 38,523 phantom units of which 6,629 were purchased in 1997.
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. The plan
was terminated on August 1, 1997 and directors were paid their accumulated
deferred balance which approximated $267,000.
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.
65
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The resulting liability from the Directors' Emeritus Plan approximates the
liability accrued under the Directors' Consultation Plan. An expense of
approximately $18,000, 33,000 and $37,000 was recorded for these plans for
the years ended December 31, 1997, 1996 and 1995, respectively. The
Directors' Emeritus Plan was terminated in 1997 and final payment of $240,000
was made to the directors. Therefore, the resulting liability to the Company
was approximately $0 and $244,000 at December 31, 1997 and 1996, respectively.
66
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
67
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock options activity and related information
for the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
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.................................. 537,499 14.14 499,921 11.54 491,327 8.78
Granted....................................................... 100,000 29.15 121,750 20.90 153,750 16.85
Exercised..................................................... 471,168 16.86 61,311 6.37 105,239 6.05
Forfeited or canceled......................................... 11,040 19.59 22,860 13.99 39,917 12.48
Outstanding--end of year...................................... 155,291 15.17 537,499 14.14 499,921 11.54
Exercisable--end of year...................................... 155,291 15.17 288,912 11.32 253,738 9.21
</TABLE>
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $4.62 to $21.16 and
6.0 years, respectively.
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. Proforma information regarding net income and
net income per share has been determined under a fair value method. The per
share weighted-average fair value of stock options granted during 1997, 1996
and 1995 was $6.63, $4.80, and $3.99, respectively. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk Free Interest rate 6.50% 6.50% 6.50%
Dividend yield 3.75% 3.75% 3.75%
Volatility .306% .341% .341%
Expected Option life 3.5 years 3.5 years 3.5 years
</TABLE>
For purposes of pro forma disclosures, if the estimated fair value of the
options is amortized to expense over the options' vesting period, the effect
on net income would be (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income
As reported $10,216 $16,087 $16,221
Pro forma 9,539 15,699 15,853
Basic earnings per share
As reported $ .83 1.32 1.60
Pro Forma .78 1.30 1.55
Diluted earnings per share
As reported $ .83 1.32 1.58
Pro forma .78 1.29 1.55
</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' vested period of generally
five years and compensation cost for options granted prior to January 1995 is
not considered.
The following table reconciles the denominators for basic and diluted net
income per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Denominator
For basic net income
per share--average shares
outstanding 12,258,265 12,051,935 10,137,302
Effect of dilutive securities--
stock options 53,692 119,286 107,024
For diluted net income per
share--average shares
outstanding after assumed
conversions 12,311,957 12.171,221 10,244,326
</TABLE>
There were no dilutive securities for the years ended December 31, 1997,
1996, and 1995 in calculating the numerator for basic and diluted net income
per share.
68
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Other noninterest income:
Service charges on deposit accounts................................................ $ 5,279 $ 4,341 $ 3,653
Trust fees......................................................................... 912 789 605
Recoveries on distressed assets.................................................... 479 250 296
Gain on sale of loans, net......................................................... 3,411 1,019 545
Merchant & loan servicing fees..................................................... 1,627 1,716 1,326
Fees related to mortgage loans purchased under agreements to resell................ 1,135 689 369
Brokerage fees..................................................................... 1,927 1,982 1,263
Other noninterest expense:
Salaries and benefits.............................................................. 23,858 21,690 17,599
Occupancy.......................................................................... 4,638 4,123 3,076
Equipment.......................................................................... 3,748 3,473 2,813
Professional and legal fees........................................................ 2,486 1,969 1,257
Amortization of intangibles........................................................ 2,021 2,037 1,269
FDIC Insurance..................................................................... 681 7,858 1,965
Supplies........................................................................... 1,573 1,434 973
Postage............................................................................ 1,378 1,202 900
Marketing and promotion............................................................ 1,982 2,244 1,469
Computer processing................................................................ 1,934 1,972 1,702
Restructuring charges.............................................................. 11,508 -- --
Director Fees...................................................................... 1,864 702 566
</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>
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent potential credit risk
Commitments to extend credit........................................................... $ 131,609 $ 148,826
Letters of credit......................................................................... 24,477 5,660
Undisbursed construction loans in repurchase program...................................... 11,582 12,419
</TABLE>
69
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter party.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. All
letters of credit are short-term guarantees of one year or less. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company has a secured interest
in various assets as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held on those
commitments at December 31, 1997 and 1996 is in excess of the committed
amount.
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks................................................................. $ 9,901 $ 2,121
Interest-bearing deposits with financial institutions................................... -- 6,076
Securities available for sale........................................................... -- 217
Investment in subsidiaries.............................................................. 161,882 157,014
Note receivable......................................................................... -- 1,450
Other assets............................................................................ 13,471 5,433
---------- ----------
TOTAL ASSETS.......................................................................... $ 185,254 $ 172,311
---------- ----------
---------- ----------
LIABILITIES
Notes payable and other liabilities..................................................... $ 4,259 $ 2,052
STOCKHOLDERS' EQUITY
Common stock............................................................................ 19,110 19,110
Additional paid-in capital.............................................................. 78,094 78,192
Retained earnings....................................................................... 81,764 83,599
Treasury stock at cost.................................................................. -- (10,304)
Guaranteed ESOP obligation.............................................................. -- (379)
Recognition and retention plan obligation............................................... -- (4)
Net unrealized gain on securities available-for-sale.................................... 2,027 45
---------- ----------
Total stockholders' equity............................................................ 180,995 170,259
---------- ----------
Total liabilities and stockholders' equity............................................ $ 185,254 $ 172,311
---------- ----------
---------- ----------
</TABLE>
70
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries.................................................... $ 12,805 $ 14,445 $ 27,522
Interest and other income...................................................... 1,933 1,200 414
--------- --------- ---------
Total income................................................................. 14,738 15,645 27,936
--------- --------- ---------
Expenses
Salaries and benefits.......................................................... 907 290 222
Other operating expenses....................................................... 7,137 1,492 1,115
--------- --------- ---------
TOTAL EXPENSES............................................................... 8,044 1,782 1,337
--------- --------- ---------
Income before income tax benefit and undistributed earnings of subsidiaries...... 6,694 13,863 26,599
Income tax benefit............................................................... (947) (210) (342)
Equity in undistributed earnings of subsidiaries................................. 2,575 2,014 (10,720)
--------- --------- ---------
NET INCOME..................................................................... $ 10,216 $ 16,087 $ 16,221
--------- --------- ---------
</TABLE>
71
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 10,216 $ 16,087 $ 16,221
Equity in undistributed earning of subsidiaries................................ (2,575) (2,014) 10,720
Other, net..................................................................... (12,137) (1,188) (1,056)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... (4,496) 12,885 25,885
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits with financial
institutions................................................................. 6,076 18,108 (17,610)
Purchase acquisition, net of cash.............................................. -- -- (28,219)
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)
Proceeds from paydowns of available-for-sale securities........................ -- 27 27
Proceeds from sales and maturities of available-for-sale securities............ 1,089 -- --
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................. 7,165 15,028 (47,887)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of treasury stock....................................... $ 425 -- --
Proceeds from issuance of common stock......................................... 7,436 662 13,821
Purchase of treasury shares at cost............................................ -- (613) (957)
Contribution to fund ESOP...................................................... 379 211 125
(Repayments) Proceeds from short-term borrowings............................... 396 (18,000) 18,000
Dividends paid................................................................. (9,550) (8,590) (6,826)
Redemption of shareholders' rights plan........................................ (48) -- --
Cash paid for fractional shares................................................ (4) -- --
--------- --------- ---------
NET CASH USED (PROVIDED) BY FINANCING ACTIVITIES............................. (966) (26,330) 24,163
--------- --------- ---------
Net increase in cash and cash equivalents........................................ 1,703 1,583 2,161
Cash and cash equivalents at beginning of year................................... 8,198 6,615 4,454
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $9,901 $ 8,198 $ 6,615
</TABLE>
71
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997 of approximately $33.2 million.
NOTE 18 COMMITMENTS AND CONTINGENT LIABILITIES
There are various other matters of litigation pending against the Company
that have arisen during the normal course of business. Management is
vigorously defending themselves in all matters. Management believes that the
impact to the financial statements resulting from the ultimate resolution of
these matters will not be significant.
73
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 SUBSEQUENT EVENT- PENDING ACQUISITION
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
approval and is expected to close in the second quarter of 1998.
73
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
(in thousands, except per share data stock prices)
1997
Interest income........................................... 40,071 41,590 42,671 42,740
Net interest income....................................... 18,130 18,475 18,953 20,028
Provision for loan losses................................. 805 865 10,850 800
Income before income tax expense.......................... 8,957 9,134 (10,172) 7,556
Net income................................................ 5,996 5,955 (7,081) 5,346
Net income per share...................................... $ 0.49 $ .49 ($0.58) $ 0.43
Stock price range......................................... $ 23.25-28.00 $ 25.13-29.00 $28.50-36.00 $35.00-49.38
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......................................... $17.75-20.50 $20.00-21.75 $19.50-24.75 $23.25-25.00
</TABLE>
75
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
76
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 20, 1998, the directors and executive officers of Pinnacle are
as indicated in the following table. The table also indicates the positions held
by such persons at Pinnacle Bank.
<TABLE>
<CAPTION>
Name Age Pinnacle Position(s) Pinnacle Bank Position(s)
- ---------------------------------- --- ---------------------------------- ----------------------------------
<S> <C> <C> <C>
John P. Cunningham................ 60 Director Director
Terrence A. Friedman.............. 60 Director Director
Joseph F. Heffernan............... 62 Director Director, President of Mortgage
Repurchasing Division
James E. Hutton................... 59 Director Director
Donald A. Lesch................... 47 Director, President and Chief Director
Operating Officer
Richard L. Schanze................ 57 Director, Chairman and Chief Director, Chairman and Chief
Executive Officer Executive Officer
Howard Silverman.................. 59 Director Director
Arnold L. Weaver.................. 52 Director Director, President and Chief
Operating Officer
Alton C. Wendzel.................. 67 Director Director
Fred A. Wittlinger................ 56 Director Director
Barbara A. Young.................. 48 Director Director
Donald E. Radde................... 45 Executive Vice President and Director, Executive Vice
Secretary President, Chief Lending Officer
and Secretary
David W. Kolhagen................. 40 Senior Vice President and Senior Vice President and Chief
Treasurer Financial Officer
John A. Newcomer.................. 46 Vice President and Corporate Vice President and Corporate
Affairs Officer Affairs Officer
</TABLE>
John P. Cunningham is a director of both Pinnacle and Pinnacle Bank. He also
is a member of the Audit Committee, Retirement Committee, the Compensation
Committee and the Merger and Acquisition Committee of the Pinnacle Board. He is
also a member of the Audit Committee, the Retirement Committee, the Merger and
Acquisition Committee and the Compensation Committee of the Board of Directors
of Pinnacle Bank. He is currently the President and Chief Executive Officer of
Boston Optical Fiber, Inc., a manufacturer of plastic optical fiber. Prior to
1998, he was the Chief Financial Officer of Whirlpool Corporation, a
publicly-held appliance manufacturer with securities listed on the New York
Stock Exchange. In 1995 he was the Chief Financial Officer of Maytag, a
publicly-held appliance manufacturer with securities listed on the New York
Stock Exchange. Prior to that time he was the Controller of IBM, a publicly-held
company with securities listed on the New York Stock Exchange.
Terrence A. Friedman is a director of both Pinnacle and Pinnacle Bank and is
a member of the Compensation Committee and the Merger and Acquisition Committee
of the Board of Directors of Pinnacle. He is also a member of the Executive
Committee, the Compensation Committee, the Merger and Acquisition Committee and
the Loan Review Committee of the Board of Directors of Pinnacle Bank. He is
currently the Chairman of Trelleborg-YSH, Inc., a manufacturer of rubber
components primarily for the auto industry.
Joseph F. Heffernan has been a director of both Pinnacle and Pinnacle Bank,
and the President of the Mortgage Repurchasing Division of Pinnacle Bank, since
August 1, 1997. Prior thereto, Mr. Heffernan was the Chairman of the Board,
President and Chief Executive Officer of CB Bancorp, Inc. and Community Bank. He
is a member of the Merger
77
<PAGE>
and Acquisition Committee and the Strategic Planning Committee of the Pinnacle
Board. He is also a member of the Merger and Acquisition Committee and the
Strategic Planning Committee of the Board of Directors of Pinnacle Bank.
James E. Hutton has been a director of both Pinnacle and Pinnacle Bank since
August 1, 1997. He is a member of the Audit Committee, the Retirement Committee
and the Compensation Committee of the Pinnacle Board. He is also a member of the
Executive Committee, the Audit Committee, the Retirement Committee and the
Compensation Committee of the Board of Directors of Pinnacle Bank. Since June
1993, Mr. Hutton has served as Vice President in charge of operations for
Burrell Professionals Labs, Inc., a professional photo processing company with
operations throughout the United States. Prior thereto, Mr. Hutton was Managing
Partner of the Northern Indiana office of Geo. S. Olive and Co., an accounting
firm. Mr. Hutton is a certified public accountant.
Donald A. Lesch has been a director of both Pinnacle and Pinnacle Bank, and
the Vice Chairman, President and Chief Operating Officer of Pinnacle, since
August 1, 1997. He is an ex-officio member of all of the committees of the
Pinnacle Board. He is also a member of the Executive Committee, and an ex-
officio member of all of the committees of the Board of Directors of Pinnacle
Bank. Prior thereto, Mr. Lesch was the Chairman of the Board of IFC and IndFed
Bank since June 1, 1993. He became Chief Executive Officer of both of those
entities in 1996. Prior thereto, Mr. Lesch was an investor and consultant to
Gough and Lesch Development Corporation, a real estate development company
located in Merrillville, Indiana.
Richard L. Schanze is a director of both Pinnacle and Pinnacle Bank and is
an ex-officio member of all of the committees of the Board of Directors of
Pinnacle, and a member of the Executive Committee and an ex-officio member of
all of the committees of the Board of Directors of Pinnacle Bank. He is
currently the Chairman and Chief Executive Officer of Pinnacle and the Chairman
and Chief Executive Officer of Pinnacle Bank.
Howard Silverman has been a director of both Pinnacle and Pinnacle Bank
since August 1, 1997. He is a member of the Merger and Acquisition Committee and
the Strategic Planning Committee of the Pinnacle Board. He is also a member of
the Merger and Acquisition Committee and the Strategic Planning Committee of the
Board of Directors of Pinnacle Bank. Mr. Silverman is Chairman of the Board of
Directors of Reliance Acceptance Group, Inc., a specialty consumer finance
company, since the split-off of its subsidiary bank in February 1997. On
February 9, 1998, Reliance Acceptance Group, Inc. filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. He has also been Chairman of
the Board of Reliance Acceptance Corporation, its operating subsidiary, since
its incorporation in 1992. For more than five years, Mr. Silverman has also been
President of Silverman and Associates, a consulting firm furnishing services to
businesses and financial institutions which provided services to Indiana Federal
Corporation, which was merged into Pinnacle effective August 1, 1997. During his
earlier career, he served as Chairman and Executive Officer of a multi-bank and
financial services company, which included a finance company subsidiary, and as
President of a securities broker/dealer. Mr. Silverman is also a director of
Forrest Holdings, Inc. which owns and operates Forrest Financial Corporation, a
leasing company that provides financing solutions for the acquisition of
information systems.
Arnold L. Weaver is a director of both Pinnacle and Pinnacle Bank and is an
ex-officio member of all of the committees of the Board of Directors of
Pinnacle, and a member of the Executive Committee and an ex-officio member of
all of the committees of the Board of Directors of Pinnacle Bank. He is
currently the Vice Chairman of Pinnacle and the President and Chief Operating
Officer of Pinnacle Bank.
Alton C. Wendzel is a director of both Pinnacle and Pinnacle Bank and is
a member of the Audit Committee and the Strategic Planning Committee of the
Board of Directors of Pinnacle. He is also a member of the Audit Committee,
Strategic Planning Committee and the Loan Review Committee of the Board of
Directors of Pinnacle Bank. He is currently the President of Greg Orchards
and Produce, Inc. and Coloma Frozen Foods, Inc., processors of fresh and
frozen producer.
Fred A. Wittlinger has been a director of both Pinnacle and Pinnacle Bank
since August 1, 1997. He also is a member of the Audit
78
<PAGE>
Committee and the Merger and Acquisition Committee of the Pinnacle Board. He is
a member of the Audit Committee and the Merger and Acquisition Committee of the
Board of Directors of Pinnacle Bank. Since 1988, Mr. Wittlinger has served as
President and Chief Executive Officer of United Consumers Club, Inc., a consumer
buying club franchising corporation located in Merrillville, Indiana.
Barbara A. Young has been a director of both Pinnacle and Pinnacle Bank
since August 1, 1997. She is a member of the Compensation Committee and the
Retirement Committee of the Pinnacle Board. She is also a member of the
Compensation Committee, the Retirement Committee and the Risk Management
Committee of the Board of Directors of Pinnacle Bank. Since January 1, 1994, Ms.
Young has served as President of Benchmark LTD, a real estate development
company located in Valparaiso, Indiana. Prior thereto, Ms. Young was an attorney
with the law firm of Hoeppner, Wagner & Evans, located in both Valparaiso and
Merrillville, Indiana.
Donald E. Radde is an Executive Vice President and the Secretary of
Pinnacle. He is also a Director, an Executive Vice President, Chief Lending
Officer and Secretary of Pinnacle Bank.
David W. Kolhagen is a Senior Vice President and the Treasurer of Pinnacle
and a Senior Vice President and the Chief Financial Officer of Pinnacle Bank.
John A. Newcomer is a Vice President and the Corporate Affairs Officer of
Pinnacle and of Pinnacle Bank.
Directors of Pinnacle are elected annually by the stockholders of Pinnacle.
Executive officers of Pinnacle are appointed by the Pinnacle Board and serve
until their successors are appointed and qualified. No director or executive
officer of Pinnacle or Pinnacle Bank is related to any other director or to any
executive officer of Pinnacle or of any of its subsidiaries by blood, marriage
or adoption, and there are no arrangements or understandings between a director
or executive officer and any other person pursuant to which such person was
elected a director or executive officer of Pinnacle or any of its subsidiaries.
79
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to each of the five
most highly compensated executive officers and/or employees of Pinnacle and its
subsidiaries (the "Named Pinnacle Executives") for the last three completed
fiscal years whose salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------
Other Annual
Name and Salary Bonus Compensation
Principle Position Year ($) ($) ($) (1)
- ------------------------- ---- ------- ------- --------------
<S> <C> <C> <C> <C>
Richard L. Schanze....... 1997 325,000 300,000 1,403,481
Chairman/CEO 1996 288,875 225,000 23,000
1995 242,420 180,000 17,800
Donald A. Lesch.......... 1997 275,000 427,000 564,608
President/COO 1996 168,427 -- --
1995 139,992 -- --
Arnold L. Weaver......... 1997 225,000 125,000 1,031,405
President/COO of 1996 208,875 75,000 23,000
Pinnacle Bank 1995 167,200 70,000 17,800
Donald E. Radde.......... 1997 170,000 45,000 762,711
Exec. Vice President 1996 132,875 40,000 --
1995 106,620 28,000 --
David W. Kolhagen........ 1997 145,000 40,000 696,021
Senior Vice 1996 97,375 35,000 --
President/CFO 1995 82,280 30,000 --
<CAPTION>
Long Term Payout
Awards Compensation ------
---------------- ------------ LTIP All Other
Name and Restricted Stock Options/SARs Payout Compensation
Principle Position Award(s) ($) (#) ($) ($) (2)
- ------------------------- ---------------- ------------ ------ ------------
<S> <C> <C> <C> <C>
Richard L. Schanze....... -- 24,000 -- 186,448
Chairman/CEO -- 9,500 -- 37,205
-- 15,300 -- 35,403
Donald A. Lesch.......... -- -- -- 11,233
President/COO -- 3,000 -- 9,000
-- -- -- 8,400
Arnold L. Weaver......... -- 19,000 -- 66,391
President/COO of -- 8,000 -- 5,559
Pinnacle Bank -- 10,600 -- 10,833
Donald E. Radde.......... -- 17,000 -- 13,874
Exec. Vice President -- 7,000 -- 4,800
-- 7,500 -- 5,920
David W. Kolhagen........ -- 17,000 -- 10,660
Senior Vice -- 6,500 -- 7,116
President/CFO -- 7,000 -- 8,534
</TABLE>
- ------------------------
(1) Amounts shown consist of director fees paid by Pinnacle and by Pinnacle
Bank, and gains on exercise of stock options.
(2) Amounts shown for 1997 consist of the following: (i) Mr. Schanze: matching
contributions under Pinnacle Bank's 401-k plan of $2,375, personal use of
Company-owned automobile of $2,860, and contributions under Pinnacle Bank's
Deferred Compensation Plan for Executive Officers of $181,213; (ii) Mr.
Lesch: matching contributions under Pinnacle Bank's 401-k plan of $1,057,
personal use of Company-owned automobile of $1,202, and contributions under
IFC's Employee Stock Ownership Plan of $8,974; (iii) Mr. Weaver: matching
contributions under Pinnacle Bank's 401-k plan of $2,375, personal use of
Company-owned automobile of $2,855, and contributions under Pinnacle Bank's
Deferred Compensation Plan for Executive Officers of $61,161; (iv) Mr.
Radde: matching contributions under Pinnacle Bank's 401-k plan of $2,375,
personal use of Company-owned automobile of $2,281, and contributions under
Pinnacle Bank's Deferred Compensation Plan for Executive Officers of $9,218;
and (v) Mr. Kolhagen: matching contributions under Pinnacle Bank's 401-k
plan of $2,375, personal use of Company-owned automobile of $5,448, and
contributions under Pinnacle Bank's Deferred Compensation Plan for Executive
Officers of $2,837. Amounts shown for 1996 consist of the following: (i) Mr.
Schanze: matching contributions under Pinnacle Bank's 401-k plan of $2,375,
personal use of Company-owned automobile of $3,304, and contributions under
Pinnacle Bank's Deferred Compensation Plan for Executive Officers of
$31,526; (ii) Mr. Weaver: matching contributions under Pinnacle Bank's
401-k plan of $2,375, and personal use of Company-owned automobile of
$3,184; (iii) Mr. Radde: matching contributions under Pinnacle Bank's
401-k plan of $2,375 and personal use of Company-owned automobile of $2,425;
and (iv) Mr. Kolhagen: matching contributions under Pinnacle Bank's 401-k
plan of $2,375 and personal use of Company-owned automobile of $4,741.
Amounts shown for 1995 consist of the following: (i) Mr. Schanze: matching
contributions under Pinnacle Bank's 401-k plan of $4,620, personal use of
Company-owned automobile of $3,192, and contributions under Pinnacle Bank's
Deferred Compensation Plan for Executive Officers of $27,591; (ii) Mr.
Weaver: matching contributions under Pinnacle Bank's 401-k plan of $4,620,
personal use of Company-owned automobile of $3,770 and contributions under
Pinnacle Bank's Deferred Compensation Plan for Executive Officers of $2,443;
(iii) Mr. Radde: matching contributions under Pinnacle's 401-k plan of
$4,620 and personal use of Company-owned automobile of $1,300; and (iv)
Mr. Kolhagen: matching contributions under Pinnacle Bank's 401-k
plan of $3,781 and personal use of Company-owned automobile of $4,753.
80
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth
certain information concerning stock options/SARs granted during 1997 to the
Named Pinnacle Executives.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total
Securities Options/ Sars
Underlying Granted to Exercise of
Grant Options/ Sars Employees in Base Price Expiration
Name Date Granted Fiscal Year ($/sh) Date
- ------------------------------------------- ----------- ----------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard L. Schanze
Chairman/CEO............................. 07/97 24,000 24.00% $ 29.15 See
Donald A. Lesch
President/COO............................ -- -- -- -- --
Arnold L. Weaver
President/COO of Pinnacle Bank........... 07/97 19,000 19.00% 29.15 See
Donald E. Radde
Executive Vice President................. 07/97 17,000 17.00% 29.15 See
David W. Kolhagen
Senior Vice President, CFO............... 07/97 17,000 17.00% 29.15 See
<CAPTION>
NAME 5% 10%
- ------------------------------------------- ----- ---------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term
<S> <C> <C>
Richard L. Schanze
Chairman/CEO............................. Note Below
Donald A. Lesch
President/COO............................ -- --
Arnold L. Weaver
President/COO of Pinnacle Bank........... Note Below
Donald E. Radde
Executive Vice President................. Note Below
David W. Kolhagen
Senior Vice President, CFO............... Note Below
</TABLE>
The above listed stock options were granted pursuant to Pinnacle's Executive
Long-Term Incentive Plan, which is administered by the Compensation Committee of
the Board of Directors of Pinnacle. All of the above listed stock options that
were granted in 1997 became fully vested and immediately exercisable on August
1,1997 upon consummation of the mergers of IFC and CB with and into Pinnacle;
and all of the above listed options were exercised prior to December 31, 1997.
PENSION PLAN
The following table shows estimated annual benefits payable upon retirement
to, and credited years of services for, each of the Named Executive Officers.
<TABLE>
<CAPTION>
Annual Benefit Per Years of Service
-----------------------------------------------------------
Annual Comp 15 20 25 30 More Than 30
- ----------------------------------------------------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$125,000............................................. $ 30,478 $ 40,637 $ 50,797 $ 60,956 $ 60,956
$150,000............................................. $ 37,040 $ 49,387 $ 61,734 $ 74,081 $ 74,081
$175,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$200,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$225,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$250,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$300,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$400,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$450,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
$500,000............................................. $ 39,665 $ 52,887 $ 66,109 $ 79,331 $ 79,331
</TABLE>
81
<PAGE>
The benefits shown above are payable in a straight-life annuity and are not
offset by any other benefits, including Social Security. The final average
annual compensation is determined under the defined benefit plan by the average
of the five highest consecutive years of annual compensation (including salary
and bonus payments) during the last ten years of employment, subject to a
maximum of $150,000 for 1994, 1995 and 1996, and $160,000 for all subsequent
years. As of December 31, 1997, Mr. Schanze had 22 years of credited service,
Mr. Lesch had 5 years of credited service, Mr. Weaver had 21 years of credited
service, Mr. Radde had 16 years of credited service, and Mr. Kolhagen had 17
years of credited service.
SEVERANCE AGREEMENTS
Pinnacle currently has in effect certain severance agreements (the
"Severance Agreements") with seven executive officers (the "Executives"), which
include, among other things, provisions regarding payments under certain
circumstances following a "change in control." The Executives with Severance
Agreements are Richard L. Schanze, Chairman and Chief Executive Officer, Arnold
L. Weaver, Vice Chairman of Pinnacle and President and Chief Operating Officer
of Pinnacle Bank, Donald E. Radde, Executive Vice President, David W. Kolhagen,
Senior Vice President and Chief Financial Officer, John A. Newcomer, Vice
President and Corporate Affairs Officer, Donald A. Lesch, Vice Chairman,
President and Chief Operating Officer, and Michael J. Griffin, Senior Vice
President of Pinnacle Bank. Approval of the merger agreement with CNB by the
Pinnacle shareholders will constitute a "change in control" under each of the
Severance Agreements.
The Severance Agreements provide, among other things, that upon a "change in
control," an Executive will be entitled to receive certain amounts in the event
that, within twenty-four months after the change in control, such Executive's
employment is terminated for any reason other than "cause" (as defined in the
Severance Agreements) or such Executive terminates his employment for "good
reason" (as defined in the Severance Agreements). In such an event, the
appropriate Severance Agreement provides that Mr. Schanze would be entitled to
receive the greater of 299% of his base amount, as determined under Section 280G
of the Code (the "Base Amount") or $1,118,000; Mr. Weaver would be entitled to
receive the greater of 299% of his Base Amount or $559,000; Mr. Radde would be
entitled to receive the greater of (a) the lesser of (i) 200% of his total
compensation or (ii) 299% of his Base Amount, or (b) $354,000; Mr. Kolhagen
would be entitled to receive the greater of (a) the lesser of (i) 200% of his
total compensation or (ii) 299% of his Base Amount, or (b) $287,000; Mr.
Newcomer would be entitled to receive the greater of (a) the lesser of (i) 100%
of his total compensation or (ii) 299% of his Base Amount, or (b) $156,000; Mr.
Lesch would be entitled to receive the greater of (a) 299% of his Base Amount,
or (b) $568,100; and Mr. Griffin would be entitled to receive the greater of
200% of his Base Amount or $87,816.
The Severance Agreements each also provide that in the event that an
Executive's employment is terminated for cause or the Executive terminates his
employment for any reason other than good reason, in either event upon or at any
time following a change in control, such Executive will be entitled to the
following payment: Mr. Schanze, $1,118,000; Mr. Weaver, $559,000; Mr. Radde,
$354,000; Mr. Kolhagen, $287,000; Mr. Newcomer, $156,000; Mr. Lesch, $568,100;
and Mr. Griffin, $87,816.
Pinnacle also currently has certain other severance contracts in effect with
Joseph F. Heffernan, Daniel R. Buresh and James D. Neff. These severance
contracts do not provide for additional payments upon a change in control, and
no benefits will be payable thereunder solely as a result of the consummation of
the merger with CNB. Under these severance contracts, in the event the
employee's employment is terminated for "Cause" (as defined therein), no
severance payment is due the employee; however, in the event the employee's
employment is terminated for any reason other than "Cause", Mr. Heffernan would
then be entitled to receive the greater of $223,000 or 100% of his then current
annual salary and bonus payments; Mr. Buresh would then be entitled to receive
the greater of $70,000 or 100% of his then current annual salary and bonus
payments; and Mr. Neff would then be entitled to receive the greater of $95,000
or 100% of his then current annual salary and bonus payments.
OTHER COMPENSATION ARRANGEMENTS
82
<PAGE>
Under Pinnacle Bank's Deferred Compensation Plan for Executive Officers,
certain highly compensated employees of Pinnacle Bank or its affiliates may be
granted certain awards of deferred compensation. These awards, which must be
approved by the Board of Directors of Pinnacle Bank, may be granted annually.
All awards remain the property of Pinnacle Bank until paid out. Awards, together
with any accrued interest thereon, are to be distributed to a participant in
annual installments over a ten-year period beginning on the January 1 following
the calendar year in which such participant ceases to be an employee of Pinnacle
Bank or its affiliates. (In the event of a participant's death the balance of
his awards will be paid in full to his estate within 90 days of the date of his
death.) These accounts are credited with interest at the end of each month at
110% of the rate then being paid on certain U.S. Treasury securities.
IFC EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENTS. Pinnacle has
assumed the obligations of its predecessor, IFC, under Executive Supplemental
Retirement Income Agreements ("IFC ESRIAs") with Mr. Lesch and certain other key
officers. The IFC ESRIAs are unfunded, non-qualified agreements which provide
for an annual benefit to each executive of an amount generally equal to a stated
percentage (of between 15% and 45%) of the executive's highest five-year average
"base compensation" (which includes salary, but excludes bonuses and fringe
benefits), to be paid over a 15-year period. The IFC ESRIAs also provide for
disability and death benefits, including a $10,000 burial expense payment. In
addition, the IFC ESRIAs provide that the beneficiaries will be eligible to
receive their full supplemental benefit in the event they involuntarily
terminate their employment prior to reaching retirement age. Until disbursed,
the amounts payable under the IFC ESRIAs are subject to the claims of general
creditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997 only James E. Hutton, Terrence A. Friedman, and John P.
Cunningham and Barbara A. Young, each a director of Pinnacle, served as members
of the Compensation Committee of the Board of Directors of Pinnacle. No officers
or employees of Pinnacle or Pinnacle Bank served as members of the Compensation
Committee and no executive officer of Pinnacle served as a member of the
Compensation Committee of another entity.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation policy of Pinnacle, as applicable to executive officers, is
designed to assure Pinnacle's ongoing ability to attract, retain and motivate,
while at the same time recognizing the contributions of those individuals upon
whose judgement, efforts and results Pinnacle is largely dependent for its
success and future. Pinnacle is cognizant of the fact it competes for qualified
individuals at the local and regional levels and to a lesser degree, nationally.
As a result, compensation for executive officers is monitored carefully.
To assist in this process, the Compensation Committee reviews information
from independent salary studies that include the financial industry and other
industrial classifications.
While Pinnacle and Pinnacle Bank establish objective annual goals in
targeted areas such as asset growth, earnings, loan originations, etc. and
progress toward these goals is reviewed, a specific "trigger level" is not
required to be reached in each area.
On a subjective basis, performance criteria encompass evaluation of each
officer's initiative and contribution to overall corporate performance, the
officer's managerial ability, the officer's leadership capacity and the
officer's performance in any special projects which the officer may have
undertaken. No formula was used to determine the Chief Executive Officer's, or
other named executives', bonus or award of stock options. This was the fifth
year stock options were awarded and the previous award schedule was taken into
consideration while awarding 1997's stock options. In future years, if awards
are granted, the Compensation Committee will take into consideration awards
previously made to a potential recipient, the vesting schedule of such awards,
and the number of awards outstanding in the aggregate to all recipients.
83
<PAGE>
In reviewing Mr. Schanze's total compensation, the primary focus of the
Compensation Committee was on Pinnacle's performance in 1997, which met
established goals. The Compensation Committee also considered Mr. Schanze's
contributions to various non-quantifiable community improvement activities and
the positive impact they have had upon Pinnacle and to various long-range
initiatives impacting the future of Pinnacle, including the acquisition
strategies currently in place, as well as acquisitions completed in 1997.
Members of the Compensation Committee:
James E. Hutton John P. Cunningham Terrence A. Friedman Barbara A. Young
DIRECTOR COMPENSATION
Each director of Pinnacle is paid an annual retainer of $7,500 plus $1,000
for each meeting of the Board of Directors of Pinnacle attended. Each director
of Pinnacle Bank is paid an annual retainer of $7,500 plus $1,000 for each
meeting of the Board of Directors of Pinnacle Bank attended. Members of
committees of the Board of Directors of Pinnacle Bank also receive $1,000 for
each committee meeting attended. Messrs. Schanze, Lesch, and Weaver have waived
all fees for attending meetings of committees of the Board of Directors of
Pinnacle Bank in the past and intend to continue to do so in the future.
Pinnacle and Pinnacle Bank each maintain deferred compensation plans under
which a director may elect to defer receipt of either all or 50% of directors'
fees otherwise payable during a calendar year to a later calendar year. Amounts
deferred are reflected as unsecured accounts payable on the books of the
appropriate corporation and are subject to claims of such corporation's general
creditors. These accounts are credited with interest at the end of each month at
110% of the rate being paid on U.S. Treasury Securities.
IFC DIRECTORS DEFERRED COMPENSATION AGREEMENTS. Pinnacle has assumed the
obligations of its predecessor, IFC, under certain Director Deferred
Compensation Agreements ("DDCA") with certain of its non-employee directors. The
DDCAs are unfunded, non-qualified agreements which provide for retirement, death
and disability benefits for the participants and their designated beneficiaries.
Under the DDCAs, each non-employee director may, for a period of five years,
make an annual election to defer receipt of all or a portion of his or her
monthly director fees paid prior to August 1, 1997 into a Guaranteed Investment
Contract ("GIC") Account and/or a Phantom Unit Account.
Deferred amounts allocated to the GIC Account will be credited with interest
at the rate of .667% per month. Deferred amounts allocated to the Phantom Unit
Account are used to "purchase" Phantom Units, each representing a share,
initially of IFC Common Stock, and currently of Pinnacle Common Stock, at the
market price on the date of the deferral election. Phantom Units are credited
with dividends, and are adjusted for any stock splits or similar events.
Directors do not have the option to receive dividends in cash, but may elect to
reinvest such dividends in Phantom Units or in a GIC Account. Upon termination
of the director's service, the Phantom Units are deemed to be sold, and the
proceeds of such sale are distributed to the director in cash pursuant to the
payment provisions of the DDCAs.
At normal retirement (age 65), each director will be entitled to receive
over a 15-year period his or her accrued benefit, which is determined by
annuitizing such benefit over the payment period using a monthly interest factor
of .833%. The DDCAs also provide for disability and death benefits, including a
$10,000 burial expense payment. Until disbursed, the amounts directed to be
deferred are subject to the claims of general creditors.
84
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on Pinnacle's Common Stock against the cumulative total
return of the Standard & Poor's 500 Index and the Banks: Midwest Index for the
periods shown.
PINNACLE FINANCIAL SERVICES, INC.; STANDARD & POORS 500;
AND BANKS: MIDWEST INDEX
TOTAL RETURN ANALYSIS*
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pinnacle............................................ 100.00 171.79 113.60 136.01 188.00 404.52
Standard & Poor's 500............................... 100.00 110.09 111.54 153.47 188.71 251.68
Banks: Midwest...................................... 100.00 100.51 92.17 140.36 189.65 314.63
</TABLE>
- ------------------------
* Shows performance results through December 31, 1997 for Pinnacle Financial
Services, Inc. Common Stock, Standard & Poor's 500, and Banks: Midwest
assuming $100 was invested at the close of trading December 1992 and all
dividends are reinvested.
Source: FactSet Data Systems
85
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information provided by the persons indicated
with respect to the beneficial ownership (as defined under applicable rules of
the Commission) of shares of Pinnacle Common Stock as of March 20, 1998, by (i)
each person known by Pinnacle who is the owner of more than 5% of the
outstanding shares of Pinnacle Common Stock, (ii) each person who is a director
or an executive officer of Pinnacle, and (iii) all persons who are directors or
executive officers of Pinnacle as a group.
<TABLE>
<CAPTION>
Percentage of
Name and Address(1) Number of Shares(2) Beneficial Ownership(2)
- --------------------------------------------------------------------- ------------------- ---------------------------
<S> <C> <C>
Cyrus A. Ansary...................................................... 1,188,994 9.4%
Joseph P. Cunningham(3).............................................. 2,000 *
Terrence A. Friedman(3).............................................. 35,288 *
Joseph F. Heffernan(3)(4)............................................ 62,798 *
James E. Hutton(3)................................................... 55,559 *
David W. Kolhagen(4)................................................. 37,193 *
Donald A. Lesch(3)(4)................................................ 84,676 *
John Newcomer(4)..................................................... 26,148 *
Donald E. Radde(4)................................................... 41,575 *
Richard L. Schanze(3)(4)............................................. 305,624 2.4%
Howard Silverman(3).................................................. 32,799 *
Arnold L. Weaver(3)(4)............................................... 53,138 *
Alton C. Wendzel(3).................................................. 84,724 *
Fred A. Wittlinger(3)................................................ 53,619 *
Barbara A. Young(3).................................................. 46,526 *
All directors and executive officers of Pinnacle as a group (14
persons)........................................................... 921,667 7.3%
</TABLE>
- ------------------------
(1) Unless otherwise noted, Pinnacle believes that all persons named in the
table have (i) sole voting and investment power with respect to all shares
of Pinnacle Common owned by them, except to the extent that authority is
shared by spouses under applicable law, and (ii) record and beneficial
ownership of such shares. The business address of Mr. Ansary, the only owner
of more than 5% of the outstanding shares of Pinnacle Common, is 1725 K
Street, N.W., Suite 410, Washington, D.C. 20006. The business address of all
other persons named in the table is 830 Pleasant Street, St. Joseph,
Michigan 49085.
(2) Number of shares and percentages with respect to beneficial ownership of
Pinnacle Common are based on ownership of Pinnacle Common as of March 20,
1998 and have been calculated in accordance with Rule 13d-3(d)(1) under the
Exchange Act and assuming 12,653,454 shares of Pinnacle Common are issued
and outstanding. An asterisk indicates beneficial ownership of less than 1%.
(3) Director of Pinnacle.
(4) Executive Officer of Pinnacle.
86
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The directors, officers and principal stockholders of Pinnacle and their
associates may have had in the past, and expect to have in the future,
transactions in the ordinary course of business with Pinnacle and its
subsidiaries. Such transactions were, and are expected to be, on substantially
the same terms as those prevailing at the time for comparable transactions with
others.
87
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit
Reference
Number Exhibit Description
- ---------------- ------------------------------------------------------------------------------------------------
<S> <C>
(3)(a)/(4)(a) Restated Articles of Incorporation of Pinnacle Financial Services, Inc. as filed with the
Department of Commerce of the State of Michigan on December 6, 1996 (incorporated by reference
to Exhibit (3)(a)/(4)(a) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(3)(b)/(4)(b) By-laws of Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (3)(ii) of
the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, of Pinnacle
Financial Services, Inc. (Commission file no. 0-17937)).
(4)(c) Specimen certificate for Pinnacle Financial Services, Inc. Common Stock (incorporated by
reference to Exhibit (4)(c) of the Registration Statement on Form S-2 of Pinnacle Financial
Services, Inc. (registration no. 33-95974)).
(10)(a) Agreement and Plan of Merger dated as of October 14, 1997, by and between Pinnacle Financial
Services, Inc. and CNB Bancshares, Inc. (without exhibits) (incorporated by reference to Exhibit
(2) of the Current Report on Form 8-K dated October 14, 1997, of Pinnacle Financial Services,
Inc. (Commission file no. 0-17937)).
(10)(b) Stock Option Agreement dated as of October 14, 1997, by and between Pinnacle Financial Services,
Inc. (as issuer) and CNB Bancshares, Inc. (as grantee) (incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K dated October 14, 1997, of Pinnacle Financial Services,
Inc. (Commission file no. 0-17937)).
(10)(c) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan
(incorporated by reference to Exhibit (10)(e) of the Registration Statement on Form S-4 of
Pinnacle Financial Services, Inc. (registration no. 333-19729)).
(10)(d) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Richard L. Schanze.*
(10)(e) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.
and Donald A. Lesch.*
(10)(f) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Arnold L. Weaver.*
(10)(g) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Donald E. Radde.*
(10)(h) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and David W. Kolhagen.*
(10)(i) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and John A. Newcomer.*
(10)(j) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.
and Michael J. Griffin.*
(10)(k) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and Joseph F. Heffernan.*
(10)(l) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and Daniel R. Buresh.*
(10)(m) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and James D. Neff.*
(10)(n) The Retirement Plan for the Employees of Peoples State Bank of St. Joseph, as amended
(incorporated by reference to Exhibit (10)(i) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(o) Peoples State Bank of St. Joseph Savings Plan, as amended (incorporated by reference to Exhibit
(10)(j) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc.
(registration no. 33-95974)).
(10)(p) Form of Deferred Compensation Agreement for Directors of Pinnacle Financial Services, Inc.
(incorporated by reference to Exhibit (10)(k) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(q) Form of Deferred Compensation Agreement for Directors of The Peoples State Bank of St. Joseph
(incorporated by reference to Exhibit (10)(l) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(r) Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan (incorporated by reference
to Exhibit (10)(m) of the Registration Statement on Form S-2 of Pinnacle Financial Services,
Inc. (registration no. 33-95974)).
(10)(s) Transfer Agreement dated May 4, 1995 by and between Maco Bancorp, Inc. (the
predecessor-in-interest to Pinnacle Financial Services, Inc.) and Cyrus A. Ansary (incorporated
by reference to Exhibit (99)(a) of the Registration Statement on Form S-2 of Pinnacle Financial
Services, Inc. (registration no. 33-95974)).
(10)(t) Transfer Agreement dated as of May 4, 1995 by and between Maco Bancorp, Inc. (the
predecessor-in-interest to Pinnacle Financial Services, Inc.) and Investment Services
International Co. (incorporated by reference to Exhibit (99)(b) of the Registration Statement on
Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(u) Non-Competition Agreement dated December 1, 1995 by and between Pinnacle Financial Services,
Inc. and Cyrus A. Ansary (incorporated by reference to Exhibit (10)(d) of the Current Report on
Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995) (Commission file no.
0-17937).
(10)(v) Escrow Agreement dated December 1, 1995 by and among Pinnacle Financial Services, Inc., Cyrus A.
Ansary and NationsBank Trust, N.A. (incorporated by reference to Exhibit (10)(e) of the Current
Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995) (Commission file
no. 0-17937).
(10)(w) Standstill Agreement entered into by and between Pinnacle Financial Services, Inc. and Cyrus A.
Ansary (incorporated by reference to Exhibit (10)(f) of the Current Report on Form 8-K of
Pinnacle Financial Services, Inc. dated December 1, 1995) (Commission file no. 0-17937).
(10)(x) Indemnification Agreement dated December 1, 1995, and executed and delivered by Cyrus A. Ansary
in favor of Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (10)(g) of
the Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995)
(Commission file no. 0-17937).
(10)(y) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for Executive
Officers (incorporated by reference to Exhibit (10)(u) of the Registration Statement on Form S-4
of Pinnacle Financial Services, Inc.) (registration no. 333-19729)).
(10)(z) Incentive Compensation Plan of Indiana Federal Corporation (a predecessor-in-interest to
Pinnacle Financial Services, Inc.) (incorporated by reference to the exhibits to Form 10-K for
the fiscal year ended December 31, 1992, filed by Indiana Federal Corporation (a
predecessor-in-interest to Pinnacle Financial Services, Inc.) (Commission file no. 0-17379)).
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit
Reference
Number Exhibit Description
- ---------------- ------------------------------------------------------------------------------------------------
<S> <C>
(10)(aa) Employee Stock Ownership Plan of Indiana Federal Corporation (a predecessor-in-interest to
Pinnacle Financial Services, Inc.) (incorporated by reference to the exhibits to Form S-4 filed
by Indiana Federal Corporation) (a predecessor-in-interest to Pinnacle Financial Services, Inc.)
(registration no. 33-20412)).
(10)(bb) Stock Option and Incentive Plan, as amended, of Indiana Federal Corporation (a
predecessor-in-interest to Pinnacle Financial Services, Inc.) (incorporated by reference to the
exhibits to Form 10-K for the fiscal year ended December 31, 1995, filed by Indiana Federal
Corporation (a predecessor-in-interest to Pinnacle Financial Services, Inc.) (Commission file
no. 0-17379)).
(10)(cc) Director Deferred Compensation Agreements of Indiana Federal Corporation (a
predecessor-in-interest to Pinnacle Financial Services, Inc.) (incorporated by reference to the
exhibits to Form 10-K for the fiscal year ended December 31, 1993, filed by Indiana Federal
Corporation (a predecessor-in-interest to Pinnacle Financial Services, Inc.) (Commission file
no. 0-17379)).
(10)(dd) Executive Death Benefit Agreements of Indiana Federal Corporation (a predecessor-in-interest to
Pinnacle Financial Services, Inc.) (incorporated by reference to the exhibits to Form 10-K for
the fiscal year ended December 31, 1993, filed by Indiana Federal Corporation (a
predecessor-in-interest to Pinnacle Financial Services, Inc.) (Commission file no. 0-17379)).
(10)(ee) Executive Supplemental Income Agreements of Indiana Federal Corporation (a
predecessor-in-interest to Pinnacle Financial Services, Inc.) (incorporated by reference to the
exhibits to Form 10-K for the fiscal year ended December 31, 1993, filed by Indiana Federal
Corporation (a predecessor-in-interest to Pinnacle Financial Services, Inc.) (Commission file
no. 0-17379)).
(10)(ff) Community Bank, A Federal Savings Bank Employee Stock Ownership Plan and Trust (a
predecessor-in-interest to Pinnacle Bank) (incorporated by reference to exhibits to the
Registration Statement on Form S-1 of CB Bancorp, Inc. (a predecessor-in-interest to Pinnacle
Financial Services, Inc.) (registration no. 33-51882)).
(11) No statement re computation of per share earnings is required to be filed because the
computations can be clearly determined from the materials contained herein.
(21) List of subsidiaries of Pinnacle Financial Services, Inc.*
(23) Consent of KPMG Peat Marwick LLP, independent auditors.*
(27) Financial Data Schedules of registrant.*
</TABLE>
- ------------------------
* Filed herewith.
Management contracts and compensatory plans or arrangements:
The management contracts and compensatory plans or arrangements required to
be filed as exhibits and included in such list of exhibits are as follows:
<TABLE>
<S> <C>
(10)(c) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan.
(10)(d) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Richard L. Schanze.
(10)(e) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.
and Donald A. Lesch.
(10)(f) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Arnold L. Weaver.
(10)(g) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and Donald E. Radde.
(10)(h) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and David W. Kolhagen.
</TABLE>
89
<PAGE>
<TABLE>
<S> <C>
(10)(i) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.,
Pinnacle Bank and John A. Newcomer.
(10)(j) Severance Agreement dated as of July 31, 1997, by and among Pinnacle Financial Services, Inc.
and Michael J. Griffin.
(10)(k) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and Joseph F. Heffernan.
(10)(l) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and Daniel R. Buresh.
(10)(m) Severance Agreement dated as of August 1, 1997, by and among Pinnacle Financial Services, Inc.
and James D. Neff.
(10)(n) The Retirement Plan for the Employees of Peoples State Bank of St. Joseph, as amended.
(10)(o) Peoples State Bank of St. Joseph Savings Plan, as amended.
(10)(p) Form of Deferred Compensation Agreement for Directors Pinnacle Financial Services, Inc.
(10)(q) Form of Deferred Compensation Agreement for Directors The Peoples State Bank of St. Joseph.
(10)(r) Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan.
(10)(y) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for Executive
Officers.
(10)(z) Incentive Compensation Plan of Indiana Federal Corporation (predecessor-in-interest to Pinnacle
Financial Services, Inc).
(10)(aa) Employee Stock Ownership Plan of Indiana Federal Corporation (predecessor-in-interest to
Pinnacle Financial Services, Inc).
(10)(bb) Stock Option and Incentive Plan, as amended, of Indiana Federal Corporation
(predecessor-in-interest to Pinnacle Financial Services, Inc).
(10)(cc) Director Deferred Compensation Agreements of Indiana Federal Corporation
(predecessor-in-interest to Pinnacle Financial Services, Inc).
(10)(dd) Executive Death Benefit Agreements of Indiana Federal Corporation (predecessor-in-interest to
Pinnacle Financial Services, Inc).
(10)(ee) Executive Supplemental Income Agreements of Indiana Federal Corporation (predecessor-in-interest
to Pinnacle Financial Services, Inc).
(10)(ff) Community Bank, A Federal Savings Bank Employee Stock Ownership Plan and Trust (a
predecessor-in-interest to Pinnacle Bank).
</TABLE>
Index to Financial Statements and Financial Statement Schedules:
<TABLE>
<CAPTION>
10-K
Report
Page(s)
-----------
<S> <C>
Financial Statements:
Report of independent auditors...........................................................................
Consolidated balance sheets as of December 31, 1997 and 1996.............................................
Consolidated statements of income for each of the years ended December 31, 1997,1996 and 1995............
Consolidated statements of stockholders' equity for each of the years ended December 31, 1997, 1996 and
1995...................................................................................................
Consolidated statements of cash flows for each of the years ended December 31, 1997, 1996 and 1995.......
</TABLE>
90
<PAGE>
All schedules for which provision is made in Regulation S-X either (i) are
not required under the related instructions or are inapplicable and, therefore,
have been omitted, or (ii) the information required is included in the
consolidated financial statements or the notes thereto that are a part hereof.
(b) Reports on Form 8-K:
Two (2) reports on Form 8-K were filed during the last quarter of the period
covered by this report. One report on Form 8-K dated October 14, 1997, was filed
to report, under Item 5, registrant's planned merger with CNB Bancshares, Inc.,
an Indiana corporation. The other report, being Amendment No. 1 to the Current
Report on Form 8-K dated August 14, 1997, was filed to report, under Item 7,
financial statements of businesses acquired by registrant through the mergers of
Indiana Federal Corporation and CB Bancorp, Inc. with and into the registrant,
effective as of August 1, 1997.
91
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
DATE: MARCH 31, 1998 BY: /s/ David W. Kolhagen
-----------------------------------------
David W. Kolhagen
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
Chairman and Chief
/s/ RICHARD L. SCHANZE Executive Officer
- ------------------------------ (Principal Executive March 31, 1998
Richard L. Schanze Officer)
/s/ DAVID W. KOLHAGEN Senior Vice President, and
- ------------------------------ Treasurer (Principal March 31, 1998
David W. Kolhagen Financial Officer)
/s/ JOHN P. CUNNINGHAM Director
- ------------------------------ March 31, 1998
John P. Cunningham
/s/ TERRENCE A. FRIEDMAN Director
- ------------------------------ March 31, 1998
Terrence A. Friedman
/s/ JOSEPH F. HEFFERNAN Director
- ------------------------------ March 31, 1998
Joseph F. Heffernan
/s/ JAMES E. HUTTON Director
- ------------------------------ March 31, 1998
James E. Hutton
/s/ DONALD A. LESCH Director, President and
- ------------------------------ Chief Operating Officer March 31, 1998
Donald A. Lesch
/s/ RICHARD L. SCHANZE Director
- ------------------------------ March 31, 1998
Richard L. Schanze
/s/ HOWARD B. SILVERMAN Director
- ------------------------------ March 31, 1998
Howard Silverman
/s/ ARNOLD L. WEAVER Director
- ------------------------------ March 31, 1998
Arnold L. Weaver
Director
- ------------------------------
Alton C. Wendzel
/s/ FRED A. WITTLINGER Director March 31, 1998
- ------------------------------
Fred A. Wittlinger
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ BARBARA A. YOUNG Director
- ------------------------------ March 31, 1998
Barbara A. Young
</TABLE>
93
<PAGE>
EXHIBIT 10(d)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), PINNACLE BANK, a Michigan banking
corporation ("Pinnacle Bank"), and RICHARD L. SCHANZE (the "Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into (i) an Agreement and Plan of Merger
dated as of November 14, 1996, as amended by First Amendment to Agreement and
Plan of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"),
with Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, and (ii) an Agreement and
Plan of Merger dated as of March 1, 1997, (the "CB Merger Agreement"), with
CB Bancorp, Inc., a Delaware corporation ("CB"), pursuant to which CB is to
be merged with and into Pinnacle (the "CB Merger"), and the wholly-owned
subsidiary of CB, Community Bank, a Federal Savings Bank ("CB Bank"), is to
be merged and consolidated into Pinnacle Bank; and
WHEREAS, Executive is currently serving as an executive of Pinnacle
and/or Pinnacle Bank and is a party to an Employment Severance Compensation
Agreement dated as of October 16, 1992, as amended by the amended and
restated Employment Severance Compensation Agreement dated April 30, 1996
(the "Employment Agreement"), with Pinnacle and Pinnacle Bank, pursuant to
which the Executive is entitled to certain benefits, including, among other
things, certain benefits following a change in control affecting Pinnacle
and/or Pinnacle Bank; and
WHEREAS, upon both of the mergers contemplated under the IFC Merger
Agreement and the CB Merger Agreement becoming effective, Pinnacle, as the
survivor of the mergers with IFC and CB, and Pinnacle Bank, as the survivor
of the mergers and consolidations with IndFed Bank and CB Bank, desire to
continue the employment of the Executive with Pinnacle and/or Pinnacle Bank,
but on terms provided herein, which are different than and would supersede
the
<PAGE>
terms provided in the Employment Agreement; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of both of the mergers contemplated
by the IFC Merger Agreement and the CB Merger Agreement on terms provided
herein, and to cancel and terminate the Employment Agreement as herein
provided;
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein, the parties do
hereby agree as follows:
1. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, Pinnacle Bank,
any of their affiliates, any person (as hereinabove defined) acting on behalf
of Pinnacle and/or Pinnacle Bank as underwriter pursuant to an offering who
is temporarily holding securities in connection with such offering, any
trustees or other fiduciary holding securities under an employee benefit plan
of Pinnacle and/or Pinnacle Bank, or any corporation owned, directly or
indirectly, by the stockholders of Pinnacle in substantially the same
proportions as their ownership of stock of Pinnacle), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Pinnacle and/or Pinnacle Bank
representing 25% or more of the combined voting power of Pinnacle's and/or
Pinnacle Bank's then outstanding securities; (ii) individuals who are members
of the Board of Pinnacle and/or Pinnacle Bank (the "Incumbent Board") upon
the consummation of both the IFC Merger and the CB Merger (the "Commencement
Date") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the Commencement
Date whose election was approved by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
stockholders was approved by the nominating committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; (iii)
the stockholders of Pinnacle and/or Pinnacle Bank approve a merger or
consolidation of Pinnacle and/or Pinnacle Bank with any other corporation,
other than (1) a merger or consolidation which would result in the voting
securities of Pinnacle outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
<PAGE>
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of Pinnacle or such surviving entity
outstanding immediately after such merger or consolidation, or (2) a merger
or consolidation effected to implement a recapitalization of Pinnacle (or
similar transaction) in which no person (as hereinabove defined) acquires
more than 25% of the combined voting power of Pinnacle's then outstanding
securities; or (iv) the stockholders of Pinnacle and/or Pinnacle Bank approve
a plan of complete liquidation of Pinnacle and/or Pinnacle Bank or an
agreement for the sale or disposition by Pinnacle and/or Pinnacle Bank of all
or substantially all of the assets of Pinnacle and/or Pinnacle Bank (or any
transaction having a similar effect). Notwithstanding the foregoing or
anything to the contrary, neither the IFC Merger nor the CB Merger shall
constitute a "Change in Control" for purposes of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be principally based at any
location not within 25 miles of St. Joseph, Michigan, or that
he substantially increase his travel on Pinnacle or Pinnacle
Bank business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the
frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the Executive,
other than as part of a company-wide reduction in staff;
(4) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members
of the senior management of Pinnacle or Pinnacle Bank;
<PAGE>
(5) a material and extended increase in the required hours of work
or the workload of the Executive; or
(6) the failure of Pinnacle or Pinnacle Bank to obtain a
satisfactory agreement from any successor to assume the
obligations and liabilities under this Agreement, as
contemplated in Section 16 hereof.
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or
Pinnacle Bank, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or Pinnacle Bank, or any material breach
of this Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of Pinnacle or Pinnacle Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of both the IFC Merger and the CB Merger,
Executive shall serve as an employee of Pinnacle and/or Pinnacle Bank, in
such capacity as may be mutually agreed by Pinnacle and/or Pinnacle Bank and
Executive. As an employee of Pinnacle and/or Pinnacle Bank, Executive will
provide Pinnacle and its affiliates with the benefit of his special
knowledge, skill, contacts and business experience in the banking, savings
and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
<PAGE>
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle and/or Pinnacle Bank or
Executive at any time, whether for "Cause" or any reason whatsoever, subject
to the provisions of Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A CHANGE IN
CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and Pinnacle Bank, for any reason, which
termination of employment service occurs after the effective date of this
Agreement but prior to the occurrence of a Change in Control, including,
without limitation, the termination by Pinnacle and/or Pinnacle Bank of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle and/or Pinnacle Bank shall pay Executive, or in the event
of his death or disability, his beneficiary or beneficiaries, or his estate
or legal representatives, as the case may be, (i) the salary of Executive
through the Date of Termination at the rate in effect at the time the Notice
of Termination is given, at the time such payments are due; and (ii) in a
lump sum in cash, within 30 days after the Date of Termination, as severance
pay or liquidated damages, or both, the sum of $1,118,000.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR FOLLOWING A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate his employment for Good
<PAGE>
Reason, or the Executive's employment shall be terminated by retirement,
death or disability, in any said case upon or within 24 months following a
Change in Control, Pinnacle and/or Pinnacle Bank shall (i) pay the Executive
his salary through the Date of Termination at the rate in effect at the time
the Notice of Termination is given, at the time such payments are due; and
(ii) pay to the Executive in a lump sum in cash, within 30 days after the
Date of Termination, an amount equal to the greater of: (A) 299% of the
Executive's "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), less the aggregate present
value of the payments or benefits, if any, in the nature of compensation for
the benefit of the Executive, arising under any other plans or arrangements
(i.e., not this Agreement) between Pinnacle or Pinnacle Bank or any of their
affiliates and the Executive, which are contingent upon a Change in Control
and which are not deemed to be "reasonable compensation" under Section 280G
of the Code, or (B) $1,118,000.
(b) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment for Cause, or the Executive shall terminate his
employment other than for Good Reason, in any said case upon or at any time
following a Change in Control, or the Executive's employment shall be
terminated for any reason more than 24 months following a Change in Control,
Pinnacle and/or Pinnacle Bank shall pay to Executive , or in the event of his
death or disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such payments are due; and (ii) in a lump
sum in cash, within 30 days after the Date of Termination, as severance pay
or liquidated damages, or both, the sum of $1,118,000.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (the "FDIA"), 12 U.S.C. Section 1818(e)(3) and (g)(1), or
Section 37 of the Michigan Banking Code (the "MBC"), M.C.L. Section 487.337,
Pinnacle's and Pinnacle Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Pinnacle and/or
Pinnacle Bank may in its discretion (i) pay the Executive all or part of
withheld
<PAGE>
while its obligations under this Agreement were suspended and (ii) reinstate
in whole or in part any of its obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
an order issue under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section
1818(e)(4) and (g)(1), or under Section 37 of the MBC, M.C.L. Section
487.337, all obligations of Pinnacle and Pinnacle Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(c) If Pinnacle and/or Pinnacle Bank is in default (as defined in
Section 3(x)(1) of the FDIA), or its performance of this Agreement is grounds
for an action under Section 35 of the MBC, M.C.L. Section 487.335, all
obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of the contracting
parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of employment by another employer, by retirement benefits after the
date of termination or otherwise. This Agreement shall not be construed as
providing the Executive any rights to be retained in the employ of Pinnacle,
Pinnacle Bank or any affiliate of Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle and/or Pinnacle Bank or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
<PAGE>
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle and Pinnacle Bank as may reasonably be required by
Pinnacle and/or Pinnacle Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle and/or Pinnacle Bank.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS; JOINT AND SEVERAL OBLIGATIONS.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, on the one hand, and his heirs, beneficiaries and legal
representatives, and Pinnacle and Pinnacle Bank, on the other hand, and their
respective successors and assigns.
(c) The obligations of Pinnacle and Pinnacle Bank hereunder are joint
and several obligations of each of them.
11. MODIFICATION.
<PAGE>
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle and/or Pinnacle Bank, if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
16. SUCCESSOR TO PINNACLE AND/OR PINNACLE BANK.
Pinnacle and Pinnacle Bank shall each require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all its business or assets, expressly and
unconditionally to assume and agree to perform its obligations under this
Agreement, in the same manner and to the same extent that it would be
required to perform if no such succession or assignment had taken place.
<PAGE>
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENTS.
This Agreement shall be effective upon consummation of both the IFC
Merger and the CB Merger. In the event the IFC Merger Agreement is
terminated, or if the IFC Merger is not consummated for any reason, or the CB
Merger Agreement is terminated, or if the CB Merger is not consummated, this
Agreement shall be null and void and of no effect. Notwithstanding the
foregoing, by executing this Agreement, the Executive acknowledges and agrees
that, in the event both the IFC Merger and the CB Merger are consummated and
this Agreement becomes effective, his Employment Severance Compensation
Agreement with Pinnacle and Pinnacle Bank dated as of October 16, 1992 and
amended and restated on April 30, 1996, shall immediately and automatically
be and become superseded, void and of no effect, without need of any further
action; and that, in said event, he shall have no rights to any payments or
other benefits under such prior agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Pinnacle Financial Services, Inc.
____________________________ By:
Richard L. Schanze Arnold L. Weaver
"Executive" President
Pinnacle Bank
By:
Arnold L. Weaver
President
<PAGE>
EXHIBIT 10(e)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), and DONALD A. LESCH (the
"Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into an Agreement and Plan of Merger dated
as of November 14, 1996, as amended by First Amendment to Agreement and Plan
of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"), with
Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, a Michigan banking
corporation ("Pinnacle Bank"); and
WHEREAS, Executive is currently serving as an executive of IFC and/or
IndFed Bank and is a party to an Employment Agreement dated as of July 1,
1994, as amended by the First Amendment to the Employment Agreement dated
January 12, 1996 (the "IFC Employment Agreement"), with IFC, pursuant to
which the Executive is entitled to certain benefits, including, among other
things, certain benefits following a change in control affecting IFC and/or
IndFed Bank; and
WHEREAS, upon the merger contemplated under the IFC Merger Agreement
becoming effective, Pinnacle, as the survivor of the merger with IFC, desires
to continue the employment of the Executive with Pinnacle and/or Pinnacle
Bank, as the survivor of the merger and consolidation with IndFed Bank, but
on terms provided herein, which are different than and would supersede the
terms provided in the IFC Employment Agreement; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of the merger contemplated by the
IFC Merger Agreement on terms provided herein, and to cancel and terminate
the IFC Employment Agreement as herein provided;
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein, the parties do
hereby agree as follows:
2. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, any of its
affiliates, any person (as hereinabove defined) acting on behalf of Pinnacle
as underwriter pursuant to an offering who is temporarily holding securities
in connection with such offering, any trustees or other fiduciary holding
securities under an employee benefit plan of Pinnacle, or any corporation
owned, directly or indirectly, by the stockholders of Pinnacle in
substantially the same proportions as their ownership of stock of Pinnacle),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Pinnacle representing
25% or more of the combined voting power of Pinnacle's then outstanding
securities; (ii) individuals who are members of the Board of Pinnacle upon
the consummation of the IFC Merger (the "Incumbent Board") as contemplated by
the IFC Merger Agreement (the "Commencement Date") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the Commencement Date whose election was approved in
the IFC Merger Agreement (i.e., the election of Joseph Heffernan to the Board
of Pinnacle upon the consummation of a merger of CB Bancorp, Inc., a Delaware
corporation ("CB"), with and into Pinnacle (the "CB Merger"), as contemplated
by the IFC Merger Agreement), or by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
Pinnacle's stockholders was approved by the nominating committee serving
under an Incumbent Board, shall be considered a member of the Incumbent
Board; (iii) the stockholders of Pinnacle approve a merger or consolidation
of Pinnacle with any other corporation, other than (1) a merger or
consolidation which would result in the voting securities of Pinnacle
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of Pinnacle or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a merger or consolidation effected to
implement a recapitalization of Pinnacle (or similar transaction) in which no
person (as hereinabove defined) acquires
<PAGE>
more than 25% of the combined voting power of Pinnacle's then outstanding
securities; or (iv) the stockholders of Pinnacle approve a plan of complete
liquidation of Pinnacle or an agreement for the sale or disposition by
Pinnacle of all or substantially all of Pinnacle's assets (or any transaction
having a similar effect). Notwithstanding the foregoing or anything to the
contrary, neither the IFC Merger nor the CB Merger as contemplated by the IFC
Merger Agreement shall constitute a "Change in Control" for purposes of this
Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be based at any location not
within 25 miles of Valparaiso, Indiana, or that he
substantially increase his travel on Pinnacle business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the
frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the Executive,
other than as part of a Pinnacle-wide reduction in staff;
(4) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members
of the senior management of Pinnacle;
(5) a material and extended increase in the required hours of work
or the workload of the Executive; or
(6) the failure of Pinnacle to obtain a satisfactory agreement from
any successor to assume the obligations and liabilities under
this Agreement,
<PAGE>
as contemplated in Section 16 hereof.
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or one
of its affiliates, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or one of its affiliates or any material
breach of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or
omitted to be done, not in good faith and without reasonable belief that the
action or omission was in the best interest of Pinnacle or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of the IFC Merger, Executive shall serve as
an employee of Pinnacle and/or its affiliates, in such capacity as may be
mutually agreed by Pinnacle and Executive. As an employee of Pinnacle and/or
its affiliates, Executive will provide Pinnacle and its affiliates with the
benefit of his special knowledge, skill, contacts and business experience in
the banking, savings and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
Executive shall be employed as an "at will" employee, and said
employment may be terminated by either Pinnacle or Executive at any time,
whether for "Cause" or any reason whatsoever, subject to the provisions of
Sections 4, 5, 6 and 8 of this Agreement.
<PAGE>
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A CHANGE IN
CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and its subsidiaries and corporate affiliates,
for any reason, which termination of employment service occurs after the
effective date of this Agreement but prior to the occurrence of a Change in
Control, including, without limitation, the termination by Pinnacle of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle shall pay Executive, or in the event of his death or
disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such payments are due; and (ii) in a lump
sum in cash, within 30 days after the Date of Termination, as severance pay
or liquidated damages, or both, the sum of $568,100.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR FOLLOWING A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle shall terminate the Executive's
employment other than Termination for Cause, or the Executive shall terminate
his employment for Good Reason, or the Executive's employment shall be
terminated by retirement, death or disability, in any said case upon or
within 24 months following a Change in Control, Pinnacle shall (i) pay the
Executive his salary through the Date of Termination at the rate in effect at
the time the Notice of Termination is given, at the time such payments are
due; and (ii) pay to the Executive in a lump sum in cash, within 30 days
after the Date of Termination, an amount equal to the greater
<PAGE>
of: (A) 299% of the Executive's "base amount" as determined under Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), less the
aggregate present value of the payments or benefits, if any, in the nature of
compensation for the benefit of the Executive, arising under any other plans
or arrangements (i.e., not this Agreement) between Pinnacle or any of its
affiliates and the Executive, which are contingent upon a Change in Control
and which are not deemed to be "reasonable compensation" under Section 280G
of the Code, or (B) $568,100.
(b) In the event that Pinnacle shall terminate the Executive's
employment for Cause, or the Executive shall terminate his employment other
than for Good Reason, in any said case upon or at any time following a Change
in Control, or the Executive's employment shall be terminated for any reason
more than 24 months following a Change in Control, Pinnacle shall pay to
Executive , or in the event of his death or disability, his beneficiary or
beneficiaries, or his estate or legal representatives, as the case may be,
(i) the salary of Executive through the Date of Termination at the rate in
effect at the time the Notice of Termination is given, at the time such
payments are due; and (ii) in a lump sum in cash, within 30 days after the
Date of Termination, as severance pay or liquidated damages, or both, the sum
of $568,100.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (the "FDIA"),
12 U.S.C. Section 1818(e)(3) and (g)(1), or Section 37 of the Michigan
Banking Code (the "MBC"), M.C.L. Section 487.337, Pinnacle's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are
dismissed, Pinnacle may in its discretion (i) pay the Executive all or part
of withheld while its obligations under this Agreement were suspended and
(ii) reinstate in whole or in part any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's affairs by an order issue under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and
(g)(1), or under Section 37 of the MBC, M.C.L. Section 487.337, all
obligations of Pinnacle under this Agreement shall terminate as of the
effective date of the order, but vested rights
<PAGE>
of the contracting parties shall not be affected.
(c) If Pinnacle is in default (as defined in Section 3(x)(1) of the
FDIA), or its performance of this Agreement is grounds for an action under
Section 35 of the MBC, M.C.L. Section 487.335, all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the contracting parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with
12 U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of employment by another employer, by retirement benefits after the
date of termination or otherwise. This Agreement shall not be construed as
providing the Executive any rights to be retained in the employ of Pinnacle
or any affiliate of Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one
<PAGE>
(1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle as may reasonably be required by Pinnacle in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
11. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the
<PAGE>
meaning or interpretation of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle, if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
16. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under
this Agreement, in the same manner and to the same extent that Pinnacle would
be required to perform if no such succession or assignment had taken place.
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENTS.
This Agreement shall be effective upon consummation of the IFC Merger
contemplated by the IFC Merger Agreement. In the event the IFC Merger
Agreement is terminated, or if the IFC Merger is not consummated for any
reason, this Agreement shall be null and void and of no effect.
Notwithstanding the foregoing, by executing this Agreement, the Executive
acknowledges and agrees that, in the event the IFC Merger is consummated and
this Agreement becomes effective,
<PAGE>
his Employment Agreement with IFC dated as of July 1, 1994 and amended on
January 12, 1996, shall immediately and automatically be and become
superseded, void and of no effect, without need of any further action; and
that, in said event, he shall have no rights to any payments or other
benefits under such prior agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Pinnacle Financial Services, Inc.
By:
Richard L. Schanze
Chairman and Chief Executive
Officer
_____________________________________
Donald A. Lesch
"Executive"
<PAGE>
EXHIBIT 10(f)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), PINNACLE BANK, a Michigan banking
corporation ("Pinnacle Bank"), and ARNOLD L. WEAVER (the "Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into (i) an Agreement and Plan of Merger
dated as of November 14, 1996, as amended by First Amendment to Agreement and
Plan of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"),
with Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, and (ii) an Agreement and
Plan of Merger dated as of March 1, 1997, (the "CB Merger Agreement"), with
CB Bancorp, Inc., a Delaware corporation ("CB"), pursuant to which CB is to
be merged with and into Pinnacle (the "CB Merger"), and the wholly-owned
subsidiary of CB, Community Bank, a Federal Savings Bank ("CB Bank"), is to
be merged and consolidated into Pinnacle Bank; and
WHEREAS, Executive is currently serving as an executive of Pinnacle
and/or Pinnacle Bank and is a party to an Employment Severance Compensation
Agreement dated as of October 16, 1992, as amended by the amended and
restated Employment Severance Compensation Agreement dated April 30, 1996
(the "Employment Agreement"), with Pinnacle and Pinnacle Bank, pursuant to
which the Executive is entitled to certain benefits, including, among other
things, certain benefits following a change in control affecting Pinnacle
and/or Pinnacle Bank; and
WHEREAS, upon both of the mergers contemplated under the IFC Merger
Agreement and the CB Merger Agreement becoming effective, Pinnacle, as the
survivor of the mergers with IFC and CB, and Pinnacle Bank, as the survivor
of the mergers and consolidations with IndFed Bank and CB Bank, desire to
continue the employment of the Executive with Pinnacle and/or Pinnacle Bank,
but on terms provided herein, which are different than and would supersede
the
<PAGE>
terms provided in the Employment Agreement; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of both of the mergers contemplated
by the IFC Merger Agreement and the CB Merger Agreement on terms provided
herein, and to cancel and terminate the Employment Agreement as herein
provided;
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein, the parties do
hereby agree as follows:
3. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, Pinnacle Bank,
any of their affiliates, any person (as hereinabove defined) acting on behalf
of Pinnacle and/or Pinnacle Bank as underwriter pursuant to an offering who
is temporarily holding securities in connection with such offering, any
trustees or other fiduciary holding securities under an employee benefit plan
of Pinnacle and/or Pinnacle Bank, or any corporation owned, directly or
indirectly, by the stockholders of Pinnacle in substantially the same
proportions as their ownership of stock of Pinnacle), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Pinnacle and/or Pinnacle Bank
representing 25% or more of the combined voting power of Pinnacle's and/or
Pinnacle Bank's then outstanding securities; (ii) individuals who are members
of the Board of Pinnacle and/or Pinnacle Bank (the "Incumbent Board") upon
the consummation of both the IFC Merger and the CB Merger (the "Commencement
Date") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the Commencement
Date whose election was approved by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
stockholders was approved by the nominating committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; (iii)
the stockholders of Pinnacle and/or Pinnacle Bank approve a merger or
consolidation of Pinnacle and/or Pinnacle Bank with any other corporation,
other than (1) a merger or consolidation which would result in the voting
securities of Pinnacle outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
<PAGE>
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of Pinnacle or such surviving entity
outstanding immediately after such merger or consolidation, or (2) a merger
or consolidation effected to implement a recapitalization of Pinnacle (or
similar transaction) in which no person (as hereinabove defined) acquires
more than 25% of the combined voting power of Pinnacle's then outstanding
securities; or (iv) the stockholders of Pinnacle and/or Pinnacle Bank approve
a plan of complete liquidation of Pinnacle and/or Pinnacle Bank or an
agreement for the sale or disposition by Pinnacle and/or Pinnacle Bank of all
or substantially all of the assets of Pinnacle and/or Pinnacle Bank (or any
transaction having a similar effect). Notwithstanding the foregoing or
anything to the contrary, neither the IFC Merger nor the CB Merger shall
constitute a "Change in Control" for purposes of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be principally
based at any location not within 25 miles of St.
Joseph, Michigan, or that he substantially increase
his travel on Pinnacle or Pinnacle Bank business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of
personnel reporting to the Executive or a material
reduction in the frequency with which, or in the
nature of the matters with respect to which such
personnel are to report to the Executive, other
than as part of a company-wide reduction in staff;
(4) a reduction in the Executive's salary or a material
adverse change in the Executive's perquisites,
benefits, contingent benefits or vacation, other
than as part of an overall program applied
uniformly and with equitable effect to all members
of the senior management of Pinnacle or Pinnacle
Bank;
<PAGE>
(5) a material and extended increase in the required
hours of work or the workload of the Executive; or
(6) the failure of Pinnacle or Pinnacle Bank to obtain
a satisfactory agreement from any successor to
assume the obligations and liabilities under this
Agreement, as contemplated in Section 16 hereof.
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or
Pinnacle Bank, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or Pinnacle Bank, or any material breach
of this Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of Pinnacle or Pinnacle Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of both the IFC Merger and the CB Merger,
Executive shall serve as an employee of Pinnacle and/or Pinnacle Bank, in
such capacity as may be mutually agreed by Pinnacle and/or Pinnacle Bank and
Executive. As an employee of Pinnacle and/or Pinnacle Bank, Executive will
provide Pinnacle and its affiliates with the benefit of his special
knowledge, skill, contacts and business experience in the banking, savings
and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
<PAGE>
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle and/or Pinnacle Bank or
Executive at any time, whether for "Cause" or any reason whatsoever, subject
to the provisions of Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and Pinnacle Bank, for any reason, which
termination of employment service occurs after the effective date of this
Agreement but prior to the occurrence of a Change in Control, including,
without limitation, the termination by Pinnacle and/or Pinnacle Bank of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle and/or Pinnacle Bank shall pay Executive, or in the event
of his death or disability, his beneficiary or beneficiaries, or his estate
or legal representatives, as the case may be, (i) the salary of Executive
through the Date of Termination at the rate in effect at the time the Notice
of Termination is given, at the time such payments are due; and (ii) in a
lump sum in cash, within 30 days after the Date of Termination, as severance
pay or liquidated damages, or both, the sum of $559,000.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR
FOLLOWING A CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate his employment for Good
<PAGE>
Reason, or the Executive's employment shall be terminated by retirement,
death or disability, in any said case upon or within 24 months following a
Change in Control, Pinnacle and/or Pinnacle Bank shall (i) pay the Executive
his salary through the Date of Termination at the rate in effect at the time
the Notice of Termination is given, at the time such payments are due; and
(ii) pay to the Executive in a lump sum in cash, within 30 days after the
Date of Termination, an amount equal to the greater of: (A) 299% of the
Executive's "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), less the aggregate present
value of the payments or benefits, if any, in the nature of compensation for
the benefit of the Executive, arising under any other plans or arrangements
(i.e., not this Agreement) between Pinnacle or Pinnacle Bank or any of their
affiliates and the Executive, which are contingent upon a Change in Control
and which are not deemed to be "reasonable compensation" under Section 280G
of the Code, or (B) $559,000.
(b) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment for Cause, or the Executive shall terminate his
employment other than for Good Reason, in any said case upon or at any time
following a Change in Control, or the Executive's employment shall be
terminated for any reason more than 24 months following a Change in Control,
Pinnacle and/or Pinnacle Bank shall pay to Executive , or in the event of his
death or disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such payments are due; and (ii) in a lump
sum in cash, within 30 days after the Date of Termination, as severance pay
or liquidated damages, or both, the sum of $559,000.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (the "FDIA"), 12 U.S.C. Section 1818(e)(3) and (g)(1), or
Section 37 of the Michigan Banking Code (the "MBC"), M.C.L. Section 487.337,
Pinnacle's and Pinnacle Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Pinnacle and/or
Pinnacle Bank may in its discretion (i) pay the Executive all or part of
withheld
<PAGE>
while its obligations under this Agreement were suspended and (ii) reinstate
in whole or in part any of its obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
an order issue under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(4) and (g)(1), or under Section 37 of the MBC, M.C.L.
Section 487.337, all obligations of Pinnacle and Pinnacle Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If Pinnacle and/or Pinnacle Bank is in default (as defined in
Section 3(x)(1) of the FDIA), or its performance of this Agreement is grounds
for an action under Section 35 of the MBC, M.C.L. Section 487.335, all
obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of the contracting
parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of employment by another employer, by retirement benefits after the
date of termination or otherwise. This Agreement shall not be construed as
providing the Executive any rights to be retained in the employ of Pinnacle,
Pinnacle Bank or any affiliate of Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle and/or Pinnacle Bank or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
<PAGE>
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle and Pinnacle Bank as may reasonably be required by
Pinnacle and/or Pinnacle Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle and/or Pinnacle Bank.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS; JOINT AND SEVERAL
OBLIGATIONS.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, on the one hand, and his heirs, beneficiaries and legal
representatives, and Pinnacle and Pinnacle Bank, on the other hand, and their
respective successors and assigns.
(c) The obligations of Pinnacle and Pinnacle Bank hereunder are joint
and several obligations of each of them.
11. MODIFICATION.
<PAGE>
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle and/or Pinnacle Bank, if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
16. SUCCESSOR TO PINNACLE AND/OR PINNACLE BANK.
Pinnacle and Pinnacle Bank shall each require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all its business or assets, expressly and
unconditionally to assume and agree to perform its obligations under this
Agreement, in the same manner and to the same extent that it would be
required to perform if no such succession or assignment had taken place.
<PAGE>
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENTS.
This Agreement shall be effective upon consummation of both the IFC
Merger and the CB Merger. In the event the IFC Merger Agreement is
terminated, or if the IFC Merger is not consummated for any reason, or the CB
Merger Agreement is terminated, or if the CB Merger is not consummated, this
Agreement shall be null and void and of no effect. Notwithstanding the
foregoing, by executing this Agreement, the Executive acknowledges and agrees
that, in the event both the IFC Merger and the CB Merger are consummated and
this Agreement becomes effective, his Employment Severance Compensation
Agreement with Pinnacle and Pinnacle Bank dated as of October 16, 1992 and
amended and restated on April 30, 1996, shall immediately and automatically
be and become superseded, void and of no effect, without need of any further
action; and that, in said event, he shall have no rights to any payments or
other benefits under such prior agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Pinnacle Financial Services, Inc.
_____________________________ By:
Arnold L. Weaver Richard L. Schanze, Chairman
"Executive" and Chief Executive Officer
Pinnacle Bank
By:
Richard L. Schanze
Chairman
<PAGE>
EXHIBIT 10(g)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), PINNACLE BANK, a Michigan banking
corporation ("Pinnacle Bank"), and DONALD E. RADDE (the "Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into (i) an Agreement and Plan of Merger
dated as of November 14, 1996, as amended by First Amendment to Agreement and
Plan of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"),
with Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, and (ii) an Agreement and
Plan of Merger dated as of March 1, 1997, (the "CB Merger Agreement"), with
CB Bancorp, Inc., a Delaware corporation ("CB"), pursuant to which CB is to
be merged with and into Pinnacle (the "CB Merger"), and the wholly-owned
subsidiary of CB, Community Bank, a Federal Savings Bank ("CB Bank"), is to
be merged and consolidated into Pinnacle Bank; and
WHEREAS, Executive is currently serving as an executive of Pinnacle
and/or Pinnacle Bank and is a party to an Employment Severance Compensation
Agreement dated April 18, 1995, as amended by the amended and restated
Employment Severance Compensation Agreement dated April 30, 1996 (the
"Employment Agreement"), with Pinnacle and Pinnacle Bank, pursuant to which
the Executive is entitled to certain benefits, including, among other things,
certain benefits following a change in control affecting Pinnacle and/or
Pinnacle Bank; and
WHEREAS, upon both of the mergers contemplated under the IFC Merger
Agreement and the CB Merger Agreement becoming effective, Pinnacle, as the
survivor of the mergers with IFC and CB, and Pinnacle Bank, as the survivor
of the mergers and consolidations with IndFed Bank and CB Bank, desire to
continue the employment of the Executive with Pinnacle and/or Pinnacle Bank,
but on terms provided herein, which are different than and would supersede
the terms provided in the Employment Agreement; and
<PAGE>
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of both of the mergers contemplated
by the IFC Merger Agreement and the CB Merger Agreement on terms provided
herein, and to cancel and terminate the Employment Agreement as herein
provided;
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein, the parties do
hereby agree as follows:
4. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, Pinnacle Bank,
any of their affiliates, any person (as hereinabove defined) acting on behalf
of Pinnacle and/or Pinnacle Bank as underwriter pursuant to an offering who
is temporarily holding securities in connection with such offering, any
trustees or other fiduciary holding securities under an employee benefit plan
of Pinnacle and/or Pinnacle Bank, or any corporation owned, directly or
indirectly, by the stockholders of Pinnacle in substantially the same
proportions as their ownership of stock of Pinnacle), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Pinnacle and/or Pinnacle Bank
representing 25% or more of the combined voting power of Pinnacle's and/or
Pinnacle Bank's then outstanding securities; (ii) individuals who are members
of the Board of Pinnacle and/or Pinnacle Bank (the "Incumbent Board") upon
the consummation of both the IFC Merger and the CB Merger (the "Commencement
Date") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the Commencement
Date whose election was approved by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
stockholders was approved by the nominating committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; (iii)
the stockholders of Pinnacle and/or Pinnacle Bank approve a merger or
consolidation of Pinnacle and/or Pinnacle Bank with any other corporation,
other than (1) a merger or consolidation which would result in the voting
securities of Pinnacle outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of Pinnacle or
<PAGE>
such surviving entity outstanding immediately after such merger or
consolidation, or (2) a merger or consolidation effected to implement a
recapitalization of Pinnacle (or similar transaction) in which no person (as
hereinabove defined) acquires more than 25% of the combined voting power of
Pinnacle's then outstanding securities; or (iv) the stockholders of Pinnacle
and/or Pinnacle Bank approve a plan of complete liquidation of Pinnacle
and/or Pinnacle Bank or an agreement for the sale or disposition by Pinnacle
and/or Pinnacle Bank of all or substantially all of the assets of Pinnacle
and/or Pinnacle Bank (or any transaction having a similar effect).
Notwithstanding the foregoing or anything to the contrary, neither the IFC
Merger nor the CB Merger shall constitute a "Change in Control" for purposes
of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be principally based at any
location not within 25 miles of St. Joseph, Michigan, or that
he substantially increase his travel on Pinnacle or Pinnacle
Bank business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the
frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the Executive,
other than as part of a company-wide reduction in staff;
(4) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members
of the senior management of Pinnacle or Pinnacle Bank;
(5) a material and extended increase in the required
<PAGE>
hours of work or the workload of the Executive; or
(6) the failure of Pinnacle or Pinnacle Bank to obtain a
satisfactory agreement from any successor to assume the
obligations and liabilities under this Agreement, as
contemplated in Section 16 hereof.
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or
Pinnacle Bank, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or Pinnacle Bank or any material breach
of this Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of Pinnacle or Pinnacle Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of both the IFC Merger and the CB Merger,
Executive shall serve as an employee of Pinnacle and/or Pinnacle Bank, in
such capacity as may be mutually agreed by Pinnacle and/or Pinnacle Bank and
Executive. As an employee of Pinnacle and/or Pinnacle Bank, Executive will
provide Pinnacle and its affiliates with the benefit of his special
knowledge, skill, contacts and business experience in the banking, savings
and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
<PAGE>
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle and/or Pinnacle Bank or
Executive at any time, whether for "Cause" or any reason whatsoever, subject
to the provisions of Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A CHANGE IN
CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and Pinnacle Bank, for any reason, which
termination of employment service occurs after the effective date of this
Agreement but prior to the occurrence of a Change in Control, including,
without limitation, the termination by Pinnacle and/or Pinnacle Bank of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle and/or Pinnacle Bank shall pay Executive, or in the event
of his death or disability, his beneficiary or beneficiaries, or his estate
or legal representatives, as the case may be, (i) the salary of Executive
through the Date of Termination at the rate in effect at the time the Notice
of Termination is given, at the time such payments are due; and (ii) in a
lump sum in cash, within 30 days after the Date of Termination, as severance
pay or liquidated damages, or both, the sum of $354,000.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR FOLLOWING A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate his employment for Good
<PAGE>
Reason, or the Executive's employment shall be terminated by retirement,
death or disability, in any said case upon or within 24 months following a
Change in Control, Pinnacle and/or Pinnacle Bank shall (i) pay the Executive
his salary through the Date of Termination at the rate in effect at the time
the Notice of Termination is given, at the time such payments are due; and
(ii) pay to the Executive in a lump sum in cash, within 30 days after the
Date of Termination, an amount equal to the greater of:
(A) the lesser of:
(1) 200% of the Executive's total compensation of any and all types,
including salary, bonus, gains on exercise of stock options and
other benefits, paid to or earned by Executive from Pinnacle,
Pinnacle Bank and all of their affiliates during the fiscal
year most recently completed on or prior to the date of the
Change in Control, or
(2) 299% of the Executive's "base amount" as determined under
Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), less the aggregate present value of the payments
or benefits, if any, in the nature of compensation for the
benefit of the Executive, arising under any other plans or
arrangements (i.e., not this Agreement) between Pinnacle or
Pinnacle Bank or any of their affiliates and the Executive,
which are contingent upon a Change in Control and which are not
deemed to be "reasonable compensation" under Section 280G of the
Code, or
(B) $354,000.
(b) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment for Cause, or the Executive shall terminate his
employment other than for Good Reason, in any said case upon or at any time
following a Change in Control, or the Executive's employment shall be
terminated for any reason more than 24 months following a Change in Control,
Pinnacle and/or Pinnacle Bank shall pay to Executive, or in the event of his
death or disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such
<PAGE>
payments are due; and (ii) in a lump sum in cash, within 30 days after the
Date of Termination, as severance pay or liquidated damages, or both, the sum
of $354,000.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (the "FDIA"), 12 U.S.C. Section 1818(e)(3) and (g)(1), or
Section 37 of the Michigan Banking Code (the "MBC"), M.C.L. Section 487.337,
Pinnacle's and/or Pinnacle Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Pinnacle and/or
Pinnacle Bank may in its discretion (i) pay the Executive all or part of
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of its obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
an order issue under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section
1818(e)(4) and (g)(1), or under Section 37 of the MBC, M.C.L. Section
487.337, all obligations of Pinnacle and/or Pinnacle Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If Pinnacle and/or Pinnacle Bank is in default (as defined in
Section 3(x)(1) of the FDIA), or its performance of this Agreement is grounds
for an action under Section 35 of the MBC, M.C.L. Section 487.335, all
obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of the contracting
parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any
<PAGE>
compensation earned by the Executive as a result of employment by another
employer, by retirement benefits after the date of termination or otherwise.
This Agreement shall not be construed as providing the Executive any rights
to be retained in the employ of Pinnacle, Pinnacle Bank or any affiliate of
Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle and/or Pinnacle Bank or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle and Pinnacle Bank as may reasonably be required by
Pinnacle and/or Pinnacle Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle and/or Pinnacle Bank.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS; JOINT AND SEVERAL OBLIGATIONS.
(a) Except as required by law, no right to receive payments
<PAGE>
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation,
or to execution, attachment, levy, or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to affect any
such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, on the one hand, and his heirs, beneficiaries and legal
representatives, and Pinnacle and Pinnacle Bank, on the other hand, and their
respective successors and assigns.
(c) The obligations of Pinnacle and Pinnacle Bank hereunder
are joint and several obligations of each of them.
11. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
<PAGE>
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle and/or Pinnacle Bank, if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
16. SUCCESSOR TO PINNACLE AND/OR PINNACLE BANK.
Pinnacle and Pinnacle Bank shall each require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all its business or assets, expressly and
unconditionally to assume and agree to perform its obligations under this
Agreement, in the same manner and to the same extent that it would be
required to perform if no such succession or assignment had taken place.
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENTS.
This Agreement shall be effective upon consummation of both the IFC
Merger and the CB Merger. In the event the IFC Merger Agreement is
terminated, or if the IFC Merger is not consummated for any reason, or the CB
Merger Agreement is terminated, or if the CB Merger is not consummated, this
Agreement shall be null and void and of no effect. Notwithstanding the
foregoing, by executing this Agreement, the Executive acknowledges and agrees
that, in the event both the IFC Merger and the CB Merger are consummated and
this Agreement becomes effective, his Employment Severance Compensation
Agreement with Pinnacle and Pinnacle Bank dated April 18, 1995, as amended by
the amended and restated Employment Severance Compensation Agreement dated
April 30, 1996, shall immediately and automatically be and become superseded,
void and of no effect, without need of any further action; and that, in said
event, he shall have no rights to any payments or other benefits under such
prior agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
<PAGE>
Pinnacle Financial Services, Inc.
____________________________ By:
Donald E. Radde Richard L. Schanze, Chairman
"Executive" and Chief Executive Officer
PINNACLE BANK
By:
Arnold L. Weaver
President
<PAGE>
EXHIBIT 10(h)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), PINNACLE BANK, a Michigan banking
corporation ("Pinnacle Bank") and DAVID W. KOLHAGEN (the "Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into (i) an Agreement and Plan of Merger
dated as of November 14, 1996, as amended by First Amendment to Agreement and
Plan of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"),
with Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, and (ii) an Agreement and
Plan of Merger dated as of March 1, 1997, (the "CB Merger Agreement"), with
CB Bancorp, Inc., a Delaware corporation ("CB"), pursuant to which CB is to
be merged with and into Pinnacle (the "CB Merger"), and the wholly-owned
subsidiary of CB, Community Bank, a Federal Savings Bank ("CB Bank"), is to
be merged and consolidated into Pinnacle Bank; and
WHEREAS, Executive is currently serving as an executive of Pinnacle
and/or Pinnacle Bank and is a party to an Employment Severance Compensation
Agreement dated April 18, 1995, as amended by the amended and restated
Employment Severance Compensation Agreement dated April 30, 1996 (the
"Employment Agreement"), with Pinnacle and Pinnacle Bank, pursuant to which
the Executive is entitled to certain benefits, including, among other things,
certain benefits following a change in control affecting Pinnacle and/or
Pinnacle Bank; and
WHEREAS, upon both of the mergers contemplated under the IFC Merger
Agreement and the CB Merger Agreement becoming effective, Pinnacle, as the
survivor of the mergers with IFC and CB, and Pinnacle Bank, as the survivor
of the mergers and consolidations with IndFed Bank and CB Bank, desire to
continue the employment of the Executive with Pinnacle and/or Pinnacle Bank,
but on terms provided herein, which are different than and would supersede
the
<PAGE>
terms provided in the Employment Agreement; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of both of the mergers contemplated
by the IFC Merger Agreement and the CB Merger Agreement on terms provided
herein, and to cancel and terminate the Employment Agreement as herein
provided;
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein, the parties do
hereby agree as follows:
5. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, Pinnacle Bank,
any of their affiliates, any person (as hereinabove defined) acting on behalf
of Pinnacle and/or Pinnacle Bank as underwriter pursuant to an offering who
is temporarily holding securities in connection with such offering, any
trustees or other fiduciary holding securities under an employee benefit plan
of Pinnacle and/or Pinnacle Bank, or any corporation owned, directly or
indirectly, by the stockholders of Pinnacle in substantially the same
proportions as their ownership of stock of Pinnacle), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Pinnacle and/or Pinnacle Bank
representing 25% or more of the combined voting power of Pinnacle's and/or
Pinnacle Bank's then outstanding securities; (ii) individuals who are members
of the Board of Pinnacle and/or Pinnacle Bank (the "Incumbent Board") upon
the consummation of both the IFC Merger and the CB Merger (the "Commencement
Date") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the Commencement
Date whose election was approved by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
stockholders was approved by the nominating committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; (iii)
the stockholders of Pinnacle and/or Pinnacle Bank approve a merger or
consolidation of Pinnacle and/or Pinnacle Bank with any other corporation,
other than (1) a merger or consolidation which would result in the voting
securities of Pinnacle outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
<PAGE>
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of Pinnacle or such surviving entity
outstanding immediately after such merger or consolidation, or (2) a merger
or consolidation effected to implement a recapitalization of Pinnacle (or
similar transaction) in which no person (as hereinabove defined) acquires
more than 25% of the combined voting power of Pinnacle's then outstanding
securities; or (iv) the stockholders of Pinnacle and/or Pinnacle Bank approve
a plan of complete liquidation of Pinnacle and/or Pinnacle Bank or an
agreement for the sale or disposition by Pinnacle of all or substantially all
of the assets of Pinnacle and/or Pinnacle Bank (or any transaction having a
similar effect). Notwithstanding the foregoing or anything to the contrary,
neither the IFC Merger nor the CB Merger shall constitute a "Change in
Control" for purposes of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be principally based at any
location not within 25 miles of St. Joseph, Michigan, or that
he substantially increase his travel on Pinnacle or Pinnacle
Bank business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the
frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the
Executive, other than as part of a company-wide reduction in
staff;
(4) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members of
the senior management of Pinnacle or Pinnacle Bank;
<PAGE>
(5) a material and extended increase in the required hours of work
or the workload of the Executive; or
(6) the failure of Pinnacle or Pinnacle Bank to obtain a
satisfactory agreement from any successor to assume the
obligations and liabilities under this Agreement, as
contemplated in Section 16 hereof.
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or
Pinnacle Bank, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or Pinnacle Bank, or any material breach
of this Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of Pinnacle or Pinnacle Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of both the IFC Merger and the CB Merger,
Executive shall serve as an employee of Pinnacle and/or Pinnacle Bank, in
such capacity as may be mutually agreed by Pinnacle and/or Pinnacle Bank and
Executive. As an employee of Pinnacle and/or Pinnacle Bank, Executive will
provide Pinnacle and its affiliates with the benefit of his special
knowledge, skill, contacts and business experience in the banking, savings
and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
<PAGE>
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle and/or Pinnacle Bank or
Executive at any time, whether for "Cause" or any reason whatsoever, subject
to the provisions of Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A CHANGE IN
CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and Pinnacle Bank, for any reason, which
termination of employment service occurs after the effective date of this
Agreement but prior to the occurrence of a Change in Control, including,
without limitation, the termination by Pinnacle and/or Pinnacle Bank of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle and/or Pinnacle Bank shall pay Executive, or in the event
of his death or disability, his beneficiary or beneficiaries, or his estate
or legal representatives, as the case may be, (i) the salary of Executive
through the Date of Termination at the rate in effect at the time the Notice
of Termination is given, at the time such payments are due; and (ii) in a
lump sum in cash, within 30 days after the Date of Termination, as severance
pay or liquidated damages, or both, the sum of $287,000.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR FOLLOWING A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate his employment for Good
<PAGE>
Reason, or the Executive's employment shall be terminated by retirement,
death or disability, in any said case upon or within 24 months following a
Change in Control, Pinnacle and/or Pinnacle Bank shall (i) pay the Executive
his salary through the Date of Termination at the rate in effect at the time
the Notice of Termination is given, at the time such payments are due; and
(ii) pay to the Executive in a lump sum in cash, within 30 days after the
Date of Termination, an amount equal to the greater of:
(A) the lesser of:
(1) 200% of the Executive's total compensation of any and all
types, including salary, bonus, gains on exercise of stock
options and other benefits, paid to or earned by Executive
from Pinnacle, Pinnacle Bank and all of their affiliates
during the fiscal year most recently completed on or prior to
the date of the Change in Control, or
(2) 299% of the Executive's "base amount" as determined under
Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), less the aggregate present value of the payments
or benefits, if any, in the nature of compensation for the
benefit of the Executive, arising under any other plans or
arrangements (i.e., not this Agreement) between Pinnacle or
Pinnacle Bank or any of their affiliates and the Executive,
which are contingent upon a Change in Control and which are
not deemed to be "reasonable compensation" under Section 280G
of the Code, or
(B) $287,000.
(b) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment for Cause, or the Executive shall terminate his
employment other than for Good Reason, in any said case upon or at any time
following a Change in Control, or the Executive's employment shall be
terminated for any reason more than 24 months following a Change in Control,
Pinnacle and/or Pinnacle Bank shall pay to Executive , or in the event of his
death or disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such
<PAGE>
payments are due; and (ii) in a lump sum in cash, within 30 days after the
Date of Termination, as severance pay or liquidated damages, or both, the sum
of $287,000.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (the "FDIA"), 12 U.S.C. Section 1818(e)(3) and (g)(1), or
Section 37 of the Michigan Banking Code (the "MBC"), M.C.L. Section 487.337,
Pinnacle's and Pinnacle Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Pinnacle and/or
Pinnacle Bank may in its discretion (i) pay the Executive all or part of
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of its obligations which were suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
an order issue under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section
1818(e)(4) and (g)(1), or under Section 37 of the MBC, M.C.L. Section
487.337, all obligations of Pinnacle and Pinnacle Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(c) If Pinnacle and/or Pinnacle Bank is in default (as defined in
Section 3(x)(1) of the FDIA), or its performance of this Agreement is grounds
for an action under Section 35 of the MBC, M.C.L. Section 487.335, all
obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of the contracting
parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any
<PAGE>
compensation earned by the Executive as a result of employment by another
employer, by retirement benefits after the date of termination or otherwise.
This Agreement shall not be construed as providing the Executive any rights
to be retained in the employ of Pinnacle, Pinnacle Bank or any affiliate of
Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle and/or Pinnacle Bank or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle and Pinnacle Bank as may reasonably be required by
Pinnacle and/or Pinnacle Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle and/or Pinnacle Bank.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS; JOINT AND SEVERAL OBLIGATIONS.
(a) Except as required by law, no right to receive payments
<PAGE>
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation,
or to execution, attachment, levy, or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to affect any
such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, on the one hand, and his heirs, beneficiaries and legal
representatives, and Pinnacle and Pinnacle Bank, on the other hand, and their
respective successors and assigns.
(c) The obligations of Pinnacle and Pinnacle Bank hereunder are joint
and several obligations of each of them.
11. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
<PAGE>
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle and/or Pinnacle Bank, if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
16. SUCCESSOR TO PINNACLE AND/OR PINNACLE BANK.
Pinnacle and Pinnacle Bank shall each require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all its business or assets, expressly and
unconditionally to assume and agree to perform its obligations under this
Agreement, in the same manner and to the same extent that it would be
required to perform if no such succession or assignment had taken place.
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENTS.
This Agreement shall be effective upon consummation of both the IFC
Merger and the CB Merger. In the event the IFC Merger Agreement is
terminated, or if the IFC Merger is not consummated for any reason, or the CB
Merger Agreement is terminated, or if the CB Merger is not consummated, this
Agreement shall be null and void and of no effect. Notwithstanding the
foregoing, by executing this Agreement, the Executive acknowledges and agrees
that, in the event both the IFC Merger and the CB Merger are consummated and
this Agreement becomes effective, his Employment Severance Compensation
Agreement with Pinnacle and Pinnacle Bank dated April 18, 1995, as amended by
the amended and restated Employment Severance Compensation Agreement dated
April 30, 1996, shall immediately and automatically be and become superseded,
void and of no effect, without need of any further action; and that, in said
event, he shall have no rights to any payments or other benefits under such
prior agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
<PAGE>
Pinnacle Financial Services, Inc.
By:
_______________________________
David W. Kolhagen Richard L. Schanze, Chairman
"Executive" and Chief Executive Officer
Pinnacle Bank
By:
Arnold L. Weaver
President
<PAGE>
EXHIBIT 10(i)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), PINNACLE BANK, a Michigan banking
corporation ("Pinnacle Bank"), and JOHN A. NEWCOMER (the "Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into (i) an Agreement and Plan of Merger
dated as of November 14, 1996, as amended by First Amendment to Agreement and
Plan of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"),
with Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, and (ii) an Agreement and
Plan of Merger dated as of March 1, 1997, (the "CB Merger Agreement"), with
CB Bancorp, Inc., a Delaware corporation ("CB"), pursuant to which CB is to
be merged with and into Pinnacle (the "CB Merger"), and the wholly-owned
subsidiary of CB, Community Bank, a Federal Savings Bank ("CB Bank"), is to
be merged and consolidated into Pinnacle Bank; and
WHEREAS, Executive is currently serving as an executive of Pinnacle
and/or Pinnacle Bank; and
WHEREAS, upon both of the mergers contemplated under the IFC Merger
Agreement and the CB Merger Agreement becoming effective, Pinnacle, as the
survivor of the mergers with IFC and CB, and Pinnacle Bank, as the survivor
of the mergers and consolidations with IndFed Bank and CB Bank, desire to
continue the employment of the Executive with Pinnacle and/or Pinnacle Bank,
but on terms provided herein; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of both of the mergers contemplated
by the IFC Merger Agreement and the CB Merger Agreement on terms provided
herein;
NOW, THEREFORE, in consideration of the premises and of the
<PAGE>
respective covenants and agreements of the parties provided herein, the
parties do hereby agree as follows:
6. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, Pinnacle Bank,
any of their affiliates, any person (as hereinabove defined) acting on behalf
of Pinnacle and/or Pinnacle Bank as underwriter pursuant to an offering who
is temporarily holding securities in connection with such offering, any
trustees or other fiduciary holding securities under an employee benefit plan
of Pinnacle and/or Pinnacle Bank, or any corporation owned, directly or
indirectly, by the stockholders of Pinnacle in substantially the same
proportions as their ownership of stock of Pinnacle), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Pinnacle and/or Pinnacle Bank
representing 25% or more of the combined voting power of Pinnacle's and/or
Pinnacle Bank's then outstanding securities; (ii) individuals who are members
of the Board of Pinnacle and/or Pinnacle Bank (the "Incumbent Board") upon
the consummation of both the IFC Merger and the CB Merger (the "Commencement
Date") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the Commencement
Date whose election was approved by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
stockholders was approved by the nominating committee serving under an
Incumbent Board, shall be considered a member of the Incumbent Board; (iii)
the stockholders of Pinnacle and/or Pinnacle Bank approve a merger or
consolidation of Pinnacle and/or Pinnacle Bank with any other corporation,
other than (1) a merger or consolidation which would result in the voting
securities of Pinnacle outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of Pinnacle or such surviving entity
outstanding immediately after such merger or consolidation, or (2) a merger
or consolidation effected to implement a recapitalization of Pinnacle (or
similar transaction) in which no person (as hereinabove defined) acquires
more than 25% of the combined voting power of Pinnacle's then outstanding
securities; or (iv) the stockholders of Pinnacle and/or Pinnacle Bank approve
a plan of complete liquidation of Pinnacle and/or
<PAGE>
Pinnacle Bank or an agreement for the sale or disposition by Pinnacle and/or
Pinnacle Bank of all or substantially all of the assets of Pinnacle and/or
Pinnacle Bank (or any transaction having a similar effect). Notwithstanding
the foregoing or anything to the contrary, neither the IFC Merger nor the CB
Merger shall constitute a "Change in Control" for purposes of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be principally
based at any location not within 25 miles of St.
Joseph, Michigan, or that he substantially increase
his travel on Pinnacle or Pinnacle Bank business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of
personnel reporting to the Executive or a material
reduction in the frequency with which, or in the
nature of the matters with respect to which such
personnel are to report to the Executive, other
than as part of a company-wide reduction in staff;
(4) a reduction in the Executive's salary or a material
adverse change in the Executive's perquisites,
benefits, contingent benefits or vacation, other
than as part of an overall program applied
uniformly and with equitable effect to all members
of the senior management of Pinnacle or Pinnacle
Bank;
(5) a material and extended increase in the required
hours of work or the workload of the Executive; or
(6) the failure of Pinnacle or Pinnacle Bank to obtain
a satisfactory agreement from any successor to
assume the obligations and liabilities under this
Agreement, as contemplated in Section 16 hereof.
<PAGE>
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or
Pinnacle Bank, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or Pinnacle Bank, or any material breach
of this Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of Pinnacle or Pinnacle Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of both the IFC Merger and the CB Merger,
Executive shall serve as an employee of Pinnacle and/or Pinnacle Bank, in
such capacity as may be mutually agreed by Pinnacle and/or Pinnacle Bank and
Executive. As an employee of Pinnacle and/or Pinnacle Bank, Executive will
provide Pinnacle and its affiliates with the benefit of his special
knowledge, skill, contacts and business experience in the banking, savings
and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle and/or Pinnacle Bank or
Executive at any time, whether for "Cause" or any reason whatsoever, subject
to the provisions of Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A
<PAGE>
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and Pinnacle Bank, for any reason, which
termination of employment service occurs after the effective date of this
Agreement but prior to the occurrence of a Change in Control, including,
without limitation, the termination by Pinnacle and/or Pinnacle Bank of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle and/or Pinnacle Bank shall pay Executive, or in the event
of his death or disability, his beneficiary or beneficiaries, or his estate
or legal representatives, as the case may be, (i) the salary of Executive
through the Date of Termination at the rate in effect at the time the Notice
of Termination is given, at the time such payments are due; and (ii) in a
lump sum in cash, within 30 days after the Date of Termination, as severance
pay or liquidated damages, or both, the sum of $156,000.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR FOLLOWING A
CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate his employment for Good Reason, or the Executive's employment
shall be terminated by retirement, death or disability, in any said case upon
or within 24 months following a Change in Control, Pinnacle and/or Pinnacle
Bank shall (i) pay the Executive his salary through the Date of Termination
at the rate in effect at the time the Notice of Termination is given, at the
time such payments are due; and (ii) pay to the Executive in a lump sum in
cash, within 30 days
<PAGE>
after the Date of Termination, an amount equal to the greater of:
(A) the lesser of:
(1) 100% of the Executive's total compensation of any
and all types, including salary, bonus, gains on
exercise of stock options and other benefits, paid
to or earned by Executive from Pinnacle, Pinnacle
Bank and all of their affiliates during the fiscal
year most recently completed on or prior to the
date of the Change in Control, or
(2) 299% of the Executive's "base amount" as determined
under Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), less the aggregate
present value of the payments or benefits, if any,
in the nature of compensation for the benefit of
the Executive, arising under any other plans or
arrangements (i.e., not this Agreement) between
Pinnacle or Pinnacle Bank or any of their
affiliates and the Executive, which are contingent
upon a Change in Control and which are not deemed
to be "reasonable compensation" under Section 280G
of the Code, or
(B) $156,000.
(b) In the event that Pinnacle and/or Pinnacle Bank shall terminate the
Executive's employment for Cause, or the Executive shall terminate his
employment other than for Good Reason, in any said case upon or at any time
following a Change in Control, or the Executive's employment shall be
terminated for any reason more than 24 months following a Change in Control,
Pinnacle and/or Pinnacle Bank shall pay to Executive , or in the event of his
death or disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such payments are due; and (ii) in a lump
sum in cash, within 30 days after the Date of Termination, as severance pay
or liquidated damages, or both, the sum of $156,000.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily
<PAGE>
prohibited from participating in the conduct of Pinnacle's and/or Pinnacle
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act (the "FDIA"), 12 U.S.C. Section 1818(e)(3) and
(g)(1), or Section 37 of the Michigan Banking Code (the "MBC"), M.C.L.
Section 487.337, Pinnacle's and Pinnacle Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed,
Pinnacle and/or Pinnacle Bank may in its discretion (i) pay the Executive all
or part of withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's and/or Pinnacle Bank's affairs by
an order issue under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section
1818(e)(4) and (g)(1), or under Section 37 of the MBC, M.C.L. Section
487.337, all obligations of Pinnacle and Pinnacle Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(c) If Pinnacle and/or Pinnacle Bank is in default (as defined in
Section 3(x)(1) of the FDIA), or its performance of this Agreement is grounds
for an action under Section 35 of the MBC, M.C.L. Section 487.335, all
obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of the contracting
parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of employment by another employer, by retirement benefits after the
date of termination or otherwise. This Agreement shall not be construed as
providing the Executive any rights to be retained in the employ of Pinnacle,
Pinnacle Bank or any affiliate of Pinnacle.
7. NOTICE.
<PAGE>
(a) Any purported termination by Pinnacle and/or Pinnacle Bank or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle and Pinnacle Bank as may reasonably be required by
Pinnacle and/or Pinnacle Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle and/or Pinnacle Bank.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS; JOINT AND SEVERAL OBLIGATIONS.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the
<PAGE>
benefit of, Executive, on the one hand, and his heirs, beneficiaries and
legal representatives, and Pinnacle and Pinnacle Bank, on the other hand, and
their respective successors and assigns.
(c) The obligations of Pinnacle and Pinnacle Bank hereunder are joint
and several obligations of each of them.
11. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle and/or Pinnacle Bank, if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
<PAGE>
16. SUCCESSOR TO PINNACLE AND/OR PINNACLE BANK.
Pinnacle and Pinnacle Bank shall each require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all its business or assets, expressly and
unconditionally to assume and agree to perform its obligations under this
Agreement, in the same manner and to the same extent that it would be
required to perform if no such succession or assignment had taken place.
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS.
This Agreement shall be effective upon consummation of both the IFC
Merger and the CB Merger. In the event the IFC Merger Agreement is
terminated, or if the IFC Merger is not consummated for any reason, or the CB
Merger Agreement is terminated, or if the CB Merger is not consummated, this
Agreement shall be null and void and of no effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Pinnacle Financial Services, Inc.
By:
_____________________________
John A. Newcomer Richard L. Schanze, Chairman
"Executive" and Chief Executive Officer
Pinnacle Bank
By:
Arnold L. Weaver
President
<PAGE>
EXHIBIT 10(j)
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), is made and entered into as
of this 31st day of July, 1997, by and between PINNACLE FINANCIAL SERVICES,
INC., a Michigan corporation ("Pinnacle"), and MICHAEL J. GRIFFIN (the
"Executive").
WITNESSETH:
WHEREAS, Pinnacle has entered into an Agreement and Plan of Merger dated
as of November 14, 1996, as amended by First Amendment to Agreement and Plan
of Merger dated as of February 27, 1997 (the "IFC Merger Agreement"), with
Indiana Federal Corporation, a Delaware corporation ("IFC"), pursuant to
which IFC is to be merged with and into Pinnacle (the "IFC Merger"), and the
wholly-owned subsidiary of IFC, Indiana Federal Bank for Savings, a Federal
Savings Bank ("IndFed Bank"), is to be merged and consolidated into the
wholly-owned subsidiary of Pinnacle, Pinnacle Bank, a Michigan banking
corporation ("Pinnacle Bank"); and
WHEREAS, Executive is currently serving as an executive of IFC and/or
IndFed Bank and is a party to a Severance Agreement dated March 4, 1996 (the
"IFC Severance Agreement"), with IFC, pursuant to which the Executive is
entitled to certain benefits, including, among other things, certain benefits
following a change in control affecting IFC and/or IndFed Bank; and
WHEREAS, upon the merger contemplated under the IFC Merger Agreement
becoming effective, Pinnacle, as the survivor of the merger with IFC, desires
to continue the employment of the Executive with Pinnacle and/or Pinnacle
Bank, as the survivor of the merger and consolidation with IndFed Bank, but
on terms provided herein, which are different than and would supersede the
terms provided in the IFC Severance Agreement; and
WHEREAS, Executive is willing to be employed with Pinnacle and/or
Pinnacle Bank following the effectiveness of the merger contemplated by the
IFC Merger Agreement on terms provided herein, and to cancel and terminate
the IFC Employment Agreement as herein provided;
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements of the parties provided herein,
<PAGE>
the parties do hereby agree as follows:
7. CERTAIN DEFINITIONS.
(a) The term "Change in Control" means (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than Pinnacle, any of its
affiliates, any person (as hereinabove defined) acting on behalf of Pinnacle
as underwriter pursuant to an offering who is temporarily holding securities
in connection with such offering, any trustees or other fiduciary holding
securities under an employee benefit plan of Pinnacle, or any corporation
owned, directly or indirectly, by the stockholders of Pinnacle in
substantially the same proportions as their ownership of stock of Pinnacle),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Pinnacle representing
25% or more of the combined voting power of Pinnacle's then outstanding
securities; (ii) individuals who are members of the Board of Pinnacle upon
the consummation of the IFC Merger (the "Incumbent Board") as contemplated by
the IFC Merger Agreement (the "Commencement Date") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the Commencement Date whose election was approved in
the IFC Merger Agreement (i.e., the election of Joseph Heffernan to the Board
of Pinnacle upon the consummation of a merger of CB Bancorp, Inc., a Delaware
corporation ("CB"), with and into Pinnacle (the "CB Merger"), as contemplated
by the IFC Merger Agreement), or by a vote of at least a majority of the
directors comprising the Incumbent Board or whose nomination for election by
Pinnacle's stockholders was approved by the nominating committee serving
under an Incumbent Board, shall be considered a member of the Incumbent
Board; (iii) the stockholders of Pinnacle approve a merger or consolidation
of Pinnacle with any other corporation, other than (1) a merger or
consolidation which would result in the voting securities of Pinnacle
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of Pinnacle or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a merger or consolidation effected to
implement a recapitalization of Pinnacle (or similar transaction) in which no
person (as hereinabove defined) acquires more than 25% of the combined voting
power of Pinnacle's then outstanding securities; or (iv) the stockholders of
Pinnacle
<PAGE>
approve a plan of complete liquidation of Pinnacle or an agreement for the
sale or disposition by Pinnacle of all or substantially all of Pinnacle's
assets (or any transaction having a similar effect). Notwithstanding the
foregoing or anything to the contrary, neither the IFC Merger nor the CB
Merger as contemplated by the IFC Merger Agreement shall constitute a "Change
in Control" for purposes of this Agreement.
(b) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including, without limitation, any of the following circumstances unless such
circumstances are fully corrected prior to the Date of Termination specified
in the Notice of Termination given by the Executive in respect thereof:
(1) a requirement that the Executive be based at any location not
within 25 miles of Valparaiso, Indiana, or that he substantially
increase his travel on Pinnacle business:
(2) a material demotion of the Executive;
(3) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the frequency
with which, or in the nature of the matters with respect to which
such personnel are to report to the Executive, other than as part
of a Pinnacle-wide reduction in staff;
(4) a reduction in the Executive's salary or a material adverse change
in the Executive's perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied
uniformly and with equitable effect to all members of the senior
management of Pinnacle;
(5) a material and extended increase in the required hours of work or
the workload of the Executive; or
(6) the failure of Pinnacle to obtain a satisfactory agreement from
any successor to assume the obligations and liabilities under this
Agreement, as contemplated in Section 16 hereof.
<PAGE>
(c) The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in material loss to Pinnacle or one
of its affiliates, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order which
results in material loss to Pinnacle or one of its affiliates or any material
breach of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or
omitted to be done, not in good faith and without reasonable belief that the
action or omission was in the best interest of Pinnacle or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him
a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board of Pinnacle (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose
(after reasonable notice to Executive and an opportunity for him, together
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying termination
for Cause and specifying the particulars thereof in detail.
2. DESCRIPTION OF SERVICES.
Following the consummation of the IFC Merger, Executive shall serve as
an employee of Pinnacle and/or its affiliates, in such capacity as may be
mutually agreed by Pinnacle and Executive. As an employee of Pinnacle and/or
its affiliates, Executive will provide Pinnacle and its affiliates with the
benefit of his special knowledge, skill, contacts and business experience in
the banking, savings and loan, and financial services industries.
3. AT WILL EMPLOYMENT.
Executive shall be employed as an "at will " employee, and said
employment may be terminated by either Pinnacle or Executive at any time,
whether for "Cause" or any reason whatsoever, subject to the provisions of
Sections 4, 5, 6 and 8 of this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION PRIOR TO A
CHANGE IN CONTROL.
<PAGE>
Subject to the provisions of Section 6 of this Agreement:
(a) Upon the occurrence of an "Event of Termination Prior to a Change
of Control" (as herein defined), the provisions of this Section shall apply.
As used in Sections 4(a) and (b) of this Agreement, an "Event of Termination
Prior to a Change in Control" shall mean termination of employment service in
all capacities with Pinnacle and its subsidiaries and corporate affiliates,
for any reason, which termination of employment service occurs after the
effective date of this Agreement but prior to the occurrence of a Change in
Control, including, without limitation, the termination by Pinnacle of
Executive's full-time employment hereunder whether for "Cause" or for any
reason whatsoever, the termination by the Executive of his employment for
Good Reason or for any reason whatsoever, or termination upon the retirement,
resignation, death or disability of Executive.
(b) Upon the occurrence of an Event of Termination Prior to a Change in
Control, Pinnacle shall pay Executive, or in the event of his death or
disability, his beneficiary or beneficiaries, or his estate or legal
representatives, as the case may be, (i) the salary of Executive through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, at the time such payments are due; and (ii) in a lump
sum in cash, within 30 days after the Date of Termination, as severance pay
or liquidated damages, or both, the sum of $87,816.
5. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION UPON OR
FOLLOWING A CHANGE IN CONTROL.
Subject to the provisions of Section 6 of this Agreement:
(a) In the event that Pinnacle shall terminate the Executive's
employment other than Termination for Cause, or the Executive shall terminate
his employment for Good Reason, or the Executive's employment shall be
terminated by retirement, death or disability, in any said case upon or
within 24 months following a Change in Control, Pinnacle shall (i) pay the
Executive his salary through the Date of Termination at the rate in effect at
the time the Notice of Termination is given, at the time such payments are
due; and (ii) pay to the Executive in a lump sum in cash, within 30 days
after the Date of Termination, an amount equal to the greater of: (A) 200% of
the Executive's "base amount" as determined under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), less the aggregate
present value of the payments or
<PAGE>
benefits, if any, in the nature of compensation for the benefit of the
Executive, arising under any other plans or arrangements (i.e., not this
Agreement) between Pinnacle or any of its affiliates and the Executive, which
are contingent upon a Change in Control and which are not deemed to be
"reasonable compensation" under Section 280G of the Code, or (B) $87,816.
(b) In the event that Pinnacle shall terminate the Executive's
employment for Cause, or the Executive shall terminate his employment other
than for Good Reason, in any said case upon or at any time following a Change
in Control, or the Executive's employment shall be terminated for any reason
more than 24 months following a Change in Control, Pinnacle shall pay to
Executive, or in the event of his death or disability, his beneficiary or
beneficiaries, or his estate or legal representatives, as the case may be,
(i) the salary of Executive through the Date of Termination at the rate in
effect at the time the Notice of Termination is given, at the time such
payments are due; and (ii) in a lump sum in cash, within 30 days after the
Date of Termination, as severance pay or liquidated damages, or both, the sum
of $87,816.
6. REGULATORY AND OTHER RESTRICTIONS.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Pinnacle's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (the "FDIA"),
12 U.S.C. Section 1818(e)(3) and (g)(1), or Section 37 of the Michigan
Banking Code (the "MBC"), M.C.L. Section 487.337, Pinnacle's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are
dismissed, Pinnacle may in its discretion (i) pay the Executive all or part
of withheld while its obligations under this Agreement were suspended and
(ii) reinstate in whole or in part any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of Pinnacle's affairs by an order issue under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and
(g)(1), or under Section 37 of the MBC, M.C.L. Section 487.337, all
obligations of Pinnacle under this Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(c) If Pinnacle is in default (as defined in Section 3(x)(1)
<PAGE>
of the FDIA), or its performance of this Agreement is grounds for an action
under Section 35 of the MBC, M.C.L. Section 487.335, all obligations under
this Agreement shall terminate as of the date of default, but this provision
shall not affect any vested rights of the contracting parties.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulation promulgated thereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment or provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of employment by another employer, by retirement benefits after the
date of termination or otherwise. This Agreement shall not be construed as
providing the Executive any rights to be retained in the employ of Pinnacle
or any affiliate of Pinnacle.
7. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
8. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8
during the term of this Agreement and for one (1) full year after the
expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such
<PAGE>
information and assistance to Pinnacle as may reasonably be required by
Pinnacle in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid
in cash or check from the general funds of Pinnacle.
10. NO ATTACHMENT; SUCCESSORS AND ASSIGNS.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
11. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
<PAGE>
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of the chief executive offices of
Pinnacle, in accordance with the rules of the American Arbitration
Association then in effect.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle, if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
16. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under
this Agreement, in the same manner and to the same extent that Pinnacle would
be required to perform if no such succession or assignment had taken place.
17. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
18. EFFECTIVENESS AND SUPERSEDED AGREEMENT.
This Agreement shall be effective upon consummation of the IFC Merger
contemplated by the IFC Merger Agreement. In the event the IFC Merger
Agreement is terminated, or if the IFC Merger is not consummated for any
reason, this Agreement shall be null and void and of no effect.
Notwithstanding the foregoing, by executing this Agreement, the Executive
acknowledges and agrees that, in the event the IFC Merger is consummated and
this Agreement becomes effective, his Severance Agreement with IFC dated
March 4, 1996, shall immediately and automatically be and become superseded,
void and of no effect, without need of any further action; and that, in said
<PAGE>
event, he shall have no rights to any payments or other benefits under such
prior agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Pinnacle Financial Services, Inc.
By:
Richard L. Schanze
Chairman and Chief Executive
Officer
________________________________
Michael J. Griffin
"Executive"
<PAGE>
EXHIBIT 10(k)
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of August 1, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830
Pleasant Street, St. Joseph, Michigan 49085, and Joseph F. Heffernan (the
"Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to
the Agreement and Plan of Merger by and between Pinnacle and CB Bancorp,
dated as of the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will
be terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities,
his expertise in the field of financial management and his knowledge of the
savings and loan industry, including the mortgage repurchase program operated
by CB Bancorp and the Bank prior to the Effective Date, as defined in the
Merger Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it
is agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be
mutually agreed by Pinnacle and Executive. As an employee of Pinnacle and/or
its affiliates, Executive will provide Pinnacle and its affiliates with the
benefit of his special knowledge, skill, contacts and business experience in
the savings and loan industry, particularly as his knowledge relates to the
business previously conducted by CB Bancorp and the Bank.
2. TERMS.
<PAGE>
(a) Executive shall be employed as an "at will " employee, and said
employment may be terminated at any time, whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of Pinnacle and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may
serve, or continue to serve, on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which, in such
Board's judgment, will not present any conflict of interest with Pinnacle, or
materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 1 and 2.
Pinnacle shall pay Executive as compensation a salary of not less than
$175,000 per year ("Base Salary"). Such Base Salary shall be payable
bi-monthly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no
later than one year from the date of this Agreement. Any increase in base
salary shall then become the "Base Salary" for purposes of this Agreement.
In addition to the Base Salary provided in this Section 3(a), Pinnacle shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of Pinnacle and principal
subsidiary, Pinnacle Bank. Base Salary shall include any amounts of
compensation deferred by Executive under a qualified plan maintained by
Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit
plan or arrangement made available by Pinnacle in the future to its
employees, subject to and on a basis consistent with the terms, conditions
and overall
<PAGE>
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in
which Executive is eligible to participate. Nothing paid to the Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event
of Termination" shall mean termination of service with Pinnacle for any
reason, including the termination by Pinnacle of Executive's full-time
employment hereunder, and termination upon the retirement, resignation or
death of Executive; provided that an Event of Termination shall not include
termination of Executive by Pinnacle for Cause as defined in Section 5.
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or
both an amount equal to the greater of $223,000 or one times Executive's then
current Base Salary and any bonuses paid or to be paid during the year of
termination. At the election of the Executive, which election is to be made
within thirty (30) days of the Date of Termination following an Event of
Termination, such payment may be made in a lump sum or paid in equal monthly
installments during the thirty-six (36) months following the Executive's
termination of service. In the event that no election is made, payment to
the Executive will be made on a monthly basis in equal installments over
thirty-six (36) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to
Executive, cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by Pinnacle and
its affiliates for Executive prior to his termination of service. Such
coverage and payments shall cease upon the expiration of thirty-six (36)
months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated duties of a material
nature, personal dishonesty which results in
<PAGE>
material loss to Pinnacle or one of its affiliates, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order which results in material loss to Pinnacle or
one of its affiliates or any material breach of this Agreement. For purposes
of this Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of
Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board (excluding the Executive for
purposes of said computation) at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive any payment under
Section 4 of this Agreement, or any other compensation or other benefits for
any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 7
during the term of this Agreement and for one
<PAGE>
(1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle as may reasonably be required by Pinnacle in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the
<PAGE>
meaning or interpretation of any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of Pinnacle, in accordance with the
rules of the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle, if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under
this Agreement, in the same manner and to the same extent that Pinnacle would
be required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on August
1, 1997.
Pinnacle Financial Services, Inc.
By:
Richard L. Schanze
Chairman and Chief
Executive Officer
Joseph F. Heffernan
Executive
<PAGE>
EXHIBIT 10(l)
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of August 1, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830
Pleasant Street, St. Joseph, Michigan 49085, and Daniel R. Buresh (the
"Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to
the Agreement and Plan of Merger by and between Pinnacle and CB Bancorp,
dated as of the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will
be terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities,
his expertise in the field of financial management and his knowledge of the
savings and loan industry, including the mortgage repurchase program operated
by CB Bancorp and the Bank prior to the Effective Date, as defined in the
Merger Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it
is agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be
mutually agreed by Pinnacle and Executive. As an employee of Pinnacle and/or
its affiliates, Executive will provide Pinnacle and its affiliates with the
benefit of his special knowledge, skill, contacts and business experience in
the savings and loan industry, particularly as his knowledge relates to the
business previously conducted by CB Bancorp and the Bank.
2. TERMS.
<PAGE>
(a) Executive shall be employed as an "at will" employee, and said
employment may be terminated at any time, whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of Pinnacle and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may
serve, or continue to serve, on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which, in such
Board's judgment, will not present any conflict of interest with Pinnacle, or
materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 1 and 2.
Pinnacle shall pay Executive as compensation a salary of not less than
$53,000 per year ("Base Salary"). Such Base Salary shall be payable
bi-monthly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no
later than one year from the date of this Agreement. Any increase in base
salary shall then become the "Base Salary" for purposes of this Agreement.
In addition to the Base Salary provided in this Section 3(a), Pinnacle shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of Pinnacle and principal
subsidiary, Pinnacle Bank. Base Salary shall include any amounts of
compensation deferred by Executive under a qualified plan maintained by
Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit
plan or arrangement made available by Pinnacle in the future to its
employees, subject to and on a basis consistent with the terms, conditions
and overall
<PAGE>
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in
which Executive is eligible to participate. Nothing paid to the Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event
of Termination" shall mean termination of service with Pinnacle for any
reason, including the termination by Pinnacle of Executive's full-time
employment hereunder, and termination upon the retirement, resignation or
death of Executive; provided that an Event of Termination shall not include
termination of Executive by Pinnacle for Cause as defined in Section 5.
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or
both an amount equal to the greater of $70,000 or one times Executive's then
current Base Salary and any bonuses paid or to be paid during the year of
termination. At the election of the Executive, which election is to be made
within thirty (30) days of the Date of Termination following an Event of
Termination, such payment may be made in a lump sum or paid in equal monthly
installments during the twenty-four (24) months following the Executive's
termination of service. In the event that no election is made, payment to
the Executive will be made on a monthly basis in equal installments over
twenty-four (24) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to
Executive, cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by Pinnacle and
its affiliates for Executive prior to his termination of service. Such
coverage and payments shall cease upon the expiration of twenty-four (24)
months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated
<PAGE>
duties of a material nature, personal dishonesty which results in material
loss to Pinnacle or one of its affiliates, willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in material loss to Pinnacle or one of
its affiliates or any material breach of this Agreement. For purposes of this
Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of
Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board (excluding the Executive for
purposes of said computation) at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive any payment under
Section 4 of this Agreement, or any other compensation or other benefits for
any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph
<PAGE>
(b) of this Section 7 during the term of this Agreement and for one (1) full
year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle as may reasonably be required by Pinnacle in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included
<PAGE>
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of Pinnacle, in accordance with the
rules of the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle, if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under
this Agreement, in the same manner and to the same extent that Pinnacle would
be required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
August 1, 1997.
Pinnacle Financial Services, Inc.
By:
Richard L. Schanze
Chairman and Chief
Executive Officer
Daniel R. Buresh
Executive
<PAGE>
EXHIBIT 10(m)
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of August 1, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830
Pleasant Street, St. Joseph, Michigan 49085, and James D. Neff (the
"Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to
the Agreement and Plan of Merger by and between Pinnacle and CB Bancorp,
dated as of the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will
be terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities,
his expertise in the field of financial management and his knowledge of the
savings and loan industry, including the mortgage repurchase program operated
by CB Bancorp and the Bank prior to the Effective Date, as defined in the
Merger Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it
is agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be
mutually agreed by Pinnacle and Executive. As an employee of Pinnacle and/or
its affiliates, Executive will provide Pinnacle and its affiliates with the
benefit of his special knowledge, skill, contacts and business experience in
the savings and loan industry, particularly as his knowledge relates to the
business previously conducted by CB Bancorp and the Bank.
2. TERMS.
<PAGE>
(a) Executive shall be employed as an "at will " employee, and said
employment may be terminated at any time,whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of Pinnacle and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may
serve, or continue to serve, on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which, in such
Board's judgment, will not present any conflict of interest with Pinnacle, or
materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 1 and 2.
Pinnacle shall pay Executive as compensation a salary of not less than
$70,400 per year ("Base Salary"). Such Base Salary shall be payable
bi-monthly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no
later than one year from the date of this Agreement. Any increase in base
salary shall then become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), Pinnacle shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of Pinnacle and principal
subsidiary, Pinnacle Bank. Base Salary shall include any amounts of
compensation deferred by Executive under a qualified plan maintained by
Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit
plan or arrangement made available by Pinnacle in the future to its
employees, subject to and on a basis consistent with the terms, conditions
and overall
<PAGE>
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in
which Executive is eligible to participate. Nothing paid to the Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event
of Termination" shall mean termination of service with Pinnacle for any
reason, including the termination by Pinnacle of Executive's full-time
employment hereunder, and termination upon the retirement, resignation or
death of Executive; provided that an Event of Termination shall not include
termination of Executive by Pinnacle for Cause as defined in Section 5.
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or
both an amount equal to the greater of $95,000 or one times Executive's then
current Base Salary and any bonuses paid or to be paid during the year of
termination. At the election of the Executive, which election is to be made
within thirty (30) days of the Date of Termination following an Event of
Termination, such payment may be made in a lump sum or paid in equal monthly
installments during the twenty-four (24) months following the Executive's
termination of service. In the event that no election is made, payment to the
Executive will be made on a monthly basis in equal installments over
twenty-four (24) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to
Executive, cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by Pinnacle and
its affiliates for Executive prior to his termination of service. Such
coverage and payments shall cease upon the expiration of twenty-four (24)
months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a
termination of employment shall mean termination because of the Executive's
intentional or persistent failure to perform stated
<PAGE>
duties of a material nature, personal dishonesty which results in material
loss to Pinnacle or one of its affiliates, willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in material loss to Pinnacle or one of
its affiliates or any material breach of this Agreement. For purposes of this
Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of
Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board (excluding the Executive for
purposes of said computation) at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive any payment under
Section 4 of this Agreement,or any other compensation or other benefits for
any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph
<PAGE>
(b) of this Section 7 during the term of this Agreement and for one (1) full
year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to Pinnacle as may reasonably be required by Pinnacle in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included
<PAGE>
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within fifty (50) miles from the location of Pinnacle, in accordance with the
rules of the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by Pinnacle, if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under
this Agreement, in the same manner and to the same extent that Pinnacle would
be required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
August 1, 1997.
Pinnacle Financial Services, Inc.
By:
Richard L. Schanze
Chairman and Chief
Executive Officer
James D. Neff
Executive
<PAGE>
EXHIBIT 21
Subsidiaries of Pinnacle Financial Services, Inc.:
- - Forrest Holdings, Inc., a Nevada Corporation
- - IndFed Mortgage Company, an Indiana Corporation
- - IFB Investment Services, Inc., an Indiana Corporation
- - Community Brokerage Services, Inc., an Indiana Corporation
- - Pinnacle Bank, a Michigan State Banking Corporation
<PAGE>
Exhibit 23 Consent of KPMG Peat Marwick LLP,
Independent Auditors
The Board of Directors
Pinnacle Financial Services
We consent to the incorporation by reference in the registration statement on
Form S-8 of Pinnacle Financial Services, Inc. of our report dated March 30,
1998, relating to the consolidated financial statements of Pinnacle Financial
Services, Inc. as of and for the year ended December 31, 1997, which report
appears in December 31, 1997 annual report and form 10-K of Pinnacle
Financial Services, Inc.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 49,209
<INT-BEARING-DEPOSITS> 1,548
<FED-FUNDS-SOLD> 6,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 419,284
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,508,365
<ALLOWANCE> 20,528
<TOTAL-ASSETS> 2,115,495
<DEPOSITS> 1,433,108
<SHORT-TERM> 280,634
<LIABILITIES-OTHER> 17,516
<LONG-TERM> 203,242
0
0
<COMMON> 19,110
<OTHER-SE> 161,885
<TOTAL-LIABILITIES-AND-EQUITY> 2,115,495
<INTEREST-LOAN> 129,425
<INTEREST-INVEST> 37,123
<INTEREST-OTHER> 524
<INTEREST-TOTAL> 167,072
<INTEREST-DEPOSIT> 62,695
<INTEREST-EXPENSE> 91,486
<INTEREST-INCOME-NET> 75,586
<LOAN-LOSSES> 13,320
<SECURITIES-GAINS> 813
<EXPENSE-OTHER> 66,011
<INCOME-PRETAX> 14,775
<INCOME-PRE-EXTRAORDINARY> 14,775
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,216
<EPS-PRIMARY> .83
<EPS-DILUTED> .82
<YIELD-ACTUAL> 3.75
<LOANS-NON> 10,767
<LOANS-PAST> 7,038
<LOANS-TROUBLED> 174
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,909
<CHARGE-OFFS> 8,717
<RECOVERIES> 515
<ALLOWANCE-CLOSE> 20,528
<ALLOWANCE-DOMESTIC> 20,528
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
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