-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dk4r4/A7Ec0hxFzi9qE2G5AzpTsGBiikJZdw2P7POREya+am0I4utoJvRnYDm2gt 7BFXOKGWFcWt61ypXavPDw== 0000912057-97-011286.txt : 19970401 0000912057-97-011286.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011286 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000853461 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382671129 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17937 FILM NUMBER: 97570165 BUSINESS ADDRESS: STREET 1: 830 PLEASANT ST STREET 2: PO 48 CITY: ST JOSEPH STATE: MI ZIP: 49085 BUSINESS PHONE: 6169839262 MAIL ADDRESS: STREET 1: 830 PLEASANT ST STREET 2: PO BOX 48 CITY: ST JOSEPH STATE: MI ZIP: 49085 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-17937 PINNACLE FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2671129 (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) No.) 830 PLEASANT STREET, ST. JOSEPH, 49085 MICHIGAN (Address of Principal Executive (Zip Code) Offices)
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 21, 1997 (based on the closing price of those shares listed on the Nasdaq National Market) was $116,353,160. The number of common shares, no par value, outstanding as of March 21, 1997, was 5,980,320. DOCUMENTS INCORPORATED BY REFERENCE None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PINNACLE FINANCIAL SERVICES, INC. FORM 10-K INDEX
PAGE ----- PART I Item 1. Business.................................................................................. 3 Item 2. Properties................................................................................ 21 Item 3. Legal Proceedings......................................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders....................................... 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 21 Item 6. Selected Financial Data................................................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 24 Item 8. Financial Statements and Supplementary Data............................................... Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 70 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 70 Item 11. Executive Compensation.................................................................... 72 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 75 Item 13. Certain Relationships and Related Transactions............................................ 77 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 78 Signatures............................................................................................. 82
2 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 is one of the leading full-service community-banking institutions in southwestern Michigan and northern Indiana. Pinnacle's principal executive offices are located at 830 Pleasant Street, St. Joseph, Michigan 49085, and its telephone number is (616) 983-6311. Through Pinnacle Bank, Pinnacle offers financial service products which include domestic banking services such as consumer, commercial and real estate loans, personal and business checking accounts, savings accounts, time deposits, safe deposit services, cash management services, and transmission of funds, as well as trust and other fiduciary services, full-service brokerage services and insurance products. Commercial customers include retailers, commercial developers, professionals, and small manufacturers. Retail banking and thrift customers cover a broad spectrum with focus on providing personalized, high quality and comprehensive service in order to develop and maintain long-term, multiple account relationships with customers. Pinnacle Bank, which is headquartered in St. Joseph, Michigan, has two non-bank subsidiaries: Starke's, Inc., an insurance agency, and Brookview Real Estate, Ltd., a real estate development company. Pinnacle Bank currently operates through 16 branch offices located throughout southwestern Michigan, 14 branch offices located throughout northern Indiana, and two loan production offices that are located in Merrillville and Indianapolis, Indiana, respectively. Pinnacle Bank focuses on providing personalized, high quality and comprehensive service in order to develop and maintain long-term, multiple account relationships with customers. Pinnacle's market, which is adjacent to metropolitan Chicago, Illinois and is bisected by Interstate 94 (the primary highway between Chicago and Detroit), currently consists of northern Indiana and southwestern Michigan. The region's location has facilitated the development of a diverse economy based primarily on manufacturing, service and agriculture. The region's proximity to Chicago and the southeastern expansion of metropolitan Chicago into Lake County, Indiana, have led to significant commercial and residential development and a strong second-home housing market. The region's popularity as a year-round recreational area also has led to tourism-driven economic growth. Pinnacle had $1.1 billion in total assets as of December 31, 1996. Pinnacle returned .94% on average assets for the year ended December 31, 1996. This compares to 1.36%, 1.30% and 1.27% for each of the years in the three year period ended December 31, 1995. For the year ended December 31, 1996, Pinnacle's return on average equity was 12.34%. Annual returns on average equity since 1993 have ranged from 15.40% to 15.91%. Pinnacle believes its success is in part attributable to a growth strategy that, since the beginning of 1993, has (i) increased assets by more than 171% (with total assets growing to $1.1 billion by December 31, 1996), and (ii) increased net loans by more than 130% (with total loans growing to approximately $603.9 million at December 31, 1996). Pinnacle's loan to deposit ratio was approximately 80.1% at December 31, 1996. Pinnacle's growth has been generated internally through customer retention and cross-selling programs and externally through acquisitions. Since 1988, Pinnacle has consummated five acquisitions, two of which involved thrifts. STRATEGIES TO ACHIEVE GROWTH ACQUISITIONS. In recent years, Pinnacle's growth has occurred primarily through mergers and acquisitions. Since its formation as a bank holding company in 1986, Pinnacle has successfully integrated five 3 significant acquisitions. In February 1988, Pinnacle acquired $37 million in assets and assumed certain liabilities of First State Bank of White Cloud (the "White Cloud Acquisition"), which thereafter became a branch office of Pinnacle Bank. In December 1990, the majority of the assets of Pinnacle's White Cloud branch office were sold to, and the liabilities associated with that branch office were assumed by, another unaffiliated bank. In February 1990, the Resolution Trust Corporation transferred to Pinnacle $84 million in assets and certain liabilities of the insolvent Peoples Savings Association of St. Joseph, Michigan (the "Peoples Acquisition"). In December 1992, Pinnacle acquired all of the outstanding stock of Harbor Country Banking Company of Three Oaks, Michigan, an $82 million state bank. On December 1, 1995, Pinnacle acquired all of the outstanding capital stock of Maco Bancorp, Inc., a Delaware corporation and a registered savings and loan holding company ("Maco"), for aggregate consideration of $41.9 million (the "Purchase Price"), through the merger of Maco with and into Pinnacle (the "Maco Acquisition"). The Purchase Price, which was paid to Mr. Cyrus A. Ansary as the sole stockholder of Maco, consisted of cash, a secured, short-term, interest bearing promissory note in the principal amount of $18.0 million (the "Acquisition Note"), and shares of Pinnacle Common Stock then valued at approximately $21.0 million. As a result of the Maco Acquisition, Pinnacle became the sole stockholder of First Federal Savings Bank of Indiana, a federal savings bank that was renamed "Pinnacle Bank" in 1996 and was merged with and into Pinnacle Bank effective December 31, 1996, and Mr. Ansary became the largest single Pinnacle stockholder. Mr. Ansary currently holds approximately 20% of the shares of Pinnacle Common Stock outstanding. (In connection with the Maco Acquisition, Mr. Ansary and Pinnacle entered into certain agreements, including a Standstill Agreement dated as of December 1, 1995 (the "Standstill Agreement"). The Standstill Agreement obligates Mr. Ansary, through December 31, 1999 (unless it is sooner terminated) to vote all Pinnacle voting securities of which he is the beneficial owner in accordance with the written directions of Pinnacle's management.) As a result of these acquisitions and growth generated by its own operations, Pinnacle's assets increased from $231 million at the beginning of 1990 to $1.1 billion at December 31, 1996. Through its acquisition strategy, Pinnacle seeks to diversify and expand both its market area and its asset base, and to increase its profitability. Although Pinnacle is more interested in acquiring established financial service organizations, based on its experiences with the White Cloud Acquisition and the Peoples Acquisition, Pinnacle may acquire the assets of troubled or insolvent banks or thrift institutions if advantageous asset acquisition opportunities of this type present themselves. Factors usually considered by Pinnacle in determining the desirability of an acquisition candidate include price and terms, the growth potential of the target's market and earnings, the target's general financial condition and the quality of the target's management. On November 14, 1996, Pinnacle entered into an Agreement and Plan of Merger with Indiana Federal Corporation, a Delaware corporation and a registered savings and loan holding company ("IFC"). On February 27, 1997 Pinnacle entered into an Agreement and Plan of Merger with CB Bancorp, Inc., a Delaware corporation and a registered savings and loan holding company ("CB"). The agreements contemplate the merger of each of IFC and CB with and into Pinnacle, with Pinnacle being the surviving entity. These transactions are expected to qualify as "pooling-of-interests" for accounting and financial reporting purposes and to increase the total assets of Pinnacle by more than $1.0 billion. Consummation of these transactions is subject to shareholder and regulatory approval. In addition to expansion through acquisitions, Pinnacle may consider establishing branch facilities as a means of expanding its presence into new market areas. Pinnacle may also consider expanding into businesses closely related to its banking activities. Closely related businesses that Pinnacle could acquire or organize include, among others, mortgage lending, mortgage servicing, investment and financial advisory services, leasing, insurance, data processing, management consulting to depository institutions, and courier services. As a result of the Maco Acquisition, Pinnacle acquired First Insurance, Inc., an Indiana corporation engaged primarily in the sale of multi-peril homeowner's insurance to borrowers of Pinnacle Bank. On 4 October 1, 1996, and in exchange for 99,451 shares of Pinnacle Common Stock then valued at $2.1 million, Pinnacle Bank acquired Starke's, Inc., a Michigan corporation and an independent "full-line" insurance agency. On December 31, 1996, First Insurance, Inc. was merged with and into Starke's, Inc. There can be no assurance that any further acquisitions will be made by Pinnacle or, if made, will be successful. Moreover, there can be no assurance that Pinnacle's strategies to achieve growth will be successful. CUSTOMER DEVELOPMENT. Pinnacle believes that it can increase profitability by expanding the number and types of accounts and relationships with its existing customers. To achieve that goal, Pinnacle is continuing to explore technologies that facilitate cross-selling of financial products to existing customers and deliver services more efficiently. In 1995 Pinnacle initiated a telephone marketing program utilizing personnel trained to survey customer satisfaction and needs and to cross-sell additional products offered by it. CUSTOMER RETENTION. Pinnacle focuses on providing personalized, high quality and comprehensive service in order to develop and maintain long-term, multiple account relationships with customers. Through its subsidiaries, Pinnacle offers a wide range of banking services, including consumer, commercial and real estate loans, personal and business checking accounts, savings accounts, demand and time deposits, safe deposit services, trust and other fiduciary services, and brokerage services. To facilitate the retention of customers, Pinnacle has designed and implemented a system of quality controls and initiatives known as its "Quality in the Banking Environment" program. Pinnacle utilizes alternative delivery systems that include electronic funds transfer systems (such as direct deposit of payroll services and ATMs) and telephone banking systems. Pinnacle is also expanding its delivery of financial services in non-traditional settings. In July 1995, Pinnacle Bank established a full-service branch office in a supermarket located in Stevensville, Michigan. Pinnacle has attempted to increase customer convenience, and thereby increase customer loyalty, through, among other things, enhanced financial services, extended banking hours, and the development of products targeted to the needs of particular segments of its customer base. For example, some of Pinnacle's branch offices now offer Saturday lobby hours. Pinnacle has also developed a low-cost basic checking service, private banking services, commercial cash management services, and special products targeted to the senior citizen market. Finally, Pinnacle now offers its customers full-service brokerage services that include a wide range of investment opportunities and a combination of research and financial planning that are suited to individual customer needs. LENDING PRACTICES LOAN PORTFOLIO. In accordance with its loan policies, Pinnacle strives to maintain a diversified loan portfolio. The following table presents loans outstanding according to loan category at December 31 of each year.
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Commercial................................................... $ 210,315 $ 154,044 $ 120,414 $ 107,660 $ 97,456 Real Estate.................................................. 276,941 268,911 103,016 103,568 110,208 Consumer..................................................... 114,112 92,826 62,742 49,779 50,956 Economic development bonds and other tax-exempt loans........ 8,196 2,678 4,158 3,003 4,003 ---------- ---------- ---------- ---------- ---------- Loans, net of unearned income................................ 609,564 518,459 290,330 264,010 262,623 Allowance for loan losses.................................... (5,643) (5,852) (5,014) (5,215) (5,881) ---------- ---------- ---------- ---------- ---------- Net loans.................................................... $ 603,921 $ 512,607 $ 285,316 $ 258,795 $ 256,742 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
5 The following table presents commercial loans outstanding at December 31 of each year which, based on remaining scheduled repayments of principal, are due in the period indicated.
1996 1995 1994 --------------------- --------------------- -------------------- VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED RATE RATE RATE RATE RATE RATE ---------- --------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS) Due in 1 year or less................................... $ 37,258 $ 15,313 $ 31,468 $ 10,773 $ 76,435 $ 9,687 Due in 1 through 5 years................................ 28,479 58,409 30,553 37,595 782 33,510 Due after 5 years....................................... 65,968 4,888 38,935 4,720 -- -- ---------- --------- ---------- --------- --------- --------- Total............................................... $ 131,705 $ 78,610 $ 100,956 $ 53,088 $ 77,217 $ 43,197 ---------- --------- ---------- --------- --------- --------- ---------- --------- ---------- --------- --------- ---------
The following table presents information concerning certain non-performing loans at December 31 of each year.
1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS) Loans accounted for on a non-accrual basis(1)............................. $ 761 $ 3,321 $ 749 $ 1,722 $ 5,424 Accruing loans contractually past due 90 days or more as to principal or interest payments....................................................... 3,916 675 490 694 858 Restructured loans........................................................ 227 324 503 282 -- --------- --------- --------- --------- --------- Total non-performing loans............................................ $ 4,904 $ 4,320 $ 1,742 $ 2,698 $ 6,282 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Loans are generally placed on a non-accrual basis when, in the opinion of management, collection of principal or interest payments is unlikely. Income on such loans is then recognized only to the extent that cash is received and where future collection is likely. If non-accrual loans had been maintained current in accordance with their original terms, additional interest income of $118,000, $81,000, $87,000 and $79,000 would have been recorded during the years ended December 31, 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 $10.2 million at December 31, 1996, $9.6 million at December 31, 1995 and approximately $7.0 million at December 31, 1994. The classification of these loans, however, does not mean that Pinnacle's management expects losses on these loans. Such classification relates to specific concerns relating to each individual borrower and does not relate to any concentrated risk elements common to all the loans. The increase in such loans during 1995 is attributable to the Maco Acquisition. Pinnacle has no loans for which the terms have been renegotiated to less than market rates due to weakening of a borrower's financial condition. Pinnacle's loans outstanding to borrowers in foreign countries as of December 31, 1996, 1995 and 1994 did not exceed 1% of its total assets. As of December 31, 1996, 1995 and 1994 Pinnacle had no concentrations of loans to individual borrowers that exceeded 10% of total loans. COMMERCIAL LOANS. Through 10 experienced lending officers, Pinnacle provides cash management services and secured and unsecured loans for business purposes to individuals, companies and governmental units primarily within southwestern Michigan and northern Indiana. Pinnacle originates commercial loans for general business purposes, including working capital requirements, inventory and accounts receivable financing, and fixed asset financing for various equipment and plant expansions. Pinnacle's commercial customers include, among others, professionals, durable-goods manufacturers, service-related companies and retail establishments. 6 Pinnacle also originates mortgage loans for the acquisition and refinancing of commercial real estate properties. The majority of Pinnacle's commercial real estate loans are secured by first liens on office buildings, small retail establishments and small manufacturing facilities located in its primary market area. Although conditions vary from loan to loan, commercial loans for working capital purposes are typically written for less than one year and renewals are reviewed on an annual basis. Loans provided for non-real estate fixed assets generally have terms between four and six years and are fully amortizing over the period. Commercial real estate loans are generally written with a three to five year term with payments typically amortizing over 15 years. In addition to a first lien on the collateral asset, Pinnacle seeks to secure its loans by obtaining a security interest in all of the other assets of the borrower's business, an assignment of rents, if applicable, and personal guaranties. Commercial real estate loans generally have interest rates which are set at a regional national bank's prime rate plus a margin and which adjust each time the designated prime rate adjusts. Pinnacle also encourages commercial real estate borrowers to open or maintain a deposit account at Pinnacle to facilitate the automatic withdrawal of the loan payment based on the terms of the loan. Pinnacle evaluates all aspects of commercial loan transactions in order to mitigate risk to the extent possible. In underwriting these loans, consideration is given to the stability of the borrower's cash flow and operating history, future operating projections, comparable financial ratios for like businesses, and collateral asset evaluations. The underwriting analysis also includes credit checks and a review of the financial condition of the borrower and guarantor, if applicable. A narrative appraisal report is prepared by an appraiser who is either a member of the Appraisal Institute or state-certified and commissioned by Pinnacle to substantiate property values for 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. 7 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 quarterly basis and its evaluation is based upon examination of the portfolio, past loss experience, the level and trends of classified assets, the current level of the allowance as it relates to non-performing loans, the current level of provisions for loan losses and how such levels relate to total loans receivable, net, non-performing loans and recent and projected charge-offs, current economic conditions, the results of the most recent regulatory examinations and other relevant factors. While management of Pinnacle uses its best efforts to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. 8 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.
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Loans outstanding at end of period, net of unearned income... $ 609,564 $ 518,459 $ 290,330 $ 264,010 $ 262,623 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average loans for the period, net............................ $ 561,257 $ 322,851 $ 274,757 $ 256,970 $ 216,289 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance for loan losses, beginning of period............... $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022 Charge-offs for period: Commercial loans........................................... 172 73 284 907 621 Real Estate loans.......................................... 43 44 34 83 254 Consumer loans............................................. 720 627 280 419 627 ---------- ---------- ---------- ---------- ---------- Total charge-offs........................................ 935 744 598 1,409 1,502 ---------- ---------- ---------- ---------- ---------- Recoveries for period: Commercial loans........................................... 166 116 67 120 101 Real Estate loans.......................................... 34 23 42 90 11 Consumer loans............................................. 151 120 163 173 116 ---------- ---------- ---------- ---------- ---------- Total recoveries......................................... 351 259 272 383 228 ---------- ---------- ---------- ---------- ---------- Net charge-offs for the period............................... 584 485 326 1,026 1,274 ---------- ---------- ---------- ---------- ---------- Allowance recorded for acquired loans........................ -- 1,098 -- -- 4,039 Provision for loan losses.................................... 375 225 360 1,094 125 ---------- ---------- ---------- ---------- ---------- Total allowance for loan losses, end of period............... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Ratio of net charge-offs during the period to average loans outstanding................................................ .10% .15% .12% .40% .59% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allocation of allowance for loan losses: Commercial loans........................................... $ 3,089 $ 3,169 $ 2,855 $ 3,038 $ 3,635 Real Estate loans.......................................... 1,426 1,475 1,189 1,181 1,174 Consumer loans............................................. 1,128 1,208 970 996 1,072 ---------- ---------- ---------- ---------- ---------- Total allowance for loan losses.......................... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Percentage of loans to total gross loans: Commercial loans........................................... 35% 29% 42% 41% 37% Real Estate loans.......................................... 45 52 35 39 42 Consumer loans............................................. 19 18 22 19 19 Economic development bonds and other tax-exempt loans...... 1 1 1 1 2 ---------- ---------- ---------- ---------- ---------- Total.................................................... 100% 100% 100% 100% 100% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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. 9 INVESTMENT ACTIVITIES GENERAL. Financial institutions such as Pinnacle have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various Federal agencies and of state and municipal governments, certificates of deposit at federally-insured banks and savings and loan associations, certain bankers' acceptances and Federal funds. Subject to various restrictions, Pinnacle may also invest a portion of its assets in commercial paper, corporate debt securities and mutual funds (so long as the assets of such mutual funds conform to the investments that financial institutions such as Pinnacle are otherwise authorized to make directly). Pinnacle's investment securities are comprised of securities held-to-maturity and securities available-for-sale. Securities which management believes could be sold prior to maturity in order to manage interest rate risk, prepayments, liquidity risk, or other corporate purposes are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported as a component of stockholders' equity. Securities, other than the foregoing, which management has the ability and positive intent to hold until maturity, are classified as securities held-to-maturity and are accounted for using historical amortized cost. Pinnacle has no material trading account securities. INVESTMENT PORTFOLIO. The following table presents the amortized cost basis of securities held-to-maturity as of December 31, 1994. At December 31, 1996 or 1995, Pinnacle did not have any securities held-to-maturity.
AT DECEMBER 31, --------------- 1994 --------------- (IN THOUSANDS) U.S. Treasury Securities..................................................... $ -- Obligations of other U.S. government agencies and corporations............... -- Obligations of states and political subdivisions(1).......................... 16,103 Corporate securities......................................................... 15,616 Equity securities............................................................ -- Mortgage-backed securities................................................... 11,720 ------- Total.................................................................... $ 43,439 ------- -------
- ------------------------ (1) At December 31, 1994, the book value of securities issued by the State of Michigan and the State of Illinois (including all their political subdivisions) totaled $3,706,000 and $4,315,000 with a market value of $3,756,000 and $4,338,000, respectively. At December 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. The following table presents the amortized cost basis of securities available-for-sale at the dates indicated.
AT DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- (IN THOUSANDS) U.S. Treasury Securities................................... $ 10,046 $ 9,577 $ 17,752 Obligations of other U.S. government agencies and corporations............................................. 160,434 91,925 7,258 Obligations of states and political subdivisions........... 20,936 19,406 55 Corporate securities....................................... 350 10,275 6,547 Equity securities.......................................... 12,138 6,328 1,803 Mortgage-backed securities................................. 168,897 148,298 16,616 ---------- ---------- --------- Total.................................................. $ 372,801 $ 285,809 $ 50,031 ---------- ---------- --------- ---------- ---------- ---------
10 The following table summarizes the maturities of securities available-for-sale at the date indicated and the weighted yield of such securities:
AT DECEMBER 31, 1996 ----------------------- AMOUNT YIELD ---------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury securities: Within 1 year........................................................ $ 2,012 5.45% After 1 but within 5 years........................................... 8,090 5.75 ---------- ----- Subtotal............................................................. 10,102 5.69 ---------- ----- Obligations of other U.S. government agencies and corporations: Within 1 year........................................................ 30 7.99% After 1 but within 5 years........................................... 6,764 6.83 After 5 but within 10 years.......................................... 55,099 7.42 After 10 years....................................................... 97,840 7.56 ---------- ----- Subtotal............................................................. 159,733 7.48% ---------- ----- Obligations of states and political subdivisions Within 1 year........................................................ 1,710 3.54 After 1 but within 5 years........................................... 9,428 4.19 After 5 but within 10 years.......................................... 5,731 4.82 After 10 years....................................................... 4,604 5.16 ---------- ----- Subtotal............................................................. 21,473 4.51 ---------- ----- Corporate Securities: Within 1 year........................................................ 183 5.74 After 1 but within 5 years........................................... 77 6.20 After 5 but within 10 years.......................................... -- -- After 10 years....................................................... 94 7.26 ---------- ----- Subtotal............................................................. 354 6.24 ---------- ----- Equity securities: Within 1 year........................................................ 12,110 7.49 ---------- ----- Mortgage-backed securities: Within 1 year........................................................ 738 7.29 After 1 but within 5 years........................................... 15,659 6.76 After 5 but within 10 years.......................................... 5,713 6.79 After 10 years....................................................... 146,275 7.05 ---------- ----- Subtotal............................................................. 168,385 7.02 ---------- ----- Total securities available-for-sale.................................... $ 372,157 7.05% ---------- ----- ---------- -----
11 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 periodically 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. 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.
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ------------------------ ------------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID ---------- ------------ ---------- ------------ ---------- ------------ (DOLLARS IN THOUSANDS) Noninterest-bearing demand deposits......... $ 50,458 0.00% $ 39,028 0.00% $ 37,587 0.00% Interest-bearing demand deposits............ 76,557 2.01 48,223 1.95 45,978 1.76 Savings deposits............................ 261,149 3.72 143,006 4.13 141,511 3.24 Time deposits............................... 342,285 5.63 164,332 5.63 131,025 4.52 ---------- ---------- ---------- Total................................... $ 730,449 $ 394,589 $ 356,101 ---------- ---------- ---------- ---------- ---------- ----------
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1996 are summarized as follows:
AT DECEMBER 31, 1996 --------------- (IN THOUSANDS) Three months or less......................................................... $ 31,843 Three through twelve months.................................................. 22,530 One through five years....................................................... 6,179 Over five years.............................................................. 732 ------- Total.................................................................... $ 61,284 ------- -------
BORROWINGS. Pinnacle borrows from time to time for short-term funding purposes. At December 31, 1996, total borrowings by Pinnacle were $225.4 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, 1996, Pinnacle had $159.5 million of advances from the Federal Home Loan Bank of Indianapolis and $65.9 million of securities sold under repurchase agreements, and other borrowings. 12 TRUST SERVICES Pinnacle's trust operations had approximately 328 trust accounts under management as of December 31, 1996. Pinnacle's trust operations provide a full complement of asset management services for individuals and corporations, and are currently emphasizing investment management for individuals and employee benefit plan management. Since its formation in 1987, Pinnacle's trust operations have experienced strong growth as assets under management grew to approximately $93.7 million as of December 31, 1996. The growth of Pinnacle's trust operations is attributable to concerted marketing efforts by Pinnacle. 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 companies, and money market mutual funds operating in Michigan, Indiana and elsewhere. Many of these competitors have substantially greater resources and lending limits than Pinnacle and offer certain services that Pinnacle does not currently provide. In addition, non-depository institutions are generally not subject to the extensive regulation applicable to Pinnacle. EMPLOYEES Pinnacle does not have any employees that are not also full-time employees of Pinnacle Bank or subsidiaries of Pinnacle Bank because virtually all of Pinnacle's activities are conducted through Pinnacle Bank and its subsidiaries. Pinnacle Bank had 326 full-time employees and 38 part-time employees at December 31, 1996. None of Pinnacle's employees are represented by a collective bargaining agent. Pinnacle believes that it enjoys good relations with its personnel. 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, 13 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. 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 1996 of approximately $14.9 million from retained net profits of the preceding two years, plus an amount approximately equal to the net profits (as measured under current regulations), if any, earned for the period from January 1, 1996 through the date of declaration less dividends previously paid in 1996. During 1996, Pinnacle Bank paid $3.7 million in dividends. 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 14 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. When the guidelines became fully phased-in at the end of 1992, the minimum guidelines for the ratio of total capital ("Total Capital") to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) increased from 7.25% to 8.00%. At least half of Total Capital must be composed of common stockholders' equity, minority interests in the equity accounts of consolidated subsidiaries and a limited amount of perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 1996, Pinnacle's ratio of Tier 1 Capital to risk-based assets was 11.99%. 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, 1996 was 6.16%. 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, 1996, Pinnacle Bank had a Tier 1 Capital ratio and a Total Capital ratio (computed under the 1992 guidelines) in excess of the fully phased-in requirements and a Tier 1 Capital to risk based assets ratio in excess of 8.00%. No regulatory agency has advised Pinnacle Bank of any specific applicable minimum Tier 1 Capital 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 15 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 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 $.23 to $.31 per $100, of insured deposits depending on its capital levels and risk profile, as determined by its primary federal regulator on a semiannual basis. Under its risk-based assessment system, the FDIC may place a member in one of nine assessment risk categories based on certain capital and supervisory measures. The capital measures are "well capitalized," "adequately capitalized" and "less than adequately capitalized." Within each capital 16 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 of 6% or greater, and a Tier 1 Capital 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 of 4% or greater, and a Tier 1 Capital ratio of 4% or greater. A financial institution is "less than adequately capitalized" if it does not meet the standards for "adequately capitalized." A "healthy" financial institution is one that is financially sound with only a few minor weaknesses. A financial institution raising "supervisory concern" is one with weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk to the BIF or SAIF. A financial institution raising "substantial supervisory concern" is one that poses a substantial probability of loss to the BIF or SAIF unless effective corrective action is taken. The risk-related assessment schedule adopted by the FDIC with respect to deposits insured by the BIF is as follows:
SUBSTANTIAL SUPERVISORY SUPERVISORY HEALTHY CONCERN CONCERN ------------- --------------- --------------- Well Capitalized........................................... .00% .03% .17% Adequately Capitalized..................................... .03% .10% .24% Less than Adequately Capitalized........................... .10% .24% .27%
The risk-related assessment schedule recently adopted by the FDIC with respect to deposits insured by the SAIF is as follows:
SUBSTANTIAL SUPERVISORY SUPERVISORY HEALTHY CONCERN CONCERN ------------- --------------- --------------- Well Capitalized........................................... .23% .26% .29% Adequately Capitalized..................................... .26% .29% .30% Less than Adequately Capitalized........................... .29% .30% .31%
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, 1996, Pinnacle Bank was classified as "well capitalized" and "healthy." Legislation was recently enacted that resulted in, among other things, the assessment of a one-time charge (the "Special Assessment") against financial institutions with deposits insured by SAIF. The amount of the charge equaled approximately .657% of the deposits of a financial institution held on March 31, 1995 and subject to the SAIF premium. The Special Assessment was due on September 30, 1996 and payable no later than November 27, 1996. As a result of the Special Assessment, Pinnacle paid an assessment of $2.4 million on approximately $361.3 million of deposits held by it on March 31, 1995 and insured by SAIF. The FDIC has determined not to levy any premium on healthy banks for the first half of 1997. As a "well capitalized" and "healthy" institution, Pinnacle Bank will not pay (or accrue) any premiums for FDIC coverage during the first six months of 1997. BIF insured financial institutions will, however, begin servicing Financing Corp. ("FICO") bonds, which were 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 6.4 cents for every $100 in insured 17 deposits, and SAIF members to pay 3.2 cents for each $100 in insured deposits. The servicing payments will be collected electronically by the FDIC beginning January 2, 1997. REGULATION OF PROPOSED ACQUISITIONS. With certain limited exceptions, the BHCA prohibits bank holding companies, such as Pinnacle, from acquiring direct or indirect ownership or control of voting shares or assets of any company other than a bank, unless the company involved is engaged solely in one or more activities which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Any such acquisition will require, except in certain limited cases, the prior approval of the Federal Reserve Board. FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to approve an application by any bank holding company to acquire and operate a thrift as a non-bank subsidiary of such bank holding company. A bank holding company such as Pinnacle may apply to the Federal Reserve Board for permission to acquire and operate a thrift engaged only in deposit-taking, lending and other activities that the Federal Reserve Board has determined to be permissible for bank holding companies. In evaluating an application for its approval of such an acquisition, the Federal Reserve Board will consider whether the performance by an affiliate of Pinnacle of the activity can reasonably be expected to produce benefits to the public (such as greater convenience, increased competition, or gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The Federal Reserve Board's consideration will also include an evaluation of the financial and managerial resources of Pinnacle, including its existing subsidiaries, and of any entity to be acquired, and the effect of the proposed transaction on those resources. This required regulatory approval is subject to public notice and comment procedures, and adverse public comments received, or adverse considerations raised by regulatory agencies, may delay or prevent consummation of such an acquisition. FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to approve an application by any bank holding company to acquire and operate a thrift as a non-bank subsidiary of such bank holding company. A bank holding company such as Pinnacle may apply to the Federal Reserve Board for permission to acquire and operate a thrift engaged only in deposit-taking, lending and other activities that the Federal Reserve Board has determined to be permissible for bank holding companies, in accordance with the procedures and standards described in the preceding paragraph. 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. 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 18 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 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 19 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. NO ASSURANCE OF SUCCESSFUL ACQUISITIONS. Pinnacle has experienced significant growth in assets as a result of acquisitions. Each acquisition is subject to certain risks that could adversely affect Pinnacle's financial condition and profitability. These risks may include, among others, incorrectly assessing the future earnings potential of the acquired entity or encountering difficulty in integrating the operations of the acquired entity into Pinnacle's holding company structure. Although Pinnacle has successfully integrated a number of acquisitions since 1988, there can be no assurance that Pinnacle will be able to successfully integrate any future acquisition into its holding company structure. Pinnacle intends to continue to seek acquisitions in its existing or adjoining market areas, to the extent suitable candidates and acceptable terms may be identified. However, other than the acquisition of Indiana Federal Corporation and CB Bancorp, Inc. described elsewhere herein, Pinnacle is not currently conducting any acquisition negotiations and there can be no assurance that any further acquisitions will be made or, if made, will be successful. 20 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. 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 16 additional banking offices in Berrien and Van Buren counties, Michigan and corporate offices, 14 branch offices and two loan production offices in Jasper, Lake, Marion and Porter counties, Indiana. Of the branch offices in Michigan, 14 are owned and two are leased. The corporate offices in Indiana are leased. Of the branch offices and loan production offices in Indiana, 11 are owned and three are leased. Pinnacle also owns 18 automated teller machines, of which nine are housed within its banking offices and nine are independently located. At December 31, 1996 and 1995, the properties and equipment of Pinnacle had an aggregate net book value of $12.7 million and $12.5 million, respectively. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which Pinnacle is a party or to which any of its property is subject. See also Note 19 to the consolidated financial statements of Pinnacle Financial Services, Inc. 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 1996. 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, of Pinnacle 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.
PINNACLE COMMON STOCK -------------------- HIGH LOW --------- --------- 1995 First Quarter...................................................... $ 17.50 $ 15.00 Second Quarter..................................................... 17.75 15.75 Third Quarter...................................................... 17.50 15.50 Fourth Quarter..................................................... 18.50 16.50 1996 First Quarter...................................................... 20.50 18.25 Second Quarter..................................................... 21.75 20.00 Third Quarter...................................................... 24.75 19.50 Fourth Quarter..................................................... 25.00 23.25
As of March 21, 1997 there were 733 registered holders of shares of Pinnacle Common Stock. 21 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.
1996 1995 --------- --------- (PER SHARE AMOUNTS) First Quarter............................................................ $ 0.19 $ 0.19 Second Quarter........................................................... 0.21 0.19 Third Quarter............................................................ 0.21 0.19 Fourth Quarter........................................................... 0.21 0.19
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. 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. 22 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, 1996. 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 such information is in thousands, except per share data.) SELECTED FINANCIAL DATA--FIVE YEAR SUMMARY OF OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED FINANCIAL DATA: Total assets.............................................. $1,069,121 $ 911,446 $ 409,438 $ 409,572 $ 394,880 Loans, net................................................ 603,921 512,607 290,330 264,010 262,623 Allowance for loan losses................................. 5,643 5,852 5,014 5,215 5,881 Securities................................................ 372,157 287,532 91,533 119,889 96,080 Cash and cash equivalents................................. 46,040 28,531 14,750 13,892 15,863 Deposits.................................................. 761,269 703,100 351,176 363,014 352,319 Securities sold under repurchase agreements and other borrowings.............................................. 225,361 127,154 19,882 10,454 8,685 Total stockholders' equity................................ 78,049 74,896 35,148 33,878 30,494 SELECTED OPERATIONS DATA: Interest income........................................... 73,969 37,495 28,968 29,349 26,249 Interest expense.......................................... 39,693 18,151 11,862 12,420 12,587 Net interest income..................................... 34,276 19,344 17,106 16,929 13,662 Provision for loan losses................................. 375 225 125 360 1,094 Net interest income after provision for loan losses..... 33,901 19,119 16,981 16,569 12,568 Noninterest income........................................ 7,308 4,586 3,756 4,174 3,944 Noninterest expense....................................... 26,956 14,636 13,114 13,451 10,442 Income before income taxes, extraordinary items and accounting change..................................... 14,253 9,069 7,623 7,292 6,070 Income tax expense........................................ 5,101 2,610 2,333 2,255 1,792 Net income.............................................. $ 9,152 $ 6,459 $ 5,290 $ 5,037 $ 4,278 SELECTED OPERATING RATIOS: Return on average assets.................................. 0.94% 1.36% 1.30% 1.27% 1.32% Return on average stockholders' equity.................... 12.34 15.91 15.40 15.77 14.73 Net interest margin....................................... 3.79 4.43 4.61 4.67 4.69 Ratio of noninterest income to total average assets....... 0.75 0.96 0.92 1.05 1.22 Ratio of noninterest expense to total average assets...... 2.76 3.07 3.22 3.39 3.22 Efficiency ratio (1)...................................... 63.30 59.80 60.90 61.90 57.20 Ratio of average earning assets to average total assets... 94.10 93.90 94.10 94.30 93.30 Dividend payout ratio..................................... 52.90 46.91 44.93 40.15 42.86 PER SHARE DATA: (2) Net income per share...................................... $ 1.55 $ 1.62 $ 1.38 $ 1.32 $ 1.12 Cash dividends per share.................................. 0.82 0.76 0.62 0.53 0.48 Book value per share...................................... 13.06 12.75 9.20 8.86 7.98 ASSET QUALITY RATIOS: Nonperforming loans to total loans........................ 0.80% 0.83% 0.60% 0.92% 2.39% Allowance for loan losses to total loans.................. 0.93 1.13 1.73 1.98 2.24 Allowance for loan losses to nonperforming loans.......... 115.08 135.46 287.83 215.85 93.62 Net charge-off loans to average loans..................... 0.10 0.15 0.12 0.40 0.59 CAPITAL RATIOS: Stockholders' equity to assets............................ 7.30% 8.22% 8.58% 8.27% 7.72% Tier I capital to total assets............................ 6.16 6.51 8.20 7.39 6.79 Tier I capital to risk-based assets....................... 11.99 11.97 12.13 11.85 10.70
- ------------------------------ (1) Efficiency ratio is equal to noninterest expense less amortization of intangible expenses 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. 23 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, 1996, 1995 and 1994. 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, 1996, Pinnacle reported net income of approximately $9.2 million, or $1.55 per share, as compared to net income of approximately $6.5 million, or $1.62 per share for the year ended December 31, 1995, an increase in net income of 41.7%, and a decrease of 4.3% on a per share basis. Net income for the year ended December 31, 1994 was approximately $5.3 million or $1.38 per share. The earnings for 1996 were negatively impacted by a one-time charge to replenish the Savings Association Insurance Fund ("SAIF") which insures thrift deposits. The charge to Pinnacle was $1.45 million after tax or $0.25 per share. Without the charge, net income would have increased 64.1% to $10.6 million for the year ended December 31, 1996, or $1.80 per average share outstanding, an increase of 11.1%. The substantial increase in net income for 1996 compared to 1995 is attributable primarily to the acquisition by Pinnacle of all of the outstanding capital stock of Maco Bancorp, Inc. in exchange for aggregate consideration of $41.9 million through the merger of Maco Bancorp, Inc. with and into Pinnacle (the "Maco Acquisition"). The purchase price for the Maco Acquisition consisted of cash, a secured, short-term interest-bearing promissory note in the principal amount of $18.0 million (the "Acquisition Note"), and shares of Pinnacle Common Stock then valued at approximately $21.0 million. The earnings increase in 1995 as compared to 1994 was largely the result of net interest income that was associated with higher levels of interest earning assets. Due to the timing of the Maco Acquisition, which was consummated on December 1, 1995, and because of the application of purchase accounting (which includes the earnings and assets of Maco from the date of the Maco Acquisition), results for the year ended December 31, 1996 are not necessarily comparable to results for years ended on or before December 31, 1995. Since 1994, average earning assets have equaled or exceeded 94.0% of total average assets. The following table summarizes the components of Pinnacle's total assets, total loans, total deposits and stockholders' equity at the dates indicated. OVERVIEW AND FINANCIAL HIGHLIGHTS
AT DECEMBER 31, ------------------------------------ 1996 1995 1994 ------------ ---------- ---------- (DOLLARS IN THOUSANDS) Loans, net............................................. $ 603,921 $ 512,607 $ 285,316 Total assets........................................... 1,069,121 911,446 409,438 Deposits............................................... 761,269 703,100 352,037 Stockholders' equity................................... 78,049 74,896 35,148
Pinnacle has experienced significant loan growth since December 31, 1993. Loans, net of unearned income, at December 31, 1996 were approximately $609.6 million, which was $91.1 million greater than loans, net of unearned income, at December 31, 1995. Of the growth in loans, Pinnacle Bank's new presence in the northern Indiana market provided growth of $60.9 million or 29.1% while the southwestern Michigan market grew a more moderate $30.2 million or 9.8%. Loans, net of unearned income, at December 31, 1995 were approximately $518.5 million, which was $228.1 million greater than loans, net of unearned income, at December 31, 1994. Of the growth in loans, net of unearned income, from December 31, 1994 to December 31, 1995, $209.6 million was related to the Maco Acquisition and approximately $18.5 million, or 6.4%, was the result of the banking activities of Pinnacle Bank. 24 Total assets and total deposits remained relatively constant from December 31, 1993 to November 30, 1995. However, upon consummation of the Maco Acquisition on December 1, 1995, total assets and total deposits increased substantially. Total assets at December 31, 1996 were $1.1 billion, or 17.3% greater than total assets at December 31, 1995. 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 assets at December 31, 1995 were $911.4 million, or 122.6% greater than total assets at December 31, 1994 of $409.4 million. Of this increase, approximately $444.8 million of this was attributable to the Maco Acquisition, and the balance resulted from the banking activities of Pinnacle Bank. Total deposits at December 31, 1996 were $761.0 million as compared to $703 million at December 31, 1995, an increase of 8.3%. The growth in deposits was primarily in noninterest bearing demand deposits which increased $28.0 million or 55.5% and time deposits which increased $24.1 million or 7.5%. Total deposits at December 31, 1995 increased $351.1 million over total deposits at December 31, 1994, an increase of 99.7%. Of this increase in total deposits, $318.8 million resulted from the Maco Acquisition and approximately $32.3 million, or 9.2%, resulted from the banking activities of Pinnacle Bank. Federal Home Loan Bank advances, securities sold under repurchase agreements and other borrowings were approximately $225.4 million at December 31, 1996, an increase of $98.2 million, or 77.2%, 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. Securities sold under repurchase agreements and other borrowings increased to approximately $127.2 million at December 31, 1995 from approximately $19.9 million at December 31, 1994. Of this increase, $8.5 million was attributable to the banking activities of Pinnacle Bank, approximately $80.8 million was attributable to the Maco Acquisition, and $18.0 million was attributable to the Acquisition Note issued by Pinnacle to the sole stockholder of Maco. The Acquisition Note was repaid in full in March 1996. A majority of Pinnacle's revenue is generated by its average earning assets. For 1996, average earning assets totaled $918.4 million, an increase of $470.7 million, or 105.1%, over 1995, which helped increase net interest income by $15.0 million. The Maco Acquisition on December 1, 1995 provided the increase in average earning assets of $451.2 million for 1996. The increase in average earning assets was offset by a reduction in net interest margin to 3.79% in 1996 as compared to 4.43% 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. For 1995, average earning assets totaled $447.7 million, an increase of approximately $64.8 million over 1994. This increase in average earning assets, which was attributable primarily to the Maco Acquisition, resulted in an increase in net interest income of $2.2 million for the year ended December 31, 1995. However, the increase in average earning assets was partially offset by a reduction in net interest margin, which was 4.43% in 1995 as compared to 4.61% in 1994. This reduction in net interest margin resulted from higher cost borrowings and time deposits and a lower net interest margin associated with the thrift operations acquired in the Maco Acquisition. Stockholders' equity was approximately $78.0 million at December 31, 1996, as compared to $74.9 million at December 31, 1995. Retained earnings generated primarily through net income added $4.3 million while net unrealized gains reversed to a net unrealized loss at December 31, 1996 of $376,000 for a reduction of $1.5 million. Additional paid in capital increased $352,000 primarily from the issuance of 99,451 shares of stock through the acquisition of Starke's, Inc., an insurance agency, in October 1996. Primarily as a result of the Maco Acquisition, stockholders' equity grew $39.8 million, or 113.1%, to approximately $74.9 million at December 31, 1995 as compared to stockholders' equity of $35.1 million at December 31, 1994. Of such $39.8 million increase in stockholders' equity, (i) approximately $13.2 million was attributable to the public stock offering that was associated with the Maco Acquisition and completed on December 1, 1995, (ii) approximately $21.0 million was attributable to the stock portion of the Purchase Price paid in the Maco Acquisition, (iii) approximately $3.2 million was attributable to retained earnings generated primarily through net income (net of dividends declared), and (iv) approximately $2.4 million 25 was attributable to net unrealized gains on securities available-for-sale. Pinnacle follows two key financial performance measures. Pinnacle's return on average equity measures how profitably the stockholders' invested capital has been deployed. Pinnacle's return on average equity was 12.34% for 1996 compared to 15.91% for 1995. Return on average assets measures how profitably the total assets of Pinnacle are invested. Return on average assets was .94% for 1996 compared to 1.36% for 1995. The returns were negatively impacted in 1996 by the one-time special assessment by SAIF. Excluding the SAIF assessment, return on average equity and return on average assets would have been 14.29% and 1.09% respectively. The ratio of average stockholders' equity to average total assets was 7.60% in 1996, 8.52% in 1995 and 8.44% in 1994. The ratio of dividends declared to net income per share of Pinnacle Common Stock was 52.9% in 1996, 46.9% in 1995, and 44.9% in 1994. RESULTS OF OPERATIONS NET INCOME. Net income for the year ended December 31, 1996 was approximately $9.2 million, a 41.7% increase, as compared to net income of $6.5 million for the same period in 1995. This increase in net income was largely the result of higher levels of net interest income attributable to the higher level of earning assets that resulted from the Maco Acquisition. Net income for the year ended December 31, 1995 was 22.1% higher than the $5.3 million in net income for the year ended December 31, 1994. 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. 26 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, 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- -------- -------- ------- ASSETS (DOLLARS IN THOUSANDS) Federal funds sold............... $ 7,728 $ 410 5.31% $ 4,458 $ 257 5.76% $ 2,748 $ 110 4.00% Interest-bearing deposits with financial institutions......... 9,758 529 5.42% 3,970 256 6.45% 1,554 76 4.89% U.S. Treasury and goverment agencies....................... 214,642 14,871 6.93% 66,380 4,291 6.46% 51,009 2,666 5.23% Securities of Political Subdivisions and State (2)..... 125,021 8,618 6.89% 50,083 3,335 6.66% 52,893 3,421 6.47% Loans (1)(2)..................... 561,257 50,108 8.93% 322,851 29,854 9.25% 274,757 23,255 8.46% -------- -------- ------- -------- -------- ------- -------- -------- ------- Total interest-earning assets....................... 918,406 74,536 8.12% 447,742 37,993 8.49% 382,961 29,528 7.71% -------- -------- ------- -------- -------- ------- -------- -------- ------- Cash and due from banks.......... 21,324 14,515 12,617 Premises and equipment, net...... 12,676 7,633 7,008 Allowance for loan losses........ (5,734) (5,023) (5,156) Other assets..................... 29,420 11,540 9,525 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total assets................... $976,092 $74,536 $476,407 $37,993 $406,955 $29,528 -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- LIABILITIES Interest-bearing demand.......... $ 76,557 $ 1,541 2.01% $ 48,223 $ 939 1.95% $ 45,978 $ 810 1.76% Savings and money market accounts....................... 261,149 9,727 3.72% 143,006 5,905 4.13% 141,511 4,585 3.24% Time deposits of $100,000 or more........................... 61,928 3,418 5.52% 30,496 1,641 5.38% 14,918 638 4.28% Other time deposits.............. 280,357 15,850 5.65% 133,836 7,608 5.68% 116,107 5,283 4.55% -------- -------- ------- -------- -------- ------- -------- -------- ------- Total interest-bearing deposits..................... 679,991 30,536 4.49% 355,561 16,093 4.53% 318,514 11,316 3.55% -------- -------- ------- -------- -------- ------- -------- -------- ------- Federal Home Loan Bank advances....................... 127,629 7,402 5.80% 19,041 1,182 6.21% 3,733 214 5.73% Federal funds purchased and securities sold................ 38,311 1,755 4.58% 19,091 876 4.59% 10,676 332 3.11% -------- -------- ------- -------- -------- ------- -------- -------- ------- Total interest-bearing liabilities.................... 845,931 39,693 4.69% 393,693 18,151 4.61% 332,923 11,862 3.56% -------- -------- ------- -------- -------- ------- -------- -------- ------- Noninterest-bearing deposits..... 50,458 39,028 37,587 Other liabilities................ 5,558 3,093 2,084 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total liabilities.............. 901,947 435,814 372,594 Stockholders' equity............. 74,145 40,593 34,361 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total liabilities and stockholders' equity......... $976,092 $476,407 $406,955 -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- ------- Net interest income............ $34,843 $19,842 $17,666 -------- -------- -------- -------- -------- -------- Net interest rate margin (3)... 3.79% 4.43% 4.61% ------- ------- ------- ------- ------- -------
- ------------------------------ (1) For purposes of these computations, nonaccrual loans and unearned income are included in the daily average loan amounts outstanding. (2) Income from state and political subdivisions securities and loans are stated on a tax equivalent basis. (3) Net interest rate margin is equal to total interest income less total interest expense divided by total average earning assets. 27 RATE/VOLUME ANALYSIS 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.
1996/1995 1995/1994 CHANGE IN INTEREST DUE TO: CHANGE IN INTEREST DUE TO: -------------------------------------------- ------------------------------------------ RATE & NET RATE & NET VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME CHANGE --------- --------- ----------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) ASSETS Federal funds sold............. $ 188 $ (20) $ (15) $ 153 $ 68 48 $ 31 $ 147 Interest-bearing deposits with financial institutions....... 373 (41) (59) 273 118 24 38 180 U.S. Treasury and government agencies..................... 9,578 312 690 10,580 804 627 194 1,625 Securities of state and political subdivisions (1)... 4,991 115 177 5,283 (182) 100 (4) (86) Loans (1)...................... 22,053 (1,033) (766) 20,254 4,069 2,171 359 6,599 --------- --------- ----- --------- --------- --------- --------- --------- Total interest-earning assets..................... $ 37,183 $ (667) $ 27 $ 36,543 $ 4,877 $ 2,970 $ 618 $ 8,465 --------- --------- ----- --------- --------- --------- --------- --------- --------- --------- ----- --------- --------- --------- --------- --------- LIABILITIES Interest-bearing demand........ $ 553 $ 29 $ 20 $ 602 $ 40 $ 87 $ 2 $ 129 Savings and money market accounts..................... 4,879 (586) (471) 3,822 48 1,259 13 1,320 Time deposits of $100,000 or more......................... 1,691 43 43 1,777 667 164 172 1,003 Other time deposits............ 8,322 (40) (40) 8,242 807 1,312 206 2,325 --------- --------- ----- --------- --------- --------- --------- --------- Total interest-bearing deposits................... 15,445 (554) (448) 14,443 1,562 2,822 393 4,777 --------- --------- ----- --------- --------- --------- --------- --------- Federal Home Loan Bank advances..................... 6,743 (78) (445) 6,220 877 18 73 968 Federal funds purchased and securities sold.............. 882 (2) (1) 879 262 158 124 544 --------- --------- ----- --------- --------- --------- --------- --------- Total interest-bearing liabilities................ $ 23,070 $ (634) $ (894) $ 21,542 $ 2,701 $ 2,998 $ 590 $ 6,289 --------- --------- ----- --------- --------- --------- --------- --------- --------- --------- ----- --------- --------- --------- --------- --------- Net interest income.......... $ 14,113 $ (33) $ 921 $ 15,001 $ 2,176 $ (28) $ 28 $ 2,176 --------- --------- ----- --------- --------- --------- --------- --------- --------- --------- ----- --------- --------- --------- --------- ---------
- ------------------------ (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 $34.8 million for the year ended December 31, 1996, as compared to $19.8 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. An increase in average earning assets for the year ended December 31, 1996 of $470.7 million increased net interest income by $14.1 million, while a 28 lower net interest margin of 3.79% for 1996 as compared to 4.43% for 1995 resulted in a decrease in net interest income. The decrease in net interest margin was attributable mainly to lower margins at First Federal. Net interest income on a tax-equivalent basis for the year ended December 31, 1995, increased approximately $2.2 million, or 12.4%, over net interest income on a tax-equivalent basis of approximately $17.7 million for the year ended December 31, 1994. During 1995, an increase in average loan balances of approximately $48.1 million led to an increase in interest income on loans of nearly $4.1 million. The increase in interest income was offset by an increase in interest expense of $2.5 million that was caused by an increase in average interest-bearing liabilities of nearly $60.8 million. In addition, a higher interest rate environment during 1995 caused an increase in interest income on earning assets of $3.0 million to be offset by an increase in interest expense on interest-bearing liabilities of $3.0 million. Net interest margin decreased to 4.43% for year ended December 31, 1995 from 4.61% for the year ended December 31, 1994. Total loans as of December 31, 1996 were $609.6 million, an increase of $91.1 million or 17.6% over total loans as of December 31, 1995. Emphasis on commercial and home equity loans in our new Indiana market entered through the Maco Acquisition on December 1, 1995 impacted this growth. Commercial loans at December 31, 1996 totaled $210.3 million, an increase of $56.3 million or 36.5% over the December 31, 1995 total of $154.0 million. Pinnacle's Indiana balances of commercial loans provided $39.1 million of this growth, an increase of 214.5% over total commercial loans of $18.2 million in Indiana as of December 31, 1995, as the bank placed greater emphasis on commercial banking in that market. Consumer loans, including home equity loans, grew by 22.9% to $114.1 million at December 31, 1996 as compared to $92.8 million at December 31, 1995. The new Indiana market also provided most of this growth, with consumer loans in Indiana increasing $20.2 million, or 83.3%, to $44.4 million at December 31, 1996. Real estate loans at December 31, 1996 increased slightly by 3.0%, or $8.0 million, to $276.9 million as compared to $268.9 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. Total loans at December 31, 1995, increased $228.1 million, or 78.6%, over total loans at December 31, 1994 of $290.3 million. Approximately $209.6 million of this increase in total loans resulted from the Maco Acquisition, while $18.5 million, or 6.4%, of this increase was attributable to the banking activities of Pinnacle Bank. Commercial loans at December 31, 1995 increased by $33.6 million, or 27.9%, to $154.0 million. Of this increase, approximately $18.2 million resulted from the Maco Acquisition and approximately $15.4 million, or 12.8%, was attributable to the banking activities of Pinnacle Bank and strong demand for commercial business and development in southwestern Michigan. Consumer loans grew 48.0% to approximately $92.9 million at December 31, 1995 as compared to $62.7 million at December 31, 1994. Of this increase, $24.2 million resulted from the Maco Acquisition and approximately $5.9 million, or 9.4%, was attributable to the banking activities of Pinnacle Bank and a new home equity loan product introduced by Pinnacle Bank in 1994. Real estate loans at December 31, 1995 increased approximately $165.9 million, or 161.0%, over real estate loans of $103.0 million at December 31, 1994. Approximately $167.2 million of this increase was attributable to the Maco Acquisition. Securities, federal funds sold and interest-bearing deposits with financial institutions were $391.1 million at December 31, 1996 and $332.9 million at December 31, 1995. The increase in this item in 1996 as compared to 1995 was attributable primarily to Pinnacle Bank using specific adjustable rate security investments to match against short-term funding sources as a tool to manage interest rate risk. Securities, federal funds sold and interest-bearing deposits with financial institutions increased $240.2 million, or 259.2%, at December 31, 1995 as compared to approximately $92.7 million at December 31, 1994. The growth during 1995 was primarily attributable to the Maco Acquisition, which added $203.7 million to this item. 29 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.
1996 1995 1994 AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE BALANCE PAID BALANCE PAID BALANCE PAID ---------- ------------- ---------- ------------- ---------- ------------- (DOLLARS IN THOUSANDS) Noninterest-bearing demand deposits........ $ 50,458 0.00% $ 39,028 0.00% $ 37,587 0.00% Interest-bearing demand deposits........... 76,557 2.01 48,223 1.95 45,978 1.76 Savings deposits........................... 261,149 3.72 143,006 4.13 141,511 3.24 Time deposits.............................. 342,285 5.63 164,332 5.63 131,025 4.52 ---------- ---------- ---------- Total.................................... $ 730,449 $ 394,589 $ 356,101 ---------- ---------- ---------- ---------- ---------- ----------
Total deposits increased by $58.2 million or 8.3% to $761.3 million at December 31, 1996 from $703.1 million at December 31, 1995. Noninterest bearing demand deposits increased $28.0 million or 55.5% as Pinnacle continued to have success with a new line of checking accounts introduced in 1995. Time deposits grew by $24.1 million, or 7.5%, to $344.2 million at December 31, 1996 as compared to $320.2 million on 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. Total deposits increased by $351.1 million, or 99.7%, to $703.1 million at December 31, 1996 from $352.0 million at December 31, 1994. The Maco Acquisition provided $318.8 million in deposit growth while internal growth was $32.3 million, or 9.2%, as a new line of checking account products was introduced. Demand deposit product balances grew $43.1 million or 49.4% with the Maco Acquisition providing $38.2 million in demand deposit growth and internal growth of $4.9 million, or 5.7%. Time deposits at December 31, 1995 totaled $320.2 million as compared to $133.1 million on December 31, 1994, an increase of $187.1 million or 140.5%. The time deposits of the Maco Acquisition totaled $161.7 million at December 31, 1995 while Pinnacle Bank's Michigan market totaled $158.5 million for an increase of $25.4 million, or 19.2%, for 1995, as interest rates increased during the first half of 1995 and customers determined that yields on time deposits were more attractive than yields on products available from non-bank competitors. Savings products increased $120.8 million, or 91.8%, to $252.5 million at December 31, 1995 of which $118.9 million came through the Maco Acquisition and $2.0 million in growth in Pinnacle Bank's Michigan market. 30 SHORT-TERM BORROWINGS
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) FEDERAL FUNDS PURCHASED: Balance at end of period....................................................... $ 42,900 $ -- $ 1,400 Weighted average interest rate at end of year.................................. 5.67% 0.00% 6.08% Maximum amount outstanding (1)................................................. $ 42,900 $ 11,150 $ 6,300 Average amount outstanding..................................................... $ 12,259 $ 2,061 $ 1,014 Weighted average interest rate during year..................................... 5.51% 6.21% 4.64% SECURITIES SOLD UNDER REPURCHASE AGREEMENTS: Balance at end of period....................................................... $ 22,413 $ 12,402 $ 9,982 Weighted average interest rate at end of year.................................. 3.94% 3.20% 3.40% Maximum amount outstanding (1)................................................. $ 25,092 $ 24,209 $ 12,454 Average amount outstanding..................................................... $ 22,413 $ 15,501 $ 9,961 Weighted average interest rate during year..................................... 3.90% 4.26% 2.95%
- ------------------------ (1) Based on amount outstanding at month end during each year Federal Home Loan Bank advances, securities sold under repurchase agreements and other borrowings increased $98.2 million, or 77.2%, to approximately $225.4 million at December 31, 1996. The increase was primarily used to match specific adjustable rate security purchases of approximately $40 million and to the match funding of approximately $30 million in longer term 15 year fixed rate home equity loans. Federal Home Loan Bank advances, securities sold under repurchase agreements and other borrowings increased approximately $107.3 million, or 539.5%, to approximately $127.2 million at December 31, 1995. In comparison, this item was only $19.9 million at December 31, 1994. The growth in 1995 was primarily the result of the Maco Acquisition, and includes approximately $80.8 million in balances at Maco and the $18.0 million Acquisition Note issued by Pinnacle to the sole stockholder of Maco. (The Acquisition Note was repaid in full in March, 1996.) In addition, during 1995, borrowings at the Federal Home Loan Bank of Indianapolis increased by $8.5 million, or 42.9%, as Pinnacle continued to utilize alternative low rate funding sources to fund increased loan demand and certain investment security purchases with similar adjustable rate features and maturities. PROVISION FOR LOAN LOSSES. For the year ended December 31, 1996, the provision for loan losses totaled $375,000 as compared to $225,000 for the same period in 1995, and $125,000 for the same period in 1994. Non-accrual loans decreased to $761,000 at December 31, 1996 as compared to $3.3 million at December 31, 1995, and $749,000 at December 31, 1994. Total nonperforming loans to total loans decreased to 0.80% as of December 31, 1996 compared to 0.83% as of December 31, 1995. Total past due loans over 90 days increased from $675,000 in 1995 to $3.9 million in 1996. Pinnacle management believes these increases are attributable primarily to the Maco Acquisition and not to any general decline in credit quality. The 1995 increase in the provision for loan losses was attributable mainly to loan growth and an increase in net charge-offs of $161,000. Even though nonaccrual loans totaled $3.3 million at December 31, 1995, as compared to $749,000 at December 31, 1994, Pinnacle's management believes loan credit quality remains good since much of this increase was attributable to the Maco Acquisition. Indeed, nonaccrual loans attributable to the lending activities of Pinnacle Bank increased only $132,000 to $881,000 at December 31, 1995. Total nonperforming loans to total loans remained strong at .83% at December 31, 1995 as compared to .60% at December 31, 1994. Total past due loans over 90 days increased from $490,000 in 1994 to $675,000 in 1995. 31 NONINTEREST INCOME. The following table reflects various components of noninterest income for each time period reported. NONINTEREST INCOME
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Service charges on deposit accounts.............................. $ 2,207 $ 1,530 $ 1,479 Trust fees....................................................... 601 533 485 Investment services fees......................................... 229 125 169 Merchant and loan service fees................................... 1,270 923 770 Recoveries on distressed assets.................................. 250 296 262 Gain (loss) on sale of loans, net................................ 1,075 182 (11) Investment securities gains, net................................. 653 350 64 Other income..................................................... 1,023 647 538 --------- --------- --------- Total noninterest income..................................... $ 7,308 $ 4,586 $ 3,756 --------- --------- --------- --------- --------- ---------
Noninterest income for the year ended December 31, 1996 was approximately $7.3 million and approximately $4.6 million for the year ended December 31, 1995. Of this $2.7 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). In addition, at Pinnacle Bank, deposit service charges increased $306,000, or 20.3%, trust income increased $68,000, or 12.8%, brokerage and investment services fees increased $104,000, or 83.2%, and other loan service fees increased $299,000, or 32.5%. Noninterest income for the year ended December 31, 1995 increased $830,000, or 22.1%, as compared to approximately $3.8 million for the year ended December 31, 1994. Net security gains accounted for $286,000 of the increase as securities available-for-sale were sold to support loan demand in a period where investment security pricing was rising and yields were decreasing. Mortgage loan sales income for the year ended December 31, 1995 was $182,000, a $193,000 increase as compared to a loss of $11,000 for year ended December 31, 1994. During 1995, service charges on deposit accounts, trust fees and merchant and loan servicing fees all demonstrated steady increases as new products were introduced. However, investment service fees continued to decline in revenue as customers remained invested in bank time deposits rather than seeking alternate non-bank investments. NONINTEREST EXPENSE. The following table presents the major components of noninterest expense for each period reported. NONINTEREST EXPENSE
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Salaries..................................................... $ 8,239 $ 5,306 $ 4,776 Benefits..................................................... 2,604 1,794 1,297 --------- --------- --------- Total salaries and benefits.............................. $ 10,843 $ 7,100 $ 6,073 Occupancy expense............................................ 2,055 1,097 1,033 Equipment expense............................................ 1,615 947 885 Postage and delivery......................................... 643 362 292 Supplies..................................................... 915 455 418 Marketing and promotion...................................... 1,481 695 298 Professional services........................................ 718 314 417 FDIC insurance............................................... 3,196 552 808 Amortization of intangibles.................................. 1,283 525 458 Other expense................................................ 4,207 2,589 2,432 --------- --------- --------- Total noninterest expense................................ $ 26,956 $ 14,636 $ 13,114 --------- --------- --------- --------- --------- ---------
32 Non-interest expense for the year ended December 31, 1996 was $27.0 million as compared to $14.6 million for the same period in 1995. Of this 84.2% 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, $358,000 for the Special Assessment charged against Pinnacle Bank's Michigan thrift deposits, $302,000 for computer equipment upgrades, $106,000 for telephone expenses, and $59,000 for professional fees. Noninterest expense increased $1.5 million, or 11.6%, for the year ended December 31, 1995 as compared to $13.1 million for the same period in 1994. Salary and benefits increased $1.0 million, or 16.9%, in 1995 due primarily to the Maco Acquisition, merit increases and the opening of a new supermarket branch. Marketing expenses increased $397,000, or 133.2%, in 1995 due to increased costs associated with a new line of checking account products introduced by Pinnacle Bank in March 1995. FDIC insurance decreased $256,000, or 31.7%, in the period due to a decline in insurance premiums on bank deposits. INCOME TAXES. Income taxes were approximately $5.1 million for the year ended December 31, 1996 and approximately $2.6 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. Income taxes for the year ended December 31, 1995, increased $277,000 over income taxes of $2.3 million for the year ended December 31, 1994. This increase was due primarily to higher levels of earnings in 1995. In addition, Pinnacle obtained a favorable settlement of an Internal Revenue Service claim pertaining to the deductibility of certain amortized intangible assets. The settlement which increased the deductibility of the amount amortized from 50% to 85%, reduced federal income taxes for 1995 by approximately $250,000. The effective tax rates for 1996, 1995 and 1994 were 35.8%, 28.8% and 30.6%, 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 94.1% of total average assets for the year ended December 31, 1996 and 94.0% for the same period in 1995 and 94.1% for the same period in 1994. 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, 1996 were $561.3 million. Average loans outstanding at December 31, 1995 were $322.9 million. The increase in this item was attributable to the Maco Acquisition which added $222.5 million, the growth of average loans outstanding in the Michigan market by $15.9 million, or 5.2%, reflecting stable local economic conditions in Michigan, and the focus of management on building its commercial presence in Indiana. Average loans outstanding in 1995 were approximately $48.1 million and 17.5% greater than average loans outstanding in 1994. The Maco Acquisition added approximately $17.8 million to average loans outstanding in 1995. The banking activities of Pinnacle Bank added $30.3 million to average loans outstanding in 1995. This internal growth was a reflection of strong local economic conditions. 33 The following table presents the amortized cost of securities held-to-maturity as of December 31, 1994.
1994 ----------- (DOLLARS IN THOUSANDS) Obligations of states and political subdivisions.................................. $ 16,103 Corporate securities.............................................................. 15,616 Collateralized mortgage obligations............................................... 787 Other mortgage backed securities.................................................. 10,933 ----------- Total........................................................................... $ 43,439 ----------- -----------
The following table presents the amortized cost of securities available-for-sale at the dates indicated.
AT DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury securities................................... $ 10,046 $ 9,577 $ 17,752 Obligations of other U.S. government agencies and corporations............................................. 160,434 91,925 7,258 Obligations of states and political subdivisions........... 20,936 19,406 55 Corporate securities....................................... 350 10,275 6,547 Equity securities.......................................... 12,138 6,328 1,803 Collateralized mortgage obligations........................ 83,570 104,932 8,649 Other mortgage backed securities........................... 85,327 43,366 7,967 ---------- ---------- --------- Total.................................................... $ 372,801 $ 285,809 $ 50,031 ---------- ---------- --------- ---------- ---------- ---------
The following table sets forth certain information regarding securities available-for-sale at December 31, 1996.
AFTER 5 BUT AFTER 1 BUT WITHIN 10 WITHIN 1 YEAR WITHIN 5 YEARS YEARS AFTER 10 YEARS -------------- -------------- -------------- --------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------- ----- ------- ----- ------- ----- -------- ----- (DOLLARS IN THOUSANDS) U.S. Treasury securities................ $ 2,012 5.45% $ 8,090 5.75% $ -- 0.00% $ -- 0.00% Obligations of other U.S. government agencies and corporations............. 30 7.99 6,764 6.83 55,099 7.42 97,840 7.56 Obligations of states and political subdivisions (1)...................... 1,710 3.54 9,428 4.19 5,731 4.82 4,604 5.16 Corporate securities.................... 183 5.74 77 6.20 -- 0.00 94 7.26 Equity securities....................... 12,110 7.49 -- 0.00 -- 0.00 -- 0.00 Collateralized mortgage obligations (2)................................... 738 7.29 780 6.73 2,284 6.32 79,300 6.61 Other mortgage backed securities (2).... -- 0.00 14,879 6.76 3,429 7.10 66,975 7.57 ------- ----- ------- ----- ------- ----- -------- ----- Total amount/yield...................... $16,783 6.82% $40,018 5.96% $66,543 7.14% $248,813 7.22% ------- ----- ------- ----- ------- ----- -------- ----- ------- ----- ------- ----- ------- ----- -------- -----
- ------------------------ (1) Weighted yields on tax-exempt obligations have not been computed on a fully tax-equivalent basis. (2) Maturities of collateralized mortgage obligations and mortgage backed securities are determined based on original maturity dates. 34 Average securities for the year ended December 31, 1996 was approximately $339.7 million as compared to $116.5 million at December 31, 1995, as the Maco Acquisition added $185.6 million to average security balances and Pinnacle Bank added $37.6 million in 1996 as the Bank increased the level of adjustable rate securities that were matched with short-term FHLB advances. Average securities increased $12.6 million in 1995 over 1994. Pinnacle Bank's average security balances decreased by approximately $2.3 million in 1995 as available funds were used to fund higher yielding loan demand. Security balances at December 31, 1995 totaled $287.5 million, an increase of approximately $197.0 million, or 217.7%, over security balances of approximately $90.5 million at December 31, 1994. This increase was primarily attributable to approximately $180.3 million of securities acquired in the Maco Acquisition. All such securities have been placed in the available-for-sale classification so as to be available to support loan growth and to allow for better interest rate and margin management. Gross loan balances as of December 31, 1996 totaled $609.6 million, an increase of $91.1 million, or 17.6%. Commercial loans increased by $56.3 million, or 36.5%, at December 31, 1996 to $210.3 million with the Indiana market providing $39.1 million of the commercial loan growth as management focused their attention on developing a commercial bank presence in its new Indiana market. Consumer loans (primarily in home equity loans) increased $21.3 million, or 22.9%, to $114.1 million with its Indiana market providing $20.2 million of the consumer loan growth reflecting strong economic conditions there. Real estate loans grew slightly in 1996 by $8.0 million, or 3.0%, to $276.9 million as Pinnacle originated real estate loans primarily for sale in the secondary market in order to manage interest rate risk. Pinnacle sold approximately $104.3 million in originated real estate loans in 1996 as compared to $11.0 million in 1995. The increase is primarily from the Maco Acquisition which has a larger network of loan originators throughout Indiana. Gross loans at December 31, 1995 totaled approximately $518.5 million, an increase of $228.1 million, or 78.6%, as compared to gross loans at December 31, 1994. Of this increase, $209.6 million resulted from the Maco Acquisition and $18.5 million resulted from the banking activities of Pinnacle Bank. Commercial loans increased by $33.6 million, or 27.9%, to $154.0 million at December 31, 1995. Of the increase, $18.2 million was attributable to the Maco Acquisition and $15.4 million was attributable to the banking activities of Pinnacle Bank. Consumer loans (primarily home equity loans) increased $30.1 million, or 48.0%, to $92.8 million at December 31, 1995, with $24.2 million of this increase resulting from the Maco Acquisition and the balance resulting from the banking activities of Pinnacle Bank. Real estate loans grew by approximately $165.9 million, or 161.0%, to $268.9 million at December 31, 1995. While the Maco Acquisition added approximately $167.2 million to this item, Pinnacle Bank's real estate loan balances decreased by approximately $1.3 million as Pinnacle managed interest rate risk in Pinnacle Bank's real estate loan portfolio. In connection with the management of its real estate portfolio, Pinnacle Bank sold approximately $11.0 million in originated loans in the secondary market in 1995 as compared to $19.0 million sold in 1994. Lower refinancing activity and higher mortgage rates continued to impact mortgage loan volume during 1995. 35 The following table presents loans outstanding, according to loan category at the dates indicated.
AT DECEMBER 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial........................................... $ 210,315 $ 154,044 $ 120,414 $ 107,660 $ 97,456 Real estate.......................................... 276,941 268,911 103,016 103,568 110,208 Consumer............................................. 114,112 92,826 62,742 49,779 50,956 Economic development, bonds and other tax exempt loans.............................................. 8,196 2,678 4,158 3,003 4,003 ---------- ---------- ---------- ---------- ---------- Total Loans...................................... 609,564 518,459 290,330 264,010 262,623 Less allowance for loan losses....................... (5,643) (5,852) (5,014) (5,215) (5,881) ---------- ---------- ---------- ---------- ---------- Net Loans........................................ $ 603,921 $ 512,607 $ 285,316 $ 258,795 $ 256,742 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The following table presents commercial loans outstanding at the date indicated which, based on remaining scheduled repayments of principal, are due in the period indicated.
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 --------------------- --------------------- VARIABLE FIXED VARIABLE FIXED RATE RATE RATE RATE ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Due in 1 year or less.............................................. $ 37,258 $ 15,313 $ 31,468 $ 10,773 Due in 1 through 5 years........................................... 28,479 58,409 30,553 37,595 Due after 5 years.................................................. 65,968 4,888 38,935 4,720 ---------- --------- ---------- --------- Total............................................................ $ 131,705 $ 78,610 $ 100,956 $ 53,088 ---------- --------- ---------- --------- ---------- --------- ---------- ---------
The following table presents information concerning nonperforming loans including nonaccrual, past due, and restructured loans at the indicated dates.
AT DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Loans accounted for on a nonaccrual basis (1).................... $ 761 $ 3,321 $ 749 $ 1,722 $ 5,424 Accruing loans contractually past due 90 days or more as to principal or interest payments................................. 3,916 675 490 694 858 Restructured loans............................................... 227 324 503 282 -- --------- --------- --------- --------- --------- Total nonperforming loans...................................... $ 4,904 $ 4,320 $ 1,742 $ 2,698 $ 6,282 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (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 $$118,000, $81,000 and $87,000 would have been recorded during the periods ended December 31, 1996, 1995 and 1994, 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 Financial Services, Inc. contained later in this document. The Company has no loans for which the terms have been renegotiated to less than market rates due to weakening of a borrower's financial condition. 36 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 $10.2 million and $9.6 million at December 31, 1996 and 1995, respectively, where management is closely following the borrower's ability to continue to comply with loan payment terms. Current conditions do not warrant classification as nonperforming, nor is any principal loss on these loans considered likely at this time. FOREIGN LOANS The Company's loans outstanding to borrowers in foreign countries as of December 31, 1996 and 1995 did not exceed 1% of its total assets. LOAN CONCENTRATIONS As of December 31, 1996, there were no concentrations of loans to individual borrowers that exceeded 10% of total loans. 37 The following table summarizes the loan loss experience, and provides a breakdown of the allowance for loan losses at December 31 of each year.
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Loans Outstanding at end of period, net of unearned discount............................................ $ 609,564 $ 518,459 $ 290,330 $ 264,010 $ 262,623 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average loans for the period.......................... $ 561,257 $ 322,851 $ 274,757 $ 256,970 $ 216,289 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance for loan losses, beginning of period........ $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022 ---------- ---------- ---------- ---------- ---------- Charge-offs for period: Commercial loans.................................... 172 73 284 907 621 Real Estate loans................................... 43 44 34 83 254 Consumer loans...................................... 720 627 280 419 627 ---------- ---------- ---------- ---------- ---------- Total charge-offs................................. 935 744 598 1,409 1,502 ---------- ---------- ---------- ---------- ---------- Recoveries for period: Commercial loans.................................... 166 116 67 120 101 Real Estate loans................................... 34 23 42 90 11 Consumer loans...................................... 151 120 163 173 116 ---------- ---------- ---------- ---------- ---------- Total recoveries.................................. 351 259 272 383 228 ---------- ---------- ---------- ---------- ---------- Net charge-offs for the period........................ 584 485 326 1,026 1,274 ---------- ---------- ---------- ---------- ---------- Allowance recorded for acquired loans................. -- 1,098 -- -- 4,039 Provision for loan losses............................. 375 225 125 360 1,094 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses, end of period.............. $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Ratio of net charge-offs during the period to average loans outstanding................................... 0.10% 0.15% 0.12% 0.40% 0.59% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allocation of allowance for loan losses: Commercial loans.................................... $ 3,089 $ 3,169 $ 2,855 $ 3,038 $ 3,635 Real Estate loans................................... 1,426 1,475 1,189 1,181 1,174 Consumer loans...................................... 1,128 1,208 970 996 1,072 ---------- ---------- ---------- ---------- ---------- Total allowance for loan losses................... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Percentage of loan to total gross loans: Commercial loans.................................... 35% 29% 42% 41% 37% Real Estate loans................................... 45 52 35 39 42 Consumer loans...................................... 19 18 22 19 19 Economic development bonds and other tax exempt loans............................................... 1 1 1 1 2 ---------- ---------- ---------- ---------- ---------- Total............................................. 100% 100% 100% 100% 100% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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. 38 ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses totaled approximately $5.7 million at December 31, 1996 as compared to approximately $5.9 million at December 31, 1995, as compared to $5.0 million at December 31, 1994. The allowance as a percentage of total loans was .93%, 1.1%, and 1.7%, respectively, for such dates indicated. The Maco Acquisition added approximately $1.1 million to the allowance in 1995. However, the allowance attributable to Pinnacle Bank decreased by $262,000 during 1995 as its loan quality remained good and management believed the allowance for loan losses remained adequate to cover potential losses in the loan portfolio. The reductions in the allowance as a percentage of total loans in 1996 and 1995 were attributable mainly to the large amount of mortgage loans acquired in the Maco Acquisition that generally carry a lower reserve per management's estimate. Net charge-offs for the year ended December 31, 1996 were $584,000, or 0.10%, of average loans outstanding as compared to $487,000, or 0.15%, for the year ended December 31, 1995, and $326,000, or 0.12%, for the year ended December 31, 1994. Recoveries on previously charged-off loans were $351,000 in 1996, $257,000 in 1995, and $272,000 in 1994. At December 31, 1996 and 1995, nonaccrual loans amounted to $761,000 and $3.3 million, respectively. This compares to nonaccrual loans of $749,000 at December 31, 1994. Pinnacle's management believes that the reduced level of nonaccrual loans at Pinnacle Bank reflects good economic conditions and credit quality. Other loans of concern to Pinnacle management increased to approximately $10.2 million as of December 31, 1996 as compared to approximately $9.6 million in 1995. Other loans of concern to Pinnacle management increased $2.6 million in 1995. This compares to other loans of concern to Pinnacle management totaling $7.0 million in 1994. In the opinion of Pinnacle's management, the allowance for loan losses is adequate and appropriately reflects the risk inherent in each of the period-end loan portfolios. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on economic conditions and borrower circumstances. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Pinnacle's allowance for loan losses. Such agencies may require Pinnacle to recognize additions to the allowance based on their judgments regarding information available to them at the time of their examination. NONEARNING ASSETS. Premises and equipment increased $140,000 to $12.7 million as of December 31, 1996 from $12.5 million as of December 31, 1995. The increase was attributable in part to investment in technology and computer-based systems that are used in sales support efforts and to better manage the operations of consolidated banking activities. Capital improvements in each of the years ended December 31, 1996 and 1995 totaled $1.5 million. Premises and equipment increased $5.6 million as of December 31, 1995 from $6.9 million as of December 31, 1994. Approximately $4.9 million of this increase resulted from the Maco Acquisition. Capital improvements in 1995 totaled $1.5 million as compared to $720,000 in 1994. The increase was attributable primarily to a computer capacity upgrade associated with the Maco Acquisition and the opening of a supermarket branch facility in July 1995. Interest receivable and other assets increased to $31.0 million from $28.7 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 increased to $1.7 million from $1.4 million for the same time periods. Goodwill and other purchased intangible assets decreased $2.1 million to $13.5 million as of December 31, 1996 as compared to $15.6 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 receivable and other assets increased $18.9 million as of December 31, 1995, from approximately $9.8 million as of December 31 1994. The increase during 1995 was primarily the result of the Maco Acquisition, which added approximately $18.1 million (including approximately $13.3 million of goodwill 39 associated with the Maco Acquisition). Other real estate increased slightly as of December 31, 1995 to $1.4 million as compared to $1.3 million as of December 31, 1994. At December 31, 1995, virtually all of such other real estate was held by Pinnacle Bank. INTEREST-BEARING LIABILITIES. In 1996, average interest-bearing liabilities increased $452.2 million, or 114.9%, over 1995. The Maco Acquisition was the primary reason for the increase with the acquisition providing $393.6 million of the increase. The Pinnacle Bank operation grew $56.6 million, or 15.7%. The increases in Michigan were primarily in time deposits which grew 9.0%, or $13.5 million, to $164.2 million at December 31, 1996 and FHLB advances, securities sold under purchase agreements and other borrowings which grew 103.5%, or $31.6 million, in 1996 to $62.2 million as Pinnacle used this type of funding to match specific loan and investment purchases with like maturities. In 1995, average interest-bearing liabilities increased approximately $60.8 million, or 18.3%, over 1994. The Maco Acquisition added $32.2 million and Pinnacle Bank's average interest-bearing liabilities increased $28.5 million, or 8.6%. The increase at Pinnacle Bank resulted from increases in average time deposits of $19.6 million, or 15.0%, and average short-term borrowings of $16.1 million. These increases were partially offset by a decrease in savings deposits of $8.8 million. The changes reflect the shift of funds by consumers to higher yielding time deposits as interest rates increased in late 1994. Pinnacle utilized low cost borrowings from the Federal Home Loan Bank of Indianapolis to support loan growth and specific matched security portfolio investments. Year-end 1995 interest-bearing liabilities totaled approximately $779.9 million as compared to approximately $330.1 million for December 31, 1994 an increase of approximately $449.8 million, or 136.3%. The Maco Acquisition was the primary reason for this increase, adding $390.1 million. Pinnacle Bank added approximately $41.7 million, or 12.6%, in 1995. In addition, the $18.0 million Acquisition Note was issued by Pinnacle to the sole stockholder of Maco in connection with the Maco Acquisition. (The Acquisition Note was paid in full in March 1996.) OTHER LIABILITIES. At December 31, 1996, other liabilities decreased $1.9 million, or 29.5%, to $4.4 million from $6.3 million as of December 31, 1995. The reduction was primarily from reductions in income taxes payable and deferred income tax adjustments associated with the recapture of bad debt reserves and deferred taxes associated with market value adjustments in the investment portfolio market value swings in 1996. At December 31, 1995, other liabilities increased $3.9 million, or 165.5%, from approximately $2.4 million at December 31, 1994. The Maco Acquisition added $3.2 million. Other liabilities at Pinnacle Bank increased $720,000 due to increases in accrued interest on interest-bearing liabilities associated with growth and higher interest rates. 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, 1996, cash and due from banks, federal funds sold, and money market instruments equaled approximately $49.3 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, 1996, Pinnacle had borrowed $159.5 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 $372.2 million and $287.5 million, respectively, as being available-for-sale at December 31, 1996 and December 31, 1995, respectively. Pinnacle classified all of its security portfolio at December 1, 1995 as being available-for-sale. Consequently, this portfolio, which totaled $372.2 million at December 31, 1996, is available to meet any liquidity needs of Pinnacle. Securities acquired as a result of the Maco Acquisition and totaling $169.6 million were transferred from held-to- maturity to available-for-sale at fair market value, thereby conforming such securities to Pinnacle's interest 40 rate and credit risk policy. The remainder of the reclassification came from Pinnacle Bank, with an amortized cost of $35.3 million, made pursuant to the FASB's issuance of "A Guide to Implementation of FASB 115" that allowed entities a one-time reclassification of securities. At the date of transfer, December 1, 1995, Pinnacle Bank's securities had a net unrealized gain totaling $530,000. Proceeds from the sales of securities available-for-sale amounted to $140.0 million in 1996, $69.0 million in 1995, and $14.1 million in 1994, with resulting net gains of $653,000, $350,000, and $64,000, respectively. At December 31, 1996, gross unrealized holding gains and gross unrealized holding losses in Pinnacle's total security portfolio amounted to approximately $1.4 million and approximately $2.0 million, respectively. At December 31, 1995 gross unrealized holding gains and gross unrealized holding losses in Pinnacle's total security portfolio amounted to approximately $2.2 million and $478,000 respectively. The focus of liquidity management at Pinnacle is to satisfy general operating expenses, to service existing debt, and to take advantage of investment opportunities which Pinnacle's management believes will result in an improved return to stockholders. Substantially all of Pinnacle's revenues result from dividends paid to it by Pinnacle Bank and from earnings on investments. Dividends paid to Pinnacle by Pinnacle Bank amounted to $3.7 million for the year ended December 31, 1996, $12.1 million for the year 1995, and approximately $2.4 million in 1994. Dividends paid to Pinnacle by First Federal amounted to $1.3 million for the year ended December 31, 1996 and $4.0 million in 1995. There are statutory and regulatory requirements applicable to the payment of dividends by Pinnacle Bank as well as by Pinnacle to its stockholders. Under applicable dividend restrictions, Pinnacle Bank, without obtaining government approvals, could declare aggregate dividends in 1996 of approximately $14.9 million from retained net profits of the preceding two years, plus an amount approximately equal to the net profits (as measured under current regulations), if any, earned for the period from January 1, 1996 through the date of declaration less dividends previously paid in 1996. INTEREST RATE SENSITIVITY Interest rate sensitivity is measured by analyzing the maturity and timing of interest rate changes on assets and liabilities. The "gap" is the amount by which interest-sensitive assets exceed interest-sensitive liabilities for any given period. In periods of increasing interest rates, a positive gap will generally result in increased net interest income; conversely, a negative gap will result in decreased net interest income in such periods. In periods of decreasing interest rates, a positive gap will result in decreased net interest income, and a negative gap will result in increased net interest income. To manage Pinnacle's exposure to changes in interest rates, management of Pinnacle closely monitors its interest rate risk. An asset/liability committee consisting of senior officers meets regularly and reviews Pinnacle's interest rate risk position and makes recommendation for adjustments to the position. In addition, the Board of Directors of Pinnacle periodically reviews Pinnacle's asset/liability position, including simulations of the effect on Pinnacle's earnings and capital of various interest rate scenarios. In managing its asset/liability mix, and depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, Pinnacle may place somewhat greater emphasis on maximizing its net interest margin than on matching the interest rate sensitivity of its assets and liabilities in an effort to increase its net income. Management believes that the increased net income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates which can result from such mismatch. As a result, there may be relatively more exposure to rapid increases in interest rates than some other institutions which concentrate principally on matching the duration of their assets and liabilities. Pinnacle is managing its current negative gap position by emphasizing variable rate loans, investing in short-term securities, and encouraging longer term deposit products through pricing strategies. The 41 following table sets forth management's estimate of the projected maturities and/or repricing of Pinnacle's assets and liabilities as of December 31, 1996. 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
DECEMBER 31, 1996 --------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY PERIOD --------------------------------------------------------------------------------------- 0 - 3 4 - 6 7 - 9 10 - 12 1 - 5 OVER 5 MONTHS MONTHS MONTHS MONTHS YEARS YEARS TOTAL ---------- ----------- ----------- ----------- ---------- ---------- ------------ (DOLLARS IN THOUSANDS) ASSETS: Interest-bearing deposits with financial institutions........ $ 18,973 $ -- $ -- $ -- $ -- $ -- $ 18,973 Securities available for sale... 169,051 12,510 5,355 9,285 66,168 109,788 372,157 Loans........................... 177,325 30,831 41,675 33,439 232,857 93,437 609,564 Nonearning assets............... -- -- -- -- -- -- 68,427 ---------- ----------- ----------- ----------- ---------- ---------- ------------ Total Assets.................. $ 365,349 $ 43,341 $ 47,030 $ 42,724 $ 299,025 $ 203,225 $ 1,069,121 ---------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- ---------- ---------- ------------ FUNDING SOURCES: Interest-bearing demand......... $ 65,799 $ -- $ -- $ -- $ 10,866 $ -- $ 76,665 Savings and time deposits....... 254,399 97,662 39,983 23,571 186,965 3,659 606,239 Federal Home Loan Bank advances...................... 43,500 -- 40,500 -- 45,489 30,000 159,489 Other borrowings................ 54,557 -- -- -- 11,315 65,872 Noninterest bearing sources..... -- -- -- -- -- -- 160,856 ---------- ----------- ----------- ----------- ---------- ---------- ------------ Total funding sources......... $ 418,255 $ 97,662 $ 80,483 $ 23,571 $ 254,635 $ 33,659 $ 1,069,121 ---------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- ---------- ---------- ------------ REPRICING/MATURITY GAP Period.......................... $ (52,906) $ (54,321) $ (33,453) $ 19,153 $ 44,390 $ 169,566 Cumulative...................... $ (52,906) $ (107,227) $ (140,680) $ (121,527) $ (77,137) $ 92,429 Cumulative rate sensitivity assets/Cumulative rate sensitivity funding sources...... 87.35% 79.22% 76.41% 80.40% 91.18% 110.18%
Certain shortcomings are inherent in the above analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of, or lag behind, changes in market rates. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the analysis. Finally, in the event of rising interest rates, management may choose to increase the rates paid on deposit accounts in order to retain those accounts. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of Pinnacle are monetary in nature. As a result, interest 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. 42 EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which is effective, in part, for transactions occurring after December 31, 1996. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. Pinnacle adopted this statement on January 1, 1997, and it will not have a material effect on the Company's financial condition, results of operations, or liquidity. Effective January 1, 1995, Pinnacle adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Under SFAS No. 114 and SFAS No. 118, impaired loans must be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or, as a practical expedient, at the loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. SFAS No. 114 and SFAS No. 118 do not apply to certain groups of small-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, or debt securities. Prior to January 1, 1995, Pinnacle's impaired loans were described as, and equaled, non-accrual loans. The adoption of SFAS No. 114 and SFAS No. 118 has had no material effect on Pinnacle's non-performing assets or financial condition. See Note 1(c) to Pinnacle's Consolidated Financial Statements. In October 1994, SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" was issued by the Financial Accounting Standard Board ("FASB"). Effective for financial statements issued for fiscal years ending after December 15, 1994, SFAS No. 119 requires disclosures about the amounts, nature and terms of certain derivative financial instruments. Pinnacle adopted SFAS No. 119 and has made the required disclosures thereunder for the year ended December 31, 1994. In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights", which requires Pinnacle to recognize the rights to service mortgage loans for others as a separate asset, regardless of the manner in which such rights are acquired, was issued. The statement applies to fiscal years beginning after December 15, 1995, with earlier adoption permitted. Pinnacle adopted SFAS No. 122 on January 1, 1995, which did not materially impact the capital, financial position or net income of Pinnacle. RECENT LEGISLATION Legislation was 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 $2.4 million on approximately $361.3 million of deposits held by it on March 31, 1995 and insured by SAIF. 43 INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors Pinnacle Financial Services, Inc.: We have audited the accompanying consolidated balance sheets of Pinnacle Financial Services, Inc. and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Financial Services, Inc. and its subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP March 3, 1997 Chicago, Illinois 44 CONSOLIDATED BALANCE SHEETS
YEAR ENDED DECEMBER 31 ------------------------ 1996 1995 ------------ ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS: Cash and cash equivalents: Cash and due from banks............................................................. $ 30,290 $ 24,681 Federal funds sold.................................................................. 15,750 3,850 ------------ ---------- Total Cash and Cash Equivalents................................................... 46,040 28,531 Interest-bearing deposits with financial institutions................................. 3,223 41,511 Securities available-for-sale: Taxable............................................................................. 350,685 267,460 Tax-exempt.......................................................................... 21,472 20,072 Loans, net of unearned income: Real estate......................................................................... 276,941 268,911 Commercial.......................................................................... 210,315 154,044 Tax-exempt.......................................................................... 8,196 2,678 Consumer............................................................................ 114,112 92,826 ------------ ---------- Total loans....................................................................... 609,564 518,459 Less allowance for loan losses...................................................... 5,643 5,852 ------------ ---------- Net Loans........................................................................... 603,921 512,607 Premises and equipment, net........................................................... 12,686 12,546 Interest receivable and other assets.................................................. 31,094 28,719 ------------ ---------- Total Assets...................................................................... $ 1,069,121 $ 911,446 ------------ ---------- ------------ ---------- LIABILITIES: Deposits: Non-interest bearing demand......................................................... $ 78,365 $ 50,400 Interest bearing demand............................................................. 76,665 80,066 Savings............................................................................. 261,997 252,453 Time................................................................................ 344,242 320,181 ------------ ---------- Total Deposits.................................................................... 761,269 703,100 Federal Home Loan Bank advances..................................................... 159,489 96,752 Securities sold under repurchase agreements and other borrowings.................... 65,872 30,402 Interest payable and other liabilities.............................................. 4,442 6,296 ------------ ---------- Total Liabilities................................................................. 991,072 836,550 STOCKHOLDERS' EQUITY: Common stock; no par value;15,000,000 shares authorized; 5,977,548 shares issued and outstanding at December 31, 1996; and 5,873,358 shares issued and outstanding at December 31, 1995................................................................... 19,110 19,110 Additional paid-in capital............................................................ 44,526 44,174 Retained earnings..................................................................... 14,789 10,475 Net unrealized gain (loss) on securities available-for-sale........................... (376) 1,137 ------------ ---------- TOTAL STOCKHOLDERS' EQUITY.......................................................... 78,049 74,896 ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 1,069,121 $ 911,446 ------------ ---------- ------------ ----------
See accompanying notes to consolidated financial statements. 45 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME: Interest and fees on loans: Taxable............................................................. $ 49,791 $ 29,542 $ 22,949 Tax-exempt.......................................................... 218 214 209 Interest and dividends on securities: Available-for-sale Taxable........................................................... 21,957 5,074 2,712 Tax-exempt........................................................ 1,064 32 -- Held-to-maturity Taxable........................................................... -- 1,247 1,914 Tax-exempt........................................................ -- 873 998 Interest on federal funds sold........................................ 410 257 110 Interest on interest-bearing deposits with financial institutions..... 529 256 76 ------------ ------------ ------------ TOTAL INTEREST INCOME............................................... 73,969 37,495 28,968 INTEREST EXPENSE: Interest on deposits.................................................. 30,536 16,093 11,316 Interest on Federal Home Loan Bank advances........................... 7,402 1,182 214 Interest on securities sold under repurchase agreements and other borrowings.......................................................... 1,755 876 332 ------------ ------------ ------------ TOTAL INTEREST EXPENSE.............................................. 39,693 18,151 11,862 ------------ ------------ ------------ NET INTEREST INCOME................................................. 34,276 19,344 17,106 PROVISION FOR LOAN LOSSES............................................... 375 225 125 ------------ ------------ ------------ NET INTEREST INCOME, AFTER PROVISION FOR LOAN LOSSES................ 33,901 19,119 16,981 NONINTEREST INCOME: Service charges on deposit accounts................................... 2,207 1,530 1,479 Trust income.......................................................... 601 533 485 Securities gains and losses, net...................................... 653 350 64 Other income.......................................................... 3,847 2,173 1,728 ------------ ------------ ------------ TOTAL NONINTEREST INCOME............................................ 7,308 4,586 3,756 NONINTEREST EXPENSES: Salaries and benefits................................................. 10,843 7,100 6,073 Occupancy expense..................................................... 2,055 1,097 1,033 Equipment expense..................................................... 1,615 947 885 FDIC insurance premiums............................................... 3,196 552 808 Other expense......................................................... 9,247 4,940 4,315 ------------ ------------ ------------ TOTAL NONINTEREST EXPENSES.......................................... 26,956 14,636 13,114 ------------ ------------ ------------ INCOME BEFORE INCOME TAX EXPENSE........................................ 14,253 9,069 7,623 INCOME TAX EXPENSE...................................................... 5,101 2,610 2,333 ------------ ------------ ------------ NET INCOME.............................................................. $ 9,152 $ 6,459 $ 5,290 ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME PER COMMON SHARE............................................. $ 1.55 $ 1.62 $ 1.38 ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 5,899,453 3,996,137 3,821,904 ------------ ------------ ------------ ------------ ------------ ------------ CASH DIVIDENDS DECLARED PER COMMON SHARE................................ $ 0.82 $ 0.76 $ 0.62 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 46 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET UNREALIZED ADDITIONAL GAINS (LOSSES) COMMON PAID-IN RETAINED ON SECURITIES STOCK CAPITAL EARNINGS AVAILABLE-FOR-SALE TOTAL --------- ----------- --------- ----------------- --------- (DOLLARS IN THOUSANDS) BALANCE, JANUARY 1, 1994........................... $ 19,110 $ 10,005 $ 4,390 $ 373 $ 33,878 Net income......................................... -- -- 5,290 -- 5,290 Cash dividends declared, $.62 per share............ -- -- (2,369) -- (2,369) Change in unrealized losses for securities available-for-sale, net of tax effect of $(851)........................................... (1,651) (1,651) --------- ----------- --------- ------ --------- BALANCE, DECEMBER 31, 1994......................... 19,110 10,005 7,311 (1,278) 35,148 Net income......................................... -- -- 6,459 -- 6,459 Common stock issuance, 862,500 shares, net of stock offering costs................................... -- 13,184 -- -- 13,184 Common stock issuance per merger, 1,188,954 shares at $17.65 per share.............................. -- 20,985 -- -- 20,985 Cash dividends declared, $.76 per share............ -- -- (3,295) -- (3,295) Change in unrealized losses for securities available-for-sale, net of tax effect of $1,244........................................... -- -- -- 2,415 2,415 --------- ----------- --------- ------ --------- BALANCE, DECEMBER 31, 1995......................... 19,110 44,174 10,475 1,137 74,896 Net income......................................... -- -- 9,152 -- 9,152 Common stock issuance, 104,190 shares, net of offering costs................................... -- 352 -- -- 352 Cash dividends declared, $.82 per share............ -- -- (4,838) -- (4,838) Change in unrealized gains for securities available-for-sale, net of tax effect of $(805)........................................... -- -- -- (1,513) (1,513) --------- ----------- --------- ------ --------- BALANCE, DECEMBER 31, 1996......................... $ 19,110 $ 44,526 $ 14,789 $ (376) $ 78,049 --------- ----------- --------- ------ --------- --------- ----------- --------- ------ ---------
47 CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................... $ 9,152 $ 6,459 $ 5,290 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................................... 2,628 1,308 1,251 Net amortization on loans and securities............................... 625 1,269 1,264 Provision for loan losses.............................................. 375 225 125 Deferred income taxes.................................................. (261) (380) (340) Mortgage loans originated for sale..................................... (121,924) (10,904) (581) Proceeds from sales of loans........................................... 79,781 24,318 12,386 Gain on sale of securities, net........................................ (653) (350) (64) (Gain) loss on sale of loans, net...................................... (1,075) (182) 11 Increase (decrease) in interest receivable and other assets............ (2,546) (2,793) 849 (Decrease) increase in interest payable and other liabilities.......... (1,993) 436 69 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. (35,891) 19,406 20,260 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in loans, excluding loan sales, purchases, and originated for sale............................................................... (10,476) (18,497) (31,470) Purchases of loans....................................................... (38,311) (14,846) (7,192) Purchases of securities available-for-sale............................... (264,913) (116,722) (27,050) Purchases of securities held-to-maturity................................. -- (1,600) (3,971) Proceeds from sales of securities available-for-sale..................... 140,008 69,007 14,149 Proceeds from maturities and paydowns of securities available-for-sale... 38,260 14,231 25,667 Proceeds from maturities and paydowns of securities held-to-maturity..... -- 12,153 16,059 Net decrease (increase) in interest-bearing deposits with financial institutions........................................................... 38,288 (24,362) (1,032) Capital expenditures..................................................... (1,485) (1,570) (720) Acquisition of financial institution, net of cash and stock issued....... -- (12,683) -- ----------- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES.................................. (98,629) (94,889) (15,560) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits...................................... 58,169 33,365 (10,977) Net increase in securities sold under repurchase agreements and other borrowings............................................................. 98,207 45,505 9,428 Common stock issued...................................................... 352 13,184 -- Dividends paid........................................................... (4,699) (2,790) (2,293) ----------- ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES.................................. 152,029 89,264 (3,842) ----------- ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. 17,509 13,781 858 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 28,531 14,750 13,892 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 46,040 $ 28,531 $ 14,750 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES: Interest paid.......................................................... $ 39,455 $ 17,683 $ 11,752 Federal income taxes paid.............................................. $ 4,840 $ 3,195 $ 2,185 Loans transferred to other real estate owned........................... $ 756 $ 738 $ 508 Transfers of securities held-to-maturity to available-for-sale......... $ -- $ 204,974 $ --
See accompanying notes to consolidated financial statements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Pinnacle Financial Services, Inc. and subsidiary (the "Company") 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 of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following are significant accounting and reporting policies of Pinnacle Financial Services, Inc. and subsidiary. (a) Consolidation The consolidated financial statements include the accounts of Pinnacle Financial Services, Inc. and its wholly-owned subsidiary, Pinnacle Bank (the "Bank"). 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 known collectively as Pinnacle Bank. Significant intercompany balances and transactions are eliminated in consolidation. (b) Securities The Company classifies debt and equity securities and mortgage backed securities into three separate categories, namely securities available-for-sale, securities held-to-maturity and trading account securities. Securities which management believes could be sold prior to maturity in order to manage interest rate risk, prepayments, liquidity risk, or other corporate purposes are classified as available-for-sale and are carried at fair value with unrealized gains 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. The Company has no material trading account securities. Premiums and discounts on securities are amortized and accreted over the life of the related securities as an adjustment to yield using the effective interest method. Gain or loss on the sale of securities is determined based on the adjusted cost of the specific security sold. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings, thereby establishing a new cost basis for the security. (c) Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to operating expense, is decreased by charge offs, net of recoveries, and is available for losses incurred on loans, including certain accrued interest receivable. The allowance for loan losses is based on management's periodic evaluation of the loan portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, and management's evaluation of the collectibility of specific loans. Management believes that the allowance for loan losses is adequate. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, (as amended by Statement 118), "Accounting by Creditors for Impairment of a Loan" issued by the Financial Accounting Standards Board ("FASB"). Under the new statements, the 1995 allowance for loan losses related to loans that are identified as impaired is based on discounted cash flows using the loan's initial effective interest rate on the fair value of the collateral for certain collateral dependent loans. A loan is considered impaired when it is probable that a creditor will be unable to collect contractual principal and interest due according to the contractual terms of the loan agreement. Impaired loans are generally considered by the Company to be nonaccrual Commercial and Commercial Real Estate loans, restructured loans and loans which principle 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 loans is less than the recorded book value, a valuation allowance is established as a component of the allowance for loan losses. (d) Nonperforming Assets Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, including impaired loans, loans contractually past due 90 days or more as to interest and/or principal and not included in nonaccrual loans, and other real estate which has been acquired primarily through foreclosure and is awaiting disposition. Loans are generally placed on a nonaccrual basis when, in the opinion of management, collection of principal or interest payments if unlikely. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable. Other real estate is carried at the lower of cost or fair value, less estimated costs to sell. When the property is acquired through foreclosure, any excess of the related loan balance over estimated fair value is charged to the allowance for loan losses. Subsequent write-downs, losses upon sale, and expenses related to maintenance of properties are charged to other operating expense. (e) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation, computed on the straight-line and accelerated methods, is charged to operations over the estimated useful lives of the properties. (f) Long-lived Assets and Long-lived Assets to be Disposed of On January 1, 1996, Pinnacle adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of", which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicates that the carrying amount may not be recoverable. The impairment is measured based on the present value of expected future cash flows from the use of the assets and its eventual disposition. If the expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized based on current fair values. The adoption did not have a material impact to the Company's consolidated financial statements. (g) Retirement Plan Costs for the Company's defined benefit plan, which covers substantially all employees, are accounted for in accordance with the requirements of Statement of Financial Accounting Standards No. 87, "Employers; Accounting for Pensions" (Statement 87). The projected unit credit method is utilized 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. (h) 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. (i) Stock Option Plans As of December 31, 1996, Pinnacle adopted the disclosure requirements of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation". Pinnacle applies APB Opinion 25 and related interpretations in accounting for its stock option plans. Further disclosures are presented in Note 14. (j) Trust Assets Assets held by the Company, in fiduciary or agency capacity for customers, are not included in the consolidated financial statements and as such are not assets of the Company. Fee income is recognized on an accrual basis for financial reporting purposes. (k) Goodwill and Other Intangibles Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis up to 15 years. At December 31, 1996 and 1995, goodwill of approximately $12,509,000 and $14,382,000, respectively, is included in other assets in the accompanying consolidated balance sheets. At December 31, 1996, the average remaining life of unamortized goodwill was 10 years. Core deposit intangibles, representing the premium associated with the acquisition of certain deposit liabilities, are being amortized to operating expenses on a straight-line basis over the average lives of such deposit liabilities or approximately 10 years, with a remaining life of 3 years. At December 31, 1996 and 1995, core deposit intangibles of approximately $949,000 and $1,265,000, respectively, are included in other assets in the accompanying consolidated balance sheets. The Company assesses the recoverability of its goodwill and intangibles through review of various economic factors on a periodic basis in determining whether impairment, if any, exists. (l) Mortgage Servicing Rights Effective January 1, 1995, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights." Statement 122 amended SFAS Statement 65, "Accounting for Certain Mortgage Banking Activities," to require that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, however those servicing rights are acquired, eliminating restrictions between servicing rights acquired through purchase transactions and those acquired through loan originator's. The statement also requires the assessment of capitalized mortgage servicing rights for impairment to be used as the current fair value of those rights. Impairment is recognized through a valuation allowance established through a charge to expense. Mortgage servicing rights as of December 31, 1996 totaled approximately $125,000. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Federal Income Taxes The Company and its subsidiary file a consolidated U.S. income tax return. The consolidated tax liability is settled between companies generally as if each company had filed a separate return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. (n) Income Recognition The Company uses the accrual basis of accounting for financial reporting purposes. Loans are stated at the principal amount outstanding, net of any unearned income. Interest on loans is accrued daily based on principal outstanding. Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the yield. (o) 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. (p) Per Share Data Earnings per share is calculated by dividing net income by the weighed average number of shares of common stock outstanding during each period and is retroactively adjusted for stock splits and stock dividends. The dilutive effect of outstanding stock options on any year presented is not material. Cash dividends per share are based upon the number of shares outstanding at date of declaration, retroactively adjusted for stock splits and stock dividends. (q) Reclassifications Certain prior year amounts were reclassified to conform to current year presentation. NOTE 2 REGULATORY MATTERS 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 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 REGULATORY MATTERS (CONTINUED) average assets (as defined). Management believes, as of December 31, 1996, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notification from the Michigan Financial Institutions Bureau 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. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTION ACTUAL ADEQUACY PURPOSES PROVISIONS ---------------------- ---------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------- ----------- --------- ----------- --------- ----------- AS OF DECEMBER 31, 1996 TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED.................................. $ 71,541 13.02% $ 43,970 8.00% $ 54,962 10.00% Pinnacle Bank................................. 68,370 12.50 43,771 8.00 54,714 10.00 TIER I CAPITAL (TO RISK WEIGHTED ASSETS): CONSOLIDATED.................................. $ 65,898 11.99% $ 21,985 4.00% $ 32,977 6.00% Pinnacle Bank................................. 62,727 11.46 21,886 4.00 32,829 6.00 TIER I CAPITAL (TO AVERAGE ASSETS): CONSOLIDATED.................................. $ 65,898 6.36% $ 41,476 4.00% $ 51,844 5.00% Pinnacle Bank................................. 62,727 6.06 41,381 4.00 51,726 5.00
NOTE 3 ACQUISITION 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. This acquisition will provide another source of fee income and add financial products to sell to our existing customers and markets. On December 1, 1995, the Company acquired all of the outstanding stock of Maco Bancorp, Inc., a Delaware corporation and registered savings and loan holding company headquartered in Merrillville, Indiana ("Maco"), for a purchase price of $41,944,000 (the "Purchase Price"). Approximately 50% of the Purchase Price was paid in cash ($20,959,000) and the balance was paid in Pinnacle common stock valued at $20,985,000. The acquisition of Maco was accounted for as a purchase. All assets (approximately $412,800,000) and all liabilities (approximately $384,200,000) of Maco and its subsidiaries (First Federal Savings Bank of Indiana, Brookview Real Estate Ltd. and First Insurance, Inc.) were adjusted to fair value as of the effective date creating goodwill in the amount of $13,350,000 which is being amortized on a straight line basis over 15 years. Premiums and discounts on the fair value adjustments amounted to approximately $3,895,000 and $830,000, respectively. The operating results of Maco have been included in the Company's financial statements since the date of acquisition. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Carrying and fair values and estimating methods and assumptions are presented below:
DECEMBER 31 ---------------------------------------------- 1996 1995 ---------------------- ---------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Financial Assets: Cash and due from banks........................................ $ 30,290 $ 30,290 $ 24,681 $ 24,681 Federal funds sold............................................. 15,750 15,750 3,850 3,850 Interest-bearing deposits with financial institutions.......... 3,223 3,223 41,511 41,511 Securities available-for-sale.................................. 372,157 372,157 287,532 287,532 Loans, net..................................................... 603,921 601,602 512,607 515,184 Accrued interest receivable.................................... 9,001 9,001 5,611 5,611 ---------- ---------- ---------- ---------- Financial Liabilities: Noninterest-bearing deposits................................... $ 78,365 $ 78,365 $ 50,400 $ 50,400 Interest-bearing deposits...................................... 682,904 686,910 652,700 654,137 Securities sold under repurchase agreements, and other borrowings................................................... 225,361 228,282 127,154 127,319 Accrued interest payable....................................... 1,575 1,575 1,337 1,337 ---------- ---------- ---------- ----------
Loan commitments are not included in the table above, as their estimated fair value is immaterial. SECURITIES: The carrying value for short term investments, which include federal funds sold and interest-bearing deposits with financial institutions, approximate fair value because they mature in one year or less and do not present unanticipated credit concerns. The fair value of longer-term investments and mortgage backed securities, except certain obligations of states and political subdivisions, is estimated based on bid prices published in reliable financial publications or bid quotations received from securities dealers. The fair value of certain obligations of states and political subdivisions are not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Statement 107 specifies that fair values of securities should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instruments, possible tax ramifications, or estimated transaction costs. LOANS: Fair value is 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. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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. Fair value for credit card loans is based on the current carrying value of existing loans at December 31, 1996 and 1995. This estimate does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio. LIABILITIES: Under Statement 107, the fair value of deposits with no stated maturity, such as demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand as of December 31, 1996 and 1995. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for similar remaining maturities. The carrying amounts for securities sold under repurchase agreements, and certain other borrowings, approximate fair value because they mature in 90 days or less. The fair value of certain other borrowings with maturities of greater that 90 days are based on the discounted value of contractual cash. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. 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. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage servicing operations, premises and equipment, and intangible assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. NOTE 5 CASH AND DUE FROM BANKS The Bank is required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The reserve balances maintained in accordance with such requirements at December 31, 1996 and 1995, were $4,690,000 and $4,908,000, 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 by major security type at December 31, 1996.
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING COST GAINS LOSSES FAIR VALUE ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) Available-for-sale: U.S. Treasury securities....................................... $ 10,046 $ 56 $ -- $ 10,102 Obligations of other U.S. government agencies and corporations................................................. 160,434 320 (1,021) 159,733 Obligations of states and political subdivisions............... 20,936 540 (3) 21,473 Corporate securities........................................... 350 4 -- 354 Equity securities.............................................. 12,138 -- (28) 12,110 Mortgage backed securities..................................... 168,897 453 (965) 168,385 ---------- ----------- ----------- ---------- Total........................................................ $ 372,801 $ 1,373 $ (2,017) $ 372,157 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 SECURITIES (CONTINUED) The following summarizes the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security type at December 31, 1995.
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING COST GAINS LOSSES FAIR VALUE ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) Available-for-sale: U.S.Treasury securities........................................ $ 9,577 $ 223 $ -- $ 9,800 Obligations of other U.S. government agencies and corporations................................................. 91,925 485 (130) 92,280 Obligations of states and political subdivisions............... 19,406 702 (8) 20,100 Corporate securities........................................... 10,275 16 (28) 10,263 Equity securities.............................................. 6,328 -- (16) 6,312 Mortgage backed securities..................................... 148,298 775 (296) 148,777 ---------- ----------- ----- ---------- Total........................................................ $ 285,809 $ 2,201 $ (478) $ 287,532 ---------- ----------- ----- ---------- ---------- ----------- ----- ----------
Maturities of investment securities classified as available-for-sale at December 31, 1996 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE-FOR-SALE ---------------------- AMORTIZED COST FAIR VALUE ---------- ---------- (DOLLARS IN THOUSANDS) No maturity........................................................... $ 12,138 $ 12,110 Due in one year or less............................................... 3,894 3,936 Due after one year through five years................................. 24,083 24,359 Due after five years through ten years................................ 60,674 60,829 Due after ten years................................................... 103,115 102,538 Mortgage-backed securities............................................ 168,897 168,385 ---------- ---------- Total............................................................... $ 372,801 $ 372,157 ---------- ---------- ---------- ----------
Proceeds from sales of securities during 1996, 1995 and 1994 were $139,338,000, $69,007,000, and $14,149,000, respectively. Gross gains of $803,000, $575,000, and $97,000 for 1996, 1995, and 1994, respectively, and gross losses of $150,000, $225,000, and $33,000 were realized on those sales for 1996, 1995, and 1994, respectively. During 1996, 1995, and 1994 there were no sales of securities classified as held-to-maturity. On December 1, 1995, securities held-to-maturity (including those 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. At the date of transfer, these securities held an amortized cost of $204,974,000 and a net unrealized gain of $530,000. During 1994, Federal Home Loan Bank Stock of $1,553,000 was transferred from securities held-to-maturity to securities available-for-sale for the purpose of conforming with accounting guidelines. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 SECURITIES (CONTINUED) 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. These securities are not considered to be a high risk. Securities with an amortized cost of $337,889,000 and $251,771,000 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits and securities sold under agreements to repurchase and for other purposes as required by law or contract. The Company did not have any investment securities of states (including their political subdivisions) that individually exceeded 10% of stockholders' equity at December 31, 1996 and 1995. NOTE 7 LOANS The following summarizes loans by classification at December 31 of each year.
1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Real estate mortgages................................................. $ 276,941 $ 268,911 Commercial loans...................................................... 210,315 154,044 Consumer loans........................................................ 114,112 92,826 Economic development bonds and other tax exempt loans................. 8,196 2,678 ---------- ---------- Total............................................................... $ 609,564 $ 518,459 ---------- ---------- ---------- ----------
The Company's mortgage servicing portfolio for borrowers totaled $62.0 million at December 31, 1996. The recorded investment in loans determined to be impaired at December 31, 1996 totaled $848,000, of which the collateral values are equal to or greater than the recorded investment. In addition, a specific loan loss reserve of $191,000 has been assigned to all of these loans. As of December 31, 1996, the average recorded investment in impaired loans approximated $1,099,000. For the year, interest income recorded on such loans totaled $101,000, of which $53,000 has been recorded on a cash basis. The following summarizes nonaccrual loans and loans greater than 90 days delinquent which are still accruing interest at December 31 of each year.
1996 1995 ------------------------ ---------------------- 90 DAYS NON- 90 DAYS NON- ACCRUAL PAST DUE ACCRUAL PAST DUE ----------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Real Estate Mortgages................................ $ 293 $ 1,849 $ 2,581 $ 556 Commercial Loans..................................... 388 1,773 577 52 Consumer Loans....................................... 80 294 163 67 ----- ----------- --------- ----- Total.............................................. $ 761 $ 3,916 $ 3,321 $ 675 ----- ----------- --------- ----- ----- ----------- --------- -----
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7 LOANS (CONTINUED) At December 31, 1996, if nonaccrual loans had been maintained current in accordance with their original terms, additional interest income of $118,000 would have been realized. For years ended December 31, 1995 and 1994, additional interest income of $81,000 and $87,000 would have been realized. In addition to the loans classified as nonaccrual and greater than 90 days delinquent still accruing interest at December 31, 1996 and 1995, there were other loans of approximately $10,218,000 in 1996 and $9,600,000 in 1995, where management is closely following the borrowers' ability to continue to comply with loan payment terms. Current conditions do not warrant classification as nonperforming, nor is any principal loss on these loans considered likely at this time. The Company's market area is considered to be Southwest Michigan and Northern Indiana. The Company is not dependent upon any single industry or business for its banking opportunities. Certain officers, directors, and entities with which they are affiliated have borrowed funds from the Company. These loans were made in the ordinary course of business on substantially the same terms as loans to other persons and, in the opinion of management, do not involve more than the normal risks of collectibility or present other unfavorable features. Such loans at December 31, 1996 and 1995 aggregated approximately $12,580,000 and $11,043,000 respectively. The net increase of $1,537,000 in such loans resulted from new loans of $5,102,000 and collections on loans $3,565,000. The following summarizes the activity in the allowance for loan losses.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance, beginning of year....................................... $ 5,852 $ 5,014 $ 5,215 Provisions charged against income................................ 375 225 125 Recoveries....................................................... 351 259 272 Allowance of acquired financial institutions..................... -- 1,098 -- --------- --------- --------- 6,578 6,596 5,612 Loans charged off................................................ (935) (744) (598) --------- --------- --------- Balance, end of year............................................. $ 5,643 $ 5,852 $ 5,014 --------- --------- --------- --------- --------- ---------
NOTE 8 PREMISES AND EQUIPMENT, NET The following summarizes premises and equipment by classification at December 31.
1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Land and land improvements........................................... $ 2,124 $ 2,124 Buildings............................................................ 11,314 10,069 Furniture, fixtures and equipment.................................... 7,723 7,056 --------- --------- Subtotal........................................................... 21,161 19,249 Less accumulated depreciation........................................ 8,475 6,703 --------- --------- Premises and equipment, net........................................ $ 12,686 $ 12,546 --------- --------- --------- ---------
Depreciation expense charged to operations was $1,345,000, $789,000, and $793,000 in 1996, 1995, and 1994, respectively. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 TIME CERTIFICATES OF DEPOSIT The following summarizes time certificates of deposit in amounts of $100,000 or more and their remaining maturities, included in interest-bearing deposits at December 31.
1996 ----------- (DOLLARS IN THOUSANDS) Three months or less............................................................ $ 31,843 Three through six months........................................................ 22,530 Six through twelve months....................................................... 6,179 Over twelve months.............................................................. 732 ----------- Total......................................................................... $ 61,284 ----------- -----------
Interest expense related to time deposits of $100,000 or more approximated $3,418,000, $1,641,000, and $638,000 for the years ended December 31, 1996, 1995, and 1994, respectively. NOTE 10 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS & OTHER BORROWINGS The following is a schedule of securities sold under repurchase agreements and other borrowings at December 31 of each year.
1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Securities sold under repurchase agreements........................ $ 22,972 $ 12,402 Fed funds purchased................................................ 42,900 -- Advances from the Federal Home Loan Bank........................... 159,489 96,752 Other borrowings................................................... -- 18,000 ---------- ---------- Total............................................................ $ 225,361 $ 127,154 ---------- ---------- ---------- ----------
Securities sold under repurchase agreements, which mature daily, represent an indebtedness of the Company secured by certain securities. At December 31, 1996, 1995, and 1994, the interest cost with regard to daily averages was 3.90%, 3.41%, and 2.95%, respectively. Securities with an amortized cost of $20,710,000, and $14,149,000, an estimated fair value of approximately $20,726,000, and $14,317,000, were pledged as collateral for these agreements at December 31, 1996, 1995, and 1994, respectively. Federal funds purchased, which mature daily, had an interest cost with regard to daily averages of 5.70%, and 4.64% at December 31, 1996, and 1995, respectively. Advances from the Federal Home Loan Bank represent borrowings from Federal Home Loan Banks. Advances of $122,900,000, and $32,500,000, were drawn upon during 1996, and 1995, respectively. In addition, the acquisition of Maco added $61,500,000 in advances from Federal Home Loan Banks and an additional $19,000,000 net in advances in December 1995, for a total of $80,500,000 in advances at First Federal as of December 31, 1995. At December 31, 1996, 1995, and 1994, respectively, the interest cost with regard to daily averages was 5.80%, 6.22%, and 5.73%, with maturities of three to sixty months. These borrowings are secured by Federal Home Loan Stock (carried at $11,388,000) and by all eligible first mortgage loans on one-to-four family held by Pinnacle Bank (approximately $408,868,000 at December 31, 1996). 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 INCOME TAXES Federal income taxes (benefits) reported in the consolidated statements of income for the years ended December 31, 1996, 1995, and 1994 include the following components.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) U.S. Federal Current........................................................ $ 4,861 $ 2,990 $ 2,673 Deferred....................................................... (229) (380) (340) State Current........................................................ 501 -- -- Deferred....................................................... (32) -- -- --------- --------- --------- Income tax expense............................................. $ 5,101 $ 2,610 $ 2,333 --------- --------- --------- --------- --------- ---------
The following federal income tax expense differs from the amounts computed by applying the federal income tax rate of 35% in 1996 and 34% in 1995 and 1994 to pretax income at December 31 of each year.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Computed "expected" tax.......................................... $ 4,989 $ 3,083 $ 2,592 Tax exempt interest, net......................................... (385) (325) (367) Amortization of goodwill......................................... 327 42 42 State income tax, net of federal benefit......................... 305 -- -- Other, net....................................................... (135) (190) 66 --------- --------- --------- Income tax expense........................................... $ 5,101 $ 2,610 $ 2,333 --------- --------- --------- --------- --------- ---------
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 INCOME TAXES (CONTINUED) 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.
1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Deferred Tax Assets: Loan loss reserve..................................................... $ 1,524 $ 833 Deferred loan fees.................................................... 58 458 Deferred directors fees............................................... 395 364 Depreciation.......................................................... 179 179 Capital loss carryforward............................................. 61 61 Unrealized losses on securities available-for-sale.................... 220 -- Alternative minimum tax credit carry forward.......................... 0 563 Other................................................................. 81 361 --------- --------- Total gross deferred tax assets..................................... 2,518 2,819 Less valuation allowance.............................................. (61) (61) Net deferred tax assets............................................. $ 2,457 $ 2,758 --------- --------- --------- ---------
1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Deferred Tax Liabilities: Deposit base premium.................................................. $ (185) $ (245) Pension............................................................... (271) (270) Purchase discount..................................................... (1,369) (1,932) Unrealized gains on securities available-for-sale..................... -- (586) Other................................................................. (57) (217) --------- --------- Total gross deferred tax liabilities................................ (1,882) (3,250) --------- --------- Net deferred tax asset/(liability).................................... $ 575 $ (492) --------- --------- --------- ---------
The valuation allowance for deferred tax assets at December 31, 1996 and 1995 was $61,000 with no change during 1996. The valuation allowance is due to capital losses from prior years which can only be utilized against subsequent capital gains. NOTE 12 RETIREMENT PLANS The Company sponsors a defined benefit pension plan which provides benefits to substantially all full time employees. Benefits under the plan are based on the employees' years of service and compensation 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 RETIREMENT PLANS (CONTINUED) during the five highest paid plan years of the last ten years preceding retirement. The following present the components of net pension income at December 31 of each year.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Service cost--benefits earned during the year......................................... $ 463 $ 333 $ 283 Interest cost on projected benefit obligation......................................... 401 268 217 Actual return on plan assets.......................................................... (923) (1,093) (6) Net amortization and deferral......................................................... 144 535 (551) --------- --------- --------- Net pension expense (income)........................................................ $ 85 $ 43 $ (57) --------- --------- --------- --------- --------- ---------
The following presents the funded status of the Pinnacle Banks' plan and amounts recognized in the consolidated balance sheets at December 31 of each year.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Actuarial present value of projected benefit obligation: Accumulated benefit obligation: Vested........................................................................ $ (3,440) $ (2,837) $ (1,785) Nonvested..................................................................... (118) (109) (68) Provision for future salary increases........................................... (2,580) (1,969) (1,560) --------- --------- --------- Projected benefit obligation.................................................... (6,138) (4,915) (3,413) Plan assets at fair value......................................................... 8,048 7,253 4,811 --------- --------- --------- Excess of plan assets over projected benefit obligation........................... 1,910 2,338 1,398 Unrecognized net transition asset................................................. (731) (799) (867) Unrecognized net (gain)/loss...................................................... 16 (259) 342 Unrecognized prior service cost................................................... (35) (36) (36) --------- --------- --------- Prepaid pension cost, included in other assets.................................. $ 1,160 $ 1,244 $ 837 --------- --------- --------- --------- --------- --------- Major assumptions used: Discount rate................................................................... 7.50% 7.75% 7.25% Rate of increase in compensation levels......................................... 5.50% 6.00% 6.00% Expected long-term rate on plan assets.......................................... 10.00% 10.00% 10.00% --------- --------- ---------
The plan assets were invested primarily in a collective investment trust at December 31, 1996, 1995 and 1994. The Company also sponsors a defined contribution 401(k) plan for the benefit of all employees. The Company matches employee contributions at levels dependent upon current operating results. In 1996, 1995, and 1994, the Company contributions amounted to $63,000, $121,000 and $56,000, respectively. Employee contributions to the plan are based upon optional percentages (ranging from 2% to 10%) of before tax compensation. NOTE 13 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has a Retiree Medical Plan which provides a portion of retiree medical care premiums. The Company's level of contribution is based on an age and service formula which provides benefits to substantially all retired participants until December 31, 1997 and will provide benefits to active participants 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) in a 100% co-pay basis until age 65. The components of the 1996 and 1995 net periodic postretirement benefit cost are shown below:
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Service cost.................................................................. $ 0 $ -- $ -- Interest cost................................................................. 19 21 20 Net amortization and deferral................................................. 33 33 25 --------- --------- --------- Net periodic postretirement benefit cost.................................... $ 52 $ 54 $ 45 --------- --------- --------- --------- --------- ---------
The funded status of the plan and amounts recognized in the consolidated balance sheets are shown below:
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Retired participants and beneficiaries........................................ $ (248) $ (281) $ (275) Active participants........................................................... -- -- -- --------- --------- --------- Accumulated postretirement benefit obligation............................... (248) (281) (275) Plan assets at fair value..................................................... -- -- -- --------- --------- --------- Excess of accumulated postretirement benefit obligation over plan assets...... (248) (281) (275) Unrecognized transition obligation............................................ 193 226 260 Unrecognized loss/(gain)...................................................... (6) 2 (28) --------- --------- --------- Accrued postretirement benefit cost......................................... $ (61) $ (53) $ (43) --------- --------- --------- --------- --------- ---------
For measurement purposes, a 9.00%, 10.00% and 12.00% annual rate of increase in the per capita cost of covered benefits (health care cost trend rate) was assumed for 1996, 1995, and 1994, respectively; the rate was further assumed to decline to 4.00% after 8 years. The health care cost trend rate assumption has an increasing effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation by $25,000 and $53,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $2,000 for years ended December 31, 1996, 1995 and 1994, respectively. The weighted average discount rate used in determining the accumulated posrtretirement benefit obligation was 7.50% for December 31, 1996 and 7.25% for December 31, 1995 and 1994, respectively. NOTE 14 NON-QUALIFIED STOCK OPTION PLAN 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 Pinnacle's Board of Directors, none of whom is eligible to participate in the Plan, awarded certain key employees options to purchase shares of Pinnacle common stock at an exercise price which approximates the fair market value of the grant period. The total number of shares available under the Plan is 500,000 (all numbers have been restated to reflect the two-for-one stock split effected in September 1993). All options are fully vested at day of grant and will expire if not exercised within five years of the date of grant. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 NON-QUALIFIED STOCK OPTION PLAN (CONTINUED) A summary of the aggregate activity for the Plan for 1996, 1995, and 1994 is as follows:
WTD. AVG. NUMBER OF COMMON EXERCISE SHARES SHARES PRICE EXERCISABLE --------- ------------- ----------- Outstanding at December 31, 1993................................. 23,350 $ 17.16 0 --------- ------ ----------- Granted.......................................................... 27,600 $ 17.95 Exercised........................................................ -- -- Forfeited or canceled............................................ -- -- --------- ------ ----------- Outstanding at December 31, 1994................................. 50,950 $ 17.59 5,837 --------- ------ ----------- Granted.......................................................... 71,725 $ 17.07 Exercised........................................................ -- -- Forfeited or canceled............................................ (400) $ 17.16 --------- ------ ----------- Outstanding at December 31, 1995................................. 122,275 $ 17.29 18,575 --------- ------ ----------- Granted.......................................................... 71,250 $ 21.16 Exercised........................................................ (4,739) $ 17.09 Forfeited or canceled............................................ (7,537) $ 18.54 --------- ------ ----------- Outstanding at December 31, 1996................................. 181,249 $ 18.75 49,243 --------- ------ -----------
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its stock option plan. If the alternative accounting related provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" had been adopted as of the beginning of 1995, the effect on 1995 and 1996, income before taxes and net income would have been immaterial. At December 31, 1996, the range of exercise prices and weighted average remaining contractual life of outstanding options was $16.43 - $21.16 and 3.5 years, respectively. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 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.
1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Other noninterest income: Service charges on deposit accounts............................................... $ 2,207 $ 1,530 $ 1,479 Trust Fees........................................................................ 601 533 485 Recoveries on distressed assets................................................... 250 296 262 Gain on sale of loans, net........................................................ 1,075 182 (11) Merchant & loan servicing fees.................................................... 1,270 923 770 Other noninterest expenses: Salaries and benefits............................................................. 10,843 7,100 6,073 Occupancy......................................................................... 2,055 1,097 1,033 Equipment......................................................................... 1,615 947 885 Professional and legal fees....................................................... 718 314 417 Amortization of intangibles....................................................... 1,283 525 458 FDIC insurance.................................................................... 3,196 552 808 Supplies.......................................................................... 915 455 418 Marketing and promotion........................................................... 1,481 695 298
NOTE 16 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. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) The following presents financial instruments with off-balance sheet risk at December 31 of each year.
1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Financial instruments whose contract amounts represent credit risk Commitments to extend credit.......................................... $ 97,240 $ 79,551 Letters of credit..................................................... 1,511 777 --------- --------- --------- ---------
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, 1996 and 1995 is in excess of the committed amount. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17 PARENT COMPANY FINANCIAL INFORMATION CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
DECEMBER 31 -------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks.................................................................. $ 1,926 $ 1,923 Interest-bearing deposits with financial institutions.................................... -- 18,100 Investment in subsidiary................................................................. 75,837 73,029 Other assets............................................................................. 1,598 1,178 --------- --------- TOTAL ASSETS........................................................................... $ 79,361 $ 94,230 --------- --------- --------- --------- LIABILITIES Notes payable and other liabilities...................................................... $ 1,312 $ 19,334 STOCKHOLDERS' EQUITY Common stock............................................................................. 19,110 19,110 Additional paid-in capital............................................................... 44,526 44,174 Retained earnings........................................................................ 14,789 10,475 Net unrealized (losses)/gains on securities available-for-sale........................... (376) 1,137 --------- --------- TOTAL STOCKHOLDERS' EQUITY............................................................. 78,049 74,896 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $ 79,361 $ 94,230 --------- --------- --------- ---------
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) INCOME Dividends from subsidiary......................................................... $ 4,975 $ 12,082 $ 2,376 Interest and other income......................................................... 812 170 43 --------- --------- --------- TOTAL INCOME.................................................................... 5,787 12,252 2,419 --------- --------- --------- EXPENSES Compensation and benefits......................................................... 258 192 96 Other operating expenses.......................................................... 772 368 239 --------- --------- --------- TOTAL EXPENSES.................................................................. 1,030 560 335 --------- --------- --------- Income before federal income tax expense (benefit) and undistributed earnings of subsidiary........................................................................ 4,757 11,692 2,084 Federal income tax benefit.......................................................... (74) (133) (97) Equity in undistributed earnings of subsidiary...................................... 4,321 (5,366) 3,109 --------- --------- --------- NET INCOME...................................................................... $ 9,152 $ 6,459 $ 5,290 --------- --------- --------- --------- --------- ---------
68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) CONDENSED PARENT COMPANY ONLY STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------- 1996 1995 1994 ---------- ---------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 9,152 $ 6,459 $ 5,290 Equity in undistributed earnings of subsidiaries.............................. (4,321) 5,366 (3,109) Other, net.................................................................... (109) (956) 69 ---------- ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 4,722 10,869 2,250 CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease/(increase) in interest-bearing deposits with financial institutions................................................................ 18,108 (18,000) -- Purchase acquisition, net of cash............................................. -- (20,466) -- Purchases of available-for-sale securities.................................... (507) -- -- Proceeds from paydowns of available-for-sale securities....................... 27 27 59 ---------- ---------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................ 17,628 (38,439) 59 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock........................................ 352 13,184 -- (Repayments)/Proceeds from short-term borrowings.............................. (18,000) 18,000 -- Dividends paid................................................................ (4,699) (2,790) (2,293) ---------- ---------- --------- NET CASH USED BY FINANCING ACTIVITIES....................................... (22,347) 28,394 (2,293) ---------- ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 3 824 16 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 1,923 1,099 1,083 ---------- ---------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 1,926 $ 1,923 $ 1,099 ---------- ---------- --------- ---------- ---------- ---------
NOTE 18 DIVIDENDS FROM HOLDING COMPANY Pinnacle is a legal entity separate and distinct from its subsidiary. Substantially all of Pinnacle's revenues result from dividends paid to it by Peoples and First Federal and from earnings on investments. There are statutory and regulatory requirements applicable to the payment of dividends by Peoples and First Federal as well as by Pinnacle to its stockholders. Under the foregoing dividend restrictions, Peoples, without obtaining government approvals, could declare aggregate dividends in 1996 of approximately $17.2 million. First Federal was eligible to make capital distributions of approximately $9.6 million at December 31, 1996. On December 1, 1995 the Company, in conjunction with the acquisition of Maco Bancorp, issued 862,500 shares in a public offering and issued 1,188,954 shares to the sole shareholder of Maco resulting in total shares outstanding increasing from 3,821,904, to 5,873,358. Dividends paid in 1996 to the Company by its subsidiary amounted to $4,975,000. Dividends paid in 1995 to the Company by its subsidiary, The Peoples State Bank, amounted to $12,082,000 of which approximately $8,500,000 was used for the cash portion of the Maco acquisition. In addition its subsidiary, First Federal, paid dividends amounting to $4,000,000 used for debt reduction obtained by way of the Maco acquisition. Dividends paid in 1994 to the Company by its subsidiary, The Peoples State Bank, amounted to $2,376,000. Unless prior regulatory approval is obtained, banking regulations limit the 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18 DIVIDENDS FROM HOLDING COMPANY (CONTINUED) amount of dividends that the Company's subsidiary can declare during 1997, to the 1996 net profits, as defined in the Federal Reserve Act, plus retained net profits for 1996 and 1995 of $14,900,000. NOTE 19 COMMITMENTS AND CONTINGENT LIABILITIES The Company has entered into indemnification agreements with the principal sole stockholder of Maco, subject to certain conditions, to partially indemnify Pinnacle from certain liabilities. Any claim on costs incurred by Pinnacle related to such liabilities must be made by May 26, 1998. The indemnification agreements relate to two transfer agreements and other various matters entered into on May 4, 1995 between Maco and an affiliate of the principal sole stockholder of Maco, that relate to litigation in effect prior to the acquisition. The first item relates to the 1988 acquisition of a distressed thrift by Maco through an assistance agreement with the Federal Savings and Loan Insurance Corporation ("FSLIC"). The Federal Deposit Insurance Corporation ("FDIC"), successor-in-interest to FSLIC, has brought suit seeking payment of $3,000,000 allegedly due it under such agreement. Management believes the FDIC suit is without merit and the indemnification agreement and a related escrow agreement reduces any risk of loss to the Company. The second item relates to a counterclaim brought against Maco as a result of a claim made against a third party by Maco. The Company intends to vigorously defend these actions, even though it is covered by the indemnification agreements. There are various other matters of litigation pending against the Company that have arisen during the normal course of business. Based upon discussions with legal counsel, management believes that the aggregate liability, if any, issuing from these matters will not be material to the financial results of the Company. On November 14, 1996, Pinnacle entered into a definitive agreement with Indiana Federal Corporation (IFC) which will add approximately $837 million in total assets. The transaction is contemplated as a merger of equals through the issuance of one share of Pinnacle Common Stock for each share of IFC Common Stock and it is anticipated to be accounted for using the pooling of interests method. The acquisition, subject to shareholder and regulatory approval is scheduled to close in the second quarter of 1997. NOTE 20 SUBSEQUENT EVENT--ACQUISITION On March 3, 1997, Pinnacle announced the acquisition of CB Bancorp, Inc. ("CB") of Michigan City, Indiana which will add approximately $227 million in total assets. The fixed purchase price is equal to $35.00 per CB share, payable in Pinnacle shares. If Pinnacle's average stock price exceeds $29.00, CB shareholders will receive 1.2069 Pinnacle shares per CB share. If Pinnacle's average stock price is less than $23.00 per share, CB shareholders will receive 1.5217 Pinnacle shares per CB share. The acquisition, subject to shareholder and regulatory approval, is expected to close in the second quarter of 1997 and is anticipated to be accounted for using the pooling of interests method. 70 SELECTED QUARTERLY FINANCIAL INFORMATION The following table provides a summary of unaudited quarterly financial information of Pinnacle for the periods indicated.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT STOCK PRICES) 1996 Interest income.................................. $ 17,158 $ 18,005 $ 18,635 $ 20,171 Net interest income.............................. 7,869 8,440 8,722 9,245 Provision for loan losses........................ 80 70 95 130 Income before income tax expense................. 3,622 4,214 1,908 4,509 Net income....................................... 2,444 2,580 1,261 2,867 Net income per share............................. 0.42 0.44 0.21 0.48 Stock price range................................ 18.25-20.50 20-21.75 19.50-24.75 23.25-25 1995 Interest income.................................. $ 8,331 $ 8,763 $ 8,848 $ 11,553 Net interest income.............................. 4,552 4,583 4,676 5,533 Provision for loan losses........................ 85 40 70 30 Income before income tax expense................. 2,129 2,230 2,285 2,425 Net income....................................... 1,472 1,535 1,568 1,884 Net income per share............................. 0.39 0.40 0.41 0.42 Stock price range................................ 15-17.50 15.75-17.75 15.50-17.50 16.50-18.50
71 ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of March 21, 1997, 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.
NAME AGE PINNACLE POSITION(S) PINNACLE BANK POSITION(S) - --------------------------------------- --- -------------------------------- -------------------------------- John P. Cunningham..................... 59 Director Director Charles R. Edinger..................... 68 Director Director John D. Fetters........................ 69 Director Director Terrence A. Friedman................... 59 Director Director Richard L. Schanze..................... 56 Director, Chairman and Chief Director, Chairman and Chief Executive Officer Executive Officer Kay F. Varga........................... 59 Director Director Arnold L. Weaver....................... 51 Director, President and Chief Director, President and Chief Operating Officer Operating Officer Alton C. Wendzel....................... 66 Director Director Donald E. Radde........................ 44 Executive Vice President and Director, Executive Vice Secretary President, Chief Lending Officer and Secretary David W. Kolhagen...................... 39 Senior Vice President and Senior Vice President and Chief Treasurer Financial Officer LeAnn Krokker.......................... 38 Vice President, Executive Vice President, Executive Marketing Officer Marketing Officer John A. Newcomer....................... 45 Corporate Affairs Officer Corporate Affairs Officer
John P. Cunningham has been a director of both Pinnacle and Pinnacle Bank since May, 1996. He also is a member of the Retirement Committee, the Compensation Committee and the Merger and Acquisition Committee of the Pinnacle Board. He is also a member of the Retirement Committee and the Compensation Committee of the Board of Directors of Pinnacle Bank. He is currently the Chief Financial Officer of Whirlpool Corporation, a publicly-held appliance manufacturer with securities listed on the New York Stock Exchange. In 1995 he was the Chief Financial Officer of Maytag, a publicly-held appliance manufacturer with securities listed on the New York Stock Exchange. Prior to that time he was the Controller of IBM, a publicly-held company with securities listed on the New York Stock Exchange. Charles R. Edinger is a director of both Pinnacle and Pinnacle Bank and is a member of the Audit Committee and the Trust Committee of the Board of Directors of Pinnacle. He is also a member of the Audit Committee and the Trust Committee of the Board of Directors of Pinnacle Bank. He is currently the President of Anderson Building Materials, Co., a steel fabricating company. John D. Fetters is a director of both Pinnacle and Pinnacle Bank and is a member of the Compensation Committee of the Board of Directors of Pinnacle. He is also a member of the Compensation Committee of the Board of Directors of Pinnacle Bank. He is currently the President of Sanitary Dry Cleaners, Inc., a dry cleaning company. Terrence A. Friedman is a director of both Pinnacle and Pinnacle Bank and is a member of the Compensation Committee, the Loan Review Committee and the Merger and Acquisition Committee of the Board of Directors of Pinnacle. He is also a member of the Compensation Committee and the Loan 72 Review Committee of the Board of Directors of Pinnacle Bank. He is currently the President of Yale-South Haven Inc., a manufacturer of rubber components primarily for the auto industry. Richard L. Schanze is a director of both Pinnacle and Pinnacle Bank and is a member of the Trust Committee, the Loan Review Committee and the Merger and Acquisition Committee of the Board of Directors of Pinnacle, and the Trust Committee and the Loan Review Committee of the Board of Directors of Pinnacle Bank. He is currently the Chairman and Chief Executive Officer of Pinnacle and the Chairman and Chief Executive Officer of Pinnacle Bank. Kay F. Varga is a director of both Pinnacle and Pinnacle Bank and is a member of the Trust Committee and the Audit Committee of the Board of Directors of Pinnacle. She is also a member of the Trust Committee and the Audit Committee of the Board of Directors of Pinnacle Bank. She is currently the President of Thayer, Inc., a paper products distributor. Arnold L. Weaver is a director of both Pinnacle and Pinnacle Bank and is a member of the Trust Committee, the Loan Review Committee and the Merger and Acquisition Committee of the Board of Directors of Pinnacle, and the Trust Committee and the Loan Review Committee of the Board of Directors of Pinnacle Bank. He is currently the President of Pinnacle and of Pinnacle Bank. Alton C. Wendzel is a director of both Pinnacle and Pinnacle Bank and is a member of the Audit Committee, the Loan Review Committee and the Merger and Acquisition Committee of the Board of Directors of Pinnacle. He is also a member of the Audit 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. 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. LeAnn Krokker is Vice President, Executive Marketing Officer of Pinnacle and of Pinnacle Bank. John A. Newcomer is the Corporate Affairs Officer of Pinnacle and of Pinnacle Bank. Directors of Pinnacle are elected annually by the stockholders of Pinnacle. Executive officers of Pinnacle are appointed by the Pinnacle Board and serve until their successors are appointed and qualified. No director or executive officer of Pinnacle or Pinnacle Bank is related to any other director or to any executive officer of Pinnacle or of any of its subsidiaries by blood, marriage or adoption, and there are no arrangements or understandings between a director or executive officer and any other person pursuant to which such person was elected a director or executive officer of Pinnacle or any of its subsidiaries. 73 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 $100,000.
LONG TERM COMPENSATION -------------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUT ---------------------------------------------- ------------------------------ --------- OTHER ANNUAL RESTRICTED LTIP ALL OTHER NAME AND SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS/SARS PAYOUT COMPENSATION PRINCIPLE POSITION YEAR ($) ($) ($) (1) ($) (#) ($) ($) (2) - ----------------------- --------- --------- --------- ------------- --------------- ------------- --------- ------------- Richard L. Schanze 1996 288,875 225,000 23,000 -- 9,500 -- 37,205 Chairman/CEO 1995 242,420 180,000 17,800 -- 15,300 -- 35,403 1994 222,410 130,000 15,100 -- 7,200 -- 5,219 Arnold L. Weaver 1996 208,875 75,000 23,000 -- 8,000 -- 5,559 President 1995 167,200 70,000 17,800 -- 10,600 -- 10,833 1994 147,410 45,000 15,100 -- 4,550 -- 5,404 Donald E. Radde 1996 132,875 40,000 -- -- 7,000 -- 4,800 Exec. Vice President 1995 106,620 28,000 -- -- 7,500 -- 5,920 1994 91,289 21,000 -- -- 2,500 -- 5,187 David W. Kolhagen 1996 97,375 35,000 -- -- 6,500 -- 7,116 Senior Vice President/ 1995 82,280 30,000 -- -- 7,000 -- 8,534 CFO 1994 -- -- -- -- -- -- --
- ------------------------------ (1) Amounts shown consist of director fees paid by Pinnacle and by Pinnacle Bank. (2) 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. Amounts shown for 1994 consist of the following: (i) Mr. Schanze: matching contributions under Pinnacle Bank's 401-k plan of $2,310, and personal use of Company-owned automobile of $2,909; (ii) Mr. Weaver: matching contributions under Pinnacle Bank's 401-k plan of $2,310, and personal use of Company-owned automobile of $3,094; and (iii) Mr. Radde: matching contributions under Pinnacle Bank's 401-k plan of $1,790 and personal use of Company-owned automobile of $3,397. 74 OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth certain information concerning stock options/SARs granted during 1996 to the Named Pinnacle Executives.
INDIVIDUAL GRANTS ------------------------------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION NUMBER OF % OF TOTAL FOR SECURITIES OPTIONS/ SARS OPTION UNDERLYING GRANTED TO EXERCISE OF TERM OPTIONS/ SARS EMPLOYEES IN BASE PRICE EXPIRATION --------- NAME GRANT DATE GRANTED FISCAL YEAR ($/SH) DATE 5% - -------------------------------------------- ----------- ------------- ------------- ----------- ----------- --------- Richard L. Schanze 07/96 9,500 13.33% $ 21.16 07/17/01 $ 55,538 Chairman/CEO Arnold L. Weaver 07/96 8,000 11.22 21.16 07/17/01 46,768 President Donald E. Radde 07/96 7,000 9.82 21.16 07/17/01 40,922 Executive Vice President David W. Kolhagen 07/96 6,500 9.12 21.16 07/17/01 37,999 Senior Vice President, CFO NAME 10% - -------------------------------------------- --------- Richard L. Schanze $ 122,724 Chairman/CEO Arnold L. Weaver 103,347 President Donald E. Radde 90,428 Executive Vice President David W. Kolhagen 83,969 Senior Vice President, CFO
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. 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.
ANNUAL BENEFIT PER YEARS OF SERVICE --------------------------------------------------------- ANNUAL COMP 15 20 25 30 MORE THAN 30 - ------------- --------- --------- --------- --------- ------------- $ 125,000 $ 30,744 $ 40,992 $ 51,241 $ 61,489 $ 61,489 $ 150,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 175,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 200,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 225,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 250,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 300,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 400,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 450,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614 $ 500,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
The benefits shown above are payable in a straight-life annuity and are not offset by any other benefits, including Social Security. The final average annual compensation is determined under the defined benefit plan by the average of the five highest consecutive years of annual compensation (including salary and bonus payments) during the last ten years of employment, subject to a maximum of $150,000 for all years. As of December 31, 1996, Mr. Schanze had 21 years of credited service, Mr. Weaver had 20 years of credited service, Mr. Radde had 15 years of credited service, and Mr. Kolhagen had 16 years of credited service. EMPLOYMENT SEVERANCE COMPENSATION AGREEMENTS Pinnacle and Pinnacle Bank have entered into "employment severance compensation agreements" with Messrs. Schanze, Weaver, Radde and Kolhagen (each, a "key manager"). Under the terms of these agreements, each key manager's annual salary is established by the Board of Directors of Pinnacle or Pinnacle Bank, and once such salary is established it may not be reduced without the consent of such key manager unless the reduction (i) is made pursuant to a general reduction in salaries for all similarly-situated officers, and (ii) is in an amount or percentage comparable to such general reduction. 75 Under the employment severance compensation agreements, in the event there is a "change of control" and a key manager's employment is terminated, the key manager is entitled to be paid an amount equal to two times his annual base salary at the date of termination and an amount equal to two times the highest bonus paid to him in any one year during the most recent five-year period. Upon the occurrence of such events, a key manager is also entitled to (i) certain life, health and other insurance benefits, reimbursement of certain expenses (including reasonable travel expenses, and reasonable office and secretarial expenses), executive car benefits, and financial counseling, all for a period of two years after such termination, and (ii) reimbursement of reasonable outplacement costs and certain legal expenses. For purposes of the foregoing, a "change of control" shall have occurred if: (i) Pinnacle and/or Pinnacle Bank sells substantially all of its assets to a single purchaser or to a group of associated purchasers; (ii) at least one-half of the outstanding corporate shares of Pinnacle and/or Pinnacle Bank are sold, exchanged or otherwise disposed of, in one transaction; (iii) Pinnacle and/or Pinnacle Bank elects to terminate its business or liquidate its assets; or (iv) there is a merger or consolidation of Pinnacle and/or Pinnacle Bank in a transaction in which the stockholders of Pinnacle and/or Pinnacle Bank receive less than 50% of the outstanding voting shares of the new or continuing corporation. OTHER COMPENSATION ARRANGEMENTS 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996 only John D. Fetters, Terrence A. Friedman, and John P. Cunningham, 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 76 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 fourth year stock options were awarded and the previous award schedule was taken into consideration while awarding 1996'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. In reviewing Mr. Schanze's total compensation, the primary focus of the Compensation Committee was on Pinnacle's performance in 1996, 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. Members of the Compensation Committee: John D. Fetters John P. Cunningham Terrence A. Friedman DIRECTOR COMPENSATION Each director of Pinnacle is paid an annual retainer of $2,500 plus $500 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 $500 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 $500 for each committee meeting attended. Messrs. Schanze 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. 77 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 Value Line Banks: Midwest Index for the periods shown. PINNACLE FINANCIAL SERVICES, INC.; STANDARD & POORS 500; AND VALUE LINE BANKS: MIDWEST INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PINNACLE FINANCIAL SERVICES STANDARD & POOR'S 500 BANKS:MIDWEST 1991 $100.00 $100.00 $100.00 1992 $182.07 $107.79 $123.96 1993 $335.67 $118.66 $125.32 1994 $222.25 $120.55 $115.17 1995 $266.18 $166.78 $175.24 1996 $361.64 $204.32 $235.03
TOTAL RETURN ANALYSIS*
DECEMBER 31, ---------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- --------- Pinnacle........................................ 100.00 182.07 335.67 222.25 266.18 361.64 Standard & Poor's 500........................... 100.00 107.79 118.66 120.55 166.78 204.32 Value Line Banks: Midwest....................... 100.00 123.96 125.32 115.77 175.24 235.03
*Shows performance results through December 31, 1996 for Pinnacle Financial Services, Inc. Common Stock, Standard & Poor's 500, and Banks: Midwest assuming $100 was invested at the close of trading December 1991 and all dividends are reinvested. Source: Value Line, Inc. 78 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 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.
PERCENTAGE OF NAME AND ADDRESS(1) NUMBER OF SHARES(2) BENEFICIAL OWNERSHIP(2) - --------------------------------------------------------------------- ------------------- ------------------------- Cyrus A. Ansary...................................................... 1,188,954 19.9% John P. Cunningham................................................... -0- * Charles R. Edinger................................................... 34,072(3) * John D. Fetters...................................................... 31,864 * Terrence A. Friedman................................................. 35,288 * David W. Kolhagen.................................................... 20,193(4)(5) * LeAnn Krokker........................................................ 2,777(4)(6) * John Newcomer........................................................ 2,836(4)(7) * Donald E. Radde...................................................... 24,575(4)(8) * Richard L. Schanze................................................... 281,504(9) 4.7(9) Kay F. Varga......................................................... 8,471 * Arnold L. Weaver..................................................... 34,138(4)(10) * Alton C. Wendzel..................................................... 84,724(11) 1.4(11) All directors and executive officers of Pinnacle as a group (13 persons)........................................................... 560,342(12) 9.2(12)
- ------------------------ (1) Unless otherwise noted, Pinnacle believes that all persons named in the table have (i) sole voting and investment power with respect to all shares of Pinnacle Common Stock owned by them, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership of such shares. The business address of Mr. Ansary is 1725 K Street, N.W., Suite 410, Washington, D.C. 20006. The business address of all other persons named in the table is 830 Pleasant Street, St. Joseph, Michigan 48085. (2) Number of shares and percentages with respect to beneficial ownership of Pinnacle Common Stock are based on ownership of Pinnacle Common Stock as of March 21, 1997, and have been calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act and assuming 5,977,548 shares of Pinnacle Common Stock are issued and outstanding. An asterisk indicates beneficial ownership of less than 1%. (3) Includes 25,432 shares held jointly with spouse, 4,320 held by Mr. Edinger's spouse and 4,320 held by Mr. Edinger. (4) All shares are held jointly with spouse. (5) Includes 17,500 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. (6) Includes 2,226 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. (7) Includes 1,688 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. (8) Includes 19,400 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. 79 (9) Includes 39,200 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. (10) Includes 27,700 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. (11) Includes 78,972 shares of Pinnacle Common Stock held jointly with his spouse and 5,752 shares of Pinnacle Common Stock held by a corporation of which Mr. Wendzel is President. (12) Includes 105,488 shares of Pinnacle Common Stock issuable upon exercise of options which are exercisable within 60 days. 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. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Exhibits:
ITEM 601 REGULATION S-K EXHIBIT REFERENCE NUMBER EXHIBIT DESCRIPTION - ---------------- ------------------------------------------------------------------------------------------------ (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)(b)/ (4)(b) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)). (4)(c) Specimen certificate for Pinnacle Financial Services, Inc. Common Stock (incorporated by reference to Exhibit (4)(c) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)). (10)(a) Agreement and Plan of Merger dated as of November 14, 1996 by and between Pinnacle Financial Services, Inc. and Indiana Federal Corporation (without exhibits) (incorporated by reference to Exhibit (2)/(10)(a) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(b) First Amendment to Agreement and Plan of Merger dated as of February 27, 1997 by and between Pinnacle Financial Services, Inc. and Indiana Federal Corporation.* (10)(c) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial Services, Inc. (as issuer) and Indiana Federal Corporation (as grantee) (incorporated by reference to Exhibit (10)(b) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(d) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial Services, Inc. (as grantee) and Indiana Federal Corporation (as issuer) (incorporated by reference to Exhibit (10)(c) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(e) Form of Agreement and Plan of Merger and Consolidation between Pinnacle Bank, a wholly-owned subsidiary of Pinnacle Financial Services, Inc., and Indiana Federal Bank for Savings, a wholly-owned subsidiary of Indiana Federal Corporation (incorporated by reference to Exhibit (10)(d) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(f) 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)(g) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Richard L. Schanze (incorporated by reference to Exhibit (10)(f) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)).
81
ITEM 601 REGULATION S-K EXHIBIT REFERENCE NUMBER EXHIBIT DESCRIPTION - ---------------- ------------------------------------------------------------------------------------------------ (10)(h) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Arnold L. Weaver (incorporated by reference to Exhibit (10)(g) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(i) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Donald E. Radde (incorporated by reference to Exhibit (10)(h) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(j) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and David W. Kolhagen (incorporated by reference to Exhibit (10)(i) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)). (10)(k) 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)(l) 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)(m) Form of Deferred Compensation Agreement for Directors--Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (10)(k) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)). (10)(n) Form of Deferred Compensation Agreement for Directors--The Peoples State Bank of St. Joseph (incorporated by reference to Exhibit (10)(l) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)). (10)(o) 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)(p) 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)(q) 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)(r) 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).
82
ITEM 601 REGULATION S-K EXHIBIT REFERENCE NUMBER EXHIBIT DESCRIPTION - ---------------- ------------------------------------------------------------------------------------------------ (10)(s) Escrow Agreement dated December 1, 1995 by and among Pinnacle Financial Services, Inc., Cyrus A. Ansary and NationsBank Trust, N.A. (incorporated by reference to Exhibit (10)(e) of the Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995). (10)(t) Standstill Agreement entered into by and between Pinnacle Financial Services, Inc. and Cyrus A. Ansary (incorporated by reference to Exhibit (10)(f) of the Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995). (10)(u) Indemnification Agreement dated December 1, 1995 and executed and delivered by Cyrus A. Ansary in favor of Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (10)(g) of the Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995). (10)(v) 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)(w) Agreement and Plan of Merger dated as of February 27, 1997 by and between Pinnacle Financial Services, Inc. and CB Bancorp, Inc.* (10)(x) Stock Option Agreement dated as of February 27, 1997 by and between Pinnacle Financial Services, Inc. (as grantee) and CB Bancorp, Inc. (as issuer).* (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.* (24) Powers of attorneys.* (27) Financial Data Schedule of registrant.*
- ------------------------ * 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: (10)(f) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan. (10)(g) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Richard L. Schanze. (10)(h) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Arnold L. Weaver. (10)(i) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Donald E. Radde. (10)(j) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and David W. Kolhagen. (10)(k) The Retirement Plan for the Employees of Peoples State Bank of St. Joseph, as amended.
83 (10)(l) Peoples State Bank of St. Joseph Savings Plan, as amended. (10)(m) Form of Deferred Compensation Agreement for Directors--Pinnacle Financial Services, Inc. (10)(n) Form of Deferred Compensation Agreement for Directors--The Peoples State Bank of St. Joseph. (10)(o) Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan. (10)(v) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for Executive Officers.
Index to Financial Statements and Financial Statement Schedules:
10-K REPORT PAGE(S) ------------- Financial Statements: Report of independent auditors.......................................................................... 44 Consolidated balance sheets as of December 31, 1996 and 1995............................................ 45 Consolidated statements of income for each of the years ended December 31, 1996, 1995 and 1994.......... 46 Consolidated statements of stockholders' equity for each of the years ended December 31, 1996, 1995 and 1994.................................................................................................. 47 Consolidated statements of cash flows for each of the years ended December 31, 1996, 1995 and 1994...... 48 Notes to consolidated financial statements.............................................................. 49
- ------------------------ 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. Reports on Form 8-K: One report on Form 8-K dated November 14, 1996, was filed during the last quarter of the period covered by this report, to report under Item 5, registrant's planned merger with Indiana Federal Corporation, a Delaware corporation. FORM 10-K COPIES OF THE COMPANY'S PINNACLE FINANCIAL SERVICES, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AS FILED WITH SECURITIES AND EXCHANGE COMMISSION WILL BE AVAILABLE AFTER APRIL 1, 1997, WITHOUT CHARGE, UPON WRITTEN REQUEST. ALL WRITTEN REQUESTS SHOULD BE DIRECTED TO: JOHN A. NEWCOMER, CORPORATE AFFAIRS OFFICER, PINNACLE FINANCIAL SERVICES, INC., P.O. BOX 48, ST. JOSEPH, MICHIGAN 49085 (616) 983-6311 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly cuased this report to be signed on its behalf by the undersigned, thereunto duly authorized. PINNACLE FINANCIAL SERVICES, INC. Date: March 30, 1997 By: /s/ DAVID W. KOLHAGEN ----------------------------------------- David W. Kolhagen SENIOR VICE PRESIDENT AND TREASURER (PRINCIPAL FINANCIAL OFFICER) 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.
SIGNATURE TITLE DATE - -------------------------------------- -------------------------------------- ----------------- * ------------------------------------ Chairman and Chief Executive Officer March 31, 1997 Richard L. Schanze (Principal Executive Officer) /s/ DAVID W. KOLHAGEN ------------------------------------ Senior Vice President, and Treasurer March 31, 1997 David W. Kolhagen (Principal Financial Officer) * ------------------------------------ Director March 31, 1997 John P. Cunningham * ------------------------------------ Director March 31, 1997 Charles R. Edinger * ------------------------------------ Director March 31, 1997 John D. Fetters ------------------------------------ Director Terrence A. Friedman * ------------------------------------ Director March 31, 1997 Richard L. Schanze
85
SIGNATURE TITLE DATE - -------------------------------------- -------------------------------------- ----------------- * ------------------------------------ Director March 31, 1997 Kay F. Varga * ------------------------------------ Director, President and Chief March 31, 1997 Arnold L. Weaver Operating Officer ------------------------------------ Director Alton C. Wendzel
By: /s/ DAVID W. KOLHAGEN ------------------------- David W. Kolhagen, as attorney-in- fact for the persons indicated
86 EX-10.(B) 2 EXHIBIT 10(B) EXHIBIT (10)(b) FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment"), dated as of February 27, 1997, between PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Pinnacle"), and INDIANA FEDERAL CORPORATION, a Delaware corporation ("IFC"). W I T N E S S E T H: WHEREAS, Pinnacle and IFC entered into an Agreement and Plan of Merger dated November 14, 1996 (the "Agreement"), but subsequently have determined that certain amendments to the Agreement are necessary and appropriate and therefore wish to amend the Agreement as set forth herein; NOW THEREFORE, in consideration of the premises and the mutual and dependent promises hereinafter contained, the parties do represent, warrant, covenant and agree as follows: 1. Section 1.11 of the Agreement shall be and hereby is amended and restated in its entirety to read as follows: "1.11 BOARD OF DIRECTORS. At the Effective Time, the persons who shall be the directors of the Surviving Corporation shall be determined as follows: (a) In the event that the transactions provided for under the terms of the Agreement and Plan of Merger (the "CB Merger Agreement") between Pinnacle and CB Bancorp, Inc., a Delaware corporation ("CB"), have been consummated and become effective, then the Board of Directors of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as well as Mr. Arnold L. Weaver and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of Pinnacle, and Mr. Donald A. Lesch, as well as Mr. Howard Silverman and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of IFC, and Mr. Joseph F. Heffernan. (b) In the event that the transactions provided for under the terms of the CB Merger Agreement have not been consummated and become effective, then the Board of Directors of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as well as Mr. Arnold L. Weaver and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of Pinnacle, and Mr. Donald A Lesch, as well as Mr. Howard Silverman and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of IFC; provided, that, in the event that the transactions provided for under the terms of the CB Merger Agreement subsequently are consummated and become effective, then the Board of Directors of the Surviving Corporation shall consist of those persons named as directors of the Surviving Corporation in the preceding clause of this subsection (b) and, in addition, Mr. Joseph F. Heffernan shall be named as a director of the Surviving Corporation. (c) In any case, at and following the Effective Time, under the terms of the Standstill Agreement dated as of December 1, 1995, between Pinnacle and Mr. Cyrus A. Ansary, Pinnacle may have certain obligations to nominate Mr. Ansary for election as a director of Pinnacle and said agreement shall be binding on Pinnacle as the Surviving Corporation. In the event that Pinnacle, as the Surviving Corporation, becomes obligated to nominate Mr. Ansary as a director of the Surviving Corporation, then the Board of Directors at that time shall be increased in size by two (2) persons, and Mr. Ansary shall be nominated as a director of the Surviving Corporation pursuant to the terms of the Standstill Agreement dated as of December 1, 1995, between Pinnacle and Mr. Ansary, and the Chairman shall nominate for approval by the Board of Directors an additional person as a director of the Surviving Corporation. (d) Whenever the Board of Directors of the Surviving Corporation is comprised of ten (10) or fewer persons, action of the Board within the meaning of Section 523 of the MBCA, and for all other purposes, shall require the favorable vote of six (6) or more of the directors, and whenever the Board of Directors of the Surviving Corporation is comprised of eleven (11) or twelve (12) persons, action of the Board within the meaning of Section 523 of the MBCA, and for all other purposes, shall require the favorable vote of seven (7) or more of the directors." 2. Subsection (d) of Section 1.13 of the Agreement shall be and hereby is amended and restated in its entirety to read as follows: "(d) the directors of Pinnacle Bank as the surviving institution following the Bank Merger shall be determined as follows: (i) In the event that the transactions provided for under the terms of Section 1.13 of the CB Merger Agreement have been consummated and become effective, then the Board of Directors of Pinnacle Bank as the surviving institution shall consist of twenty-one (21) persons with nine (9) persons to be named as directors by the Board of Directors of Pinnacle Bank, nine (9) persons to be named as directors by the Board of Directors of IndFed Bank, and three (3) persons to be named as directors by the Board of Directors of Community Bank, a federal savings bank (one of which persons shall be Mr. Joseph F. Heffernan); - 2 - (ii) In the event that the transactions provided for under the terms of Section 1.13 of the CB Merger Agreement have not been consummated and become effective, then the Board of Directors of the surviving institution shall consist of eighteen (18) persons with nine (9) persons to be named as directors by the Board of Directors of Pinnacle Bank and nine (9) persons to be named as directors by IndFed Bank; provided, that, in the event that the transactions provided for under the terms of Section 1.13 of the CB Merger Agreement subsequently are consummated and become effective, then the Board of Directors of the surviving institution shall consist of those persons named as directors of the surviving institution in the preceding clause of this subsection (d)(ii) and, in addition, three (3) persons named as directors by the Board of Directors of Community Bank, a federal savings bank (one of which persons shall be Mr. Joseph F. Heffernan) shall be named as directors of the surviving institution; and (iii) The executive officers of Pinnacle Bank as the surviving institution following the Bank Merger shall be those appointed by the Board of Directors of the surviving institution upon consummation of the Bank Merger, on the basis of recommendations made by Mr. Schanze, as the Chairman of the parent Surviving Corporation, Mr. Lesch, as the Vice Chairman of the parent Surviving Corporation, and an outside consulting service to be engaged and charged with reviewing and evaluating the qualifications of candidates." 3. The meaning of the term "Material Adverse Effect", as defined in Section 3.1 of the Agreement, and used in and throughout the Agreement, shall be amended and restated in its entirety to provide as follows: "As used in this Agreement, the term "Material Adverse Effect" means, with respect to IFC, Pinnacle or the Surviving Corporation, as the case may be, a material adverse effect on the business, results of operations, financial condition, or (insofar as they can reasonably be foreseen) prospects of such party and its Subsidiaries taken as a whole, excluding for this purpose only, however, (i) the payment and/or incurrence of (1) the one-time special assessment on institutions holding deposits subject to assessment by the Savings Association Insurance Fund ("SAIF") pursuant to The Deposit Insurance Funds Act of 1996 ("Funds Act") intended to increase SAIF's net worth as of October 1, 1996 to 1.25 percent of SAIF-insured deposits, and (2) transactional expenses by IFC or Pinnacle in connection with the Merger, (ii) the effects upon Pinnacle of the merger transaction, and all transactional expenses with respect thereto, contemplated by the CB Merger Agreement, whether or not consummated, and (iii) the effects upon Pinnacle of the branch office swap transactions, and all - 3 - transactional expenses with respect thereto, contemplated by the Purchase and Assumption Agreement executed, or to be executed, between Shoreline Bank, as Seller, and Pinnacle Bank, as Buyer, and the Purchase and Assumption Agreement executed, or to be executed, between Pinnacle Bank, as Seller, and Shoreline Bank, as Buyer (collectively, the "Branch Office Swap Agreements"), whether or not consummated, in any said case to the extent having such an effect." 4. The entering into and performance of the CB Merger Agreement, and/or the Branch Office Swap Agreements, and consummation of the transactions contemplated thereby, by Pinnacle are hereby ratified, approved and authorized, and are and shall be deemed to be expressly permitted for all purposes under the Agreement and the Option Agreements (defined herein as in the Agreement) and shall not constitute a "triggering event" under any Option Agreement. 5. Except as amended hereby, the Agreement is ratified and confirmed in all respects. [THIS SPACE INTENTIONALLY LEFT BLANK] - 4 - IN WITNESS WHEREOF, this Amendment has been duly executed by and on behalf of each of the parties hereto as of the date first above written. PINNACLE FINANCIAL SERVICES, INC. By: /s/ Richard L. Schanze ----------------------------- Richard L. Schanze Chairman and Chief Executive Officer INDIANA FEDERAL CORPORATION By: /s/ Donald A. Lesch ----------------------------- Donald A. Lesch Chairman and Chief Executive Officer - 5 - EX-10.(W) 3 EXHIBIT 10(W) AGREEMENT AND PLAN OF MERGER BETWEEN PINNACLE FINANCIAL SERVICES,INC. AND CB BANCORP, INC. DATED AS OF MARCH 1, 1997 TABLE OF CONTENTS Page ---- ARTICLE I THE MERGER 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Effects of the Merger. . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Conversion of CB Common Stock. . . . . . . . . . . . . . . . . . . 2 1.5 Pinnacle Common Stock. . . . . . . . . . . . . . . . . . . . . . . 3 1.6 Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.7 Articles of Incorporation. . . . . . . . . . . . . . . . . . . . . 3 1.8 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.9 Tax Consequences; Accounting Treatment . . . . . . . . . . . . . . 4 1.10 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.11 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 4 1.12 Headquarters of Surviving Corporation. . . . . . . . . . . . . . . 5 1.13 Bank Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE II EXCHANGE OF SHARES 2.1 Pinnacle to Make Shares and Cash in Lieu of Fractional Shares Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PINNACLE 3.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Authority; No Violation. . . . . . . . . . . . . . . . . . . . . . 11 3.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . 12 3.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 13 3.7 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.8 Absence of Certain Changes or Events . . . . . . . . . . . . . . . 14 3.9 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 15 3.10 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . 15 3.11 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.12 SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.13 Compliance with Applicable Law . . . . . . . . . . . . . . . . . . 18 3.14 Certain Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 19 3.15 Agreements with Regulatory Agencies. . . . . . . . . . . . . . . . 20 3.16 Other Activities of Pinnacle and its Subsidiaries. . . . . . . . . 20 3.17 Investment Securities. . . . . . . . . . . . . . . . . . . . . . . 21 3.18 Interest Rate Risk Management Instruments. . . . . . . . . . . . . 21 3.19 Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . 21 3.20 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . 21 3.21 State Takeover Laws. . . . . . . . . . . . . . . . . . . . . . . . 22 3.22 Pooling of Interests . . . . . . . . . . . . . . . . . . . . . . . 22 i ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CB 4.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . 22 4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.3 Authority; No Violation. . . . . . . . . . . . . . . . . . . . . . 24 4.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . 25 4.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 26 4.7 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.8 Absence of Certain Changes or Events . . . . . . . . . . . . . . . 27 4.9 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 27 4.10 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . 27 4.11 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.12 SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.13 Compliance with Applicable Law . . . . . . . . . . . . . . . . . . 31 4.14 Certain Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 32 4.15 Agreements with Regulatory Agencies. . . . . . . . . . . . . . . . 32 4.16 Other Activities of CB and its Subsidiaries. . . . . . . . . . . . 33 4.17 Investment Securities. . . . . . . . . . . . . . . . . . . . . . . 33 4.18 Interest Rate Risk Management Instruments. . . . . . . . . . . . . 33 4.19 Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . 34 4.20 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . 34 4.21 State Takeover Laws and Charter Provisions . . . . . . . . . . . . 34 4.22 Pooling of Interests . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Businesses Prior to the Effective Time. . . . . . . . . 35 5.2 Conduct of CB Businesses Prior to the Effective Time . . . . . . . 35 5.3 Forbearances of Pinnacle . . . . . . . . . . . . . . . . . . . . . 35 5.4 Forbearances of CB . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . 38 6.2 Access to Information. . . . . . . . . . . . . . . . . . . . . . . 39 6.3 Stockholders' Approvals. . . . . . . . . . . . . . . . . . . . . . 40 6.4 Legal Conditions to Merger . . . . . . . . . . . . . . . . . . . . 40 6.5 Affiliates; Publication of Combined Financial Results. . . . . . . 40 6.6 Nasdaq National Market Listing . . . . . . . . . . . . . . . . . . 41 6.7 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . 41 6.8 Indemnification; Directors' and Officers' Insurance. . . . . . . . 46 6.9 Additional Agreements. . . . . . . . . . . . . . . . . . . . . . . 48 6.10 Advice of Changes. . . . . . . . . . . . . . . . . . . . . . . . . 48 6.11 Negotiations with Other Parties. . . . . . . . . . . . . . . . . . 48 ii ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation To Effect the Merger . . . . 49 7.2 Conditions to Obligation of Pinnacle . . . . . . . . . . . . . . . 50 7.3 Conditions to Obligation of CB . . . . . . . . . . . . . . . . . . 53 ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . 56 8.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 8.4 Extension; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . 57 ARTICLE IX GENERAL PROVISIONS 9.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 9.2 Nonsurvival of Representations, Warranties and Agreements. . . . . 58 9.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 9.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 9.5 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.10 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 9.11 Assignment; Third Party Beneficiaries. . . . . . . . . . . . . . . 60 9.12 Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . 60 iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of March 1, 1997, by and between PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Pinnacle"), and CB BANCORP, INC., a Delaware corporation ("CB"). WITNESSETH: WHEREAS, the Boards of Directors of Pinnacle and CB have determined that it is in the best interests of their respective companies and their stockholders to consummate the business combination transaction provided for herein in which CB will, subject to the terms and conditions set forth herein, merge with and into Pinnacle (the "Merger"), so that Pinnacle is the surviving corporation (hereinafter sometimes called the "Surviving Corporation") in the Merger; and WHEREAS, as a condition to, and immediately after the execution of, this Agreement, Pinnacle and CB are entering into a CB stock option agreement (the "CB Option Agreement") attached hereto as Exhibit A; and WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. Subject to the terms and conditions of this Agreement, in accordance with the Michigan Business Corporation Act, as amended (the "MBCA"), and the Delaware General Corporation Law, as amended (the "DGCL"), at the Effective Time (as defined in Section 1.2), CB shall merge with and into Pinnacle. Pinnacle shall be the Surviving Corporation in the Merger, and shall continue its corporate existence under the laws of the State of Michigan. Upon consummation of the Merger, the separate corporate existence of CB shall terminate. 1.2 EFFECTIVE TIME. The Merger shall become effective as set forth in certificates of merger (each, a "Certificate of Merger"), which shall specify an effective date and time no earlier than the filing thereof with the appropriate authorities of the State of Michigan, and with the appropriate authorities of the State of Delaware, on the Closing Date (as defined in Section 9.1), or as soon thereafter as practicable. The term "Effective Time" shall be the date and time when the Merger becomes effective, as set forth in each Certificate of Merger having been filed in accordance with the MBCA and DGCL. 1.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger shall have the effects set forth in the MBCA and the DGCL. 1.4 CONVERSION OF CB COMMON STOCK. At the Effective Time, in each case, subject to Section 2.2(e), by virtue of the Merger and without any action on the part of Pinnacle, CB or the holder of any of the following securities: (a) Each share of the common stock, par value $0.01 per share, of CB (the "CB Common Stock") issued and outstanding immediately prior to the Effective Time (other than shares of CB Common Stock held (x) in CB's treasury or (y) directly or indirectly by CB or Pinnacle or any of their respective wholly-owned Subsidiaries (as defined in Section 3.1) (except for Trust Account Shares and DPC shares, as such terms are defined in Section 1.4(c) and as set forth in the CB Disclosure Schedule)), shall be converted into the right to receive that number of shares of the common stock, without par value, of Pinnacle (the "Pinnacle Common Stock") determined by dividing $35.00 (the "Exchange Value") by the average (the "Average Price") of the daily averages of the closing bid and the closing ask prices per share of Pinnacle Common Stock as reported by the Nasdaq National Market for the period of fifteen (15) business days ending on the fifth (5th) business day prior to the Closing Date; provided, however, that (i) in the event the Average Price as determined under the foregoing provision is $29.00 or higher, the Exchange Value shall be divided by $29.00 (resulting in the fractional number 1.2069) rather than said Average Price (so that, in such case, each share of CB Common Stock issued and outstanding so converted, would be converted into the right to receive 1.2069 shares of Pinnacle Common Stock), and (ii) in the event the Average Price as determined under the foregoing provision is $23.00 or lower, the Exchange Value shall be divided by $23.00 (resulting in the fractional number 1.5217) rather than said Average Price (so that, in such case, each share of CB Common Stock issued and outstanding so converted, would be converted into the right to receive 1.5217 shares of Pinnacle Common Stock); and provided, further, no fractional shares of Pinnacle Common Stock shall be issued pursuant hereto and, in lieu thereof, any said fractional shares shall be paid the cash equivalent value thereof based on the Average Price. (b) All of the shares of CB Common Stock converted into the right to receive shares of Pinnacle Common Stock, and cash in lieu of fractional shares, pursuant to this Article I shall no longer be outstanding and shall automatically be cancelled and shall cease to exist as of the Effective Time, and each certificate (each a "Common Certificate") previously representing any such shares of CB Common Stock shall thereafter represent the right to receive (i) a certificate representing the number of whole shares, and (ii) cash in lieu of any fractional share, of Pinnacle Common Stock into which the shares of CB Common Stock represented by such Common Certificate have been converted pursuant to this Section 1.4 and Section 2.2. Common Certificates previously representing shares of CB Common Stock shall be exchanged for certificates representing -2- whole shares, and cash in lieu of fractional shares, of Pinnacle Common Stock upon the surrender of such Common Certificates in accordance with Section 2.2, without any interest thereon. If, prior to the Effective Time, the outstanding shares of CB Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, then an appropriate and proportionate adjustment shall be made to the Exchange Value. (c) At the Effective Time, all shares of CB Common Stock that are owned by CB as treasury stock and all shares of CB Common Stock that are owned, directly or indirectly, by CB or Pinnacle or any of their respective wholly- owned Subsidiaries (other than shares of CB Common Stock held, directly or indirectly, in trust accounts, managed accounts and the like or otherwise held in a fiduciary capacity that are beneficially owned by third parties (any such shares, and shares of Pinnacle Common Stock which are similarly held, whether held directly or indirectly by CB or Pinnacle, as the case may be, being referred to herein as "Trust Account Shares") and other than any shares of CB Common Stock held by CB or Pinnacle or any of their respective wholly-owned Subsidiaries in respect of a debt previously contracted (any such shares of CB Common Stock, and shares of Pinnacle Common Stock which are similarly held, whether held directly or indirectly by CB or Pinnacle or any of their respective Subsidiaries, being referred to herein as "DPC Shares") and as set forth in the CB Disclosure Schedule) shall be cancelled and shall cease to exist and no stock of Pinnacle or other consideration shall be delivered in exchange therefor. 1.5 PINNACLE COMMON STOCK. At and after the Effective Time, each share of Pinnacle Common Stock issued and outstanding immediately prior to the Closing Date shall remain an issued and outstanding share of common stock of the Surviving Corporation and shall not be affected by the Merger. All shares of Pinnacle Common Stock that are owned by CB or any of its wholly-owned Subsidiaries (other than Trust Account Shares and DPC Shares) shall become treasury stock of Pinnacle. 1.6 OPTIONS. At the Effective Time, each option granted by CB to purchase shares of CB Common Stock (including any option that has been awarded but has not yet vested) which is outstanding and unexercised immediately prior thereto shall cease to represent the option to acquire shares of CB Common Stock and shall be converted automatically into the right to receive shares of Pinnacle Common Stock in an amount determined by dividing the difference between the Exchange Value and the exercise price of such option by the Average Price. 1.7 ARTICLES OF INCORPORATION. Subject to the terms and conditions of this Agreement, at the Effective Time, the Articles -3- of Incorporation of Pinnacle shall be the Articles of Incorporation of the Surviving Corporation, until thereafter amended in accordance with applicable law. 1.8 BYLAWS. Subject to the terms and conditions of this Agreement, at the Effective Time, the Bylaws of Pinnacle, with appropriate amendments to incorporate the provisions of Section 1.11(d) of this Agreement, shall be the Bylaws of the Surviving Corporation, until thereafter amended in accordance with applicable law. 1.9 TAX CONSEQUENCES; ACCOUNTING TREATMENT. It is intended that (i) the Merger shall constitute a reorganization within the meaning of Section 368(a)(i)(A) of the Code, (ii) this Agreement shall constitute a "plan of reorganization" for the purposes of Section 368 of the Code, and (iii) the Merger shall qualify for "pooling of interests" accounting treatment under Accounting Principles Board Opinion No. 16 and SEC Accounting Series Releases 130 and 135, as amended. 1.10 MANAGEMENT. At the Effective Time, those persons who are the officers of Pinnacle immediately prior to the Effective Time shall be the officers of the Surviving Corporation, serving in the same officer capacities, respectively, together with such other persons who may be appointed as officers of the Surviving Corporation by the Board of Directors of the Surviving Corporation. 1.11 BOARD OF DIRECTORS. At the Effective Time, the persons who shall be the directors of the Surviving Corporation shall be determined as follows: (a) In the event that the transactions provided for under the terms of the Agreement and Plan of Merger dated as of November 14, 1996 (the "IFC Merger Agreement"), between Pinnacle and Indiana Federal Corporation, a Delaware corporation ("IFC"), have been consummated and become effective, then the Board of Directors of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as well as Mr. Arnold L. Weaver and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of Pinnacle, and Mr. Donald A. Lesch, as well as Mr. Howard Silverman and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of IFC, and Mr. Joseph F. Heffernan. (b) In the event that the transactions provided for under the terms of the IFC Merger Agreement have not been consummated and become effective, then the Board of Directors of the Surviving Corporation shall be comprised of those persons who are the directors of Pinnacle immediately prior to the Effective Time and Mr. Joseph F. Heffernan; provided, that, in the event that the transactions provided for under the terms of the IFC Merger Agreement subsequently are consummated and become effective, then the Board of Directors of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as well as Mr. Arnold L. Weaver and -4- three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of Pinnacle, and Mr. Donald A. Lesch, as well as Mr. Howard Silverman and three (3) other persons named as directors of the Surviving Corporation on behalf of the Board of Directors of IFC, and Mr. Joseph F. Heffernan. (c) In any case, at and following the Effective Time, under the terms of the Standstill Agreement dated as of December 1, 1995, between Pinnacle and Mr. Cyrus A. Ansary, Pinnacle has certain obligations to nominate Mr. Ansary for election as a director of Pinnacle and said agreement shall be binding on Pinnacle as the Surviving Corporation. In the event that Pinnacle, as the Surviving Corporation, becomes obligated to nominate Mr. Ansary as a director of the Surviving Corporation, then the Board of Directors at that time shall be increased in size by two (2) persons, and Mr. Ansary shall be nominated as a director of the Surviving Corporation pursuant to the terms of the Standstill Agreement dated as of December 1, 1995, between Pinnacle and Mr. Ansary, and the Chairman shall nominate for approval by the Board of Directors an additional person as a director of the Surviving Corporation. (d) Whenever the Board of Directors is comprised of ten (10) or fewer persons, action of the Board within the meaning of Section 523 of the MBCA, and for all other purposes, shall require the favorable vote of six (6) or more of the directors, and whenever the Board of Directors is comprised of eleven (11) or twelve (12) persons, action of the Board within the meaning of Section 523 of the MBCA, and for all other purposes, shall require the favorable vote of seven (7) or more of the directors. 1.12 HEADQUARTERS OF SURVIVING CORPORATION. At the Effective Time, the headquarters and principal executive offices of Pinnacle immediately prior to the Effective Time shall be the headquarters and principal executive offices of the Surviving Corporation. 1.13 BANK MERGER. At the Bank Merger Effective Time (as hereinafter defined), Community Bank, a federal savings bank ("CB Bank"), the wholly-owned subsidiary of CB, shall be merged (the "Bank Merger") with and into Pinnacle Bank, a Michigan banking corporation ("Pinnacle Bank"), the wholly-owned subsidiary of Pinnacle, pursuant to the terms and conditions set forth herein and in the Agreement and Plan of Merger and Consolidation substantially in the form attached hereto as Exhibit B (the "Bank Merger Agreement"). Upon consummation of the Bank Merger, the separate existence of CB Bank shall cease, and Pinnacle Bank shall continue as the surviving institution of the Bank Merger. The name of Pinnacle Bank, as the surviving institution of the Bank Merger, shall be "Pinnacle Bank". From and after the Bank Merger Effective Time (as hereinafter defined), Pinnacle Bank as the surviving institution of the Bank Merger shall possess all of the properties and rights and be subject to all of the liabilities and obligations of Pinnacle Bank and CB Bank. The Bank Merger shall become effective at the time the Bank Merger Agreement for such merger is -5- endorsed and declared effective by the Financial Institutions Bureau of the State of Michigan (the "Bank Merger Effective Time"). The parties shall cause the Bank Merger to become effective as soon as practical following the Merger. At the Bank Merger Effective Time: (a) each share of CB Bank common stock issued and outstanding immediately prior thereto shall, by virtue of the Bank Merger, be cancelled. No new shares of the capital stock or other securities or obligations of CB Bank shall be issued or be deemed issued with respect to or in exchange for such cancelled shares, and such cancelled shares of common stock of CB Bank shall not be converted into any shares or other securities or obligations of any other entity; (b) each share of Pinnacle Bank common stock issued and outstanding immediately prior thereto shall remain an issued and outstanding share of common stock of Pinnacle Bank as the surviving institution and shall not be affected by the Bank Merger; (c) the charter and bylaws of Pinnacle Bank, as then in effect, shall be the Charter and Bylaws of Pinnacle Bank as the surviving institution of the Bank Merger, and may thereafter be amended in accordance with applicable law; and (d) the directors of Pinnacle Bank as the surviving institution following the Bank Merger shall be determined as follows: (i) In the event that the transactions provided for under the terms of the Agreement and Plan of Merger and Consolidation to be entered into by and between Indiana Federal Bank for Savings and Pinnacle Bank pursuant to the IFC Merger Agreement (the "InFed Bank Merger Agreement") have been consummated and become effective, then the Board of Directors of Pinnacle Bank as the surviving institution shall consist of twenty-one (21) persons with eighteen (18) persons to be named as directors as provided in the IFC Merger Agreement and three (3) persons to be named as directors by the Board of Directors of CB Bank (one of which persons shall be Mr. Joseph F. Heffernan). (ii) In the event that the transactions provided for under the terms of the InFed Bank Merger Agreement have not been consummated and become effective, then the Board of Directors of Pinnacle Bank as the surviving institution shall be comprised of those persons who are the directors of Pinnacle Bank immediately prior to the Bank Merger Effective Time and two (2) persons to be named as directors by the Board of Directors of CB Bank (one of which persons shall be Mr. Joseph F. Heffernan); provided, however, that in the event that the transactions provided for under the terms of the InFed Bank Merger Agreement subsequently are consummated and become effective, then the Board of Directors of Pinnacle Bank as the surviving institution shall consist of twenty-one (21) -6- persons with eighteen (18) persons to be named as directors as provided in the IFC Merger Agreement and three (3) persons to be named as directors by the Board of Directors of CB Bank. ARTICLE II EXCHANGE OF SHARES 2.1 PINNACLE TO MAKE SHARES AND CASH IN LIEU OF FRACTIONAL SHARES AVAILABLE. Prior to the Effective Time, Pinnacle shall deposit, or shall cause to be deposited, with Harris Trust and Savings Bank, Chicago, Illinois, or another bank or trust company reasonably acceptable to each of Pinnacle and CB (the "Exchange Agent"), for the benefit of the holders of Common Certificates, for exchange in accordance with this Article II, certificates representing the shares of Pinnacle Common Stock and cash for payment of consideration in lieu of fractional shares (such certificates for shares of Pinnacle Common Stock, together with cash for payment of consideration in lieu of fractional shares, and any dividends or distributions with respect to any whole shares of Pinnacle Common Stock, being hereinafter referred to as the "Exchange Fund") to be issued and paid pursuant to Section 1.4 and Section 2.2(a) in exchange for outstanding shares of CB Common Stock. 2.2 EXCHANGE OF SHARES. (a) As soon as practicable after the Effective Time, and in no event later than five (5) business days thereafter, the Exchange Agent shall mail to each holder of record of one or more Common Certificates a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Common Certificates shall pass, only upon delivery of the Common Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Common Certificates in exchange for certificates representing the shares of Pinnacle Common Stock and any cash in lieu of fractional shares into which the shares of CB Common Stock represented by such Common Certificate or Common Certificates shall have been converted pursuant to this Agreement. Upon proper surrender of a Common Certificate for exchange and cancellation to the Exchange Agent, together with such properly completed letter of transmittal, duly executed, the holder of such Common Certificate shall be entitled to receive in exchange therefor, as applicable, (i) a certificate representing that number of whole shares of Pinnacle Common Stock, and (ii) a check representing the amount of any cash in lieu of fractional shares, to which such holder of CB Common Stock shall have become entitled pursuant to the provisions of Article I, and the Common Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on any cash in lieu of fractional shares or on any unpaid dividends and distributions payable to holders of Common Certificates. (b) No dividends or other distributions declared with respect to Pinnacle Common Stock with a record date following the -7- Effective Time shall be paid to the holder of any unsurrendered Common Certificate until the holder thereof shall surrender such Common Certificate in accordance with this Article II. (c) If any certificate representing shares of Pinnacle Common Stock is to be issued in a name other than that in which the Common Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the Common Certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer, and that the person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the issuance of a certificate representing shares of Pinnacle Common Stock in any name other than that of the registered holder of the Common Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) After the Effective Time, there shall be no transfers on the stock transfer books of CB of shares of CB Common Stock which were issued and outstanding immediately prior to the Effective Time. If, after the Effective Time, Common Certificates representing such shares are presented for transfer to the Exchange Agent, they shall be cancelled and exchanged for certificates representing shares of Pinnacle Common Stock and cash in lieu of fractional shares as provided in this Article II. (e) Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of Pinnacle Common Stock shall be issued upon the surrender for exchange of Common Certificates, no dividend or distribution with respect to Pinnacle Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a stockholder of CB. In lieu of the issuance of any such fractional share, Pinnacle shall pay to each former stockholder of CB who otherwise would be entitled to receive such fractional share an amount in cash determined by multiplying (i) the Average Price by (ii) the fraction of a share (rounded to the nearest thousandth when expressed as an Arabic number) of Pinnacle Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 1.4. (f) Any portion of the Exchange Fund that remains unclaimed by the stockholders of CB for twelve (12) months after the Effective Time shall be paid to Pinnacle. Any stockholders of CB who have not theretofore complied with this Article II shall thereafter look only to Pinnacle for payment of the shares of Pinnacle Common Stock, cash in lieu of any fractional shares and any unpaid dividends and distributions on whole shares of Pinnacle Common Stock deliverable in respect of each share of CB Common Stock such stockholder holds as determined pursuant to this Agreement, in each case, without any interest thereon. Notwithstanding the foregoing, none of CB, Pinnacle, the Exchange -8- Agent or any other person shall be liable to any former holder of shares of CB Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Common Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Common Certificate to be lost, stolen or destroyed and, if reasonably required by Pinnacle or the Exchange Agent, the posting by such person of a bond in such amount as Pinnacle or the Exchange Agent may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Common Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Common Certificate the shares of Pinnacle Common Stock and any cash in lieu of fractional shares deliverable in respect thereof pursuant to this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PINNACLE Except as disclosed in the Pinnacle disclosure schedule delivered to CB concurrently herewith (the "Pinnacle Disclosure Schedule"), Pinnacle hereby represents and warrants to CB as follows: 3.1 CORPORATE ORGANIZATION. (a) Pinnacle is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Pinnacle has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Pinnacle. As used in this Agreement, the term "Material Adverse Effect" means, with respect to CB, Pinnacle or the Surviving Corporation, as the case may be, a material adverse effect on the on-going business (including the continuing right and ability to conduct said business and generate earnings therefrom), results of operations or financial condition of such party and its Subsidiaries taken as a whole, excluding for this purpose only, however, (i) the payment and/or incurrence of transactional expenses by CB or Pinnacle in connection with the Merger; (ii) the effects upon Pinnacle to the extent disclosed by the Pinnacle Disclosure Schedule delivered to CB with this Agreement (and including the disclosure schedules of Pinnacle and IFC referenced in the IFC Merger Agreement, copies of which have been delivered by Pinnacle to CB, but excluding any Material Adverse Effect that may be subsequently disclosed by a closing date disclosure schedule delivered pursuant to the IFC Merger Agreement) of the transactions -9- contemplated by, and all transactional expenses associated with the transactions contemplated by, the IFC Merger Agreement, whether or not consummated, the Pinnacle stock option agreement dated as of November 14, 1996 between Pinnacle and IFC, and the IFC stock option agreement dated as of November 14, 1996 between Pinnacle and IFC (said stock option agreements being the "Pinnacle/IFC Stock Option Agreements"), and (iii) the effects upon Pinnacle of the transactions contemplated by, and all transactional expenses associated with the transactions, contemplated by, the Purchase and Assumption Agreement executed, or to be executed, between Shoreline Bank, as Seller, and Pinnacle Bank, as Buyer, and the Purchase and Assumption Agreement executed, or to be executed, between Pinnacle Bank, as Seller, and Shoreline Bank, as Buyer (collectively, the "Branch Office Swap Agreements"), whether or not consummated, in any said case to the extent having such an effect. As used in this Agreement, the word "Subsidiary" when used with respect to any party means any bank, savings and loan institution, corporation, partnership, limited liability company, or other organization, whether incorporated or unincorporated, which is consolidated with such party for financial reporting purposes. Pinnacle is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). True and complete copies of the Articles of Incorporation and Bylaws of Pinnacle, as in effect as of the date of this Agreement, have previously been made available by Pinnacle to CB. (b) Each Pinnacle Subsidiary (i) is duly organized and validly existing as a bank, savings and loan institution, corporation, partnership or limited liability company under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have a Material Adverse Effect on Pinnacle, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. (c) The minute books of Pinnacle accurately reflect in all material respects all corporate actions held or taken since January 1, 1994 of its stockholders and Board of Directors (including committees of the Board of Directors of Pinnacle). 3.2 CAPITALIZATION. (a) The authorized capital stock of Pinnacle consists of (i) 15,000,000 shares of Pinnacle Common Stock, of which as of February 26, 1997, 5,977,860 shares were issued and outstanding and no shares were held in treasury. All of the issued and outstanding shares of Pinnacle Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except pursuant to the terms of (i) those options to purchase shares of Pinnacle Common Stock issued or issuable under Pinnacle benefit -10- plans (the "Pinnacle Stock Plans"), (ii) the Pinnacle/IFC Stock Option Agreements, and (iii) the IFC Merger Agreement, Pinnacle does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Pinnacle Common Stock or any other equity securities of Pinnacle or any securities representing the right to purchase or otherwise receive any shares of Pinnacle Common Stock or any other equity securities of Pinnacle. As of February 26, 1997, no shares of Pinnacle Common Stock were reserved for issuance, except for (i) 494,949 shares reserved for issuance upon the exercise of stock options pursuant to the Pinnacle Stock Plans and (ii) shares reserved for issuance pursuant to the Pinnacle/IFC Stock Option Agreements and the IFC Merger Agreement. Since January 1, 1996, Pinnacle has not issued any shares of Pinnacle Common Stock or other equity securities of Pinnacle, or any securities convertible into or exercisable for any shares of Pinnacle Common Stock or other equity securities of Pinnacle, other than pursuant to (i) the exercise of employee stock options granted prior to such date, (ii) the Pinnacle/IFC Stock Option Agreements, and (iii) the IFC Merger Agreement. The shares of Pinnacle Common Stock to be issued pursuant to the Merger will be duly authorized and validly issued and, at the Effective Time, all such shares will be fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. (b) Pinnacle owns, directly or indirectly, all of the issued and outstanding shares of capital stock of each of the Pinnacle Subsidiaries, free and clear of any liens, pledges, charges, encumbrances and security interests whatsoever ("Liens"), and all of such shares are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Pinnacle Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary. 3.3 AUTHORITY; NO VIOLATION. (a) Pinnacle has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Pinnacle. The Board of Directors of Pinnacle has directed that this Agreement and the transactions contemplated hereby be submitted to Pinnacle's stockholders for approval at a meeting of such stockholders and, except for the adoption of this Agreement by the affirmative vote of the holders of a majority of the outstanding shares of Pinnacle Common Stock, no other corporate proceedings on the part of Pinnacle are necessary to approve this -11- Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Pinnacle and (assuming due authorization, execution and delivery by CB) constitutes a valid and binding obligation of Pinnacle, enforceable against Pinnacle in accordance with its terms. (b) Neither the execution and delivery of this Agreement by Pinnacle nor the consummation by Pinnacle of the transactions contemplated hereby, nor compliance by Pinnacle with any of the terms or provisions hereof, will (i) violate any provision of the Articles of Incorporation or Bylaws of Pinnacle or (ii) assuming that the consents and approvals referred to in Section 3.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Pinnacle or any of its Subsidiaries or any of their respective properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of Pinnacle or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Pinnacle or any of its Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults which, either individually or in the aggregate, will not have or be reasonably likely to have a Material Adverse Effect on Pinnacle or the Surviving Corporation. 3.4 CONSENTS AND APPROVALS. Except for (i) the filing of applications and notices, as applicable, with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHC Act and approval of such applications and notices, (ii) the filing of any required applications with the Office of Thrift Supervision (the "OTS"), (iii) the filing of any required applications or notices with any state or foreign agencies and approval of such applications and notices (the "State Approvals"), (iv) the filing with the Securities and Exchange Commission (the "SEC") of a joint proxy statement in definitive form relating to the meetings of Pinnacle's and CB's stockholders to be held in connection with this Agreement and the transactions contemplated hereby (and, if applicable, the meetings of Pinnacle's and IFC's stockholders to be held in connection with the IFC Merger Agreement and the transactions contemplated thereby) (the "Joint Proxy Statement") and the registration statement on Form S-4 (the "S-4") in which the Joint Proxy Statement will be included as a prospectus (which Joint Proxy Statement and S-4 may also describe the transactions contemplated by the IFC Merger Agreement), (v) the filing of Certificates of Merger with the appropriate authorities of the State of Michigan pursuant to the MBCA and with the appropriate officials of the State of Delaware pursuant to the -12- DGCL, (vi) any notices to or filings with the Small Business Administration ("SBA"), (vii) any consent, authorizations, approvals, filings or exemptions in connection with compliance with the applicable provisions of federal and state securities laws relating to the regulation of broker-dealers or investment advisers, and federal commodities laws relating to the regulation of futures commission merchants and the rules and regulations thereunder and of any applicable industry self-regulatory organization ("SRO"), and the rules of Nasdaq, or which are required under consumer finance, mortgage banking and other similar laws, (viii) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of the shares of Pinnacle Common Stock pursuant to this Agreement, and (ix) the approval of this Agreement by the requisite vote of the stockholders of Pinnacle and CB, no consents or approvals of or filings or registrations with any court, administrative agency or commission or other governmental authority or instrumentality (each a "Governmental Entity") or with any third party are necessary in connection with (A) the execution and delivery by Pinnacle of this Agreement and (B) the consummation by Pinnacle of the Merger and the other transactions contemplated hereby. 3.5 REPORTS. Pinnacle and each of its Subsidiaries have timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1994 with (i) the Federal Reserve Board, (ii) the Federal Deposit Insurance Corporation, (iii) any state regulatory authority (each a "State Regulator"), (iv) the Office of the Comptroller of the Currency (the "OCC"), (v) the OTS, (vi) the SEC and (vii) any SRO (collectively "Regulatory Agencies"), and all other reports and statements required to be filed by them since January 1, 1994, including, without limitation, any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state, or any Regulatory Agency and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect on Pinnacle. Except for normal examinations conducted by a Regulatory Agency in the regular course of the business of Pinnacle and its Subsidiaries, no Regulatory Agency has initiated any proceeding or, to the best knowledge of Pinnacle, investigation into the business or operations of Pinnacle or any of its Subsidiaries since January 1, 1994, except where such proceedings or investigation are not likely, either individually or in the aggregate, to have a Material Adverse Effect on Pinnacle. There is no unresolved violation, criticism, or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of Pinnacle or any of its Subsidiaries which, in the reasonable judgment of Pinnacle, is likely, either individually or in the aggregate, to have a Material Adverse Effect on Pinnacle. -13- 3.6 FINANCIAL STATEMENTS. Pinnacle has previously made available to CB copies of (a) the consolidated balance sheets of Pinnacle and its Subsidiaries as of December 31, for the fiscal years 1994 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the fiscal years 1993 through 1995, inclusive, as reported in Pinnacle's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case accompanied by the audit report of KPMG Peat Marwick LLP, independent public accountants with respect to Pinnacle, and (b) the unaudited consolidated balance sheet of Pinnacle and its Subsidiaries as of September 30, 1996 and the related unaudited consolidated statements of income, cash flows and changes in stockholders' equity for the nine-month period then ended as reported in Pinnacle's Quarterly Report on Form 10-Q for the period ended September 30, 1996 filed with the SEC under the Exchange Act (the "Pinnacle September 30, 1996 Form 10-Q"). The December 31, 1995 consolidated balance sheet of Pinnacle (including the related notes, where applicable) fairly presents the consolidated financial position of Pinnacle and its Subsidiaries as of the date thereof, and the other financial statements referred to in this Section 3.6 (including the related notes, where applicable) fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount) the results of the consolidated operations and changes in stockholders' equity and consolidated financial position of Pinnacle and its Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been prepared in all material respects in accordance with generally accepted accounting principles ("GAAP") consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q. The books and records of Pinnacle and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements. All financial statements and reports filed by or on behalf of Pinnacle with any Regulatory Agency shall be furnished to CB as soon as practicable after being filed with such Regulatory Agency. 3.7 BROKER'S FEES. Neither Pinnacle nor any Pinnacle Subsidiary nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the Merger or related transactions contemplated by this Agreement, other than PL Capital, L.L.C. (a copy of which engagement agreement has been disclosed by Pinnacle to CB) whose fees, commissions and expenses shall be paid by Pinnacle. 3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. -14- (a) Except as publicly disclosed in reports filed by Pinnacle with Regulatory Agencies (the "Pinnacle Reports") prior to the date hereof, and except for the one-time special assessment on institutions holding deposits subject to assessment by the Savings Association Insurance Fund ("SAIF") pursuant to the Deposit Insurance Funds Act of 1996 ("Funds Act") intended to increase SAIF's net worth as of October 1, 1996 to 1.25 percent of SAIF insured deposits, since December 31, 1995, (i) Pinnacle and its Subsidiaries taken as a whole have not incurred any material liability, except in the ordinary course of their business, and (ii) no event has occurred which has had, individually or in the aggregate, a Material Adverse Effect on Pinnacle or the Surviving Corporation. (b) Except as publicly disclosed in Pinnacle Reports filed prior to the date hereof, since December 31, 1995, Pinnacle and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary and usual course. (c) Since December 31, 1995, neither Pinnacle nor any of its Subsidiaries has (i) except for such actions as are in the ordinary course of business consistent with past practice or except as required by applicable law, (A) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer, employee, or director from the amount thereof in effect as of December 31, 1995, or (B) granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonuses in excess of Pinnacle's 1995 salary and employee benefits expenses, or (ii) suffered any strike, work stoppage, slowdown, or other labor disturbance which, in the reasonable judgment of Pinnacle, is likely, either individually or in the aggregate, to have a Material Adverse Effect on Pinnacle. 3.9 LEGAL PROCEEDINGS. (a) Neither Pinnacle nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Pinnacle's knowledge, threatened, material legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Pinnacle or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on Pinnacle. (b) There is no injunction, order, judgment, decree, or regulatory restriction (other than those that apply to similarly situated bank holding companies, savings and loan holding companies banks, or savings institutions) imposed upon Pinnacle, any of its Subsidiaries or the assets of Pinnacle or any of its Subsidiaries which has had, or might reasonably be expected to have, a Material Adverse Effect on Pinnacle. -15- 3.10 TAXES AND TAX RETURNS. (a) Each of Pinnacle and its Subsidiaries has duly filed all federal, state, county, foreign and, to the best of Pinnacle's knowledge, local information returns and tax returns required to be filed by it on or prior to the date hereof (all such returns being accurate and complete in all material respects) and has duly paid or made provisions for the payment of all Taxes (as defined in Section 3.10(b)) and other governmental charges which have been incurred or are due or claimed to be due from it by federal, state, county, foreign or local taxing authorities on or prior to the date of this Agreement (including, without limitation, if and to the extent applicable, those due in respect of its properties, income, business, capital stock, deposits, franchises, licenses, sales and payrolls) other than (i) Taxes or other charges which are not yet delinquent or are being contested in good faith and have not been finally determined, or (ii) information returns, tax returns, Taxes or other governmental charges the failure to file, pay or make provision for, either individually or in the aggregate, are not likely, in the reasonable judgment of Pinnacle, to have a Material Adverse Effect on Pinnacle. The income tax returns of Pinnacle and its Subsidiaries have been examined by the Internal Revenue Service (the "IRS") and any liability with respect thereto has been satisfied for all years to and including 1993, and either no material deficiencies were asserted as a result of such examination for which Pinnacle does not have adequate reserves or all such deficiencies were satisfied. To the best of Pinnacle's knowledge, there are no material disputes pending, or claims asserted for, Taxes or assessments upon Pinnacle or any of its Subsidiaries for which Pinnacle does not have adequate reserves, nor has Pinnacle or any of its Subsidiaries given any currently effective waivers extending the statutory period of limitation applicable to any federal, state, county or local income tax return for any period. In addition, (A) proper and accurate amounts have been withheld by Pinnacle and its Subsidiaries from their employees for all prior periods in compliance in all material respects with the tax withholding provisions of applicable federal, state and local laws, except where failure to do so would not have a Material Adverse Effect on Pinnacle, (B) federal, state, county and local returns which are accurate and complete in all material respects have been filed by Pinnacle and its Subsidiaries for all periods for which returns were due with respect to income tax withholding, Social Security and unemployment taxes, except where failure to do so would not have a Material Adverse Effect on Pinnacle, (C) the amounts shown on such federal, state, local or county returns to be due and payable have been paid in full or adequate provision therefor has been included by Pinnacle in its consolidated financial statements as of December 31, 1995, except where failure to do so would not have a Material Adverse Effect on Pinnacle and (D) there are no Tax liens upon any property or assets of Pinnacle or its Subsidiaries except liens for current taxes not yet due or liens that would not have a Material Adverse Effect on Pinnacle. Neither Pinnacle nor any of its Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated -16- by Pinnacle or any of its Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method, in either case which has had or is reasonably likely to have a Material Adverse Effect on Pinnacle. Except as set forth in the financial statements described in Section 3.6, neither Pinnacle nor any of its Subsidiaries has entered into a transaction which is being accounted for as an installment obligation under Section 453 of the Code, which would be reasonably likely to have a Material Adverse Effect on Pinnacle. (b) As used in this Agreement, the term "Tax" or "Taxes" means all federal, state, county, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, and other taxes, charges, levies or like assessments together with all penalties and additions to tax and interest thereon. 3.11 EMPLOYEES. (a) The Pinnacle Disclosure Schedule sets forth a true and complete list of each material employee benefit plan, arrangement or agreement that is maintained as of the date of this Agreement (the "Pinnacle Benefit Plans") by Pinnacle or any of its Subsidiaries or by any affiliated trade or business, whether or not incorporated (an "ERISA Affiliate"), all of which together with Pinnacle would be deemed a "single employer" within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (b) Pinnacle has heretofore delivered to CB true and complete copies of each of the Pinnacle Benefit Plans and certain related documents, including, but not limited to, (i) the actuarial report for such Pinnacle Benefit Plan (if applicable) for each of the last two years, and (ii) the most recent determination letter from the IRS (if applicable) for such Plan. (c) (i) Each of the Pinnacle Benefit Plans has been operated and administered in all material respects in compliance with applicable laws, including, but not limited to, ERISA and the Code, (ii) each of the Pinnacle Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified, (iii) with respect to each Pinnacle Benefit Plan which is subject to Title IV of ERISA, the present value of accrued benefits under such Pinnacle Benefit Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Pinnacle Benefit Plan's actuary with respect to such Pinnacle Benefit Plan, did not, as of its latest valuation date, exceed the then current value of the assets of such Pinnacle Benefit Plan allocable to such accrued benefits, (iv) no Pinnacle Benefit Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees of Pinnacle, its Subsidiaries or any ERISA Affiliate beyond their retirement or -17- other termination of service, other than (A) coverage mandated by applicable law, (B) death benefits or retirement benefits under any "employee pension plan" (as such term is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the books of Pinnacle, its Subsidiaries or the ERISA Affiliates or (D) benefits the full cost of which is borne by the current or former employee (or his beneficiary), (v) no material liability under Title IV of ERISA has been incurred by Pinnacle, its Subsidiaries or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to Pinnacle, its Subsidiaries or any ERISA Affiliate of incurring a material liability thereunder, (vi) no Pinnacle Benefit Plan is a "multiemployer pension plan" (as such term is defined in Section 3(37) of ERISA), (vii) all contributions or other amounts payable by Pinnacle or its Subsidiaries as of the Effective Time with respect to each Pinnacle Benefit Plan in respect of current or prior plan years have been paid or accrued in accordance with GAAP and Section 412 of the Code, (viii) neither Pinnacle, its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in connection with which Pinnacle, its Subsidiaries or any ERISA Affiliate reasonably could be subject to either a material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of the Code, and (ix) to the best knowledge of Pinnacle there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Pinnacle Benefit Plans or any trusts related thereto which are, in the reasonable judgment of Pinnacle, likely, either individually or in the aggregate, to have a Material Adverse Effect on Pinnacle. (d) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any material payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any director or any employee of Pinnacle or any of its affiliates from Pinnacle or any of its affiliates under any Pinnacle Benefit Plan or otherwise, (ii) materially increase any benefits otherwise payable under any Pinnacle Benefit Plan or (iii) result in any acceleration of the time of payment or vesting of any such benefits to any material extent. 3.12 SEC REPORTS. Pinnacle has previously made available to CB an accurate and complete copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1994 by Pinnacle with the SEC pursuant to the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act (the "Pinnacle Reports") and prior to the date hereof and (b) communication mailed by Pinnacle to its stockholders since January 1, 1994 and prior to the date hereof, and no such registration statement, prospectus, report, schedule, proxy statement or communication contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date shall be -18- deemed to modify information as of an earlier date. Since January 1, 1994, Pinnacle has timely filed all Pinnacle Reports and other documents required to be filed by it under the Securities Act and the Exchange Act, and, as of their respective dates, all Pinnacle Reports complied in all material respects with the published rules and regulations of the SEC with respect thereto. 3.13 COMPLIANCE WITH APPLICABLE LAW. Pinnacle and each of its Subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to all, and have complied in all material respects with and are not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Pinnacle or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default would not, individually or in the aggregate, have a Material Adverse Effect on Pinnacle. 3.14 CERTAIN CONTRACTS. (a) Neither Pinnacle nor any of its Subsidiaries is a party to or bound by any contract, arrangement, commitment or understanding (whether written or oral) (i) with respect to the employment of any directors, officers or employees other than in the ordinary course of business consistent with past practice, (ii) which, upon the consummation of the transactions contemplated by this Agreement will (either alone or upon the occurrence of any additional acts or events) result in any payment (whether of severance pay or otherwise) becoming due from CB, Pinnacle, the Surviving Corporation, or any of their respective Subsidiaries to any officer or employee thereof, (iii) which is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement that has not been filed or incorporated by reference in the Pinnacle Reports, (iv) which materially restricts the conduct of any line of business by Pinnacle, (v) with or to a labor union or guild (including any collective bargaining agreement) or (vi) (including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan) any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. Pinnacle has previously made available to CB true and correct copies of all employment and deferred compensation agreements which are in writing and to which Pinnacle is a party. Each contract, arrangement, commitment or understanding of the type described in this Section 3.14(a), whether or not set forth in the Pinnacle Disclosure Schedule, is referred to herein as a "Pinnacle Contract", and neither Pinnacle nor any of its Subsidiaries knows of, or has received notice of, any violation of the above by any of the other parties thereto which, individually or in the aggregate, would have a Material Adverse Effect on Pinnacle. -19- (b) (i) Each Pinnacle Contract is valid and binding on Pinnacle or any of its Subsidiaries, as applicable, and in full force and effect, (ii) Pinnacle and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it to date under each Pinnacle Contract, except where such noncompliance, individually or in the aggregate, would not have a Material Adverse Effect on Pinnacle, and (iii) no event or condition exists which constitutes or, after notice or lapse of time or both, would constitute, a material default on the part of Pinnacle or any of its Subsidiaries under any such Pinnacle Contract, except where such default, individually or in the aggregate, would not have a Material Adverse Effect on Pinnacle. 3.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither Pinnacle nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been since January 1, 1994, a recipient of any supervisory letter from, or since January 1, 1994, has adopted any board resolutions at the request of any Regulatory Agency or other Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its credit policies, its management or its business (each, whether or not set forth in the Pinnacle Disclosure Schedule, a "Pinnacle Regulatory Agreement"), nor has Pinnacle or any of its Subsidiaries been advised since January 1, 1994, by any Regulatory Agency or other Governmental Entity that it is considering issuing or requesting any such Regulatory Agreement. 3.16 OTHER ACTIVITIES OF PINNACLE AND ITS SUBSIDIARIES. (a) Neither Pinnacle nor any of its Subsidiaries that is neither a bank, a bank operating subsidiary or a bank service corporation, directly or indirectly, engages in any activity prohibited by the Federal Reserve Board or the OTS. Without limiting the generality of the foregoing, any equity investment of Pinnacle and each Subsidiary that is not a bank, a bank operating subsidiary or a bank service corporation is not prohibited by the Federal Reserve Board or the OTS. (b) Each Pinnacle Subsidiary which is a federally insured bank or savings institution (a "Pinnacle Bank Subsidiary") currently performs all personal trust, corporate trust and other fiduciary activities ("Trust Activities") with requisite authority under applicable law of Governmental Entities and in accordance in all material respects with the agreed-upon terms of the agreements and instruments governing such Trust Activities, sound fiduciary principles and applicable law and regulation (specifically including, but not limited to, Section 9 of Title 12 of the Code of Federal Regulations) where the failure to so perform would have a Material Adverse Effect on Pinnacle; there is no investigation or inquiry of a material nature by any Governmental Entity pending, or to the knowledge of Pinnacle, threatened, against or affecting -20- Pinnacle, or any Significant Subsidiary thereof relating to the compliance by Pinnacle or any such Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X of the SEC) with sound fiduciary principles and applicable regulations; and except where any such failure would not have a Material Adverse Effect on Pinnacle, each employee of a Pinnacle Bank Subsidiary had the authority to act in the capacity in which he or she acted with respect to Trust Activities, in each case, in which such employee held himself or herself out as a representative of a Pinnacle Bank Subsidiary; and each Pinnacle Bank Subsidiary has established policies and procedures for the purpose of complying with applicable laws of Governmental Entities relating to Trust Activities, has followed such policies and procedures in all material respects and has performed appropriate internal audit reviews of, and has engaged independent accountants to perform audits of, Trust Activities, which audits since January 1, 1994 have disclosed no material violations of applicable laws of Governmental Entities or such policies and procedures. 3.17 INVESTMENT SECURITIES. Each of Pinnacle and its Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity), free and clear of any Lien, except to the extent such securities are pledged in the ordinary course of business consistent with prudent banking practices to secure obligations of Pinnacle or any of its Subsidiaries. Such securities are valued on the books of Pinnacle in accordance with GAAP. 3.18 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements, whether entered into for the account of Pinnacle or for the account of a customer of Pinnacle or one of its Subsidiaries, were entered into in the ordinary course of business and, to Pinnacle's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of any Regulatory Authority and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of Pinnacle or one of its Subsidiaries enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. Pinnacle and each of its Subsidiaries have duly performed in all material respects all of their material obligations thereunder to the extent that such obligations to perform have accrued; and, to Pinnacle's knowledge, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. 3.19 UNDISCLOSED LIABILITIES. Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of Pinnacle included in the Pinnacle September 30, 1996 Form 10-Q and for liabilities incurred in the ordinary course of business consistent with past practice since September 30, 1996, -21- neither Pinnacle nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) that, either alone or when combined with all similar liabilities, has had, or could reasonably be expected to have, a Material Adverse Effect on Pinnacle. 3.20 ENVIRONMENTAL LIABILITY. Except as set forth in the Pinnacle Disclosure Schedule, there are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that could reasonably be expected to result in the imposition, on Pinnacle or any of the Pinnacle Subsidiaries of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), pending or threatened against Pinnacle or any of the Pinnacle Subsidiaries, which liability or obligation could reasonably be expected to have a Material Adverse Effect on Pinnacle. To the knowledge of Pinnacle, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any material liability or obligation that could reasonably be expected to have a Material Adverse Effect on Pinnacle. Neither Pinnacle nor any of the Pinnacle Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any material liability or obligation that could reasonably be expected to have a Material Adverse Effect on Pinnacle. 3.21 STATE TAKEOVER LAWS. The Board of Directors of Pinnacle has approved the transactions contemplated by this Agreement and taken such action such that the provisions of Chapter 7A of the MBCA and any other provisions of any state or local "takeover" law applicable to Pinnacle will not apply to this Agreement or any of the transactions contemplated hereby. 3.22 POOLING OF INTERESTS. Pinnacle has no reason to believe that the Merger will not qualify as a "pooling of interests" for accounting purposes. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CB Except as disclosed in the CB disclosure schedule delivered to Pinnacle concurrently herewith (the "CB Disclosure Schedule"), CB hereby represents and warrants to Pinnacle as follows: 4.1 CORPORATE ORGANIZATION. (a) CB is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. CB has the corporate power and authority to own or lease all of its -22- properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on CB. CB is duly registered as a savings and loan holding company under the Home Owners' Loan Act ("HOLA"). True and complete copies of the Certificate of Incorporation and Bylaws of CB, as in effect as of the date of this Agreement, have previously been made available by CB to Pinnacle. (b) Each CB Subsidiary (i) is duly organized and validly existing as a bank, savings and loan institution, corporation, partnership or limited liability company under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have a Material Adverse Effect on CB, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. (c) The minute books of CB accurately reflect in all material respects all corporate actions held or taken since January 1, 1994 of its stockholders and Board of Directors (including committees of the Board of Directors of CB). 4.2 CAPITALIZATION. (a) The authorized capital stock of CB consists of (i) 500,000 shares of preferred stock, par value $0.01 per share, none of which as of February 28, 1997 were issued or outstanding; and (ii) 1,500,000 shares of CB Common Stock, of which as of February 28, 1997, 1,161,997 shares were issued and outstanding and 122,241 shares were held in treasury. All of the issued and outstanding shares of CB Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except pursuant to the terms of (i) those options to purchase shares of CB Common Stock issued or issuable under CB benefit plans (the "CB Stock Plans"), and (ii) the CB Option Agreement, CB does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of CB Common Stock or any other equity securities of CB or any securities representing the right to purchase or otherwise receive any shares of CB Common Stock or any other equity securities of CB. As of February 28, 1997, no shares of CB Common Stock were reserved for issuance, except for 94,883 shares reserved for issuance upon the exercise of stock options pursuant to the CB Stock Plans. Since January 1, 1996, CB has not issued any shares of CB Common Stock or other -23- equity securities of CB, or any securities convertible into or exercisable for any shares of CB Common Stock or other equity securities of CB, other than pursuant to the exercise of employee stock options granted prior to such date. (b) CB owns, directly or indirectly, all of the issued and outstanding shares of capital stock of each of the CB Subsidiaries, free and clear of any Liens, and all of such shares are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No CB Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary. 4.3 AUTHORITY; NO VIOLATION. (a) CB has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of CB. The Board of Directors of CB has directed that this Agreement and the transactions contemplated hereby be submitted to CB's stockholders for approval at a meeting of such stockholders and, except for the adoption of this Agreement by the affirmative vote of the holders of a majority of the outstanding shares of CB Common Stock, no other corporate proceedings on the part of CB are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by CB and (assuming due authorization, execution and delivery by Pinnacle) constitutes a valid and binding obligation of CB, enforceable against CB in accordance with its terms. (b) Neither the execution and delivery of this Agreement by CB nor the consummation by CB of the transactions contemplated hereby, nor compliance by CB with any of the terms or provisions hereof, will (i) violate any provision of the Certificate of Incorporation or Bylaws of CB or (ii) assuming that the consents and approvals referred to in Section 4.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to CB or any of its Subsidiaries or any of their respective properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of CB or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, -24- bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which CB or any of its Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults which, either individually or in the aggregate, will not have or be reasonably likely to have a Material Adverse Effect on CB or the Surviving Corporation. 4.4 CONSENTS AND APPROVALS. Except for (i) the filing of applications and notices, as applicable, with the Federal Reserve Board under the BHC Act and approval of such applications and notices, (ii) the filing of any required applications with the OTS, (iii) the filing of any required applications or notices for, and the receipt of, the State Approvals, (iv) the filing with the SEC of the Joint Proxy Statement and the S-4 in which the Joint Proxy Statement will be included as a prospectus, (v) the filing of Certificates of Merger with the appropriate authorities of the State of Michigan pursuant to the MBCA and with the appropriate officials of the State of Delaware pursuant to the DGCL, (vi) any notices to or filings with the SBA, (vii) any consent, authorizations, approvals, filings or exemptions in connection with compliance with the applicable provisions of federal and state securities laws relating to the regulation of broker-dealers or investment advisers, and federal commodities laws relating to the regulation of futures commission merchants and the rules and regulations thereunder and of any applicable industry SRO, and the rules of Nasdaq, or which are required under consumer finance, mortgage banking and other similar laws, (viii) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of the shares of Pinnacle Common Stock pursuant to this Agreement, and (ix) the approval of this Agreement by the requisite vote of the stockholders of Pinnacle and CB, no consents or approvals of or filings or registrations with any Governmental Entity or with any third party are necessary in connection with (A) the execution and delivery by CB of this Agreement and (B) the consummation by CB of the Merger and the other transactions contemplated hereby. 4.5 REPORTS. CB and each of its Subsidiaries have timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1994 with any of the Regulatory Agencies, and all other reports and statements required to be filed by them since January 1, 1994, including, without limitation, any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state, or any Regulatory Agency and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect on CB. Except for normal examinations conducted by a Regulatory Agency in the regular course of the business of CB and its Subsidiaries, no Regulatory Agency has -25- initiated any proceeding or, to the best knowledge of CB, investigation into the business or operations of CB or any of its Subsidiaries since January 1, 1994, except where such proceedings or investigation are not likely, either individually or in the aggregate, to have a Material Adverse Effect on CB. There is no unresolved violation, criticism, or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of CB or any of its Subsidiaries which, in the reasonable judgment of CB, is likely, either individually or in the aggregate, to have a Material Adverse Effect on CB. 4.6 FINANCIAL STATEMENTS. CB has previously made available to Pinnacle copies of (a) the consolidated balance sheets of CB and its Subsidiaries as of March 31, for the fiscal years 1995 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the fiscal years 1994 through 1996, inclusive, as reported in CB's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 filed with the SEC under the Exchange Act, in each case accompanied by the audit report of Crowe Chizek & Company, L.L.P., independent public accountants with respect to CB, and (b) the unaudited consolidated balance sheet of CB and its Subsidiaries as of December 31, 1996 and the related unaudited consolidated statements of income, cash flows and changes in stockholders' equity for the nine-month period then ended as reported in CB's Quarterly Report on Form 10-Q for the period ended December 31, 1996 filed with the SEC under the Exchange Act (the "CB December 31, 1996 Form 10-Q"). The March 31, 1996 consolidated balance sheet of CB (including the related notes, where applicable) fairly presents the consolidated financial position of CB and its Subsidiaries as of the date thereof, and the other financial statements referred to in this Section 4.6 (including the related notes, where applicable) fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount) the results of the consolidated operations and changes in stockholders' equity and consolidated financial position of CB and its Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been prepared in all material respects in accordance with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q. The books and records of CB and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements. All financial statements and reports filed by or on behalf of CB with any regulatory agency shall be furnished to Pinnacle as soon as practicable after being filed with such Regulatory Agency. 4.7 BROKER'S FEES. Neither CB nor any CB Subsidiary nor any of their respective officers or directors has employed any broker -26- or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the Merger or related transactions contemplated by this Agreement, other than Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc. ("Charles Webb & Company") (a copy of which engagement agreement has been disclosed by CB to Pinnacle) whose fees, commissions and expenses shall be paid by CB. 4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. (a) Except as publicly disclosed in CB Reports (as defined in Section 4.12) filed prior to the date hereof, and except for the one-time special assessment on institutions holding deposits subject to assessment by SAIF pursuant to the Funds Act intended to increase SAIF's net worth as of October 1, 1996 to 1.25 percent on SAIF deposits, since March 31, 1996, (i) CB and its Subsidiaries taken as a whole have not incurred any material liability, except in the ordinary course of their business, and (ii) no event has occurred which has had, individually or in the aggregate, a Material Adverse Effect on CB or the Surviving Corporation. (b) Except as publicly disclosed in CB Reports filed prior to the date hereof, since March 31, 1996, CB and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary and usual course. (c) Since March 31, 1996, neither CB nor any of its Subsidiaries has (i) except for such actions as are in the ordinary course of business consistent with past practice or except as required by applicable law, (A) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer, employee, or director from the amount thereof in effect as of March 31, 1996, or (B) granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonuses in excess of CB's 1995 salary and employee benefits expenses, or (ii) suffered any strike, work stoppage, slowdown, or other labor disturbance which, in the reasonable judgment of CB, is likely, either individually or in the aggregate, to have a Material Adverse Effect on CB. 4.9 LEGAL PROCEEDINGS. (a) Neither CB nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of CB's knowledge, threatened, material legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against CB or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement or the CB Option Agreement as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on CB. -27- (b) There is no injunction, order, judgment, decree, or regulatory restriction (other than those that apply to similarly situated bank holding companies, savings and loan holding companies banks, or savings institutions) imposed upon CB, any of its Subsidiaries or the assets of CB or any of its Subsidiaries which has had, or might reasonably be expected to have, a Material Adverse Effect on CB. 4.10 TAXES AND TAX RETURNS. (a) Each of CB and its Subsidiaries has duly filed all federal, state, county, foreign and, to the best of CB's knowledge, local information returns and tax returns required to be filed by it on or prior to the date hereof (all such returns being accurate and complete in all material respects) and has duly paid or made provisions for the payment of all Taxes and other governmental charges which have been incurred or are due or claimed to be due from it by federal, state, county, foreign or local taxing authorities on or prior to the date of this Agreement (including, without limitation, if and to the extent applicable, those due in respect of its properties, income, business, capital stock, deposits, franchises, licenses, sales and payrolls) other than (i) Taxes or other charges which are not yet delinquent or are being contested in good faith and have not been finally determined, or (ii) information returns, tax returns, Taxes or other governmental charges the failure to file, pay or make provision for, either individually or in the aggregate, are not likely, in the reasonable judgment of CB, to have a Material Adverse Effect on CB. The income tax returns of CB and its Subsidiaries have not been examined by the IRS. No material deficiencies were asserted as a result of such examination for which CB does not have adequate reserves or all such deficiencies were satisfied. To the best of CB's knowledge, there are no material disputes pending, or claims asserted for, Taxes or assessments upon CB or any of its Subsidiaries for which CB does not have adequate reserves, nor has CB or any of its Subsidiaries given any currently effective waivers extending the statutory period of limitation applicable to any federal, state, county or local income tax return for any period. In addition, (A) proper and accurate amounts have been withheld by CB and its Subsidiaries from their employees for all prior periods in compliance in all material respects with the tax withholding provisions of applicable federal, state and local laws, except where failure to do so would not have a Material Adverse Effect on CB, (B) federal, state, county and local returns which are accurate and complete in all material respects have been filed by CB and its Subsidiaries for all periods for which returns were due with respect to income tax withholding, Social Security and unemployment taxes, except where failure to do so would not have a Material Adverse Effect on CB, (C) the amounts shown on such federal, state, local or county returns to be due and payable have been paid in full or adequate provision therefor has been included by CB in its consolidated financial statements as of March 31, 1996, except where failure to do so would not have a Material Adverse Effect on CB and (D) there are no Tax liens upon any property or assets of CB or its Subsidiaries except liens for current taxes not yet due or -28- liens that would not have a Material Adverse Effect on CB. Neither CB nor any of its Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by CB or any of its Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method, in either case which has had or is reasonably likely to have a Material Adverse Effect on CB. Except as set forth in the financial statements described in Section 4.6, neither CB nor any of its Subsidiaries has entered into a transaction which is being accounted for as an installment obligation under Section 453 of the Code, which would be reasonably likely to have a Material Adverse Effect on CB. (b) Any amount that is reasonably likely to be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of CB or any of its affiliates who is a "Disqualified Individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or CB Benefit Plan (as defined in Section 4.11(a)) currently in effect should not be characterized as an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code). (c) No disallowance of a deduction under Section 162(m) of the Code for employee remuneration of any amount paid or payable by CB or any Subsidiary of CB under any contract, plan, program, arrangement or understanding would be reasonably likely to have a Material Adverse Effect on CB. 4.11 EMPLOYEES. (a) The CB Disclosure Schedule sets forth a true and complete list of each material employee benefit plan, arrangement or agreement that, as of the date of this Agreement, either is maintained by CB or any of its Subsidiaries or any ERISA Affiliate, all of which together with CB would be deemed a "single employer" within the meaning of Section 4001 of ERISA, or if not currently maintained under which CB or any of its Subsidiaries or any ERISA Affiliate has any liability to any current or former employees (the "CB Benefit Plans"). (b) CB has heretofore delivered to Pinnacle true and complete copies of each of the CB Benefit Plans and certain related documents, including, but not limited to, (i) the actuarial report for such CB Benefit Plan (if applicable) for each of the last five years, (ii) the most recent determination letter from the IRS (if applicable) for such CB Benefit Plan, (iii) the annual reports for the most recent five years (Form 5500 series including all schedules thereto), (iv) all agreements regarding plan assets with respect to the CB Benefit Plans, and (v) a copy of the most recent summary plan description (if applicable) of each CB Benefit Plan, together with any modifications thereto. To CB's knowledge, such actuarial reports fairly present the financial condition and -29- results of operations of each such CB Benefit Plan in accordance with GAAP. (c) (i) Each of the CB Benefit Plans has been operated and administered in all material respects in compliance with applicable laws, including, but not limited to, ERISA and the Code, (ii) each of the CB Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified, (iii) with respect to each CB Benefit Plan which is subject to Title IV of ERISA, and any "multiple employer pension plan" (as defined in Section 413(e) of the Internal Revenue Code of 1986, as amended (the "Code")), the present value of accrued benefits under such CB Benefit Plan, (A) assuming all benefits are fully vested on a plan termination basis and based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such CB Benefit Plan's actuary with respect to such CB Benefit Plan, did not, as of its latest valuation date, exceed the then current value of the assets of such CB Benefit Plan allocable to such accrued benefits, and (B) since the last valuation date for each such CB Benefit Plan and each ERISA Affiliate, no event has occurred or circumstance exists that would increase the amount of benefits under any such CB Benefit Plan or that would cause the excess of CB Benefit Plan assets over benefit liabilities (as defined in Section 4001 of ERISA) to decrease, or the amount by which benefit liabilities exceed assets to increase, (iv) no reportable event (as defined in Section 4043 of ERISA and in the regulations issued thereunder) has occurred, (v) no CB Benefit Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees of CB, its Subsidiaries or any ERISA Affiliate beyond their retirement or other termination of service, other than (A) coverage mandated by applicable law, (B) death benefits or retirement benefits under any "employee pension plan" (as such term is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the books of CB, its Subsidiaries or the ERISA Affiliates or (D) benefits the full cost of which is borne by the current or former employee (or his beneficiary), (vi) no material liability under Title IV of ERISA has been incurred by CB, its Subsidiaries or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to CB, its Subsidiaries or any ERISA Affiliate of incurring a material liability thereunder, (vii) none of CB, its Subsidiaries or any ERISA Affiliate (A) has ever established, maintained, or contributed to or otherwise participated in, or had an obligation to maintain, contribute to, or otherwise participate in, any multiple employer pension plan or any "multiemployer pension plan" (as such term is defined in Section 3(37) of ERISA) or (B) has withdrawn from any multiple employer pension plan or any multiemployer pension plan with respect to which there is any outstanding liability as of the date of this Agreement, (viii) the Merger does not present a risk of, and shall not cause, or could cause, the occurrence of any withdrawal from, or the participation, termination, reorganization, or insolvency of, any multiple employer pension plan or any multiemployer pension plan that could result in any liability of -30- any of Pinnacle, Pinnacle's Subsidiaries, CB, its Subsidiaries, or any ERISA Affiliate of any of the foregoing, to any multiple employer pension plan or any multiemployer pension plan, (ix) none of CB, its Subsidiaries or any ERISA Affiliate has received notice from any multiple employer pension plan or any multiemployer pension plan that such multiemployer pension plan is in reorganization or is insolvent, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, or that such multiple employer pension plan or such multiemployer pension plan intends to terminate or has terminated, (x) no multiple employer pension plan and no multiemployer pension plan to which CB, its Subsidiaries or any ERISA Affiliate contributes or has contributed is a party to any pending merger or asset or liability transfer or is subject to any proceeding brought by the Pension Benefit Guaranty Corporation, (xi) each of CB and its Subsidiaries has the right to modify and terminate benefits to retirees (other than pensions) with respect to both retired and active employees, (xii) all contributions or other amounts payable by CB or its Subsidiaries as of the Effective Time with respect to each CB Benefit Plan in respect of current or prior plan years have been paid or accrued in accordance with GAAP and Section 412 of the Code, (xiii) neither CB, its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in connection with which CB, its Subsidiaries or any ERISA Affiliate reasonably could be subject to either a material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of the Code, and (xiv) to the best knowledge of CB there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the CB Benefit Plans or any trusts related thereto which are, in the reasonable judgment of CB, likely, either individually or in the aggregate, to have a Material Adverse Effect on CB. (d) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any material payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any director or any employee of CB or any of its affiliates from CB or any of its affiliates under any CB Benefit Plan or otherwise, (ii) materially increase any benefits otherwise payable under any CB Benefit Plan or (iii) result in any acceleration of the time of payment or vesting of any such benefits to any material extent. 4.12 SEC REPORTS. CB has previously made available to Pinnacle an accurate and complete copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1994 by CB with the SEC pursuant to the Securities Act or the Exchange Act (the "CB Reports") and prior to the date hereof and (b) communication mailed by CB to its stockholders since January 1, 1994 and prior to the date hereof, and no such registration statement, prospectus, report, schedule, proxy statement or communication contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order -31- to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date shall be deemed to modify information as of an earlier date. Since January 1, 1994, CB has timely filed all CB Reports and other documents required to be filed by it under the Securities Act and the Exchange Act, and, as of their respective dates, all CB Reports complied in all material respects with the published rules and regulations of the SEC with respect thereto. 4.13 COMPLIANCE WITH APPLICABLE LAW. CB and each of its Subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to all, and have complied in all material respects with and are not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to CB or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default would not, individually or in the aggregate, have a Material Adverse Effect on CB. 4.14 CERTAIN CONTRACTS. (a) Neither CB nor any of its Subsidiaries is a party to or bound by any contract, arrangement, commitment or understanding (whether written or oral) (i) with respect to the employment of any directors, officers or employees other than in the ordinary course of business consistent with past practice, (ii) which, upon the consummation of the transactions contemplated by this Agreement will (either alone or upon the occurrence of any additional acts or events) result in any payment (whether of severance pay or otherwise) becoming due from CB, Pinnacle, the Surviving Corporation, or any of their respective Subsidiaries to any officer or employee thereof, (iii) which is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement that has not been filed or incorporated by reference in the CB Reports, (iv) which materially restricts the conduct of any line of business by CB, (v) with or to a labor union or guild (including any collective bargaining agreement) or (vi) (including any CB Benefit Plan, stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan) any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. CB has previously made available to Pinnacle true and correct copies of all employment and deferred compensation agreements which are in writing and to which CB is a party. Each contract, arrangement, commitment or understanding of the type described in this Section 4.14(a), whether or not set forth in the CB Disclosure Schedule, is referred to herein as a "CB Contract", and neither CB nor any of its Subsidiaries knows of, or has received notice of, any violation of the above by any of the -32- other parties thereto which, individually or in the aggregate, would have a Material Adverse Effect on CB. (b) (i) Each CB Contract is valid and binding on CB or any of its Subsidiaries, as applicable, and in full force and effect, (ii) CB and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it to date under each CB Contract, except where such noncompliance, individually or in the aggregate, would not have a Material Adverse Effect on CB, and (iii) no event or condition exists which constitutes or, after notice or lapse of time or both, would constitute, a material default on the part of CB or any of its Subsidiaries under any such CB Contract, except where such default, individually or in the aggregate, would not have a Material Adverse Effect on CB. 4.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither CB nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been since January 1, 1994, a recipient of any supervisory letter from, or since January 1, 1994, has adopted any board resolutions at the request of any Regulatory Agency or other Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its credit policies, its management or its business (each, whether or not set forth in the CB Disclosure Schedule, a "CB Regulatory Agreement"), nor has CB or any of its Subsidiaries been advised since January 1, 1994, by any Regulatory Agency or other Governmental Entity that it is considering issuing or requesting any such Regulatory Agreement. 4.16 OTHER ACTIVITIES OF CB AND ITS SUBSIDIARIES. (a) Neither CB nor any of its Subsidiaries that is neither a bank, a bank operating subsidiary or a bank service corporation, directly or indirectly, engages in any activity prohibited by the OTS. Without limiting the generality of the foregoing, any equity investment of CB and each Subsidiary that is not a bank, a bank operating subsidiary or a bank service corporation is not prohibited by the Federal Reserve Board or the OTS. (b) No CB Subsidiary which is a federally insured bank or savings institution (a "CB Bank Subsidiary") currently performs any Trust Activities. 4.17 INVESTMENT SECURITIES. Each of CB and its Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity), free and clear of any Lien, except to the extent such securities are pledged in the ordinary course of business consistent with prudent banking practices to secure -33- obligations of CB or any of its Subsidiaries. Such securities are valued on the books of CB in accordance with GAAP. 4.18 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements, whether entered into for the account of CB or for the account of a customer of CB or one of its Subsidiaries, were entered into in the ordinary course of business and, to CB's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of any Regulatory Authority and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of CB or one of its Subsidiaries enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. CB and each of its Subsidiaries have duly performed in all material respects all of their material obligations thereunder to the extent that such obligations to perform have accrued; and, to CB's knowledge, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. 4.19 UNDISCLOSED LIABILITIES. Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of CB included in the CB December 31, 1996 Form 10-Q and for liabilities incurred in the ordinary course of business consistent with past practice since December 31, 1996, neither CB nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) that, either alone or when combined with all similar liabilities, has had, or could reasonably be expected to have, a Material Adverse Effect on CB. 4.20 ENVIRONMENTAL LIABILITY. Except as set forth in the CB Disclosure Schedule, there are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that could reasonably be expected to result in the imposition, on CB or any of the CB Subsidiaries of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"), pending or threatened against CB or any of the CB Subsidiaries, which liability or obligation could reasonably be expected to have a Material Adverse Effect on CB. To the knowledge of CB, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any material liability or obligation that could reasonably be expected to have a Material Adverse Effect on CB. Neither CB nor any of the CB Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any material liability or obligation -34- that could reasonably be expected to have a Material Adverse Effect on CB. 4.21 STATE TAKEOVER LAWS AND CHARTER PROVISIONS. The Board of Directors of CB has approved the transactions contemplated by this Agreement and taken such action such that the provisions of the Certificate of Incorporation of CB pertaining to certain "Business Combinations" shall not be applicable to the transactions contemplated by this Agreement, and the provisions of Section 203 of the DGCL and any other provision of any state or local "takeover" law applicable to CB will not apply to this Agreement or any of the transactions contemplated hereby. 4.22 POOLING OF INTERESTS. CB has no reason to believe that the Merger will not qualify as a "pooling of interests" for accounting purposes. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement (including the Pinnacle Disclosure Schedule and the CB Disclosure Schedule), and the IFC Merger Agreement (including the disclosure schedules of Pinnacle and IFC referenced therein), Pinnacle shall, and shall cause each of its Subsidiaries to, (a) conduct its business in the usual, regular and ordinary course consistent with past practice, (b) use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its key officers and key employees; and (c) use reasonable best efforts to avoid taking any action which would adversely affect or delay the ability of either Pinnacle or CB to obtain any necessary approvals of any Regulatory Agency or other governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement. 5.2 CONDUCT OF CB BUSINESSES PRIOR TO THE EFFECTIVE TIME. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement (including the CB Disclosure Schedule), CB shall, and shall cause each of its Subsidiaries to, (a) conduct its business in the usual, regular and ordinary course consistent with past practice, (b) use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its key officers and key employees, (c) use reasonable best efforts to avoid taking any action which would adversely affect or delay the ability of either Pinnacle or CB to obtain any necessary approvals of any Regulatory Agency or other governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement, and (d) in a manner consistent with past practice and prudent banking standards, charge off or -35- establish provisions for all of its loans, receivables and other assets, or portions thereof, deemed uncollectible by CB in accordance with generally accepted accounting principles, applicable law or regulation, or classified as "loss" or as directed by any regulatory authority; and, in a manner consistent with past practice and prudent banking standards, maintain its allowance for loan losses at a level which is adequate to provide for all known and reasonably expected losses on assets outstanding and other inherent risks in its loan portfolio. 5.3 FORBEARANCES OF PINNACLE. During the period from the date of this Agreement to the Effective Time, except as set forth in the Pinnacle Disclosure Schedule and, except as expressly contemplated or permitted by this Agreement or the IFC Merger Agreement (including the disclosure schedules of Pinnacle and IFC referenced therein, Pinnacle shall not, without the prior written consent of CB: (a) take any action that would prevent or impede the Merger from qualifying (i) for "pooling of interests" accounting treatment or (ii) as a reorganization within the meaning of Section 368 of the Code; provided, however, that nothing contained herein shall limit the ability of Pinnacle to exercise its rights under the IFC Merger Agreement, Pinnacle/IFC Stock Option Agreements and the CB Option Agreement; (b) amend its Articles of Incorporation or its Bylaws; or (c) agree to, or make any commitment to, take any of the actions prohibited by this Section 5.3. 5.4 FORBEARANCES OF CB. During the period from the date of this Agreement to the Effective Time, except as set forth in the CB Disclosure Schedule and, except as expressly contemplated or permitted by this Agreement, CB shall not, and CB shall not permit any of its respective Subsidiaries to, without the prior written consent of Pinnacle: (a) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance short-term indebtedness and indebtedness of CB or any of its Subsidiaries to CB or any of its Subsidiaries), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance (it being understood and agreed that incurrence of indebtedness in the ordinary course of business shall include, without limitation, the creation of deposit liabilities, purchases of Federal funds, sales of certificates of deposit and entering into repurchase agreements); provided, however, that CB may continue to access lines of credit to fund the Mortgage Loan Reverse Repurchase Program currently operated by CB Bank in such amounts as are reasonably necessary to operate that program; -36- (b) (i) adjust, split, combine or reclassify any capital stock; (ii) make, declare or pay any dividend or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock; (iii) grant any stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock (and no further or additional options to purchase stock shall be granted pursuant to the CB Stock Plans); or (iv) issue any additional shares of capital stock except pursuant to (A) the exercise of stock options or warrants outstanding as of the date hereof, or (B) the CB Option Agreement; (c) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets to any individual, corporation or other entity other than a Subsidiary, or cancel, release or assign any indebtedness to any such person or any claims held by any such person, except in the ordinary course of business consistent with past practice or pursuant to contracts or agreements in force at the date of this Agreement; provided, however, that CB may continue to pursue workouts with the borrowers of those loans listed in Section 5.4(c) of the CB Disclosure Schedule and such other loans as CB's management deems prudent to workout in their reasonable judgement; (d) except for transactions in the ordinary course of business consistent with past practice or pursuant to contracts or agreements in force at the date of this Agreement, make any material investment either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other individual, corporation or other entity other than a Subsidiary thereof; (e) except for transactions in the ordinary course of business consistent with past practice, enter into or terminate any material contract or agreement, or make any change in any of its material leases or contracts, other than renewals of contracts and leases without material adverse changes of terms; (f) increase in any manner the compensation or fringe benefits of any of its employees or pay any pension or retirement allowance not required by any existing plan or agreement to any such employees or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee other than in the ordinary course of business consistent with past practice or accelerate the vesting of any stock options or other stock-based compensation; (g) solicit, encourage or authorize or permit any individual, corporation or other entity to solicit from any third party any inquiries or proposals relating to the disposition of its business or assets, or the acquisition of its voting securities, or the merger or business combination of it or any of its Subsidiaries -37- with any corporation or other entity other than as provided by this Agreement (and CB shall promptly notify Pinnacle of all of the relevant details relating to all inquiries and proposals which it may receive relating to any of such matters); (h) settle any claim, action or proceeding involving money damages, except in the ordinary course of business consistent with past practice; (i) take any action that would prevent or impede the Merger from qualifying (i) for "pooling of interests" accounting treatment or (ii) as a reorganization within the meaning of Section 368 of the Code; provided, however, that nothing contained herein shall limit the ability of Pinnacle to exercise its rights under the CB Option Agreement; (j) amend its Certificate of Incorporation or its Bylaws; (k) other than in prior consultation with Pinnacle, restructure or materially change its investment securities portfolio or its gap position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported; (l) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement, except, in every case, as may be required by applicable law; or (m) agree to, or make any commitment to, take any of the actions prohibited by this Section 5.4. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 REGULATORY MATTERS. (a) Pinnacle and CB shall promptly prepare and file with the SEC the Joint Proxy Statement and Pinnacle shall promptly prepare and file with the SEC the S-4, in which the Joint Proxy Statement will be included as a prospectus. Each of Pinnacle and CB shall use all reasonable efforts to have the S-4 declared effective under the Securities Act as promptly as practicable after such filing, and Pinnacle and CB shall thereafter mail or deliver the Joint Proxy Statement to their respective stockholders. Pinnacle shall also use all reasonable efforts to obtain all necessary state securities law or "Blue Sky" permits and approvals required to carry out the transactions contemplated by this Agreement, and CB shall furnish all information concerning CB and the holders of CB -38- Common Stock as may be reasonably requested in connection with any such action. (b) The parties hereto shall cooperate with each other and use their best efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities which are necessary or advisable to consummate the transactions contemplated by this Agreement (including, without limitation, the Merger), and to comply with the terms and conditions of all such permits, consents, approvals and authorizations of all such Governmental Entities. Pinnacle and CB shall have the right to review in advance, and, to the extent practicable, each will consult the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Pinnacle or CB, as the case may be, and any of their respective Subsidiaries, which appear in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. (c) Pinnacle and CB shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Joint Proxy Statement, the S-4 or any other statement, filing, notice or application made by or on behalf of Pinnacle, CB or any of their respective Subsidiaries to any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement. (d) Pinnacle and CB shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any Requisite Regulatory Approval will not be obtained or that the receipt of any such approval will be materially delayed. 6.2 ACCESS TO INFORMATION. (a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, each of Pinnacle and CB shall, and shall cause each of their respective Subsidiaries to, afford to the officers, employees, accountants, counsel and other representatives of the other party, access, during normal business -39- hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, each of Pinnacle and CB shall, and shall cause their respective Subsidiaries to, make available to the other party (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws or federal or state banking laws, savings and loan or savings association laws (other than reports or documents which Pinnacle or CB, as the case may be, is not permitted to disclose under applicable law) and (ii) all other information concerning its business, properties and personnel as such party may reasonably request. Neither Pinnacle nor CB nor any of their respective Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of Pinnacle's or CB's, as the case may be, customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) Each of Pinnacle and CB agrees to keep confidential, and not divulge to any other party or person (other than employees of, and attorneys, accountants, financial advisors and other representatives for, any said party), all non-public documents, information, records and financial statements received from the other and, in addition, any and all reports, information and financial information obtained through audits or other reviews conducted pursuant to this Agreement (unless readily ascertainable from public or published information, or trade sources, or already known or subsequently developed by a party independently of any investigation or received from a third party not under an obligation to the other party to keep such information confidential), and to use the same only in connection with the transactions contemplated by this Agreement; and if the transactions contemplated hereby are not consummated for any reason, each party agrees to promptly return to the other party all written materials furnished by the other party, and all copies thereof, in connection with such investigation, and to destroy all documents and records in its possession containing extracts or summaries of any such non-public information. (c) No investigation by either of the parties or their respective representatives shall affect the representations, warranties, covenants or conditions of the other set forth herein. 6.3 STOCKHOLDERS' APPROVALS. Each of Pinnacle and CB shall call a meeting of its stockholders to be held as soon as reasonably practicable for the purpose of voting upon the requisite stockholder approvals required in connection with this Agreement and the Merger, and each shall use its best efforts to cause such meetings to occur on the same date. Pinnacle and CB will, through their respective Boards of Directors, subject to their respective -40- fiduciary obligations as determined by the respective Boards of Directors, recommend to their respective stockholders approval of this Agreement and the Merger. 6.4 LEGAL CONDITIONS TO MERGER. Each of Pinnacle and CB shall, and shall cause its Subsidiaries to, use their best efforts (a) to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements which may be imposed on such party or its Subsidiaries with respect to the Merger and, subject to the conditions set forth in Article VII hereof, to consummate the transactions contemplated by this Agreement and (b) to obtain (and to cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity and any other third party which is required to be obtained by Pinnacle or CB or any of their respective Subsidiaries in connection with the Merger and the other transactions contemplated by this Agreement. 6.5 AFFILIATES; PUBLICATION OF COMBINED FINANCIAL RESULTS. (a) Each of Pinnacle and CB shall use its best efforts to cause each director, executive officer and other person who is an "affiliate" (for purposes of Rule 145 under the Securities Act and for purposes of qualifying the Merger for "pooling of interests" accounting treatment) of such party to deliver to the other party hereto, as soon as practicable after the date of this Agreement, and prior to the date of the stockholders' meetings called by Pinnacle and CB to approve this Agreement, a written agreement, in the form of Exhibit C hereto, providing that such person will not sell, pledge, transfer or otherwise dispose of any shares of Pinnacle Common Stock or CB Common Stock held by such "affiliate" and, in the case of the "affiliates" of CB, the shares of Pinnacle Common Stock to be received by such "affiliate" in the Merger: (i) in the case of shares of Pinnacle Common Stock to be received by "affiliates" of CB in the Merger, except in compliance with the applicable provisions of the Securities Act and the rules and regulations thereunder; and (ii) except to the extent and under the conditions permitted therein, during the period commencing 30 days prior to the Merger and ending at the time of the publication of financial results covering at least 30 days of combined operations of Pinnacle and CB. (b) The Surviving Corporation shall use its best efforts to publish as promptly as reasonably practical but in no event later than 90 days after the end of the first month after the Effective Time in which there are at least 30 days of post-Merger combined operations (which month may be the month in which the Effective Time occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. 6.6 NASDAQ NATIONAL MARKET LISTING. Pinnacle shall cause the shares of Pinnacle Common Stock to be issued in the Merger to be approved for trading and reporting on the Nasdaq National Market, -41- subject to official notice of issuance, prior to the Effective Time. 6.7 EMPLOYEE BENEFIT PLANS. (a) From and after the Effective Time, unless otherwise mutually determined, the employee benefit plans, arrangements and agreements maintained by Pinnacle (the "Pinnacle Benefit Plans") and CB Benefit Plans in effect as of the date of this Agreement shall remain in effect with respect to employees of Pinnacle or CB (or their Subsidiaries) covered by such plans at the Effective Time until such time as the Surviving Corporation shall, subject to applicable law, the terms of this Agreement and the terms of such plans, adopt new benefit plans (the "New Benefit Plans") with respect to employees of the Surviving Corporation and its Subsidiaries in substantial conformance with the Pinnacle Benefit Plans in effect as of the Effective Time, in replacement and substitution for the CB Benefit Plans (including, without limitation, non- qualified stock option agreements, incentive stock option agreements, the Employee Stock Ownership Plan maintained by CB Bank (the "CB Bank ESOP"), deferred compensation plans and agreements, supplemental retirement income agreements, severance agreements, employment agreements and stock option and incentive plans benefitting current or former directors, officers or employees of CB or its Subsidiaries, or their predecessors) which shall be cancelled, terminated or frozen to the extent permitted by applicable law. Prior to the Closing Date, Pinnacle shall review, evaluate and analyze the Pinnacle Benefit Plans and CB Benefit Plans and shall develop and propose appropriate New Benefit Plans for the employees covered thereby subsequent to the Merger in substantial conformance with the Pinnacle Benefit Plans in effect as of the Effective Time, in replacement and substitution for the CB Benefit Plans which shall be cancelled, terminated or frozen to the extent permitted by applicable law. It is the intention of Pinnacle and CB that Pinnacle shall develop New Benefit Plans, effective as of the Effective Time, or as soon thereafter as permitted by law and practicable, which, among other things, (i) treat similarly situated employees on a substantially equivalent basis, taking into account all relevant factors, including, without limitation, duties, geographic location, tenure, qualifications and abilities, and (ii) do not discriminate between employees of the Surviving Corporation who were covered by Pinnacle Benefit Plans, on the one hand, and those covered by CB Benefit Plans, on the other, prior to the Effective Time, but (iii) with the overall view that the CB Benefit Plans would be cancelled, terminated or frozen, and replaced by the Pinnacle Benefit Plans for times following the Effective Time to the extent permitted by applicable law. The New Benefit Plans (x) shall treat CB's employees who become employees of Pinnacle ("Continuing Employee") at the Effective Time as new employees, but shall provide credit, in accordance with the terms of the applicable CB Benefit Plan, for purposes of vesting and eligibility to participate (but not for purposes of benefit accrual), for each Continuing Employee's service with CB immediately prior to the Effective Time, and (y) shall not deprive Continuing Employees and their covered dependents of any partial or -42- complete coverage in connection with any preexisting condition or previous medical treatments. (b) Immediately prior to the Effective Time, CB shall make certain payments to Messrs. Joseph Heffernan, George L. Koehm, Daniel R. Buresh, James D. Neff, Allen E. Jones and Marvin L. Kominiarek, Jr. in the amounts set forth for each said individual, respectively, in the Acknowledgments executed and delivered by each such individual in the forms attached hereto as Exhibits D-1, D-2, D-3, D-4, D-5 and D-6, respectively (the "Acknowledgments"); and, as set forth in and provided by said Acknowledgments, in consideration of said payments, (i) the Employment Agreement dated as of December 23, 1992, as amended, among CB, CB Bank and Mr. Joseph Heffernan (the "Bank Employment Agreement"), (ii) each of the Change in Control Agreements dated as of December 23, 1992 between CB Bank and each of Messrs. George L. Koehm, Daniel R. Buresh, James D. Neff, Allen E. Jones and Marvin L. Kominiarek, Jr. (the "Bank Change in Control Agreements"), (iii) the Employment Agreement dated as of December 23, 1992, as amended, between CB and Mr. Joseph Heffernan (the "CB Employment Agreement"), and (iv) each of the Change in Control Agreements dated as of December 23, 1992 between CB and each of Messrs. George L. Koehm, Daniel R. Buresh, Allen E. Jones, and Marvin L. Kominiarek, Jr. (the "CB Change in Control Agreements"), shall be deemed to be fully satisfied and terminated for all purposes. (c) Upon the Effective Time, Pinnacle shall offer to employ on an "at will" basis each of Messrs. Joseph Heffernan, George L. Koehm, Daniel R. Buresh and James D. Neff, respectively, with certain terms regarding base salary amounts, insurance coverages and severance benefits as provided in Severance Agreements with each of said persons in the forms attached hereto as Exhibits E- 1, E-2, E-3 and E-4, respectively (the "Severance Agreements"). In the event that any said person declines such employment at and following the Effective Time and does not enter into his respective Severance Agreement with Pinnacle, CB shall make a severance payment immediately prior to the Effective Time to said person in the amount specified for said person in his respective Acknowledgment and Pinnacle shall provide said person with certain continuing insurance coverages as set forth in and provided by said person's respective Acknowledgment. (d) At or immediately prior to the Effective Time, and in connection with the Merger, CB shall make payments under the Outside Directors' Emeritus Plan (the "Directors' Emeritus Plan") to those directors of CB and CB Bank who are eligible to receive benefits thereunder in the amounts set forth in the CB Disclosure Schedule, which accurately sets forth all such amounts payable thereunder. CB covenants, represents and warrants to Pinnacle (i) that the CB Disclosure Schedule includes a true and complete list of all persons eligible to receive benefits under the Directors' Emeritus Plan and the amount of benefits payable to each person so listed at the Effective Time and in connection with the Merger, (ii) that except as otherwise disclosed in such list no one is entitled to receive any benefits under the Directors' Emeritus -43- Plan, (iii) that the payment to each person so listed of the corresponding amounts so listed shall, in each case, constitute full and complete satisfaction of all liabilities and obligations of CB, CB Bank and Pinnacle under the Directors' Emeritus Plan, and (iv) that upon the payment of all such amounts the Directors' Emeritus Plan shall terminate and be of no further force or effect. (e) On or prior to the Effective Time, CB will terminate the Board of Directors Deferred Compensation Plan and shall pay to those directors who have deferred board fees under such plan such balances as are then held under such plan for such directors. CB covenants, represents and warrants to Pinnacle (i) that the CB Disclosure Schedule includes a true and complete list of all directors who have deferred board fees under such plan and the balances payable to such persons under such plan, (ii) that except as otherwise disclosed in such list no one is entitled to receive any benefits under such plan, (iii) that the payment to each person so listed of the corresponding balance so listed shall, in each case, constitute full and complete satisfaction of all liabilities and obligations of CB, CB Bank and Pinnacle under such plan, and (iv) that upon the payment of all such amounts such plan shall terminate and be of no further force or effect. (f) CB shall fund the secular trusts under CB's Supplemental Retirement Plan (the "CB SERP") with the contributions required for 1997 prior to the Effective Time, as set forth on the CB Disclosure Schedule. Pinnacle acknowledges that the "change in control" provisions of the CB SERP will be triggered by the Merger and that, consequently, CB will be obligated to make certain payments under the CB SERP at the Effective Time and in the amounts set forth in the CB Disclosure Schedule, which accurately sets forth all amounts payable thereunder. CB may contribute to the secular trusts under the CB SERP the minimum amount of funds necessary to satisfy all amounts so due thereunder in connection with the Merger as set forth in the CB Disclosure Schedule and Pinnacle agrees that after the secular trusts under the CB SERP are funded with all amounts so due, the secular trusts may make payments at the Effective Time to the officers set forth in the CB Disclosure Schedule in the amounts set forth in the CB Disclosure Schedule. CB covenants, represents and warrants to Pinnacle (i) that the CB Disclosure Schedule includes a true and complete list of all persons eligible to receive benefits under the CB SERP and the benefits payable to such persons under the CB SERP, (ii) that except as otherwise disclosed in such list no one is entitled to receive any benefits under the CB SERP, and (iii) that the payment to each person so listed of the corresponding benefits so listed shall, in each case, constitute full and complete satisfaction of all liabilities and obligations of CB, CB Bank and Pinnacle under the CB SERP. (g) During the period commencing on the date of this Agreement and ending on the Effective Time, CB may make contributions to its Employee Stock Ownership Plan (the "CB Bank ESOP"), including but not limited to amounts required to make scheduled principal and interest payments with respect to the -44- indebtedness of the CB Bank ESOP to CB as of the date of this Agreement during each calendar quarter pro-rated on a daily basis for partial quarters from the date of this Agreement through the Effective Time; provided, however, that such contributions shall be conditioned on their being allowed as a deduction by CB for federal income tax purposes and shall be returned to CB or its successors to the extent that any such deduction shall be disallowed. Prior to making any contribution to the CB Bank ESOP, CB shall deliver to Pinnacle a certified copy of a resolution adopted by CB's Board of Directors authorizing such contribution, stating the specific dollar amount thereof, and expressly providing for the contingency set forth in the preceding sentence. CB shall take such actions as are necessary to cause the termination of the CB Bank ESOP immediately prior to the Effective Time, conditioned upon receipt from the Internal Revenue Service of a determination letter confirming that such termination does not adversely affect the qualification of the CB Bank ESOP under sections 401(a) or 409 of the Code. CB shall select such counsel and other professional advisors as it shall determine to be necessary or appropriate to advise it in connection with the termination. All assets of the CB Bank ESOP remaining after the satisfaction of any outstanding indebtedness and the payment of all expenses, shall, to the extent permissible under applicable law, be allocated to the individual accounts of eligible participants and distributed to them as soon as practicable following the later of the date of receipt of a favorable determination letter or the Effective Time. In the event that such a favorable determination letter is not obtained, Pinnacle will, to the extent reasonably practical, maintain the CB Bank ESOP until all plan assets may be distributed on a tax-qualified basis to participants participating in the CB Bank ESOP at the Effective Time. In the event that the CB Bank ESOP is not completely distributed prior to the Effective Time, Pinnacle shall assume sponsorship of the CB Bank ESOP, and shall appoint a successor plan administrator who shall be such person as Pinnacle shall select with prior written approval of CB (which approval shall not be unreasonably withheld), for the purpose of completing the termination of the ESOP and the distribution of its assets. Notwithstanding anything to the contrary herein express or applied, neither Pinnacle nor CB, nor any of their respective Subsidiaries, shall take any action with respect to the CB Bank ESOP that would result in a violation of Section 415 of the Code. (h) CB may, but shall not be required to, terminate its 401(k) Financial Institutions Thrift Plan (the "CB 401(k) Plan") as of any date prior to the Effective Time, conditioned upon receipt from the Internal Revenue Service of a determination letter confirming that such termination does not adversely affect the qualification of the CB 401(k) Plan under Section 401(a) of the Code. CB shall select such counsel and other professional advisors as it shall determine to be necessary or appropriate to advise it and Pinnacle in connection with the termination. All assets of the CB 401(k) Plan remaining after the satisfaction of any outstanding indebtedness and the payment of all expenses, shall, to the extent permissible under applicable law and without liability to CB or Pinnacle, be allocated to the individual accounts of eligible -45- participants and distributed to them as soon as practicable following the later of the date of receipt of a favorable determination letter or the Effective Time. In the event that the CB 401(k) Plan is not completely distributed prior to the Effective Time, at the Effective Time, Pinnacle shall assume sponsorship of the CB 401(k) Plan, and shall appoint a successor plan administrator who shall be such person as Pinnacle shall select with the prior written approval of CB (which approval shall not be unreasonably withheld) for the purpose of completing the termination of the 401(k) Plan and the distribution of its assets to the extent permissible under applicable law and without liability to CB or Pinnacle. (i) Subject to the requirements of ERISA and the Code, prior to the Effective Time, CB shall take all action necessary to withdraw from the Financial Institutions Retirement Fund ("Retirement Fund"), through which CB currently sponsors its defined benefit pension plan (the "CB Plan"). Such withdrawal shall take place so that there is no qualified successor plan (as defined in the Retirement Fund) in existence at any applicable time. If, and only if, assuming all Retirement Fund benefits are vested on a plan termination basis and are based upon the most recent actuarial assumptions prepared by the Retirement Fund's actuary, the total of such benefits exceed, on the withdrawal date, the then current value of the assets of such Retirement Fund, CB may increase the CB Plan benefits to the extent of such excess, less (1) any expenses incurred in connection with the withdrawal from participation in the Retirement Fund and increasing CB Plan benefits; and (2) the continuing administrative costs and expenses of retirants' benefits remaining in the Retirement Fund. Notwithstanding the foregoing or anything to the contrary, withdrawal from the Retirement Fund shall not occur or be permitted in the event it would create a liability for which CB or Pinnacle would be responsible. Prior to withdrawing from the Retirement Fund or increasing CB Plan benefits, CB shall deliver to Pinnacle a copy of all resolutions adopted by CB's Board to effect the withdrawal from participation in the Retirement Fund and the amendment of the CB Plan and for the contingencies outlined in this Section 6.7(i) and shall deliver to Pinnacle all other documentation relating to the withdrawal from participation and amendment of the CB Plan. (j) Subject to and except as otherwise expressly provided in the provisions of this Section 6.7, the Surviving Corporation agrees to honor in accordance with their terms all benefits vested as of the Effective Time under the Pinnacle Benefit Plans or the CB Benefit Plans or under other contracts, arrangements, commitments, or understandings described in the Pinnacle Disclosure Schedule and the CB Disclosure Schedule. (k) Except to the extent otherwise expressly provided in this Agreement, nothing in this Section 6.7 shall be interpreted as preventing the Surviving Corporation from amending, modifying or terminating any Pinnacle Benefit Plans, CB Benefit Plans, or other -46- contracts, arrangements, commitments or understandings, in accordance with their terms and applicable law. 6.8 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which any individual who is now, or has been at any time prior to the date of this Agreement, or who becomes prior to the Effective Time, a director or officer or employee of CB or any of its Subsidiaries, including any entity specified in the CB Disclosure Schedule (the "Indemnified Parties"), is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he is or was a director, officer or employee of CB, any of the CB Subsidiaries or any entity specified in the CB Disclosure Schedule, or any of their respective predecessors or (ii) this Agreement, the Option Agreements or any of the transactions contemplated hereby or thereby, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use their best efforts to defend against and respond thereto. It is understood and agreed that after the Effective Time, Pinnacle shall indemnify and hold harmless, as and to the fullest extent permitted by law (and, as relates to acts or times prior to the Effective Time, to the fullest extent permitted by law pertaining to CB or any of its Subsidiaries at such time, including the provisions of Section 11 of CB's Certificate of Incorporation), each such Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney's fees and expenses in advance of the final disposition of any claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by law upon receipt of any undertaking required by applicable law), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation, and in the event of any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted of arising before or after the Effective Time), the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with Pinnacle; provided, however, that (A) Pinnacle shall have the right to assume the defense thereof and upon such assumption Pinnacle shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by any Indemnified Party in connection with the defense thereof, except that if Pinnacle elects not to assume such defense or counsel for the Indemnified Parties reasonably advises the Indemnified Parties that there are issues which raise conflicts of interest between Pinnacle and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with Pinnacle, and Pinnacle shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (B) Pinnacle shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties, unless an Indemnified -47- Party shall have reasonably concluded, based on the advice of counsel, that in order to be adequately represented, separate counsel is necessary for such Indemnified Party, in which case, Pinnacle shall be obligated to pay for such separate counsel, (C) Pinnacle shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld) and (D) Pinnacle shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. Any Indemnified Party wishing to claim Indemnification under this Section 6.8, upon learning of any such claim, action, suit, proceeding or investigation, shall notify Pinnacle thereof, provided that the failure to so notify shall not affect the obligations of Pinnacle under this Section 6.8 except to the extent such failure to notify materially prejudices Pinnacle. Pinnacle's obligations under this Section 6.8 continue in full force and effect for a period of six years from the Effective Time (or the period of the applicable statute of limitations, if longer); provided, however, that all rights to indemnification in respect of any claim (a "Claim") asserted or made within such period shall continue until the final disposition of such Claim. (b) Pinnacle shall use its best efforts to cause the individuals serving as officers and directors of CB, its Subsidiaries or any entity specified in the CB Disclosure Schedule immediately prior to the Effective Time to be covered for a period of six (6) years from the Effective Time (or the period of the applicable statute of limitations, if longer) by the directors' and officers' liability insurance policy maintained by CB or any of the CB Subsidiaries (provided that Pinnacle may substitute therefor policies of the same or substantially similar coverage and amounts containing terms and conditions which are not less advantageous in any material respect than such policy) with respect to acts or omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such; provided, however, that in no event shall Pinnacle be required to expend more than 150% of the current amount expended by CB or any of the CB Subsidiaries (the "Insurance Amount") to maintain or procure insurance coverage pursuant hereto; and provided, further, that if Pinnacle is unable to maintain or obtain the insurance called for by this Section 6.8(b), Pinnacle shall use its best efforts to obtain as much comparable insurance as available for the Insurance Amount. (c) In the event Pinnacle or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Pinnacle assume the obligations set forth in this Section 6.8. -48- (d) The provisions of this Section 6.8 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. 6.9 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement (including, without limitation, any merger between a Subsidiary of Pinnacle and a Subsidiary of CB) or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to the Merger, the proper officers and directors of each party to this Agreement and their respective Subsidiaries shall take all such necessary action as may be reasonably requested by, and at the sole expense of, Pinnacle. 6.10 ADVICE OF CHANGES. Pinnacle and CB shall promptly advise the other party of any change or event having a Material Adverse Effect on it or which it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein. 6.11 NEGOTIATIONS WITH OTHER PARTIES. So long as this Agreement remains in effect and no notice of termination has been given under this Agreement, CB shall not authorize or knowingly permit any of its representatives, directly or indirectly, to entertain, solicit or encourage negotiations with any person or entity or any group of persons or entities (a "Potential Acquiror") concerning any "Acquisition Proposal" (as hereinafter defined) other than Pinnacle pursuant to this Agreement. The preceding sentence shall not be construed to prohibit the Board of Directors of CB from providing, or authorizing or permitting their respective representatives to provide, to any person making an unsolicited Acquisition Proposal, any information that is public or published information or readily ascertainable from such information, or from discussing and considering any such unsolicited Acquisition Proposal if it is advised in writing by legal counsel that such actions are advisable under applicable law in order to discharge their fiduciary duties to stockholders. As used in this Agreement, "Acquisition Proposal" means any (i) proposal pursuant to which any corporation, partnership, person or other entity or group, other than Pinnacle, would acquire or participate in a merger or other business combination involving CB or any of the CB Bank Subsidiaries, directly or indirectly; (ii) proposal by which any corporation, partnership, person or other entity or group, other than Pinnacle, would acquire the right to vote 10% or more of the capital stock of CB or any of the CB Bank Subsidiaries entitled to vote thereon for the election of directors; (iii) acquisition of 10% or more of the assets of CB or any of the CB Bank Subsidiaries, other than in the ordinary course of business; or (iv) acquisition in excess of 10% of the outstanding capital stock of CB or any of the CB Bank Subsidiaries, other than as contemplated by this Agreement. -49- ARTICLE VII CONDITIONS PRECEDENT 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) STOCKHOLDER APPROVALS. This Agreement and the transactions contemplated hereby shall have been approved and adopted by the respective requisite affirmative votes of the holders of Pinnacle Common Stock and CB Common Stock entitled to vote thereon. (b) NASDAQ LISTING. The shares of Pinnacle Common Stock which shall be issued to the stockholders of CB upon consummation of the Merger shall have been authorized for trading and reporting on the Nasdaq National Market, subject to official notice of issuance. (c) OTHER APPROVALS. All regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all such waiting periods being referred to herein as the "Requisite Regulatory Approvals"). (d) S-4. The S-4 shall have become effective under the Securities Act and no stop order suspending the effectiveness of the S-4 shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits, materially restricts or makes illegal consummation of the Merger. (f) FEDERAL TAX OPINION. Pinnacle and CB each shall have received an opinion of their respective tax counsel, addressed to Pinnacle or CB, as the case may be, in form and substance reasonably satisfactory to Pinnacle and CB, dated as of the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time: (i) The Merger will constitute a tax free reorganization under Section 368(a)(1)(A) of the Code and Pinnacle and CB will each be a party to the reorganization; -50- (ii) No gain or loss will be recognized by Pinnacle or CB as a result of the Merger; (iii) No gain or loss will be recognized by the stockholders of CB who exchange their CB Common Stock solely for Pinnacle Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Pinnacle Common Stock); (iv) The tax basis of the Pinnacle Common Stock received by stockholders who exchange all of their CB Common Stock solely for Pinnacle Common Stock in the Merger will be the same as the tax basis of the CB Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); and (v) The holding period of Pinnacle Common Stock received by stockholders of CB in the Merger will include the period during which the shares of CB Common Stock surrendered in exchange therefor were held; provided, such CB Common Stock was held as a capital asset by the holder of such CB Common Stock at the Effective Time. In rendering such opinion, counsel may require and rely upon representations contained in certificates of officers of Pinnacle, CB and others. (g) POOLING OF INTERESTS. Pinnacle and CB shall each have received a letter, effective as of the Effective Time, from their respective independent accountants addressed to Pinnacle or CB, as the case may be, to the effect that the Merger will qualify for "pooling of interests" accounting treatment. 7.2 CONDITIONS TO OBLIGATION OF PINNACLE. The obligation of Pinnacle to effect the Merger is also subject to the satisfaction or waiver by Pinnacle at or prior to the Effective Time of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of CB set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except (i) to the extent such representations and warranties speak as of an earlier date and (ii) for any changes to the CB Disclosure Schedule that are disclosed by CB to Pinnacle in the form of an updated CB disclosure schedule delivered to Pinnacle as of the Closing Date (the "Closing Date CB Disclosure Schedule")) as of the Closing Date as though made on and as of the Closing Date. Pinnacle shall have received a certificate signed on behalf of CB by the Chief Executive Officer and the Chief Financial Officer of CB to the foregoing effect, and to which any Closing Date CB Disclosure Schedule shall be appended. (b) PERFORMANCE OF OBLIGATIONS OF CB. CB shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Pinnacle shall have received a certificate signed on -51- behalf of CB by the Chief Executive Officer and the Chief Financial Officer of CB to such effect. (c) ENVIRONMENTAL MATTERS. On or before April 30, 1997, Pinnacle shall have received, reviewed and approved an assessment report or reports of a firm or firms of environmental engineers or consultants satisfactory to Pinnacle concluding, in effect, that there are no present or past conditions relating to any properties of CB or any of the CB Subsidiaries involving or resulting from a past or present storage, spill, discharge, leak, emission, injection, escape, dumping or release of any kind whatsoever of any substance or exposure of any type of any workplace or to any medium, including, but not limited to, air, land, surface waters or underground waters, or from any generation, transportation, treatment, storage or disposal of waste materials, raw materials or products of any kind or from the storage, use or handling of any hazardous or toxic materials or other substances. (d) COMFORT LETTERS. Pinnacle shall have received "comfort" letters from Crowe Chizek & Company, L.L.P., dated (x) the effective date of the S-4 and (y) not earlier than five (5) days preceding the Closing Date, in each case substantially to the effect that: (i) based upon a review (and audit of year-end statements) of CB's consolidated financial statements dated as of March 31, 1996, September 30, 1996, each subsequent year-end and quarter-end and the most recent interim month-end consolidated financial statements of CB available prior to the date of any said letter, nothing has come to their attention that has caused them to believe that any adjustments would be required to be made to restate said financial statements in a manner conforming to GAAP; (ii) they are independent public accountants with respect to CB and the CB Subsidiaries within the meaning of the Securities Act and the Exchange Act and the applicable published rules and regulations thereunder; (iii) in their opinion, the audited consolidated financial statements of CB examined by them and included or incorporated by reference in the S-4 and the prospectus and reported therein by them, comply as to form in all material respects with the applicable accounting requirements of the Exchange Act, the Securities Act and the applicable published rules and regulations thereunder, as appropriate; (iv) on the basis of certain procedures and inquiries including a reading of the latest available unaudited interim consolidated financial statements of CB, inquiries of officials of CB responsible for financial and accounting matters, and a reading of the minutes of the Boards of Directors and stockholders of CB and the CB Subsidiaries (which procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards and would not necessarily reveal any material changes in the consolidated financial position or results of operations of CB), nothing came to their attention that caused them to believe that (A) the unaudited consolidated financial statements of CB included or incorporated by reference in the S-4 and the prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Exchange Act and the Securities Act, as appropriate, or that the unaudited consolidated financial statements are not in -52- conformity with GAAP applied on a basis consistent with that of the audited consolidated financial statements or that as of the most recent month-end preceding the Closing Date there has been any material change in the capital stock of CB, except as a result of the exercise of employee stock options granted prior to September 30, 1996, or the CB Subsidiaries or any increase in consolidated long-term debt of CB or the CB Subsidiaries or any reduction in consolidated stockholders' equity as compared with the amounts of those items set out in the audited consolidated statement of condition at March 31, 1996 and with any subsequent unaudited consolidated statement of condition included or incorporated by reference in the S-4 and the prospectus, except for changes and the amount of such reduction, if any, derived from CB's accounts and records, which are described in such letter or are set forth in the S-4 and the prospectus, or (B) since March 31, 1996 any dividends were paid on the CB Common Stock except as described in such letter; and (v) in addition to the limited procedures referred to in clause (iv) above, they have carried out certain specified procedures with respect to certain accounts or percentages and financial information which appear in the S-4 and the prospectus and which have been reasonably specified by Pinnacle, as described in such letter. (e) LEGAL OPINION. CB shall have delivered to Pinnacle an opinion, dated the Closing Date, of counsel for CB, satisfactory to Pinnacle and its counsel, to the effect set forth on Exhibit F. In rendering their opinion, counsel to CB may rely on certificates of officers of CB, opinions of other counsel, the authenticity of all signatures on documents believed to be genuine and such other evidence as they may deem necessary or desirable. (f) FAIRNESS OPINION. Pinnacle shall have received the favorable opinion from PL Capital, L.L.C. or other investment banking advisory firm satisfactory to Pinnacle in connection with the deliberations of its Board of Directors approving this Agreement and confirmed at or about the time the S-4 is declared effective and the Joint Proxy Statement is distributed that consummation of the Merger transaction contemplated by this Agreement upon the terms and conditions provided in this Agreement is fair to the stockholders of Pinnacle from a financial point of view. (g) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred since December 31, 1996 which has, or is likely to have, a Materially Adverse Effect on CB or upon the right of CB or any of the CB Subsidiaries to conduct, or the continuing successful operation of, any material or significant part of their businesses as presently conducted, including, without limitation, the Mortgage Loan Reverse Repurchase Program operated by CB Bank. (h) NET WORTH. The difference between the total consolidated assets of CB and the total consolidated liabilities of CB (the "Net Worth") as of the last day of the calendar month immediately preceding the Closing Date (the "Determination Date"), -53- as determined in accordance with generally accepted accounting principles consistently applied shall be not less than the Net Worth shown on the December 31, 1996 consolidated balance sheet of CB, after taking into account any and all dividends paid or declared or other distributions made, but excluding any and all costs and expenses incurred by CB with respect to the Merger transaction through and including the Closing Date. In calculating said Net Worth it shall be assumed that the value of CB's securities held for sale is, as of the Determination Date, equivalent to its value on December 31, 1996. Purchaser shall have received a certificate to said effect signed by appropriate officers of CB and by Crowe Chizek & Company, L.L.P. (i) EMPLOYMENT MATTERS. The Acknowledgments described in Section 6.7(b) shall have been executed and delivered by the respective parties thereto as provided in Section 6.7 of this Agreement. 7.3 CONDITIONS TO OBLIGATION OF CB. The obligation of CB to effect the Merger is also subject to the satisfaction or waiver by CB at or prior to the Effective Time of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Pinnacle set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except (i) to the extent such representations and warranties speak as of an earlier date and (ii) for any changes to the Pinnacle Disclosure Schedule that are disclosed by Pinnacle to CB in the form of an updated Pinnacle disclosure schedule delivered to CB as of the Closing Date, including copies of updated disclosure schedules of Pinnacle and IFC delivered with respect to the IFC Merger Agreement (the "Closing Date Pinnacle Disclosure Schedule")) as of the Closing Date as though made on and as of the Closing Date. CB shall have received a certificate signed on behalf of Pinnacle by the Chief Executive Officer and the Chief Financial Officer of Pinnacle to the foregoing effect, and to which any Closing Date Pinnacle Disclosure Schedule shall be appended. (b) PERFORMANCE OF OBLIGATIONS OF PINNACLE. Pinnacle shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and CB shall have received a certificate signed on behalf of Pinnacle by the Chief Executive Officer and the Chief Financial Officer of Pinnacle to such effect. (c) COMFORT LETTERS. CB shall have received "comfort" letters from KPMG Peat Marwick, L.L.P., dated (x) the effective date of the S-4 and (y) not earlier than five (5) days preceding the Closing Date, in each case substantially to the effect that: (i) based upon a review (and audit of year-end statements) of Pinnacle's consolidated financial statements dated as of December 31, 1995, September 30, 1996, each subsequent year-end and quarter-end and the most recent interim month-end consolidated financial statements of Pinnacle available prior to the date of any -54- said letter, nothing has come to their attention that has caused them to believe that any adjustments would be required to be made to restate said financial statements in a manner conforming to GAAP, other than such adjustments, if any, as are specifically noted and disclosed, none of which adjustments shall be materially adverse; (ii) they are independent public accountants with respect to Pinnacle and the Pinnacle Subsidiaries within the meaning of the Securities Act and the Exchange Act and the applicable published rules and regulations thereunder; (iii) in their opinion, the audited consolidated financial statements of Pinnacle examined by them and included or incorporated by reference in the S-4 and the prospectus and reported therein by them, comply as to form in all material respects with the applicable accounting requirements of the Exchange Act, the Securities Act and the applicable published rules and regulations thereunder, as appropriate; (iv) on the basis of certain procedures and inquiries including a reading of the latest available unaudited interim consolidated financial statements of Pinnacle, inquiries of officials of Pinnacle responsible for financial and accounting matters, and a reading of the minutes of the Boards of Directors and stockholders of Pinnacle and the Pinnacle Subsidiaries (which procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards and would not necessarily reveal material adverse changes in the consolidated financial position or results of operations of Pinnacle), nothing came to their attention that caused them to believe that the unaudited consolidated financial statements of Pinnacle included or incorporated by reference in the S-4 and the prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Exchange Act and the Securities Act, as appropriate, or that the unaudited consolidated financial statements are not in conformity with GAAP applied on a basis consistent with that of the audited consolidated financial statements or that as of the most recent month-end preceding the Closing Date there has been any material change in the capital stock of Pinnacle, except as a result of the exercise of employee stock options granted prior to September 30, 1996, or the Pinnacle Subsidiaries or any increase in consolidated long-term debt of Pinnacle or the Pinnacle Subsidiaries or any reduction in consolidated stockholders' equity as compared with the amounts of those items set out in the audited consolidated statement of condition at December 31, 1995 and with any subsequent unaudited consolidated statement of condition included or incorporated by reference in the S-4 and the prospectus, except for changes and the amount of such reduction, if any, derived from Pinnacle's accounts and records, which are described in such letter or are set forth in the S-4 and the prospectus; and (v) in addition to the limited procedures referred to in clause (iv) above, they have carried out certain specified procedures with respect to certain accounts or percentages and financial information which appear in the S- 4 and the prospectus and which have been reasonably specified by CB, as described in such letter. (d) LEGAL OPINION. Pinnacle shall have delivered to CB an opinion, dated the Closing Date, of counsel for Pinnacle, -55- satisfactory to CB and its counsel, to the effect set forth on Exhibit G. In rendering their opinion, counsel to Pinnacle may rely on certificates of officers of Pinnacle, opinions of other counsel, the authenticity of all signatures on documents believed to be genuine and such other evidence as they may deem necessary or desirable. (e) FAIRNESS OPINION. CB shall have received the favorable opinion from Charles Webb & Company in connection with the deliberations of its Board of Directors approving this Agreement and confirmed at or about the time the S-4 is declared effective and the Joint Proxy Statement is distributed that consummation of the Merger transaction contemplated by this Agreement upon the terms and conditions provided in this Agreement is fair to the stockholders of CB from a financial point of view. (f) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred since December 31, 1996 which has, or is likely to have, a Materially Adverse Effect on Pinnacle or upon the right of Pinnacle or any of the Pinnacle Subsidiaries to conduct, or the continuing successful operation of, any material or significant part of their businesses as presently conducted. ARTICLE VIII TERMINATION AND AMENDMENT 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of Pinnacle or CB: (a) by mutual consent of Pinnacle and CB in a written instrument, if the Board of Directors of each so determines by a vote of a majority of the members of its entire Board; (b) by either the Board of Directors of Pinnacle or the Board of Directors of CB if any Governmental Entity which must grant a Requisite Regulatory Approval has denied approval of the Merger and such denial has become final and nonappealable or any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order permanently enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; (c) by either the Board of Directors of Pinnacle or the Board of Directors of CB if the Merger shall not have been consummated on or before the first anniversary of the date of this Agreement, unless the failure of the Closing (as defined in Section 9.1) to occur by such date shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein; (d) by either the Board of Directors of Pinnacle or the Board of Directors of CB (provided that the terminating party is -56- not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of the other party, which breach is not cured within forty-five (45) days following written notice to the party committing such breach, or which breach, by its nature or timing, cannot be cured prior to the Closing Date; (e) by either Pinnacle or CB if any approval of the stockholders of Pinnacle or CB required for the consummation of the Merger shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of stockholders or at any adjournment or postponement thereof; (f) by either Pinnacle or CB if any of the conditions specified by Article VII to the obligation of the terminating party have not been satisfied on the Closing Date (provided that the failure of satisfaction of any said condition shall not have been caused by the material breach of the terminating party); (g) by Pinnacle if the Closing Date CB Disclosure Schedule discloses any change from the CB Disclosure Schedule which has, or is likely to have, a Material Adverse Effect on CB or any of the CB Subsidiaries; or by CB if the Closing Date Pinnacle Disclosure Schedule (including copies of updated disclosure schedules of Pinnacle and IFC delivered with respect to the IFC Merger Agreement) discloses any change from the Pinnacle Disclosure Schedule which has, or is likely to have, a Material Adverse Effect on Pinnacle or any of the Pinnacle Subsidiaries; or (h) by CB if prior to the Closing Date there becomes a reasonable likelihood that the tax free reorganization treatment for federal income tax purposes accorded to the merger of Maco Bancorp, Inc. with and into Pinnacle effective December 1, 1995, will not be sustained. 8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by either Pinnacle or CB as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Pinnacle, CB, any of their respective Subsidiaries or any of the officers or directors of any of them shall have any liability of any nature whatsoever hereunder, or in connection with the transactions contemplated hereby, except that (i) Sections 6.2(b), 8.2, 9.2 and 9.3, shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, neither Pinnacle nor CB shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. 8.3 AMENDMENT. Subject to compliance with applicable law, this Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Pinnacle or CB; -57- provided, however, that after any approval of the transactions contemplated by this Agreement by the respective stockholders of Pinnacle or CB, there may not be, without further approval of such stockholders, any amendment of this Agreement which changes the amount or the form of the consideration to be delivered to the holders of CB Common Stock hereunder other than as contemplated by this Agreement. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Board of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein; provided, however, that after any approval of the transactions contemplated by this Agreement by the respective stockholders of Pinnacle or CB, there may not be, without further approval of such stockholders, any extension or waiver of this Agreement or any portion thereof which reduces the amount or changes the form of the consideration to be delivered to the holders of CB Common Stock hereunder other than as contemplated by this Agreement. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE IX GENERAL PROVISIONS 9.1 CLOSING. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date and at a place to be specified by the parties, which shall be no later than five (5) business days after the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII hereof, unless extended by mutual agreement of the parties (the "Closing Date"). 9.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement (other than pursuant to the CB Option Agreement, which shall terminate in accordance with its terms) shall survive the Effective Time, except for those covenants and agreements contained herein and therein which by their terms apply in whole or in part after the Effective Time. -58- 9.3 EXPENSES. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense; provided, however, that two-thirds of the costs and expenses of printing and mailing the Joint Proxy Statement in connection with the Merger shall be borne by Pinnacle and the balance thereof, up to a maximum amount not to exceed $25,000, shall be borne by CB. 9.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Pinnacle to: Pinnacle Financial Services, Inc. 830 Pleasant Street St. Joseph, Michigan 49085 Attention: Richard L. Schanze, Chairman and CEO Fax: (616) 853-5567 with copies to: Miller, Canfield, Paddock and Stone, P.L.C. 1400 N. Woodward Ave., Suite 100 Bloomfield Hills, Michigan 48304 Attention: J. Kevin Trimmer, Esq. Fax: (810) 258-3036 and (b) if to CB, to: CB Bancorp, Inc. 126 East Fourth Street Michigan City, Indiana 46360 Attention: Joseph F. Heffernan, Chairman, President and CEO Fax: (202) 966-9409 with copies to: Muldoon, Murphy & Faucette 5101 Wisconsin Avenue, N.W. Washington, D.C. 20016 Attention: Lori M. Beresford, Esq. Fax: (202) 966-9409 9.5 INTERPRETATION. When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained -59- in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". No provision of this Agreement shall be construed to require Pinnacle, CB or any of their respective Subsidiaries or affiliates to take any action which would violate any applicable law, rule or regulation. 9.6 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 9.7 ENTIRE AGREEMENT. This Agreement (including the documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 9.8 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. 9.9 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 9.10 PUBLICITY. Except as otherwise required by applicable law or the rules of NASDAQ, neither Pinnacle nor CB shall, or shall permit any of its Subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to, or otherwise make any public statement concerning, the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. 9.11 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor any of the rights, interests or obligations shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except as otherwise specifically provided in Section 6.8, this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. -60- 9.12 OTHER TRANSACTIONS. Prior to the date hereof, CB has been provided with copies of, and CB has reviewed, the IFC Merger Agreement (including the disclosure schedules of Pinnacle and IFC referenced therein), the Pinnacle/IFC Stock Option Agreements and the Branch Office Swap Agreements. The entering into and performance of the IFC Merger Agreement, the Pinnacle/IFC Stock Option Agreements and/or the Branch Office Swap Agreements, and consummation of the transactions contemplated thereby, by Pinnacle are hereby ratified, approved and authorized by CB, and are and shall be deemed to be expressly permitted for all purposes under this Agreement. Immediately after the execution of this Agreement, Pinnacle and CB shall execute and deliver the CB Option Agreement. -61- IN WITNESS WHEREOF, Pinnacle and CB have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PINNACLE FINANCIAL SERVICES, INC. By: _________________________________ Richard L. Schanze Chairman and Chief Executive Officer CB BANCORP, INC. By: _________________________________ Joseph F. Heffernan Chairman, President and Chief Executive Officer -62- SCHEDULE OF EXHIBITS Exhibit A - CB Option Agreement Exhibit B - Bank Merger Agreement Exhibit C - Affiliate Letter Agreement Exhibit D - Forms of Acknowledgments (Exhibits D-1, D-2, D-3, D-4, D-5 and D-6) Exhibit E - Forms of Severance Agreements (Exhibits E-1, E-2, E-3 and E-4) Exhibit F - Opinion of CB Counsel Exhibit G - Opinion of Pinnacle Counsel EXHIBIT A STOCK OPTION AGREEMENT THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED STOCK OPTION AGREEMENT, dated as of March 1, 1997, between CB BANCORP, INC., a Delaware corporation ("Issuer"), and PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Grantee"). WITNESSETH: WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto immediately prior to this Stock Option Agreement (the "Agreement"); and WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as hereinafter defined): NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 115,037 fully paid and nonassessable shares of Issuer's Common Stock, par value $ 0.01 per share ("Common Stock"), at a price of $28.50 per share (the "Option Price"); provided, however, that in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 9.9% of the Issuer's issued and outstanding shares of Common Stock without giving effect to any shares subject to or issued pursuant to the Option. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are either (i) issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased, retired or otherwise cease to be outstanding after the date of the Agreement, the number of shares of Common Stock subject to the Option shall be increased or decreased, as appropriate, so that, after an event described in either clause (i) or (ii), such number equals 9.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. A-1 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, and from time to time, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written notice of such exercise (as provided in subsection (e) of this Section 2) within 60 days following such Subsequent Triggering Event. Each of the following shall be an Exercise Termination Event: (i) the Effective Time (as defined in the Merger Agreement) of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event, except a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non- volitional); or (iii) the passage of 12 months after termination of the Merger Agreement if such termination follows the occurrence of an Initial Triggering Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional) (provided that if an Initial Triggering Event continues or occurs beyond such termination and prior to the passage of such 12-month period, the Exercise Termination Event shall be 12 months from the expiration of the Last Triggering Event but in no event more than 18 months after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to expire. The term "Holder" shall mean the holder or holders of the Option. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the stockholders of Issuer approve or accept any Acquisition Transaction. For purposes of this Agreement, "Acquisition Transaction" shall mean (w) a merger or consolidation, or any similar transaction, involving Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer, (x) a purchase, lease or other acquisition or assumption of all or a substantial portion of the assets or deposits of Issuer or any Significant Subsidiary of Issuer, (y) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 10% or more of the A-2 voting power of Issuer, or (z) any substantially similar transaction; provided, however, that in no event shall any merger, consolidation, purchase or similar transaction involving only the Issuer and one or more of its Subsidiaries or involving only any two or more of such Subsidiaries, be deemed to be an Acquisition Transaction, provided that any such transaction is not entered into in violation of the terms of the Merger Agreement; and provided, further, that any transaction described in this sentence that is expressly permitted by the Merger Agreement shall not be deemed to be an Acquisition Transaction; (ii) Issuer or any Issuer Subsidiary, without having received Grantee's prior written consent, shall have authorized, recommended, proposed or publicly announced its intention to authorize, recommend or propose, to engage in an Acquisition Transaction with any person other than Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly withdrawn or modified, or publicly announced its interest to withdraw or modify, in any manner adverse to Grantee, its recommendation that the stockholders of Issuer approve the transactions contemplated by the Merger Agreement; (iii) Any person other than Grantee, any Grantee Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of its business (and other than any person who (a) as of the date hereof beneficially owns 10% or more of the outstanding shares of Common Stock and (b) would be eligible to use Schedule 13G but for the fact that such person owns 10% or more of the outstanding shares of Common Stock) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and regulations thereunder); (iv) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its stockholders by public announcement or written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (v) After a bona fide proposal by public announcement or written communication is made by a third party to Issuer or its stockholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall not have been cured prior to the Notice Date (as defined below); or (vi) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to A-3 which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, the Office of Thrift Supervision (the "OTS"), or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (c) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 20% or more of the then outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in paragraph (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (y) shall be 20%. (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event of which it has notice (together, a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of the Federal Reserve Board, the OTS or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to designate such a bank account shall not preclude the Holder from exercising the Option. (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this A-4 Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance reasonably satisfactory to Issuer, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions to this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. A-5 (j) Notwithstanding anything to the contrary contained in this Agreement, the Issuer shall not be obligated to issue shares of Common Stock upon the exercise of the Option (i) in the absence of any required governmental or regulatory approval or consent necessary for the Issuer to issue shares or for the Grantee to exercise the Option, (ii) in the event and for so long as the Grantee is in material breach of its representations, warranties, covenants or obligations under the Merger Agreement (unless excused by reason of the material breach of the Issuer of any of its representations, warranties, covenants or obligations under the Merger Agreement), or (iii) so long as any injunction or decree or ruling issued by a court of competent jurisdiction is in effect which prohibits the sale or delivery of the Common Stock. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Change in Bank Control Act of 1978, as amended, the Home Owners' Loan Act, as amended, the Change in Savings and Loan Control Act of 1978, as amended, or any other federal or state banking or savings and loan law, prior approval of or notice to the Federal Reserve Board, the OTS or to any other federal or state regulatory authority is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board, the OTS or such other federal or state regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably A-6 satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5. In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, distributions on or in respect of the Common Stock that would be prohibited under the terms of the Merger Agreement, or the like, the type and number of shares of Common Stock purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Issuer's obligations hereunder. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 90 days of such Subsequent Triggering Event (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a shelf registration statement under the 1933 Act covering this Option and any shares issued and issuable pursuant to this Option and shall use its reasonable best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of this Option and any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its reasonable best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of the Option or Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option or Option Shares would interfere A-7 with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, however, that after any such required reduction the number of Option Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, however, that if such reduction occurs, then the Issuer shall file a registration statement for the balance as promptly as practical and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in secondary offering underwriting agreements for the Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer agrees to send a copy thereof to any other person known to Issuer to be entitled to registration rights under this Section 6, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. Notwithstanding anything to the contrary contained herein, in no event shall Issuer be obligated to effect more than two registrations pursuant to this Section 6 by reason of the fact that there shall be more than one Grantee as a result of any assignment or division of this Agreement. 7. (a) Immediately prior to the occurrence of a Repurchase Event (as defined below), (i) following a request of the Holder, delivered prior to an Exercise Termination Event, Issuer (or any successor thereto) shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to the amount by which (A) the Market/Offer Price (as defined below) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised and (ii) at the request of the owner of Option Shares from time to time (the "Owner"), delivered within 90 days of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase such number of the Option Shares from the Owner as the Owner shall designate at a price (the "Option Share Repurchase Price") equal to the Market/Offer Price multiplied by the number of Option Shares so designated. The term "Market/Offer Price" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of Common Stock within the three-month period immediately preceding the date the Holder gives notice of the required repurchase of this Option or the Owner gives notice of the required repurchase of Option Shares, as the case may be, or (iv) in the event of a sale of all or a substantial portion of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining assets of Issuer as determined by a nationally recognized A-8 investment banking firm mutually selected by the Holder or the Owner, as the case may be, on the one hand, and the Issuer, on the other, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the Market/Offer Price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm mutually selected by the Holder or Owner, as the case may be, on the one hand, and the Issuer, on the other. (b) The Holder and the Owner, as the case may be, may exercise its right to require Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement or certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that the Holder or the Owner, as the case may be, elects to require Issuer to repurchase this Option and/or the Option Shares in accordance with the provisions of this Section 7. Within the latter to occur of (x) five business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto and (y) the time that is immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered to the Holder the Option Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor or the portion thereof that Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that Issuer is prohibited under applicable law or regulation from repurchasing the Option and/or the Option Shares in full, Issuer shall immediately so notify the Holder and/or the Owner and thereafter deliver or cause to be delivered, from time to time, to the Holder and/or the Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within five business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer at any time after delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation from delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its best efforts to obtain all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to accomplish such repurchase), the Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as appropriate, that portion of the Option Repurchase Price or the Option Share Repurchase Price that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option Agreement evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Stock Option Agreement was exercisable at the time of delivery of the A-9 notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to the Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. (d) For purposes of this Section 7, a Repurchase Event shall be deemed to have occurred (i) upon the consummation of any merger, consolidation or similar transaction involving Issuer or any purchase, lease or other acquisition of all or a substantial portion of the assets of Issuer, other than any such transaction which would not constitute an Acquisition Transaction pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition by any person of beneficial ownership of 50% or more of the then outstanding shares of Common Stock, provided that no such event shall constitute a Repurchase Event unless a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event. The parties hereto agree that Issuer's obligations to repurchase the Option or Option Shares under this Section 7 shall not terminate upon the occurrence of an Exercise Termination Event unless no Subsequent Triggering Event shall have occurred prior to the occurrence of an Exercise Termination Event. 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its Subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding voting shares and voting share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its Subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (1) "Acquiring Corporation" shall mean (i) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving person, and (iii) the transferee of all or substantially all of Issuer's assets. A-10 (2) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (3) "Assigned Value" shall mean the Market/Offer Price, as defined in Section 7. (4) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Acquiring Corporation. A-11 (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to (x) the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised plus (y) Grantee's reasonable out-of-pocket expenses (to the extent not previously reimbursed), and at the request of the owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to (x) the Highest Closing Price multiplied by the number of Substitute Shares so designated plus (y) Grantee's reasonable Out-of- Pocket Expenses (to the extent not previously reimbursed). The term "Highest Closing Price" shall mean the highest closing price for shares of Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) The Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that the Substitute Option Holder or the Substitute Share Owner, as the case may be, elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable, and in any event within five business days after the surrender of the Substitute Option and/or certificates representing Substitute Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor or, in either case, the portion thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation from repurchasing the Substitute Option and/or the Substitute Shares in part or in full, the Substitute Option Issuer following a request for repurchase A-12 pursuant to this Section 9 shall immediately so notify the Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the portion of the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, that if the Substitute Option Issuer is at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in full (and the Substitute Option Issuer shall use its best efforts to receive all required regulatory and legal approvals as promptly as practicable in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Common Shares it is then so prohibited from repurchasing. 10. The 90-day period for exercise of certain rights under Sections 2, 6, 7 and 13 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights, and for the expiration of all statutory waiting periods; and (ii) to the extent necessary to avoid liability under Section 16(b) of the 1934 Act by reason of such exercise. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to A-13 consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. 12. Grantee hereby represents and warrants to Issuer that: (a) Grantee has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act. 13. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 90 days following such Subsequent Triggering Event (or such later period as provided in Section 10); provided, however, that until the date 15 days following the date on which the Federal Reserve Board and/or the OTS approves an application by Grantee if required under applicable law to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board or the OTS, as applicable. A-14 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation making application to cause the shares of Common Stock issuable hereunder to be approved for trading and reporting on the Nasdaq National Market, upon official notice of issuance and applying to the Federal Reserve Board and/or the OTS if required under applicable law for approval to acquire the shares issuable hereunder. 15. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 16. If any term, provision, covenant or restriction contained in the Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer is not permitted to repurchase pursuant to Section 7, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to acquire or to require Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 17. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 18. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 19. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 20. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. A-15 21. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 22. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. A-16 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. CB BANCORP, INC. By: _________________________________________ Joseph F. Heffernan Chairman, President and Chief Executive Officer PINNACLE FINANCIAL SERVICES, INC. By: _________________________________________ Richard L. Schanze Chairman and Chief Executive Officer A-17 EXHIBIT B AGREEMENT AND PLAN OF MERGER AND CONSOLIDATION COMMUNITY BANK WITH AND INTO PINNACLE BANK UNDER THE CHARTER OF PINNACLE BANK THIS AGREEMENT AND PLAN OF MERGER AND CONSOLIDATION (the "Plan of Merger"), dated as of ________________, 1997, by and between the Board of Directors of COMMUNITY BANK, a federal savings bank ("CB Bank"), with its principal office at 126 East Fourth Street, Michigan City, Indiana 46360, and the Board of Directors of PINNACLE BANK, a Michigan banking corporation ("Pinnacle Bank"), with its principal office at 830 Pleasant Street, St. Joseph, Michigan 49085. W I T N E S S E T H: WHEREAS, CB Bancorp, Inc., a Delaware corporation and the parent corporation of CB Bank, and Pinnacle Financial Services, Inc., a Michigan corporation and the parent corporation of Pinnacle Bank, have entered into an Agreement and Plan of Merger dated as of ______________, 1997 (the "Reorganization Agreement"), providing for, among other things, the merger and consolidation of CB Bank with and into, and under the charter of, Pinnacle Bank, with Pinnacle Bank being the Surviving Bank; and WHEREAS, Pinnacle Bank and CB Bank have determined that it is in their mutual best interests to merge, with CB Bank being merged and consolidated with and into, and under the charter of, Pinnacle Bank, with Pinnacle Bank being the Surviving Bank. NOW, THEREFORE, the plan for the consummation of such merger and consolidation (the "Bank Merger") is as follows: FIRST: The Consolidating Banks are Pinnacle Bank and CB Bank. Upon the Bank Merger Effective Time (as hereinafter defined), CB Bank shall be merged and consolidated with and into, and under the charter of, Pinnacle Bank and Pinnacle Bank shall be the Surviving Bank. SECOND: As to each Consolidating Bank, the designation and number of outstanding shares of capital stock are as follows: A. The total authorized capital stock of Pinnacle Bank immediately prior to the Bank Merger Effective Time shall be _____ shares of common stock, par value $_____ per share (the "Pinnacle Bank Common Stock"), all of which immediately prior to the Bank Merger Effective Time shall be issued and outstanding. All of the shares of Pinnacle Bank Common Stock which are issued and outstanding as of the effective record date may be voted at any meeting of the shareholder of B-1 Pinnacle Bank at which this Plan of Merger is submitted for approval. B. The total authorized capital stock of CB Bank immediately prior to the Bank Merger Effective Time shall be _____ shares of common stock, par value $_____ per share (the "CB Bank Common Stock"), all of which immediately prior to the Bank Merger Effective Time shall be issued and outstanding. All of the shares of CB Bank Common Stock which are issued and outstanding as of the effective record date may be voted at any meeting of the shareholder of CB Bank at which this Plan of Merger is submitted for approval. THIRD: The terms and conditions of the Bank Merger are as follows: A. The Bank Merger shall be consummated and become effective, subject to the terms and conditions of the Reorganization Agreement and this Plan of Merger, following the Effective Time (defined herein as in the Reorganization Agreement), which shall be held as provided in Section 1.13 of the Reorganization Agreement following, among other things, the requisite approval of the transactions contemplated hereby by the shareholders of CB Bank and Pinnacle Bank, and the receipt of all requisite approvals, consents and licenses of all regulatory and other governmental authorities for consummation of the Bank Merger. The time of ______, local time, on the day on which such Bank Merger shall become effective is herein referred to as the "Bank Merger Effective Time". B. At the Bank Merger Effective Time: l. The Articles of Incorporation of Pinnacle Bank shall thereupon be and constitute the Articles of Incorporation of the Surviving Bank until the same shall thereafter be altered or amended in accordance with applicable law. 2. The Bylaws of Pinnacle Bank shall thereupon be and constitute the Bylaws of the Surviving Bank until the same shall thereafter be altered, amended or repealed. 3. The directors of the Surviving Bank shall be the following persons: ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, and ____________. 4. The officers of the Surviving Bank shall be those persons who are appointed by the Board of Directors of the Surviving Bank promptly following the Bank Merger Effective Time. B-2 C. From and after the Bank Merger Effective Time, the separate existence of the Consolidating Banks shall cease and be merged and consolidated into one, the Surviving Bank, which shall possess all of the rights, privileges, powers and franchises as well of a public as of a private nature, and shall be subject to all of the restrictions, disabilities and duties of each of the Consolidating Banks so merged and consolidated; and all and singular the rights, privileges, powers and franchises of each of the Consolidating Banks, and all property, real, personal and mixed, and all debts due to either of said Consolidating Banks on whatever account, as well for stock subscriptions as all other things in action or belonging to each of the Consolidating Banks shall, without the necessity of delivery of any deeds, bills of sale or other instruments of transfer, be vested in the Surviving Bank resulting from the Bank Merger; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the Surviving Bank as they were of the several and respective Consolidating Banks and the title to any real estate vested by deed or otherwise, in either of such Consolidating Banks, shall not revert or be in any way impaired by reason of the Bank Merger. D. From and after the Bank Merger Effective Time, all rights of creditors and all liens upon any property of either of the Consolidating Banks shall be preserved unimpaired and all debts, liabilities and duties of the respective Consolidating Banks shall thenceforth attach to said Surviving Bank, and may be enforced against the Surviving Bank to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. E. From and after the Bank Merger Effective Time, any action or proceeding, whether civil, criminal or administrative, pending by or against either Consolidating Bank shall be prosecuted as if the Bank Merger had not taken place, or the Surviving Bank may be substituted in such action or proceeding in place of the Consolidating Bank as a party thereto. F. At the Bank Merger Effective Time, each share of Pinnacle Bank Common Stock authorized, issued and outstanding immediately prior to the Bank Merger Effective Time shall by virtue of the Bank Merger and without any action on the part of either of the Consolidating Banks, the Surviving Bank, or the holder thereof automatically be converted into one (1) share of common stock, par value $_____ per share, of the Surviving Bank. G. At the Bank Merger Effective Time, each share of CB Bank Common Stock authorized, issued and outstanding immediately prior to the Bank Merger Effective Time shall by virtue of the Bank Merger and without any action on the part of either of the Consolidating Banks, the Surviving Bank or B-3 the holder thereof automatically be cancelled, and such cancelled share of CB Bank Common Stock shall not be converted into any shares of capital stock or other securities of the Surviving Bank or any other entity. H. On the Bank Merger Effective Time, the holder of the certificate representing shares of Pinnacle Bank Common Stock outstanding at such time shall cease to have any rights with respect to such shares and its sole rights shall be with respect to the shares of common stock, par value $_____ per share, of the Surviving Bank into which its shares of Pinnacle Bank Common Stock have been converted by the Bank Merger as hereinabove provided. I. As of the Bank Merger Effective Time, each certificate evidencing shares of Pinnacle Bank Common Stock which have been converted into shares of common stock, par value $_____ per share, of the Surviving Bank pursuant to Subsection F of this Article Third shall by virtue of the Bank Merger and without any action on the part of either of the Consolidating Banks, the Surviving Bank, or the holder thereof automatically be deemed to constitute, and shall at all times thereafter constitute, a certificate representing the number of shares of common stock, par value $_____ per share, of the Surviving Bank into which the shares of Pinnacle Bank Common Stock have been converted by the Bank Merger as hereinabove provided. As of said Bank Merger Effective Time, and at all times thereafter, each certificate which represented issued and outstanding shares of Pinnacle Bank Common Stock immediately prior to the Bank Merger Effective Time shall be deemed for all purposes to evidence ownership of the shares of common stock, par value $_____ per share, of the Surviving Bank into which such shares of Pinnacle Bank Common Stock have been converted pursuant to the Bank Merger. FOURTH: This Plan of Merger will be terminated and the Bank Merger abandoned automatically in the event of the termination or abandonment of the Reorganization Agreement pursuant to the terms and conditions thereof. FIFTH: Any of the terms or conditions of this Plan of Merger may be waived at any time by whichever of the Consolidating Banks is, or the shareholders of which are, entitled to the benefit thereof by action taken by the Board of Directors of such Consolidating Banks or may be amended or modified in whole or in any part at any time prior to or subsequent to the vote(s) of the shareholder of CB Bank and/or the shareholder of Pinnacle Bank hereon by an agreement in writing after authorization by the Boards of Directors of the Consolidating Banks; PROVIDED, HOWEVER, that such action shall be taken by the Board of Directors of CB Bank and/or the Board of Directors of Pinnacle Bank only if, in the judgment of such Board, such waiver or such amendment or modification will not have a materially adverse effect on the benefits intended under this Plan of Merger to the shareholder of CB Bank or the shareholder of Pinnacle Bank, as the case may be. B-4 SIXTH: If at any time the Surviving Bank shall consider or be advised that any further assignments, conveyances or assurances in law are necessary or desirable to vest, perfect or confirm of record in the Surviving Bank the title to any property or rights of the Consolidating Banks or otherwise to carry out the provisions hereof, the proper officers of the Consolidating Banks immediately prior to the Bank Merger Effective Time shall execute and deliver any and all proper deeds, assignments and assurances in law, and do all things necessary or proper to vest, perfect or confirm title to such property or rights in the Surviving Bank and otherwise to carry out the provisions hereof. IN WITNESS WHEREOF, the respective Boards of Directors, Presidents and Secretaries of Community Bank and Pinnacle Bank have executed this Agreement and Plan of Merger under the respective seals thereof, all as of the day and year first above written. Attest: COMMUNITY BANK By _________________________ By____________________________ Secretary President ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ B-5 The signatories above being not less than a majority of all of the Directors of Community Bank. [Seal of Bank] Attest: PINNACLE BANK By _________________________ By _____________________________ Secretary President ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ The signatories above being not less than a majority of all of the Directors of Pinnacle Bank. [Seal of Bank] STATE OF INDIANA ) : ss. COUNTY OF _________ ) On this ____ day of ___________, 199_, before me, a Notary Public for the State and County aforesaid, personally came ________________, as President, and ________________, as Secretary, of Community Bank, a federal savings bank, and each in his said capacity acknowledged the foregoing instrument to be the act and B-6 deed of said corporation and the seal affixed thereto to be its seal; and came also ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, and ____________, being not less than a majority of the entire Board of Directors of said corporation, and each of them acknowledged said instrument to be the act and deed of said corporation and of himself/herself as director thereof. WITNESS my official seal and signature this day and year aforesaid. (Seal of Notary) ______________________________ , Notary Public _____________ County, Indiana My Commission Expires: _______ STATE OF MICHIGAN ) : ss. COUNTY OF _________ ) On this ____ day of ____________, 199_, before me, a Notary Public for the State and County aforesaid, personally came ________________, as President, and ___________________, as Secretary, of Pinnacle Bank, a Michigan banking corporation, and each in his said capacity acknowledged the foregoing instrument to be the act and deed of said corporation and the seal affixed thereto to be its seal; and came also ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, ____________, and ____________, being not less than a majority of the entire Board of Directors of said corporation, and each of them acknowledged said instrument to be the act and deed of said corporation and of himself/herself as director thereof. WITNESS my official seal and signature this day and year aforesaid. (Seal of Notary) ______________________________ , Notary Public _____________ County, Michigan My Commission Expires: _______ B-7 EXHIBIT C AFFILIATE'S AGREEMENT Pinnacle Financial Services, Inc. 830 Pleasant Street St. Joseph, Michigan 49085 and CB Bancorp, Inc. 126 East Fourth Street Michigan City, Indiana 46360 Ladies and Gentlemen: Reference is made to the Agreement and Plan of Merger dated as of _____________, 1997 (the "Merger Agreement"), by and between Pinnacle Financial Services, Inc., a Michigan corporation ("Pinnacle"), and CB Bancorp, Inc., a Delaware corporation ("CB"), which Merger Agreement provides for the merger (the "Merger") of CB with and into Pinnacle in a transaction in which, among other things, shares of common stock, $0.01 par value per share, of CB ("CB Common Stock"), will be converted into the right to receive shares of common stock, without par value, of Pinnacle ("Pinnacle Common Stock"), as more fully provided therein. The undersigned has been informed (i) that the Merger constitutes a transaction covered by Rule 145 under the Securities Act of 1933, as amended (the "Securities Act"); (ii) that the undersigned may be deemed to be an "affiliate" of CB and/or Pinnacle within the meaning of Rule 145; and (iii) that the shares of CB Common Stock and/or Pinnacle Common Stock held by the undersigned, and, if applicable, the shares of Pinnacle Common Stock which the undersigned may acquire in connection with the Merger, may only be disposed of in conformity with the provisions hereof. In addition, the undersigned has been informed that the treatment of the Merger as a pooling-of-interests for financial accounting purposes is dependent upon the accuracy of certain of the representations and the compliance with certain of the agreements set forth herein. The capitalized terms used and not defined herein shall have the meaning set forth in the Merger Agreement. 1. The undersigned, after inquiry of any agent with discretionary power to transfer either the undersigned's shares of CB Common Stock or the undersigned's shares of Pinnacle Common Stock, represents, warrants and covenants to Pinnacle as follows: (a) The undersigned has full power to execute this Affiliate's Agreement and to make the representations, C-1 warranties and agreements herein, and to perform his or her obligations hereunder. (b) The undersigned is currently the owner of that number of shares of CB Common Stock set forth in Schedule 1 hereto (the "CB Shares") and has held the CB Shares at all times since ___________, 1997, unless otherwise set forth in Schedule 1. (c) The undersigned is currently the owner of that number of shares of Pinnacle Common Stock set forth in Schedule 2 hereto (the "Pinnacle Shares") and has held the Pinnacle Shares at all times since ___________, 1997, unless otherwise set forth in Schedule 2. (d) The undersigned, for a period beginning not less than thirty (30) days prior to the Effective Time and ending on the date Pinnacle publishes financial results covering a period of at least thirty (30) days of combined operations of CB and Pinnacle following the Effective Time, shall not sell, transfer or otherwise dispose of, or reduce the undersigned's risk of ownership or investment in, (i) any of the CB Shares, (ii) any of the Pinnacle Shares or (iii) any shares of Pinnacle Common Stock received or acquired by the undersigned (A) pursuant to, or in connection with, the Merger, or (B) pursuant to, or in connection with, the exercise of any option, warrant or other instrument (collectively, the "Additional Pinnacle Shares"); PROVIDED, HOWEVER, that the undersigned may (i) exchange the CB Shares for shares of Pinnacle Common Stock in the Merger, and (ii) may make bona fide gifts or distributions without consideration so long as the recipients thereof agree not to sell, transfer or otherwise dispose of such Pinnacle Common Stock or CB Common Stock, as the case may be, except as provided herein. (e) The undersigned will not sell, transfer or dispose of any shares of Pinnacle Common Stock which the undersigned may receive or acquire in connection with the Merger or any securities which may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities herein sometimes collectively referred to as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless such sale, transfer or disposition is effected (i) pursuant to an exemption from the registration requirements of the Securities Act as provided in Section 3 hereof, or (ii) pursuant to an effective registration statement under, and in compliance with, the Securities Act; PROVIDED, HOWEVER, that the undersigned may make bona fide gifts or distributions without consideration so long as the recipients thereof agree not to sell, transfer or otherwise dispose of such Pinnacle Common Stock except as provided herein. C-2 (f) The undersigned has not engaged in a Sale of any shares of CB Common Stock at any time since ___________, 1997, unless otherwise set forth in Schedule 1. (g) The undersigned has not engaged in a Sale of any shares of Pinnacle Common Stock at any time since ___________, 1997, unless otherwise set forth in Schedule 2. (h) The undersigned is not aware of or participating in any plan or intention on the part of the shareholders of CB (a "Plan") to engage in a sale, exchange, transfer, redemption or reduction in any way of the undersigned's risk of ownership by short sale or otherwise, or other disposition, directly or indirectly (such actions being collectively referred to as a "Sale"), of Pinnacle Common Stock to be received by shareholders of CB pursuant to the Merger that will reduce ownership of Pinnacle Common Stock by such shareholders of CB to a number of shares having, in the aggregate, a value at the Effective Date of Merger of less than 50% of the total fair market value of the CB Common Stock outstanding immediately prior to the Merger. For purposes of this representation, shares of the CB Common Stock disposed of in a Sale prior to the Merger and in contemplation of the Merger will be considered to be outstanding stock of CB immediately prior to the Merger that was exchanged for Pinnacle Common Stock in the Merger and then disposed of pursuant to a Plan. 2. Pinnacle agrees to use its best efforts to file all reports and data with the Securities and Exchange Commission (the "Commission") necessary to permit the undersigned to sell Restricted Securities pursuant to, and otherwise in conformity with, Rule 145(d) under the Securities Act. 3. Pinnacle acknowledges that the provisions of Section 1(e) of this Affiliate's Agreement will be satisfied as to any Sale by the undersigned of Restricted Securities pursuant to Rule 145(d) under the Securities Act, as evidenced by a broker's letter stating that the requirements of Rule 145 have been met; PROVIDED, HOWEVER, that if counsel for Pinnacle or CB reasonably believes that the provisions of Rule 145 have not been complied with, or if requested by Pinnacle in connection with a proposed disposition, the undersigned shall furnish to Pinnacle a copy of a "no action" letter or other communication from the Commission or an opinion of counsel in form and substance satisfactory to Pinnacle, and its counsel, to the effect that the applicable provisions of paragraphs (c), (e), (f) and (g) of Rule 144 under the Securities Act have been complied with or that the disposition may be otherwise effected in the manner requested in compliance with the Securities Act. 4. The undersigned also understands that stop transfer instructions may be given to the transfer agent for Pinnacle with respect to the Restricted Securities, and that there may be placed on the certificates evidencing the Restricted Securities, or any substitutions therefor, a legend stating in substance: C-3 "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MUST BE SOLD PURSUANT TO RULE 145(d) PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE PROVISIONS OF THE SECURITIES ACT OF 1933, OR UNDER SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, INASMUCH AS THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED IN A TRANSACTION DESCRIBED IN RULE 145 BY PERSONS WHO MAY BE DEEMED TO BE "AFFILIATES" OF A PARTY TO THE TRANSACTION AND THE RESALE OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. CURRENTLY, UNDER RULE 145(d)(2), THIS RESTRICTION LAPSES ON __________________, 199__ (TWO (2) YEARS FROM CLOSING) UNLESS THE HOLDER OF THIS CERTIFICATE IS AN "AFFILIATE" OF THE ISSUER AT THE TIME OF SUCH SALE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND PINNACLE FINANCIAL SERVICES, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF PINNACLE FINANCIAL SERVICES, INC." Pinnacle agrees that such stop transfer instructions and legend will be promptly removed if the provisions of Section 3 are complied with, or if the undersigned causes to be delivered to Pinnacle a letter from the staff of the Commission or an opinion of counsel in form and substance satisfactory to Pinnacle, and its counsel, to the effect that such legend is not required for purposes of the Securities Act. 5. This Affiliate's Agreement shall be binding upon and enforceable against administrators, executors, representatives, heirs, legatees and divisees of the undersigned and any pledgee holding any Restricted Securities of the undersigned as collateral. [THIS SPACE INTENTIONALLY LEFT BLANK] C-4 IN WITNESS WHEREOF, the undersigned has executed the foregoing Affiliate's Agreement as of the _________ day of _________________, 1997. Very truly yours, ___________________________________ AGREED TO AND ACCEPTED: Pinnacle Financial Services, Inc. ______________________________ By: Title: C-5 SCHEDULE 1 NUMBER OF CB SHARES OWNED CB Shares Sold Since ___________, 1997 (Description of each transaction should include date of sale, number of shares sold and sale price.) - ---------------------------------------------------- SCHEDULE 2 NUMBER OF PINNACLE SHARES OWNED Pinnacle Shares Sold Since ___________, 1997 (Description of each transaction should include date of sale, number of shares sold and sale price.) - ---------------------------------------------------- EXHIBITS D-1, D-2, D-3, D-4, D-5 AND D-6 FORMS OF "ACKNOWLEDGMENTS" D-1 EXHIBIT D-1 ACKNOWLEDGMENT 1. I, Joseph F. Heffernan, acknowledge that provided that either (a) Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me at the effective time of merger (the "Effective Time") between CB Bancorp, Inc. and Pinnacle providing for a severance benefit as set forth in the Severance Agreement attached as Exhibit E-1 to the Agreement and Plan of Merger dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3 hereof, the payment of $341,000 will constitute full settlement of any and all rights which I may have pursuant to the Employment Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as of December 23, 1992, as amended from time to time (the "Employment Agreements"). 2. I further acknowledge that if I choose not to accept employment at and following the Effective Time with Pinnacle and do not enter into a severance agreement with Pinnacle as set forth in Paragraph 1 hereof. CB Bancorp, Inc. will pay me an amount of severance pay equal to $563,794 at the Effective Time plus required gross-up. 3. I further acknowledge that if I choose to accept employment at and following the Effective Time with Pinnacle and enter into a severance agreement with Pinnacle, I will be provided at no cost to me with the life, medical, dental and disability benefits provided by Pinnacle to other Pinnacle employees and that upon my termination of service with Pinnacle, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by Pinnacle for me prior to my termination of service with Pinnacle for a period of (36) thirty-six months following my termination of service with Pinnacle. I further acknowledge that in the event I do not enter into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me immediately prior to the Effective Time, for 36 months from the Effective Time. 4. I, Joseph F. Heffernan for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a Releasee") of and from all actions, causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses! damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any D1-1 amount owed pursuant to the Employment Agreements over and above the amounts described herein under paragraphs l, 2 and 3. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of ________________, 1997. _______________________________________ Joseph F. Heffernan D1-2 EXHIBIT D-2 ACKNOWLEDGMENT 1. I, George L. Koehm, acknowledge that provided that either (a) Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me at the effective time of merger (the "Effective Time") between CB Bancorp, Inc and Pinnacle providing for a severance benefit as set forth in the Severance Agreement attached as Exhibit E-2 to the Agreement and Plan of Merger dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3 hereof, the payment of $96,000 will constitute full settlement of any and all rights which I may have pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as of December 23, 1992, as amended from time to time (the "Change in Control Agreements"). 2. I further acknowledge that if I choose not to accept employment at and following the Effective Time with Pinnacle and do not enter into a severance agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc. will pay me an amount of severance pay equal to $181,860 at the Effective Time. 3. I further acknowledge that if I choose to accept employment at and following the Effective Time with Pinnacle and enter into a severance agreement with Pinnacle, I will be provided at no cost to me with the life, medical, dental and disability benefits provided by Pinnacle to other Pinnacle employees and that upon my termination of service with Pinnacle, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by Pinnacle for me prior to my termination of service with Pinnacle for a period of (24) twenty-four months following my termination of service with Pinnacle. I further acknowledge that in the event I do not enter into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me immediately prior to the Effective Time, as defined in the Agreement for 24 months from the Effective Time. 4. I, George L. Koehm for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a Releasee") of and from all actions, causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any amount owed D2-1 pursuant to the Change in Control Agreements over and above the amounts described herein under paragraphs 1, 2 and 3. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of _____________, 1997. _______________________________________ George L. Koehm D2-2 EXHIBIT D-3 ACKNOWLEDGMENT 1. I, Daniel R. Buresh, acknowledge that provided that either (a) Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me at the effective time of merger (the "Effective Time") between CB Bancorp, Inc. and Pinnacle providing for a severance benefit as set forth in the Severance Agreement attached as Exhibit E-3 to the Agreement and Plan of Merger dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3 hereof, the payment of $98,000 will constitute full settlement of any and all rights which I may have pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as of December 23, 1992, as amended from time to time (the "Change in Control Agreements"). 2. I further acknowledge that if I choose not to accept employment at and following the Effective Time with Pinnacle and do not enter into a severance agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc. will pay me an amount of severance pay equal to $168,022 at the Effective Time. 3. I further acknowledge that if I choose to accept employment at and following the Effective Time with Pinnacle and enter into a severance agreement with Pinnacle, I will be provided at no cost to me with the life, medical, dental and disability benefits provided by Pinnacle to other Pinnacle employees and that upon my termination of service with Pinnacle, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by Pinnacle for me prior to my termination of service with Pinnacle for a period of (24) twenty-four months following my termination of service with Pinnacle. I further acknowledge that in the event I do not enter into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me immediately prior to the Effective Time, for 24 months from the Effective Time. 4. I, Daniel R. Buresh for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a Releasee") of and from all actions, causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds. bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any amount owed D3-1 pursuant to the Change in Control Agreements over and above the amounts described herein under paragraphs 1, 2 and 3. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of ______________, 1997. _______________________________________ Daniel R. Buresh D3-2 EXHIBIT D-4 ACKNOWLEDGMENT 1. I, James D. Neff, acknowledge that provided that either (a) Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me at the effective time of merger (the "Effective Time") between CB Bancorp, Inc. and Pinnacle providing for a severance benefit as set forth in the Severance Agreement attached as Exhibit E-4 to the Agreement and Plan of Merger dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3 hereof, the payment of $135,400 will constitute full settlement of any and all rights which I may have pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as of December 23, 1992, as amended from time to time (the "Change in Control Agreements"). 2. I further acknowledge that if I choose not to accept employment at and following the Effective Time with Pinnacle and do not enter into a severance agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc. will pay me an amount of severance pay equal to $230,434 at the Effective Time. 3. I further acknowledge that if I choose to accept employment at and following the Effective Time with Pinnacle and enter into a severance agreement with Pinnacle, I will be provided at no cost to me with the life, medical, dental and disability benefits provided by Pinnacle to other Pinnacle employees and that upon my termination of service with Pinnacle, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by Pinnacle for me prior to my termination of service with Pinnacle for a period of (24) twenty-four months following my termination of service with Pinnacle. I further acknowledge that in the event I do not enter into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me immediately prior to the Effective Time, for 24 months from the Effective Time. 4. I, James D. Neff for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a Releasee") of and from all actions? causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any amount owed D4-1 pursuant to the Change in Control Agreements over and above the amounts described herein under paragraphs 1, 2 and 3. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of _______________, 1997. _______________________________________ James D. Neff D4-2 EXHIBIT D-5 ACKNOWLEDGMENT 1. I, Marvin L. Kominiarek, Jr., acknowledge that the payment of $113,964, will constitute full settlement of any and all rights which I may have pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank ("Bank"), and me, dated as of December 23, 1992, as amended from time to time (the "Change in Control Agreements"). 2. I further acknowledge that upon my termination of service with CB Bancorp. Inc. and the Bank immediately prior to the effective time of merger (the "Effective Time") between CB Bancorp, Inc. and Pinnacle Financial Services, Inc. ("Pinnacle"), or termination of service with Pinnacle following the Effective Time, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me by CB Bancorp, Inc. or Pinnacle, as the case may be, prior to my termination of service with CB Bancorp, Inc. or Pinnacle, as the case may be, for a period of (24) twenty-four months following my termination of service. 3. I, Marvin L. Kominiarek, Jr., for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc. and Community Bank ("each a Releasee") of and from all actions, causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any amount owed pursuant to the Change in Control Agreements over and above the amounts described herein under paragraphs 1 and 2. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of _________________, 1997. _______________________________________ Marvin L. Kominiarek, Jr. D5-1 EXHIBIT D-6 ACKNOWLEDGMENT 1. I, Allen E. Jones, acknowledge that the payment of $87,152, will constitute full settlement of any and all rights which I may have pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and Community Bank, a Federal Savings Bank ("Bank"), and me, dated as of December 23, 1992, as amended from time to time (the "Change in Control Agreements"). 2. I further acknowledge that upon my termination of service with CB Bancorp, Inc. and the Bank immediately prior to the effective time of merger (the "Effective Time") between CB Bancorp, Inc. and Pinnacle Financial Services, Inc. ("Pinnacle"), or termination of service with Pinnacle following the Effective Time, Pinnacle will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained for me by CB Bancorp, Inc. or Pinnacle, as the case may be, prior to my termination of service with CB Bancorp, Inc. or Pinnacle, as the case may be, for a period of (24) twenty-four months following my termination of service. 3. I, Allen E. Jones, for myself and my heirs, executors, administrators, successors and assigns, hereby irrevocably and unconditionally release and forever discharge Pinnacle, CB Bancorp, Inc. and Community Bank ("each a Releasee") of and from all actions, causes of action, suits, debts, dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Releasee, I or my heirs, executors, administrators, successors or assigns ever had, now have or hereafter can, shall or may have by reason of any matter, cause or thing whatsoever for payment of any amount owed pursuant to the Change in Control Agreements over and above the amounts described herein under paragraphs 1 and 2. IN WITNESS WHEREOF, I have executed this Instrument this ____ day of __________________, 1997. _______________________________________ Allen E. Jones D6-1 EXHIBITS E-1, E-2, E-3 AND E-4 FORMS OF "SEVERANCE AGREEMENTS" E-1 EXHIBIT E-1 SEVERANCE AGREEMENT This AGREEMENT is made effective as of ______________, 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. (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 E1-1 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 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. E1-2 (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 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 E1-3 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 (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 E1-4 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 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. E1-5 IN WITNESS WHEREOF, the parties have executed this Agreement on _________, 1997. Pinnacle Financial Services, Inc. By:______________________________ [Name] [Title] _________________________________ Joseph F. Heffernan Executive E1-6 EXHIBIT E-2 SEVERANCE AGREEMENT This AGREEMENT is made effective as of ________________, 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 George L. Koehm (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. (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 E2-1 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 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. E2-2 (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 $85,000 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 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 E2-3 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 (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 E2-4 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 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. E2-5 IN WITNESS WHEREOF, the parties have executed this Agreement on ________________, 1997. Pinnacle Financial Services, Inc. By: ___________________________________ [Name] [Title] _______________________________________ George L. Koehm Executive E2-6 EXHIBIT E-3 SEVERANCE AGREEMENT This AGREEMENT is made effective as of ______________, 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. (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 E3-1 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 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. E3-2 (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 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 E3-3 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 (l) 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 E3-4 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 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. E3-5 IN WITNESS WHEREOF, the parties have executed this Agreement on _______________, 1997. Pinnacle Financial Services, Inc. By: ___________________________________ [Name] [Title] _______________________________________ Daniel R. Buresh Executive E3-6 EXHIBIT E-4 SEVERANCE AGREEMENT This AGREEMENT is made effective as of _____________, 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. (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 E4-1 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 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. E4-2 (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 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 E4-3 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 (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 E4-4 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 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. E4-5 IN WITNESS WHEREOF, the parties have executed this Agreement on _________________, 1997. Pinnacle Financial Services, Inc. By: ______________________________ [Name] [Title] __________________________________ James D. Neff Executive E4-6 EXHIBIT F FORM OF OPINION OF COUNSEL TO CB BANCORP, INC. ____________, 1997 Pinnacle Financial Services, Inc. 830 Pleasant Street St. Joseph, Michigan 49083 Re: CB Bancorp, Inc. Ladies and Gentlemen: We have acted as counsel to CB Bancorp, Inc., a Delaware corporation ("CB"), in connection with the contemplated merger of CB with and into Pinnacle Financial Services, Inc., a Michigan corporation ("Pinnacle"), pursuant to that certain Agreement and Plan of Merger dated as of ___________, 1997, between Pinnacle and CB (the "Agreement"). In our capacity as counsel to CB, we have examined the Proxy Statement dated __________, 1997, filed by CB with the Securities and Exchange Commission (the "Commission") pursuant to Rule 14a-6 of the rules and regulations of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have also examined signed copies of the Agreement. This opinion is being rendered pursuant to Section 7.2(e) of the Agreement. (Capitalized terms not otherwise defined herein shall be defined herein as in the Agreement.) With respect to various questions of fact material to this opinion, we have relied upon (i) the representations and warranties made by the several parties in the Agreement and the documents referred to therein and (ii) certificates of officers of CB. We have also examined such certificates of public officials, documents and records of CB and other certificates, opinions and instruments and have made such other investigations as we have deemed necessary in connection with the opinions hereinafter set forth. In the course of our examinations and investigations, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and conformity to originals of all documents submitted to us as copies. We have further assumed that the Agreement and each other agreement entered into in connection with consummation of the transactions contemplated by the Agreement have been duly authorized by each party thereto other than CB, have been duly executed and delivered by each such other party, and constitute valid and binding obligations of each such other party, enforceable in accordance with their respective terms and conditions, and each such other party has taken all steps necessary to comply with all laws, rules, orders, rulings and regulations applicable to it to permit such party to enter into and perform its obligations. Our conclusions hereunder are specifically qualified by reference to, and are based solely upon, laws, rulings and regulations in effect on the date hereof and are subject to modification to the extent F-1 such laws, rulings and regulations are changed in the future. Based upon and subject to the foregoing, and subject to the qualifications, if any, that follow, it is our opinion that: A. CB is a corporation validly existing and in good standing under the laws of the State of Delaware, with corporate power to carry on its business substantially as described in the Proxy Statement, and is registered as a savings and loan holding company under the Home Owners' Loan Act. Based upon review of corporate records of CB and certificates of public officials and officers of CB, CB's authorized and outstanding capital stock is as set forth in the Agreement and the CB Disclosure Schedule and the Closing Date CB Disclosure Schedule, and all of the shares of its outstanding capital stock are duly and validly authorized and issued, and, except as otherwise disclosed in the Agreement, to our knowledge, there are no outstanding options, warrants, agreements, contracts, calls, commitments or demands of any character to which CB is a party relating to the capital stock of CB. B. Community Bank is a federal savings bank validly existing under the laws of the United States, and has corporate power to carry on its business in the State of Indiana. C. The execution, delivery and performance of the Agreement have been duly authorized and approved by all necessary corporate action on the part of CB, and the Agreement has been duly executed and delivered by CB and constitutes the valid and binding obligations of CB, enforceable in accordance with its respective terms, subject to considerations of bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent conveyance and the like and to general equitable principles (regardless of whether considered in a proceeding in equity or at law), and to standards of commercial reasonableness and good faith, and, to the best of our knowledge, the consummation by CB of the transactions contemplated by the Agreement will not result in any breach or violation of, or default of a material nature under any judgment, decree, mortgage, agreement, indenture or other instrument known to us applicable to CB. D. Based upon receipt of approvals from regulatory agencies, certificates of public officials and officers of CB, all such approvals, consents, authorizations or modifications as may be required to permit the performance by CB of its obligations under the Agreement have been obtained. E. Except as set forth in the CB Disclosure Schedule and the Closing Date CB Disclosure Schedule to the Agreement, we do not know of any material litigation, proceeding or governmental investigation pending against or relating to CB or any of its subsidiaries, its properties or businesses, or the transactions contemplated by the Agreement which will result in any material liability to CB or any of its subsidiaries. The opinions set forth above are limited to the Federal law of the United States of America and the General Corporation Law of the F-2 State of Delaware and the Business Corporation Act of the State of Michigan. Whenever any opinion herein contained refers to the existence or absence of facts "to the best of our knowledge", "to our knowledge", or "to our awareness" or otherwise such existence or absence of facts is based on our knowledge, actual knowledge or awareness, it is intended to signify that no information has come to the attention of those attorneys who have represented CB in this transaction (collectively, the "Designated Attorneys") which would give the Designated Attorneys actual knowledge of the existence or absence of such facts. Except to the extent expressly set forth herein, the Designated Attorneys have not undertaken any independent investigation or made inquiry of any other lawyers of Muldoon, Murphy & Faucette, or employees thereof, to determine the existence or absence of such facts, and no inference as to our knowledge or of the existence or absence of such facts should be drawn from our representation of CB. Our opinions are subject to generally applicable rules of law which (i) limit the availability of a remedy under certain circumstances where another remedy has been elected, (ii) limit the enforceability of provisions releasing, exculpating, or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct, or unlawful conduct, (iii) provide that agreements to indemnify a party for violations of securities laws are unenforceable, (iv) may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange, or (v) may permit a party who has materially failed to render or offer performance required by the contract to cure that failure unless permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance or it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract. This opinion is solely for your information. It is not to be quoted in whole or in part or otherwise referred to (except in a list of closing documents), nor is it to be filed with any governmental agency or other person without our prior written consent. Other than you, no one is entitled to rely on this opinion. We express no opinion as to any matter not addressed herein and no opinion as to matters addressed herein other than as expressly set forth herein. Sincerely, MULDOON, MURPHY & FAUCETTE F-3 EXHIBIT G FORM OF OPINION OF COUNSEL TO PINNACLE FINANCIAL SERVICES, INC. ____________, 1997 CB Bancorp, Inc. 126 East Fourth Street Michigan City, Indiana 46360 Re: Pinnacle Financial Services, Inc. Ladies and Gentlemen: We have acted as counsel to Pinnacle Financial Services, Inc., a Michigan corporation ("Pinnacle"), in connection with the contemplated merger of CB Bancorp, Inc., a Delaware corporation ("CB"), with and into Pinnacle, pursuant to that certain Agreement and Plan of Merger dated as of ___________, 1997, between Pinnacle and CB (the "Agreement"). In our capacity as counsel to Pinnacle, we have examined the Proxy Statement dated __________, 1997, filed by Pinnacle with the Securities and Exchange Commission (the "Commission") pursuant to Rule 14a-6 of the rules and regulations of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have also examined signed copies of the Agreement. This opinion is being rendered pursuant to Section 7.3(d) of the Agreement. (Capitalized terms not otherwise defined herein shall be defined herein as in the Agreement.) With respect to various questions of fact material to this opinion, we have relied upon (i) the representations and warranties made by the several parties in the Agreement and the documents referred to therein and (ii) certificates of officers of Pinnacle. We have also examined such certificates of public officials, documents and records of Pinnacle and other certificates, opinions and instruments and have made such other investigations as we have deemed necessary in connection with the opinions hereinafter set forth. In the course of our examinations and investigations, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and conformity to originals of all documents submitted to us as copies. We have further assumed that the Agreement and each other agreement entered into in connection with consummation of the transactions contemplated by the Agreement have been duly authorized by each party thereto other than Pinnacle, have been duly executed and delivered by each such other party, and constitute valid and binding obligations of each such other party, enforceable in accordance with their respective terms and conditions, and each such other party has taken all steps necessary G-1 to comply with all laws, rules, orders, rulings and regulations applicable to it to permit such party to enter into and perform its obligations. Our conclusions hereunder are specifically qualified by reference to, and are based solely upon, laws, rulings and regulations in effect on the date hereof and are subject to modification to the extent such laws, rulings and regulations are changed in the future. Based upon and subject to the foregoing, and subject to the qualifications, if any, that follow, it is our opinion that: A. Pinnacle is a corporation validly existing and in good standing under the laws of the State of Michigan, with corporate power to carry on its business substantially as described in the Proxy Statement, and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Based upon review of corporate records of Pinnacle and certificates of public officials and officers of Pinnacle, Pinnacle's authorized and outstanding capital stock is as set forth in the Agreement and the Pinnacle Disclosure Schedule and the Closing Date Pinnacle Disclosure Schedule, and all of the shares of its outstanding capital stock are duly and validly authorized and issued, and, except as otherwise disclosed in the Agreement, to our knowledge, there are no outstanding options, warrants, agreements, contracts, calls, commitments or demands of any character to which Pinnacle is a party relating to the capital stock of Pinnacle. B. Pinnacle Bank is a banking corporation validly existing and in good standing under the laws of the State of Michigan, and has corporate power to carry on its business in the State of Michigan. C. The execution, delivery and performance of the Agreement have been duly authorized and approved by all necessary corporate action on the part of Pinnacle, and the Agreement has been duly executed and delivered by Pinnacle and constitutes the valid and binding obligations of Pinnacle, enforceable in accordance with its respective terms, subject to considerations of bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent conveyance and the like and to general equitable principles (regardless of whether considered in a proceeding in equity or at law), and to standards of commercial reasonableness and good faith, and, to the best of our knowledge, the consummation by Pinnacle of the transactions contemplated by the Agreement will not result in any breach or violation of, or default of a material nature under any judgment, decree, mortgage, agreement, indenture or other instrument known to us applicable to Pinnacle. D. Based upon receipt of approvals from regulatory agencies, certificates of public officials and officers of Pinnacle, all such approvals, consents, authorizations or modifications as may be required to permit the performance by Pinnacle of its obligations under the Agreement have been obtained. E. Except as set forth in the Pinnacle Disclosure Schedule and the Closing Date Pinnacle Disclosure Schedule to the Agreement, G-2 we do not know of any material litigation, proceeding or governmental investigation pending against or relating to Pinnacle or any of its subsidiaries, its properties or businesses, or the transactions contemplated by the Agreement which will result in any material liability to Pinnacle or any of its subsidiaries. The opinions set forth above are limited to the Federal law of the United States of America, the General Corporation Law of the State of Delaware and the laws of the State of Michigan. Whenever any opinion herein contained refers to the existence or absence of facts "to the best of our knowledge", "to our knowledge", or "to our awareness" or otherwise such existence or absence of facts is based on our knowledge, actual knowledge or awareness, it is intended to signify that no information has come to the attention of those attorneys who have represented Pinnacle in this transaction (collectively, the "Designated Attorneys") which would give the Designated Attorneys actual knowledge of the existence or absence of such facts. Except to the extent expressly set forth herein, the Designated Attorneys have not undertaken any independent investigation or made inquiry of any other lawyers of Miller, Canfield, Paddock and Stone, P.L.C., or employees thereof, to determine the existence or absence of such facts, and no inference as to our knowledge or of the existence or absence of such facts should be drawn from our representation of Pinnacle. Our opinions are subject to generally applicable rules of law which (i) limit the availability of a remedy under certain circumstances where another remedy has been elected, (ii) limit the enforceability of provisions releasing, exculpating, or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct, or unlawful conduct, (iii) provide that agreements to indemnify a party for violations of securities laws are unenforceable, (iv) may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange, or (v) may permit a party who has materially failed to render or offer performance required by the contract to cure that failure unless permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance or it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract. This opinion is solely for your information. It is not to be quoted in whole or in part or otherwise referred to (except in a list of closing documents), nor is it to be filed with any governmental agency or other person without our prior written consent. Other than you, no one is entitled to rely on this opinion. G-3 We express no opinion as to any matter not addressed herein and no opinion as to matters addressed herein other than as expressly set forth herein. Sincerely, MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. G-4 SCHEDULES Pinnacle Disclosure Schedule CB Disclosure Schedule G-5 EX-10.(X) 4 EXHIBIT 10(X) STOCK OPTION AGREEMENT THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED STOCK OPTION AGREEMENT, dated as of March 1, 1997, between CB BANCORP, INC., a Delaware corporation ("Issuer"), and PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Grantee"). WITNESSETH: WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto immediately prior to this Stock Option Agreement (the "Agreement"); and WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as hereinafter defined): NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 115,037 fully paid and nonassessable shares of Issuer's Common Stock, par value $ 0.01 per share ("Common Stock"), at a price of $28.50 per share (the "Option Price"); provided, however, that in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 9.9% of the Issuer's issued and outstanding shares of Common Stock without giving effect to any shares subject to or issued pursuant to the Option. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are either (i) issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased, retired or otherwise cease to be outstanding after the date of the Agreement, the number of shares of Common Stock subject to the Option shall be increased or decreased, as appropriate, so that, after an event described in either clause (i) or (ii), such number equals 9.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, and from time to time, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written notice of such exercise (as provided in subsection (e) of this Section 2) within 60 days following such Subsequent Triggering Event. Each of the following shall be an Exercise Termination Event: (i) the Effective Time (as defined in the Merger Agreement) of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event, except a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non- volitional); or (iii) the passage of 12 months after termination of the Merger Agreement if such termination follows the occurrence of an Initial Triggering Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional) (provided that if an Initial Triggering Event continues or occurs beyond such termination and prior to the passage of such 12-month period, the Exercise Termination Event shall be 12 months from the expiration of the Last Triggering Event but in no event more than 18 months after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to expire. The term "Holder" shall mean the holder or holders of the Option. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the stockholders of Issuer approve or accept any Acquisition Transaction. For purposes of this Agreement, "Acquisition Transaction" shall mean (w) a merger or consolidation, or any similar transaction, involving Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer, (x) a purchase, lease or other acquisition or assumption of all or a substantial portion of the assets or deposits of Issuer or any Significant Subsidiary of Issuer, (y) a purchase or other acquisition (including by way of merger, consolidation, share exchange or -2- otherwise) of securities representing 10% or more of the voting power of Issuer, or (z) any substantially similar transaction; provided, however, that in no event shall any merger, consolidation, purchase or similar transaction involving only the Issuer and one or more of its Subsidiaries or involving only any two or more of such Subsidiaries, be deemed to be an Acquisition Transaction, provided that any such transaction is not entered into in violation of the terms of the Merger Agreement; and provided, further, that any transaction described in this sentence that is expressly permitted by the Merger Agreement shall not be deemed to be an Acquisition Transaction; (ii) Issuer or any Issuer Subsidiary, without having received Grantee's prior written consent, shall have authorized, recommended, proposed or publicly announced its intention to authorize, recommend or propose, to engage in an Acquisition Transaction with any person other than Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly withdrawn or modified, or publicly announced its interest to withdraw or modify, in any manner adverse to Grantee, its recommendation that the stockholders of Issuer approve the transactions contemplated by the Merger Agreement; (iii) Any person other than Grantee, any Grantee Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of its business (and other than any person who (a) as of the date hereof beneficially owns 10% or more of the outstanding shares of Common Stock and (b) would be eligible to use Schedule 13G but for the fact that such person owns 10% or more of the outstanding shares of Common Stock) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and regulations thereunder); (iv) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its stockholders by public announcement or written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (v) After a bona fide proposal by public announcement or written communication is made by a third party to Issuer or its stockholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall not have been cured prior to the Notice Date (as defined below); or -3- (vi) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, the Office of Thrift Supervision (the "OTS"), or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (c) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 20% or more of the then outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in paragraph (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (y) shall be 20%. (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event of which it has notice (together, a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of the Federal Reserve Board, the OTS or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to designate such a bank account shall not preclude the Holder from exercising the Option. -4- (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance reasonably satisfactory to Issuer, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions to this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, -5- issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. (j) Notwithstanding anything to the contrary contained in this Agreement, the Issuer shall not be obligated to issue shares of Common Stock upon the exercise of the Option (i) in the absence of any required governmental or regulatory approval or consent necessary for the Issuer to issue shares or for the Grantee to exercise the Option, (ii) in the event and for so long as the Grantee is in material breach of its representations, warranties, covenants or obligations under the Merger Agreement (unless excused by reason of the material breach of the Issuer of any of its representations, warranties, covenants or obligations under the Merger Agreement), or (iii) so long as any injunction or decree or ruling issued by a court of competent jurisdiction is in effect which prohibits the sale or delivery of the Common Stock. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Change in Bank Control Act of 1978, as amended, the Home Owners' Loan Act, as amended, the Change in Savings and Loan Control Act of 1978, as amended, or any other federal or state banking or savings and loan law, prior approval of or notice to the Federal Reserve Board, the OTS or to any other federal or state regulatory authority is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board, the OTS or such other federal or state regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common -6- Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5. In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, distributions on or in respect of the Common Stock that would be prohibited under the terms of the Merger Agreement, or the like, the type and number of shares of Common Stock purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Issuer's obligations hereunder. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 90 days of such Subsequent Triggering Event (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a shelf registration statement under the 1933 Act covering this Option and any shares issued and issuable pursuant to this Option and shall use its reasonable best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of this Option and any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its reasonable best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of the Option or Option Shares as provided -7- above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option or Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, however, that after any such required reduction the number of Option Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, however, that if such reduction occurs, then the Issuer shall file a registration statement for the balance as promptly as practical and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in secondary offering underwriting agreements for the Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer agrees to send a copy thereof to any other person known to Issuer to be entitled to registration rights under this Section 6, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. Notwithstanding anything to the contrary contained herein, in no event shall Issuer be obligated to effect more than two registrations pursuant to this Section 6 by reason of the fact that there shall be more than one Grantee as a result of any assignment or division of this Agreement. 7. (a) Immediately prior to the occurrence of a Repurchase Event (as defined below), (i) following a request of the Holder, delivered prior to an Exercise Termination Event, Issuer (or any successor thereto) shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to the amount by which (A) the Market/Offer Price (as defined below) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised and (ii) at the request of the owner of Option Shares from time to time (the "Owner"), delivered within 90 days of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase such number of the Option Shares from the Owner as the Owner shall designate at a price (the "Option Share Repurchase Price") equal to the Market/Offer Price multiplied by the number of Option Shares so designated. The term "Market/Offer Price" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of Common Stock within the three-month period immediately preceding the date the Holder -8- gives notice of the required repurchase of this Option or the Owner gives notice of the required repurchase of Option Shares, as the case may be, or (iv) in the event of a sale of all or a substantial portion of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining assets of Issuer as determined by a nationally recognized investment banking firm mutually selected by the Holder or the Owner, as the case may be, on the one hand, and the Issuer, on the other, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the Market/Offer Price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm mutually selected by the Holder or Owner, as the case may be, on the one hand, and the Issuer, on the other. (b) The Holder and the Owner, as the case may be, may exercise its right to require Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement or certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that the Holder or the Owner, as the case may be, elects to require Issuer to repurchase this Option and/or the Option Shares in accordance with the provisions of this Section 7. Within the latter to occur of (x) five business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto and (y) the time that is immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered to the Holder the Option Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor or the portion thereof that Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that Issuer is prohibited under applicable law or regulation from repurchasing the Option and/or the Option Shares in full, Issuer shall immediately so notify the Holder and/or the Owner and thereafter deliver or cause to be delivered, from time to time, to the Holder and/or the Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within five business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer at any time after delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation from delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its best efforts to obtain all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to accomplish such repurchase), the Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as appropriate, that -9- portion of the Option Repurchase Price or the Option Share Repurchase Price that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option Agreement evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Stock Option Agreement was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to the Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. (d) For purposes of this Section 7, a Repurchase Event shall be deemed to have occurred (i) upon the consummation of any merger, consolidation or similar transaction involving Issuer or any purchase, lease or other acquisition of all or a substantial portion of the assets of Issuer, other than any such transaction which would not constitute an Acquisition Transaction pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition by any person of beneficial ownership of 50% or more of the then outstanding shares of Common Stock, provided that no such event shall constitute a Repurchase Event unless a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event. The parties hereto agree that Issuer's obligations to repurchase the Option or Option Shares under this Section 7 shall not terminate upon the occurrence of an Exercise Termination Event unless no Subsequent Triggering Event shall have occurred prior to the occurrence of an Exercise Termination Event. 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its Subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding voting shares and voting share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its Subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. -10- (b) The following terms have the meanings indicated: (1) "Acquiring Corporation" shall mean (i) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving person, and (iii) the transferee of all or substantially all of Issuer's assets. (2) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (3) "Assigned Value" shall mean the Market/Offer Price, as defined in Section 7. (4) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 9.9% of the -11- shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Acquiring Corporation. (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to (x) the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised plus (y) Grantee's reasonable out-of-pocket expenses (to the extent not previously reimbursed), and at the request of the owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to (x) the Highest Closing Price multiplied by the number of Substitute Shares so designated plus (y) Grantee's reasonable Out-of- Pocket Expenses (to the extent not previously reimbursed). The term "Highest Closing Price" shall mean the highest closing price for shares of Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) The Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that the Substitute Option Holder or the Substitute Share Owner, as the case may be, elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable, and in any event within five business days after the surrender of the Substitute Option and/or certificates representing Substitute -12- Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor or, in either case, the portion thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation from repurchasing the Substitute Option and/or the Substitute Shares in part or in full, the Substitute Option Issuer following a request for repurchase pursuant to this Section 9 shall immediately so notify the Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the portion of the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, that if the Substitute Option Issuer is at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in full (and the Substitute Option Issuer shall use its best efforts to receive all required regulatory and legal approvals as promptly as practicable in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Common Shares it is then so prohibited from repurchasing. 10. The 90-day period for exercise of certain rights under Sections 2, 6, 7 and 13 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights, and for the expiration of all statutory waiting -13- periods; and (ii) to the extent necessary to avoid liability under Section 16(b) of the 1934 Act by reason of such exercise. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. 12. Grantee hereby represents and warrants to Issuer that: (a) Grantee has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act. 13. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 90 days following such Subsequent Triggering Event -14- (or such later period as provided in Section 10); provided, however, that until the date 15 days following the date on which the Federal Reserve Board and/or the OTS approves an application by Grantee if required under applicable law to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board or the OTS, as applicable. 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation making application to cause the shares of Common Stock issuable hereunder to be approved for trading and reporting on the Nasdaq National Market, upon official notice of issuance and applying to the Federal Reserve Board and/or the OTS if required under applicable law for approval to acquire the shares issuable hereunder. 15. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 16. If any term, provision, covenant or restriction contained in the Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer is not permitted to repurchase pursuant to Section 7, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to acquire or to require Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 17. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 18. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of -15- the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 19. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 20. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 21. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 22. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. -16- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. CB BANCORP, INC. By: _________________________________ Joseph F. Heffernan Chairman, President and Chief Executive Officer PINNACLE FINANCIAL SERVICES, INC. By: _________________________________ Richard L. Schanze Chairman and Chief Executive Officer -17- EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF PINNACLE FINANCIAL SERVICES, INC. Pinnacle Bank, a Michigan banking corporation Starke's Inc., a Michigan corporation (a wholly-owned subsidiary of Pinnacle Bank) Crescent Mortgage, Inc., an Indiana corporation (a wholly-owned subsidiary of Pinnacle Bank) Brookview Real Estate, Ltd., an Indiana corporation (a wholly-owned subsidiary of Pinnacle Bank) EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT The Board of Directors Pinnacle Financial Services, Inc. We consent to incorporation by reference in the registration statement of Form S-8 (Registration Statement Number 33-8488) of Pinnacle Financial Services, Inc. of our report dated March 3, 1997, relating to the consolidated balance sheets of Pinnacle Financial Services, Inc. and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Pinnacle Financial Services, Inc. KPMG Peat Marwick LLP Chicago, Illinois March 28, 1997 EX-24 7 EXHIBIT 24 EXHIBIT 24 PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that John P. Cunningham does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 31st day of March, 1997. /s/ John P. Cunningham ---------------------------------------- John P. Cunningham PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that Charles R. Edinger does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 31st day of March, 1997. /s/ Charles R. Edinger ---------------------------------------- Charles R. Edinger PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that John D. Fetters does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 29th day of March, 1997. /s/ John D. Fetters ---------------------------------------- John D. Fetters PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that Richard L. Schanze does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 31st day of March, 1997. /s/ Richard L. Schanze ---------------------------------------- Richard L. Schanze PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that Kay F. Varga does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 31st day of March, 1997. /s/ Kay F. Varga ---------------------------------------- Kay F. Varga PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that Arnold L. Weaver does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 29th day of March, 1997. /s/ Arnold L. Weaver ---------------------------------------- Arnold L. Weaver PINNCLE FINANCIAL SERVICES, INC. KNOW ALL MEN by these presents that David W. Kolhagen does hereby make, constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver, and John A. Newcomer and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the 29th day of March, 1997. /s/ David W. Kolhagen ---------------------------------------- David W. Kolhagen EX-27 8 FDS
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 30,290 3,223 15,750 0 372,157 0 0 609,564 5,643 1,069,121 761,269 113,961 4,442 111,400 0 0 19,110 58,939 1,069,121 50,009 23,021 939 73,969 30,536 39,693 34,276 375 653 26,956 14,253 14,253 0 0 9,152 1.55 1.55 3.79 761 3,916 227 10,157 5,852 934 350 5,643 5,643 0 0 Includes 2,374 for Special SAIF Assessment
-----END PRIVACY-ENHANCED MESSAGE-----