<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1996
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ILLINOIS 6711 36-3190818
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
2215 YORK ROAD, SUITE 208
OAK BROOK, ILLINOIS 60521
(708) 574-3550
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
MR. JOHN J. GLEASON, JR.
2215 YORK ROAD, SUITE 208
OAK BROOK, ILLINOIS 60521
(708) 574-3550
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD W. BURKE MARY M. SJOQUIST
Burke, Warren & MacKay, P.C. Muldoon, Murphy & Faucette
One IBM Plaza 5101 Wisconsin Avenue N.W.
330 N. Wabash Street, Suite 2200 Washington, D.C. 20016
Chicago, Illinois 60611 (202) 362-0840
(312) 840-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE MAXIMUM AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED TO BE REGISTERED PER UNIT OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, $4.69 par
value per share......... 1,456,362 shares(1) $25.875(2) $42,807,004.08 $14,759.86(3)
</TABLE>
(1) This Registration Statement covers the maximum number of shares of common
stock of the Registrant which are expected to be issued in connection with
the transactions described herein.
(2) Estimated in accordance with Rule 457(f)(1) for the purpose of calculating
the registration fee, with the market value of Financial Security Common
Stock being exchanged in the transaction for Pinnacle Common Stock being
based upon the last sale reported for Financial Security Common Stock as
reported by Nasdaq on July 26, 1996.
(3) Pursuant to Rule 457(b) under the Securities Act, $8,592.54 of the
registration fee was paid on July 11, 1996 in connection with the filing of
preliminary joint proxy materials.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT WILL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT WILL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Facing Page; Cross Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Table of
Contents; Available Information; Incorporation of
Certain Information by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................... Summary; Risk Factors; Comparative Per Share Data
4. Terms of the Transaction............................. Summary; The Merger; Comparative Rights of
Stockholders; Appendix I;
5. Pro Forma Financial Information...................... Pro Forma Capitalization Unaudited; Pro Forma
Consolidated Financial Information (Unaudited)
6. Material Contacts with the Company Being Acquired.... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters....... Not Applicable
8. Interests of Named Experts and Counsel............... Experts; Legal Opinions
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Undertakings
10. Information with Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants... Summary; Business of Pinnacle; Supervision and
Regulation of Pinnacle; Comparative Per Share Data;
Pinnacle Consolidated Historical Summary Financial
Data; Experts
13. Incorporation of Certain Information by Reference.... Incorporation of Certain Information by Reference
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants.............................. Not Applicable
15. Information with Respect to S-3 Companies............ Not Applicable
16. Information with Respect to S-2 or S-3 Companies..... Summary; Business of Financial Security; Comparative
Per Share Data; Financial Security Consolidated
Historical Summary Financial Data; Experts
17. Information with Respect to Companies Other than S-2
or S-3 Companies.................................... Not Applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................. Incorporation of Certain Information by Reference;
Summary -- The Meetings; The Meetings; The Merger
19. Information if Proxies, Consents or Authorizations
are not to be Solicited, or in an Exchange Offer.... Not Applicable
</TABLE>
<PAGE>
FINANCIAL SECURITY CORP.
LETTERHEAD
July 31, 1996
Dear Stockholder:
It is my pleasure to invite you to attend a Special Meeting of Stockholders
(the "Special Meeting") of Financial Security Corp. ("Financial Security"), to
be held at Financial Security's offices located at 1209 North Milwaukee Avenue,
Chicago, Illinois on September 11, 1996 at 3:00 p.m., Chicago time.
The purpose of this meeting is to consider and vote upon the Agreement and
Plan of Merger, dated as of April 22, 1996, between Pinnacle Banc Group, Inc.
("Pinnacle") and Financial Security (the "Merger Agreement"), pursuant to which,
among other things, Financial Security will be merged with and into Pinnacle
(the "Merger"). Pinnacle is the holding company for Pinnacle Bank, Pinnacle Bank
of the Quad-Cities and Pinnacle Bank F.S.B. A copy of the Merger Agreement is
attached to the accompanying Joint Proxy Statement/Prospectus.
The following items relating to the Special Meeting and the Merger are
enclosed:
1. Joint Proxy Statement/Prospectus;
2. Proxy Card (White);
3. Election Form (Blue) as described below;
4. A white postage-paid return envelope addressed to Harris Trust and
Savings Bank for the Proxy Card; and
5. A blue postage-paid return envelope addressed to Harris Trust and
Savings Bank for the Election Form.
At the effective time of the Merger, each outstanding share of Financial
Security Common Stock will be converted into and represent the right to receive
either (i) .8803 shares (the "Exchange Ratio") of Pinnacle Common Stock, subject
to adjustment as described in the enclosed Joint Proxy Statement/ Prospectus
(the "Stock Distribution"); (ii) $28.50 in cash (the "Cash Distribution")
(provided that the number of shares of Financial Security Common Stock for which
stockholders elect to receive cash will not exceed 45% of the outstanding shares
of Financial Security Common Stock); or (iii) an amount in cash equal to 30% of
the Cash Distribution and shares of Pinnacle Common Stock equal to 70% of the
Stock Distribution (the "Combined Distribution" and together with the "Stock
Distribution" and the "Cash Distribution," the "Merger Consideration").
YOU WILL HAVE THE OPPORTUNITY TO ELECT WHETHER TO RECEIVE THE STOCK
DISTRIBUTION, THE CASH DISTRIBUTION OR THE COMBINED DISTRIBUTION. ENCLOSED WITH
THIS JOINT PROXY STATEMENT/PROSPECTUS IS AN ELECTION FORM (THE "ELECTION FORM")
WHEREBY YOU MAY INDICATE YOUR ELECTION. IN ORDER FOR AN ELECTION FORM (BLUE) TO
BE DEEMED EFFECTIVE, SUCH ELECTION FORM MUST BE PROPERLY COMPLETED, EXECUTED AND
RETURNED TO HARRIS TRUST AND SAVINGS BANK, THE EXCHANGE AGENT, BY 5:00 P.M.,
CHICAGO TIME ON SEPTEMBER 10, 1996. OTHERWISE, YOU WILL RECEIVE THE STOCK
DISTRIBUTION.
Depending on the number of Financial Security stockholders choosing the Cash
Distribution, Financial Security stockholders who elect to receive the Cash
Distribution may receive a combination of cash and Pinnacle Common Stock in
order to preserve the favorable tax treatment of the Merger.
The consideration received in connection with the Stock Distribution and the
Combined Distribution is subject to possible adjustment depending on the
Pinnacle Average Stock Price (as defined in the Merger Agreement) prior to the
Effective Time, and as discussed in greater detail in the Joint Proxy
Statement/Prospectus. Because the market value of Pinnacle Common Stock will
fluctuate, the market value of Pinnacle Common Stock that Financial Security
stockholders may receive upon actual consummation of the Merger will increase or
decrease prior to, as well as after, the consummation of the Merger. The Cash
Distribution is not subject to any possible adjustment in connection with the
Pinnacle Average Stock Price.
<PAGE>
Pinnacle Common Stock trades on the Nasdaq Small Cap Market under the symbol
"PINN." The per share closing price of Pinnacle Common Stock on July 26, 1996,
the latest practicable trading date before the printing of the Joint Proxy
Statement/Prospectus was $30.00. There can be no assurance what the market value
of Pinnacle Common Stock will be at the Effective Time. Depending upon
fluctuations in the price of Pinnacle Common Stock during the measurement period
for the determination of the Pinnacle Average Stock Price, the market value of
Pinnacle Common Stock may be more or less than $30.00. You are advised to obtain
a current market quotation for the shares of Pinnacle Common Stock.
As described in the Joint Proxy Statement/Prospectus, consummation of the
Merger is subject to certain conditions including approval of the Merger by
various regulatory agencies. In addition, the approval of the Merger Agreement
by the holders of a majority of the outstanding shares of Financial Security
Common Stock and the holders of two-thirds of the issued and outstanding shares
of Pinnacle Common Stock is required.
THE FINANCIAL SECURITY BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF FINANCIAL SECURITY AND ITS STOCKHOLDERS AND RECOMMENDS THAT
YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The proposed Merger
has been approved by the Financial Security Board as being in the best interest
of Financial Security and its stockholders. The Board reached this decision
after careful consideration of a number of factors, including the written
opinion of Hovde Financial, Inc. ("Hovde"), its financial adviser, as of the
date of the execution of the Merger Agreement, that the Merger Consideration is
fair from a financial point of view to Financial Security stockholders. A
written opinion, dated as of the date of the enclosed Joint Proxy
Statement/Prospectus, of Hovde is reproduced in full in Appendix II to the
accompanying Joint Proxy Statement/Prospectus.
The enclosed Joint Proxy Statement/Prospectus explains in detail the terms
of the Merger, as well as other information relating to Pinnacle and Financial
Security. Please carefully review and consider all of this information.
YOUR PARTICIPATION IN THE SPECIAL MEETING, IN PERSON OR BY PROXY, IS
ESPECIALLY IMPORTANT. AN ABSTENTION OR FAILURE TO VOTE AT THE SPECIAL MEETING OR
FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE
MERGER. ACCORDINGLY, PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY IN
THE POSTAGE-PAID ENVELOPE THAT HAS BEEN PROVIDED TO YOU FOR YOUR CONVENIENCE. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON, IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD (WHITE). HOWEVER, IF YOU ARE A
STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED
ADDITIONAL DOCUMENTATION FROM YOUR RECORDHOLDER TO VOTE PERSONALLY AT THE
SPECIAL MEETING.
Thank you for your attention to this important matter.
Sincerely yours,
/s/ Daniel K. Augustine
Daniel K. Augustine
President and Chief Executive Officer.
FINANCIAL SECURITY STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES
REPRESENTING SHARES OF FINANCIAL SECURITY COMMON STOCK AT THIS TIME. A LETTER OF
TRANSMITTAL SETTING FORTH INSTRUCTIONS REGARDING THE SURRENDER OF SUCH
CERTIFICATES AND THE ISSUANCE OF CERTIFICATES REPRESENTING SHARES OF PINNACLE
COMMON STOCK WILL BE FURNISHED TO FINANCIAL SECURITY STOCKHOLDERS PROMPTLY AFTER
THE EFFECTIVE TIME OF THE MERGER.
<PAGE>
FINANCIAL SECURITY CORP.
1209 N. MILWAUKEE AVENUE
CHICAGO, ILLINOIS 60622
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE FINANCIAL SECURITY CORP. STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special
Meeting") has been called by the Financial Security Corp. ("Financial Security")
Board of Directors and will be held at Financial Security's offices located at
1209 North Milwaukee Avenue, Chicago, Illinois on September 11, 1996 at 3:00
p.m. for the purpose of considering and voting upon the following matters:
1. PROPOSED MERGER. To consider and vote upon the Agreement and Plan
of Merger between Pinnacle Banc Group Inc. ("Pinnacle") and Financial
Security, dated as of April 22, 1996 (the "Merger Agreement"), providing for
the merger of Financial Security with and into Pinnacle (the "Merger"). The
Merger Agreement is attached to the accompanying Joint Proxy Statement/
Prospectus as Appendix I.
2. OTHER BUSINESS. To consider and vote upon such other matters as may
properly come before the meeting or any adjournment thereof.
The Board of Directors has fixed July 26, 1996 as the record date for
determination of stockholders entitled to notice of and to vote at the Special
Meeting and any adjournment or postponement thereof. Only holders of common
stock of record at the close of business on such date will be entitled to notice
of and to vote at the Special Meeting or any adjournments or postponements
thereof. A list of Financial Security's stockholders entitled to vote at the
Special Meeting will be available for examination, during ordinary business
hours, at the executive offices of Financial Security, 1209 N. Milwaukee Avenue,
Chicago, Illinois, for a ten day period prior to the Special Meeting and such
list shall also be available for examination at the Special Meeting.
Stockholders of Financial Security who comply with the requirements of
Section 262 of the Delaware General Corporation Law will be entitled, if the
Merger is consummated, to seek an appraisal of their shares of common stock. See
"The Merger -- Dissenter's Rights" in, and Appendix III to, the accompanying
Joint Proxy Statement/Prospectus.
By Order of the Board of Directors,
/s/ Frank M. Swiderski
Frank M. Swiderski, Secretary
July 31, 1996
Chicago, Illinois
THE BOARD OF DIRECTORS OF FINANCIAL SECURITY RECOMMENDS THAT THE HOLDERS OF
FINANCIAL SECURITY COMMON STOCK VOTE TO APPROVE THE MERGER AGREEMENT.
<PAGE>
PINNACLE BANC GROUP, INC.
LETTERHEAD
July 31, 1996
Dear Stockholder:
It is my pleasure to invite you to attend a Special Meeting of Stockholders
(the "Special Meeting") of Pinnacle Banc Group, Inc. ("Pinnacle") to be held at
2215 York Road, Oak Brook, Illinois 60521 on September 11, 1996 at 10:00 a.m.,
Chicago time.
The purpose of this meeting is to consider and vote upon the Agreement and
Plan of Merger, dated as of April 22, 1996, between Financial Security Corp
("Financial Security") and Pinnacle (the "Merger Agreement"), pursuant to which,
among other things, Financial Security will be merged with and into Pinnacle
(the "Merger") and Pinnacle will issue shares of its authorized common stock,
par value $4.69 per share ("Pinnacle Common Stock"), to holders of common stock
of Financial Security (other than Pinnacle or any of its subsidiaries) and
holders of Financial Security stock options that are exchanged for shares of
Pinnacle Common Stock. Financial Security is the holding company for Security
Federal Savings and Loan Association of Chicago.
At the effective time of the Merger, each outstanding share of Financial
Security Common Stock (other than shares held by Pinnacle or any of its
subsidiaries) will be converted into and represent the right to receive (upon a
Financial Security stockholder's election) either (i) .8803 shares (the
"Exchange Ratio") of Pinnacle Common Stock, subject to adjustment as described
in the enclosed Joint Proxy Statement/Prospectus (the "Stock Distribution");
(ii) $28.50 in cash (the "Cash Distribution") (provided that the number of
shares of Financial Security Common Stock for which stockholders elect to
receive cash will not exceed 45% of the outstanding shares of Financial Security
Common Stock); or (iii) an amount in cash equal to 30% of the Cash Distribution
and shares of Pinnacle Common Stock equal to 70% of the Stock Distribution (the
"Combined Distribution" and together with the "Stock Distribution" and the "Cash
Distribution," the "Merger Consideration").
Pursuant to Section 11.20 of the Illinois Business Corporation Act of 1983,
as amended (the "IBCA"), Pinnacle stockholders would not be entitled to vote on
the proposal to approve and adopt the Merger Agreement if the shares of Pinnacle
Common Stock to be issued in connection with the Merger did not exceed twenty
percent (20%) of the shares of Pinnacle Common Stock outstanding immediately
prior to the Effective Time. While Pinnacle Common Stock must constitute at
least fifty-five percent (55%) of the aggregate consideration payable by
Pinnacle in connection with the Merger, it is not certain how many shares of
Pinnacle Common Stock will be issued in connection with the Merger and whether
such shares will exceed twenty percent (20%) of the shares of Pinnacle Common
Stock outstanding immediately prior to the Effective Time. As a result, Pinnacle
has scheduled the Pinnacle Meeting to approve and adopt the Merger Agreement.
Approval of the Merger by holders of two-thirds of the issued and outstanding
shares of Pinnacle Common Stock is a condition to, and required for,
consummation of the Merger. The Merger also requires regulatory approval and the
approval of the Merger Agreement by the holders of a majority of the outstanding
shares of Financial Security Common Stock. On September 11, 1996, Financial
Security stockholders will consider the approval and adoption of the Merger
Agreement.
THE PINNACLE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF PINNACLE AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The enclosed Joint Proxy Statement/Prospectus explains in detail the terms
of the Merger, as well as other information relating to Pinnacle and Financial
Security. Please carefully review and consider all of this information.
YOUR PARTICIPATION IN THE SPECIAL MEETING, IN PERSON OR BY PROXY, IS
ESPECIALLY IMPORTANT. AN ABSTENTION OR FAILURE TO VOTE AT THE SPECIAL MEETING OR
FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE
MERGER. ACCORDINGLY, PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY IN
THE POSTAGE-PAID ENVELOPE THAT HAS BEEN PROVIDED TO YOU FOR YOUR CONVENIENCE. IF
YOU ATTEND THE SPECIAL MEETING, YOU
<PAGE>
MAY VOTE IN PERSON, IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY
CARD. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR
OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORDHOLDER TO VOTE
PERSONALLY AT THE SPECIAL MEETING.
Thank you for your attention to this important matter.
Sincerely yours,
/s/ John J. Gleason
John J. Gleason, Jr.
Vice Chairman of the Board
and Chief Executive Officer
<PAGE>
PINNACLE BANC GROUP, INC.
2215 YORK ROAD
SUITE 208
OAK BROOK, ILLINOIS 60521
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE PINNACLE BANC GROUP, INC. STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders has been
called by the Pinnacle Banc Group, Inc. ("Pinnacle") Board of Directors and will
be held at 2215 York Road, Oak Brook, Illinois 60521, on September 11, 1996 at
10:00 a.m. for the purpose of considering and voting upon the following matters:
1. PROPOSED MERGER. To consider and vote upon the Agreement and Plan
of Merger, dated as of April 22, 1996 (the "Merger Agreement"), providing
for the merger of Financial Security Corp. with and into Pinnacle (the
"Merger"). The Merger Agreement is attached to the accompanying Joint Proxy
Statement/Prospectus as Appendix I.
2. OTHER BUSINESS. To consider and vote upon such other matters as may
properly come before the meeting or any adjournment thereof.
Only those Pinnacle stockholders of record at the close of business on July
26, 1996 will be entitled to notice of and to vote at the meeting. The
affirmative vote of the holders of two-thirds of the issued and outstanding
shares of Pinnacle Common Stock entitled to vote at the meeting is required to
approve the Merger. The affirmative vote of the holders of a majority of the
outstanding shares of Financial Security common stock is required to approve and
adopt the Merger Agreement.
By Order of the Board of Directors,
/s/ Richard W. Burke
Richard W. Burke, Secretary
July 31, 1996
Oak Brook, Illinois
THE PINNACLE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
PINNACLE COMMON STOCK VOTE TO APPROVE THE MERGER PROPOSAL.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING. STOCKHOLDERS
ATTENDING THE MEETING MAY PERSONALLY VOTE ON ALL MATTERS WHICH ARE CONSIDERED,
IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
<PAGE>
JOINT PROXY STATEMENT
OF
FINANCIAL SECURITY CORP.
FOR A SPECIAL MEETING TO BE HELD ON
SEPTEMBER 11, 1996
AND
PINNACLE BANC GROUP, INC.
FOR A SPECIAL MEETING TO BE HELD ON
SEPTEMBER 11, 1996
---------------------
PROSPECTUS OF
PINNACLE BANC GROUP, INC.
UP TO 1,456,362
SHARES OF COMMON STOCK (PAR VALUE $4.69 PER SHARE)
------------------------
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Financial Security Corp., a Delaware corporation ("Financial
Security"), with and into Pinnacle Banc Group, Inc., an Illinois corporation
("Pinnacle"), with Pinnacle as the surviving corporation in the Merger, as
contemplated by the Agreement and Plan of Merger (the "Merger Agreement"), dated
as of April 22, 1996, between Pinnacle and Financial Security. A copy of the
Merger Agreement is included as Appendix I hereto and incorporated by reference
herein.
This Joint Proxy Statement/Prospectus is being furnished to the stockholders
of Pinnacle and Financial Security in connection with the solicitation of
proxies by the respective Boards of Directors of Pinnacle and Financial Security
for use at the special meetings of stockholders of Pinnacle and Financial
Security, each to be held on September 11, 1996, including any respective
adjournments or postponements of such meetings. At such meetings or any
adjournments or postponements thereof, the stockholders of Pinnacle and
Financial Security will be asked to consider and vote on a proposal to approve
and adopt the Merger Agreement pursuant to which, among other things, Financial
Security will be merged with and into Pinnacle.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Pinnacle with respect to the shares of its common stock, par value $4.69 per
share ("Pinnacle Common Stock") to be issued to holders of common stock of
Financial Security, par value $.01 per share ("Financial Security Common Stock")
and to holders of outstanding stock options of Financial Security who receive
shares of Pinnacle Common Stock in consideration therefor pursuant to the terms
of the Merger Agreement.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Financial Security Common Stock outstanding immediately
prior to the consummation of the Merger will be converted into the right to
receive either (i) .8803 shares (the "Exchange Ratio") of Pinnacle Common Stock,
subject to adjustment as described herein (the "Stock Distribution"); (ii)
$28.50 in cash (the "Cash Distribution") (provided that the number of shares of
Financial Security Common Stock subject to an election to receive cash will not
exceed 45% of the outstanding shares of Financial Security Common Stock); or
(iii) an amount in cash equal to 30% of the Cash Distribution and shares of
Pinnacle Common Stock equal to 70% of the Stock Distribution (the "Combined
Distribution" and together with the "Stock Distribution" and the "Cash
Distribution," the "Merger Consideration"). Pursuant to the terms of the Merger
Agreement, cash will be paid in lieu of fractional shares of Pinnacle Common
Stock. For a more complete description of the Merger Agreement and the terms of
the Merger, see "THE MERGER."
Each Financial Security stockholder will have the opportunity to elect
whether to receive either the Stock Distribution (a "Stock Election," in which
case, such holder's shares shall be deemed to be "Stock Election Shares"), the
Cash Distribution (a "Cash Election," in which case, such holder's shares shall
be deemed to be "Cash Election Shares"), or a Combined Distribution (a "Combined
Election," in which case, such holder's shares shall be deemed to be "Combined
Election Shares"). ENCLOSED WITH THIS JOINT PROXY STATEMENT/PROSPECTUS IS AN
ELECTION FORM FOR USE BY THE STOCKHOLDERS OF FINANCIAL SECURITY (THE "ELECTION
FORM") WHEREBY STOCKHOLDERS MAY INDICATE A STOCK ELECTION, CASH ELECTION OR
COMBINED ELECTION. IN ORDER FOR AN ELECTION FORM TO BE DEEMED TO BE EFFECTIVE,
SUCH ELECTION FORM MUST BE PROPERLY COMPLETED AND DULY EXECUTED BY THE FINANCIAL
SECURITY STOCKHOLDER AND RETURNED TO HARRIS TRUST AND SAVINGS BANK (THE
"EXCHANGE AGENT") BY 5:00 P.M., CHICAGO TIME, ON THE DAY PRIOR TO THE DATE OF
THE SPECIAL MEETING OF FINANCIAL SECURITY OR SEPTEMBER 10, 1996 (THE "ELECTION
DEADLINE"). IF A COMPLETED ELECTION FORM IS NOT RECEIVED BY THE ELECTION
DEADLINE, A FINANCIAL SECURITY STOCKHOLDER SHALL RECEIVE THE STOCK DISTRIBUTION.
SEE "THE MERGER -- ELECTION PROCEDURES".
The Exchange Ratio is equal to the quotient of the agreed value of Financial
Security Common Stock per share, $28.50, divided by the per share value of
Pinnacle Common Stock during a ten day trading period prior to the execution of
the Merger Agreement, $32.375.
Pursuant to the Merger Agreement, if the Pinnacle Average Stock Price (as
defined below) is less than $30.00 per share but greater than $27.99 per share,
the Exchange Ratio shall be adjusted to equal the quotient of $26.00 divided
(CONTINUED ON NEXT PAGE)
<PAGE>
by the Pinnacle Average Stock Price. However, if the Pinnacle Average Stock
Price is greater than $35.00 per share but does not exceed $37.00 per share, the
Exchange Ratio shall be adjusted to equal the quotient of $31.00 divided by the
Pinnacle Average Stock Price. The Pinnacle Average Stock Price is defined as the
average of the closing prices per share of Pinnacle Common Stock reported by the
Nasdaq Small Cap Market (the "Nasdaq SCM") on the ten trading days on which one
or more trades actually occur immediately prior to the second business day
preceding the consummation of the Merger (the "Closing Date").
However, if the Pinnacle Average Stock Price is less than $28.00 per share,
the Exchange Ratio shall be further adjusted to .9286 and Financial Security
shall have the option to terminate the Merger Agreement unless not later than
two days prior to the Closing Date, Pinnacle agrees to further adjust the
Exchange Ratio to equal the quotient of $26.00 divided by the Pinnacle Average
Stock Price. Conversely, if the Pinnacle Average Stock Price exceeds $37.00 per
share, the Exchange Ratio shall be further adjusted to .8378 and Pinnacle shall
have the option to terminate the Merger Agreement unless not later than two days
prior to the Closing Date, Financial Security agrees to further adjust the
Exchange Ratio to equal the quotient of $31.00 divided by the Pinnacle Average
Stock Price.
The market price of Pinnacle Common Stock to be received in the Merger is
subject to fluctuation and such fluctuation may result in an increase or
decrease in the value of the Stock Distribution or the Combined Distribution to
be received by Financial Security stockholders in the Merger. See "THE MERGER --
Merger Consideration".
Neither Financial Security nor Pinnacle is required to exercise its right to
terminate the Merger Agreement based on the market value of Pinnacle Common
Stock at the Effective Time. No decision can be made unless and until it can
reasonably be anticipated that the Pinnacle Average Stock Price will trigger the
termination rights whereupon the appropriate board of directors will make a
determination based on the relevant circumstances existing at that time.
The Cash Distribution is not subject to any possible adjustment in
connection with the Pinnacle Average Stock Price.
The outstanding shares of Pinnacle Common Stock and Financial Security
Common Stock are listed on the Nasdaq SCM and the Nasdaq National Market (the
"Nasdaq National Market"), respectively under the symbols "PINN" and "FNSC",
respectively. The per share closing price of Pinnacle Common Stock and Financial
Security Common Stock on the Nasdaq SCM and the Nasdaq National Market,
respectively on July 26, 1996, the latest practicable trading date before the
printing of this Joint Proxy Statement/Prospectus, was $30.00 and $25.875,
respectively. Financial Security stockholders are advised to obtain current
market quotations for Pinnacle Common Stock.
Consummation of the Merger is subject to the approval of the holders of
two-thirds of the issued and outstanding shares of Pinnacle Common Stock and a
majority of the issued and outstanding shares of Financial Security Common Stock
and the receipt of required regulatory approvals as well as other customary
conditions.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
STOCKHOLDER OF FINANCIAL SECURITY, SEE "RISK FACTORS".
------------------------
THE SHARES OF PINNACLE COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AGENCY, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF PINNACLE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND,
THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
------------------------
This Joint Proxy Statement/Prospectus and the accompanying proxy card are
first being mailed to stockholders of Pinnacle and Financial Security on or
about July 31, 1996.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JULY 30, 1996.
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AVAILABLE INFORMATION
Pinnacle and Financial Security are subject to the reporting and
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and, in accordance therewith, Pinnacle and Financial
Security each file reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information regarding Pinnacle and Financial Security filed with the SEC
can be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60611-2511 or Seven World Trade Center (13th Floor), New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, such material, with respect to Pinnacle and
Financial Security can be inspected at the offices of the Nasdaq Stock Market
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
This Joint Proxy Statement/Prospectus constitutes a part of a registration
statement filed by Pinnacle with the SEC under the Securities Act of 1933, as
amended ("Securities Act"). As permitted by the Rules and Regulations of the
SEC, this Joint Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4, and exhibits thereto
(together with the amendments thereto, the "Registration Statement"), which has
been filed by Pinnacle with the SEC under the Securities Act with respect to
Pinnacle Common Stock and to which reference is hereby made. Copies of the
Registration Statement are available for inspection and copying as set forth
above.
Any statements contained herein concerning the provisions of any contract,
agreement or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement or otherwise filed with the
SEC. Each such statement is qualified in its entirety by such reference.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Joint Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by Pinnacle or Financial Security. This Joint Proxy Statement/Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates, nor does it constitute
an offer to or solicitation of any person in any jurisdiction to whom it would
be unlawful to make such an offer or solicitation. Neither the delivery of this
Joint Proxy Statement/Prospectus nor the distribution of any of the securities
to which this Joint Proxy Statement/Prospectus relates shall, at any time, imply
that the information herein is correct as of any time subsequent to the date
hereof.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, previously filed with the SEC by Pinnacle (File No.
0-18283) and Financial Security (File No. 0-19510) pursuant to the Exchange Act
are incorporated by reference herein:
(i) Pinnacle's Annual Report on Form 10-K for the year ended December 31,
1995;
(ii) Pinnacle's Quarterly Report on Form 10-Q for the period ended March 31,
1996;
(iii) Pinnacle's Current Report on Form 8-K, dated April 29, 1996;
(iv) Financial Security's Form 10-KSB for the year ended December 31, 1995;
(v) Financial Security's Form 10-QSB/A for the quarter ended March 31, 1996;
and
(vi) Financial Security's Current Report on Form 8-K, dated April 23, 1996,
respectively.
All documents filed by Pinnacle and Financial Security pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the date of their respective special meeting of stockholders are hereby
incorporated by reference in this Joint Proxy Statement/ Prospectus and will be
deemed a part hereof from the date of filing of such documents.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein will be deemed to
be modified or superseded for purposes of the Registration Statement and this
Joint Proxy Statement/Prospectus to the extent that a statement contained
herein, in any supplement hereto or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded will not
be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement, this Joint Proxy Statement/Prospectus or any supplement
hereto.
Also incorporated by reference herein is the Agreement and Plan of Merger,
between Pinnacle and Financial Security, dated as of April 22, 1996, which is
attached to this Joint Proxy Statement/ Prospectus as Appendix I.
All information contained in this Joint Proxy Statement/Prospectus with
respect to Pinnacle has been supplied by Pinnacle, and all information with
respect to Financial Security has been supplied by Financial Security.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS RELATING TO PINNACLE AND FINANCIAL SECURITY THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. PINNACLE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE
UPON REQUEST FROM MR. JOHN J. GLEASON, JR., VICE CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, PINNACLE BANC GROUP, INC., 2215 YORK ROAD, SUITE 208, OAK BROOK,
ILLINOIS 60521, (708) 574-3550. FINANCIAL SECURITY DOCUMENTS ARE AVAILABLE
WITHOUT CHARGE UPON REQUEST FROM MR. FRANK M. SWIDERSKI, SECRETARY, FINANCIAL
SECURITY CORP., 1209 N. MILWAUKEE AVENUE, CHICAGO, ILLINOIS 60622, (312)
227-7020. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE BY SEPTEMBER 1, 1996.
4
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................................... 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 4
SUMMARY.................................................................................................... 8
PARTIES TO THE MERGER.................................................................................. 8
Pinnacle............................................................................................. 8
Financial Security................................................................................... 8
THE MEETINGS........................................................................................... 9
Pinnacle Meeting..................................................................................... 9
Financial Security Meeting........................................................................... 10
THE MERGER............................................................................................. 11
General.............................................................................................. 11
Merger Consideration................................................................................. 11
Recommendation of the Boards of Directors............................................................ 12
Opinion of Financial Advisor......................................................................... 12
Election Procedures.................................................................................. 12
Closing Date......................................................................................... 13
Conduct of Business Pending the Merger............................................................... 13
Conditions to the Consummation of the Merger and Regulatory Approvals................................ 13
Termination.......................................................................................... 14
Termination Fee...................................................................................... 14
Accounting Treatment................................................................................. 14
Resales of Pinnacle Common Stock by Affiliates....................................................... 14
Interests of Certain Persons in the Merger........................................................... 15
Certain Tax Consequences of the Merger............................................................... 15
Certain Differences in Rights of Stockholders........................................................ 15
Common Stock Listing................................................................................. 16
Dissenters' Rights................................................................................... 16
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION...................................................... 16
COMPARATIVE PER SHARE DATA............................................................................. 18
PINNACLE CONSOLIDATED HISTORICAL SUMMARY FINANCIAL DATA................................................ 19
FINANCIAL SECURITY CONSOLIDATED HISTORICAL SUMMARY FINANCIAL DATA...................................... 20
RISK FACTORS............................................................................................... 22
Dependence on Key Personnel.............................................................................. 22
Holding Company Structure................................................................................ 22
Investment Portfolio..................................................................................... 22
Impact of Government Monetary Policies................................................................... 22
Allowance for Loan Losses................................................................................ 23
Competitive Banking Environment.......................................................................... 23
Control by Principal Stockholders........................................................................ 23
Limited Liquidity of Pinnacle Common Stock............................................................... 23
THE MEETINGS............................................................................................... 24
Pinnacle Meeting......................................................................................... 24
Financial Security Meeting............................................................................... 26
THE MERGER................................................................................................. 28
</TABLE>
5
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General.................................................................................................. 28
Background of the Merger................................................................................. 28
Reasons for the Merger................................................................................... 30
Recommendations of the Boards of Directors............................................................... 31
Opinion of Financial Security's Financial Advisor........................................................ 32
Merger Consideration..................................................................................... 36
Election Procedures...................................................................................... 37
Surrender of Certificates................................................................................ 38
Fractional Shares........................................................................................ 38
Effective Time and Closing Date.......................................................................... 38
Representations and Warranties........................................................................... 39
Conduct of Business of Financial Security Pending the Merger............................................. 39
Conduct of Business of Pinnacle Pending the Merger....................................................... 40
Conditions to Consummation of the Merger................................................................. 41
Regulatory Approvals..................................................................................... 41
Waiver and Amendment..................................................................................... 42
No Solicitation.......................................................................................... 43
Termination and Termination Fee.......................................................................... 43
Accounting Treatment..................................................................................... 44
Expenses................................................................................................. 44
Resales of Pinnacle Common Stock by Affiliates........................................................... 45
Management and Operations After the Merger............................................................... 45
Interests of Certain Persons in the Merger............................................................... 45
Certain Tax Consequences of the Merger................................................................... 48
Certain Differences in Rights of Stockholders............................................................ 52
Common Stock Listing..................................................................................... 52
PRO FORMA CAPITALIZATION (UNAUDITED)....................................................................... 53
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)................................................... 55
BUSINESS OF PINNACLE....................................................................................... 63
Pinnacle's Management's Discussion and Analysis of Financial Condition and Results of Operations......... 64
Pinnacle's Statistical Disclosure........................................................................ 80
BUSINESS OF FINANCIAL SECURITY............................................................................. 90
Financial Security's Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................................. 91
Financial Security's Statistical Disclosure.............................................................. 101
SUPERVISION AND REGULATION OF PINNACLE..................................................................... 117
DESCRIPTION OF PINNACLE CAPITAL STOCK...................................................................... 119
Common Stock............................................................................................. 119
Security Ownership of Management......................................................................... 119
Preferred Stock.......................................................................................... 121
DISSENTER'S RIGHTS......................................................................................... 121
COMPARATIVE RIGHTS OF STOCKHOLDERS......................................................................... 124
Special Meetings of Stockholders......................................................................... 124
Stockholder Action by Written Consent.................................................................... 124
Required Stockholder Vote for Certain Actions............................................................ 124
Amendment of Articles or By-laws......................................................................... 126
Inspection of Stockholder Lists.......................................................................... 127
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6
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Appraisal Rights in Mergers.............................................................................. 127
Directors and Classes of Directors; Vacancies and Removal of Directors................................... 127
Notice of Director Nominations........................................................................... 128
Dividends and Other Distributions........................................................................ 129
Director and Officer Discretion.......................................................................... 129
Indemnification.......................................................................................... 130
Anti-Takeover Statutes................................................................................... 130
FINANCIAL SECURITY STOCKHOLDER PROPOSALS................................................................... 131
PINNACLE STOCKHOLDER PROPOSALS............................................................................. 131
EXPERTS.................................................................................................... 132
LEGAL OPINIONS............................................................................................. 132
INDEX TO FINANCIAL INFORMATION............................................................................. F-1
</TABLE>
APPENDIX I Agreement and Plan of Merger
APPENDIX II Opinion of Hovde Financial, Inc.
APPENDIX III Section 262 of Delaware General Corporation Law
7
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. AS THIS SUMMARY IS NECESSARILY
INCOMPLETE, REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY, THE MORE DETAILED INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND APPENDICES HERETO.
PARTIES TO THE MERGER
PINNACLE
Pinnacle Banc Group, Inc. ("Pinnacle"), is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"), and a savings and loan holding company registered under the Home Owners
Loan Act of 1933, as amended (the "HOLA"), and is engaged in the business of
banking through the ownership of subsidiary banks. Pinnacle is subject to
regulation by the Federal Reserve Bank (the "Federal Reserve"), the Office of
Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Illinois Commissioner of Banks and Trust Companies (the
"Commissioner of Banks") and the Securities and Exchange Commission (the "SEC").
Pinnacle owns one hundred percent (100%) of the issued and outstanding shares of
common stock of Pinnacle Bank, Pinnacle Bank of the Quad-Cities (the
"Quad-Cities Bank") and Pinnacle Bank, F.S.B., formerly known as Batavia Savings
Bank, F.S.B. ("Pinnacle Savings" and collectively with Pinnacle Bank and
Pinnacle Bank of the Quad-Cities, the "Pinnacle Subsidiary Banks"). Pinnacle is
a legal entity separate and distinct from the Pinnacle Subsidiary Banks. The
major source of Pinnacle's revenues is dividends from the Pinnacle Subsidiary
Banks. At March 31, 1996, Pinnacle had total consolidated assets of
$807,498,000, total loans of $318,032,000, total deposits of $703,392,000 and
total stockholders' equity of $77,935,000. The Pinnacle Subsidiary Banks have
twelve banking locations in the metropolitan areas of Chicago and the
Quad-Cities, Illinois.
Pinnacle Bank and Quad-Cities Bank are full service commercial banks
encompassing most of the usual functions of commercial and savings banking
including commercial, consumer, and real estate lending; installment credit
lending; collections; safe deposit operations; and other services tailored for
individual customer needs. The banks also offer a full range of deposit services
to individuals and businesses which include demand, savings and time deposits,
as well as providing trust services to customers. Pinnacle Bank provides
nondeposit-based products, including mutual funds and annuities through
affiliation with an independent broker.
Pinnacle Savings is a federally-chartered savings bank which is principally
engaged in the business of attracting savings and other funds from the general
public and investing these funds, principally by originating residential
mortgage loans and investing in investment grade securities. In addition to
residential mortgage loans, Pinnacle Savings makes commercial, consumer and
installment loans. Pinnacle Savings offers a full range of deposit services
including demand, savings and time deposits.
Additional information concerning Pinnacle is included under "BUSINESS OF
PINNACLE" herein and incorporated by reference herein. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE".
The executive offices of Pinnacle are located at 2215 York Road, Suite 208,
Oak Brook, Illinois 60521. Pinnacle's telephone number at that address is (708)
574-3550.
FINANCIAL SECURITY
Financial Security Corp. ("Financial Security") was incorporated under
Delaware law in July, 1991. On December 29, 1992, Financial Security acquired
Security Federal Savings and Loan Association of Chicago, Chicago, Illinois
("Security Federal"), as a part of Security Federal's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings association. Financial Security is a savings and loan holding company
and is subject to regulation by the OTS, the FDIC and the SEC. Currently,
Financial Security does not transact any material business other than
8
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through its subsidiary, Security Federal. At March 31, 1996, Financial Security
had total consolidated assets of $273,965,000, total loans of $188,219,000,
including loans held for sale, total deposits of $188,777,000 and total
stockholders' equity of $39,372,000.
Security Federal is a member of the Federal Home Loan Bank System, and its
deposit accounts are insured to the maximum allowable amount by the FDIC.
Security Federal conducts business through its two offices which are located in
Chicago and Niles, Illinois. Security Federal's principal business has been and
continues to be attracting retail deposits from the general public, and
investing those deposits, together with funds generated from operations and
borrowings, primarily in one-to four-family residential mortgage loans and, to a
lesser extent, multi-family residential mortgage loans, mortgage-backed
securities, purchased mortgage servicing rights, U.S. Government and Federal
agency securities, and other investment securities.
Additional information concerning Financial Security is included under
"BUSINESS OF FINANCIAL SECURITY" and incorporated by reference herein. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
The executive offices of Financial Security are located at 1209 North
Milwaukee Avenue, Chicago, Illinois 60622. Financial Security's telephone number
at that address is (312) 227-7020.
THE MEETINGS
PINNACLE MEETING
MEETING DATE. The Pinnacle Meeting of Stockholders (the "Pinnacle Meeting")
will be held at 2215 York Road, Oak Brook, Illinois 60521 on September 11, 1996,
at 10:00 a.m., Chicago time, and at the place, date and time designated for any
and all adjournments or postponements thereof. See "THE MEETINGS -- Pinnacle
Meeting."
RECORD DATE. Only holders of record of shares of Pinnacle Common Stock at
the close of business on July 26, 1996 (the "Pinnacle Record Date") are entitled
to notice of and to vote at the Pinnacle Meeting. See "THE MEETINGS -- Pinnacle
Meeting."
MATTERS TO BE CONSIDERED. At the Pinnacle Meeting, holders of shares of
Pinnacle Common Stock will consider and vote on the approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the
Merger, and pursuant to which Pinnacle will issue shares of Pinnacle Common
Stock to holders of Financial Security Common Stock (other than Pinnacle or any
of its subsidiaries) electing to receive Pinnacle Common Stock in consideration
therefor and holders of Financial Security stock options who receive shares of
Pinnacle Common Stock in consideration of said options. See "THE MEETINGS --
Pinnacle Meeting." Pursuant to Section 11.20 of the Illinois Business
Corporation Act of 1983, as amended (the "IBCA"), Pinnacle stockholders would
not be entitled to vote on the proposal to approve and adopt the Merger
Agreement if the shares of Pinnacle Common Stock to be issued in connection with
the Merger did not exceed twenty percent (20%) of the shares of Pinnacle Common
Stock outstanding immediately prior to the Effective Time. While Pinnacle Common
Stock must constitute fifty-five percent (55%) of the aggregate consideration
payable by Pinnacle in connection with the Merger, it is not certain how many
shares of Pinnacle Common Stock will be issued in connection with the Merger and
whether such shares will exceed twenty percent (20%) of the shares of Pinnacle
Common Stock outstanding immediately prior to the Effective Time. As a result,
Pinnacle has scheduled the Pinnacle Meeting to approve and adopt the Merger
Agreement. Approval of the Merger by the Pinnacle stockholders is a condition
to, and required for, consummation of the Merger. See "THE MEETINGS -- Pinnacle
Meeting."
VOTE REQUIRED. The affirmative vote of the holders of two-thirds of the
issued and outstanding shares of Pinnacle Common Stock is required for approval
and adoption of the Merger Agreement. Therefor, abstentions and broker non-votes
will have the same effect as votes against the approval and adoption of the
Merger Agreement. As of the Pinnacle Record Date, there were 4,302,716 shares of
9
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Pinnacle Common Stock entitled to be voted at the Pinnacle Meeting. With a
quorum, or in the absence of such, the affirmative vote of a majority of the
shares represented at the Pinnacle Meeting may authorize the adjournment of the
meeting. See "THE MEETINGS -- Pinnacle Meeting."
SECURITY OWNERSHIP. As of the Pinnacle Record Date, directors and executive
officers of Pinnacle held in the aggregate 2,192,632 shares (excluding option
shares), or approximately 50.96% of the then issued and outstanding shares of
Pinnacle Common Stock. The directors and executive officers of Pinnacle have
indicated that they intend to vote such shares of Pinnacle Common Stock for
approval and adoption of the Merger at the Pinnacle Meeting. Accordingly,
holders of an additional 15.71% of the outstanding shares of Pinnacle Common
Stock entitled to vote must vote such shares in favor of the Merger in order for
such proposals to be approved. As of May 31, 1996, neither Financial Security
and its subsidiaries, nor, to the knowledge of Financial Security, the directors
and executive officers of Financial Security and their affiliates, held any
outstanding shares of Pinnacle Common Stock. See "THE MEETINGS -- Pinnacle
Meeting."
Pursuant to the Merger Agreement, affiliates of Pinnacle or the Pinnacle
Subsidiary Banks, including officers, employees, directors or holders of greater
than ten percent of the outstanding shares of Pinnacle Common Stock have agreed
not to purchase any Pinnacle Common Stock during the thirty business days prior
to the consummation of the Merger.
FINANCIAL SECURITY MEETING
MEETING DATE. The Financial Security Special Meeting of Stockholders (the
"Financial Security Meeting") will be held at 1209 North Milwaukee Avenue,
Chicago, Illinois on September 11, 1996, at 3:00 p.m., Chicago time, and at the
place, date and time designated for any and all adjournments or postponements
thereof. See "THE MEETINGS -- Financial Security Meeting."
RECORD DATE. Only holders of record of shares of Financial Security Common
Stock at the close of business on July 26, 1996 (the "Financial Security Record
Date") are entitled to notice of and to vote at the Financial Security Meeting.
See "THE MEETINGS -- Financial Security Meeting."
MATTERS TO BE CONSIDERED. At the Financial Security Meeting, holders of
shares of Financial Security Common Stock will vote on a proposal to approve and
adopt the Merger Agreement and the transactions contemplated thereby, including
the Merger. See "THE MEETINGS -- Financial Security Meeting."
VOTE REQUIRED. The affirmative vote of the holders of a majority of the
shares of Financial Security Common Stock outstanding is required for approval
and adoption of the Merger Agreement and the transactions contemplated thereby.
Therefor, abstentions and broker non-votes will have the same effect as votes
against the approval and adoption of the Merger Agreement. As of the Financial
Security Record Date, there were 1,550,846 shares of Financial Security Common
Stock entitled to be voted at the Financial Security Meeting. With a quorum, or
in the absence of such, the affirmative vote of a majority of the shares
represented at the Financial Security Meeting may authorize the adjournment of
the meeting. Approval of the Merger by the stockholders of Financial Security is
a condition to, and required for, consummation of the Merger. See "THE MEETINGS
- -- Financial Security Meeting."
SECURITY OWNERSHIP. As of the Financial Security Record Date, directors and
executive officers of Financial Security and their affiliates held, or
controlled the vote of, an aggregate of 225,187 shares of Financial Security
Common Stock (excluding option shares), or approximately 14.52% of the then
outstanding shares of Financial Security Common Stock. The directors and
executive officers of Financial Security have indicated that they intend to vote
such shares of Financial Security Common Stock for approval and adoption of the
Merger at the Financial Security Meeting. Accordingly, holders of an additional
35.49% of the outstanding shares of Financial Security Common Stock entitled to
vote must vote such shares in favor of the Merger Agreement in order for such
proposal to be approved. As of the Financial Security Record Date, neither
Pinnacle and its subsidiaries, nor, to the knowledge of Pinnacle, the directors
and executive officers of Pinnacle and their affiliates, held any outstanding
shares of Financial Security Common Stock. See "THE MEETINGS -- Financial
Security Meeting."
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THE MERGER
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE MERGER AGREEMENT, WHICH IS ATTACHED HERETO AS APPENDIX I AND
INCORPORATED BY REFERENCE HEREIN.
GENERAL
The stockholders of Pinnacle and Financial Security are each being asked to
separately consider and vote upon a proposal to approve and adopt the Merger
Agreement, pursuant to which Financial Security will be merged with and into
Pinnacle, with Pinnacle being the surviving corporation in the Merger. The name
of the surviving corporation in the Merger will be "Pinnacle Banc Group, Inc."
MERGER CONSIDERATION
At the effective time of the Merger (the "Effective Time"), Financial
Security will merge with and into Pinnacle in accordance with the Merger
Agreement whereby the separate existence of Financial Security will cease.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Financial Security Common Stock outstanding immediately
prior to the consummation of the Merger will be converted into and represent the
right to receive (upon a Financial Security stockholder's election) either (i)
.8803 shares (the "Exchange Ratio") of Pinnacle Common Stock, subject to
adjustment as described below (the "Stock Distribution"); (ii) $28.50 in cash
(the "Cash Distribution") (provided that the number of shares of Financial
Security Common Stock subject to an election to receive cash will not exceed 45%
of the outstanding shares of Financial Security Common Stock); or (iii) an
amount in cash equal to 30% of the Cash Distribution and shares of Pinnacle
Common Stock equal to 70% of the Stock Distribution (the "Combined Distribution"
and together with the "Stock Distribution" and the "Cash Distribution," the
"Merger Consideration"). Pursuant to the terms of the Merger Agreement, cash
will be paid in lieu of fractional shares of Pinnacle Common Stock.
The Exchange Ratio is equal to the quotient of the agreed value of Financial
Security Common Stock per share, $28.50, divided by the per share value of
Pinnacle Common Stock during a ten day trading period prior to the execution of
the Merger Agreement, $32.375.
Pursuant to the Merger Agreement, if the Pinnacle Average Stock Price (as
defined below) is less than $30.00 per share but greater than $27.99 per share,
the Exchange Ratio shall be adjusted to equal the quotient of $26.00 divided by
the Pinnacle Average Stock Price. However, if the Pinnacle Average Stock Price
is greater than $35.00 per share but does not exceed $37.00 per share, the
Exchange Ratio shall be adjusted to equal the quotient of $31.00 divided by the
Pinnacle Average Stock Price. The Pinnacle Average Stock Price is defined as the
average of the closing prices per share of Pinnacle Common Stock reported by the
Nasdaq Small Cap Market (the "Nasdaq SCM") on the ten trading days on which one
or more trades actually occur immediately prior to the second business day
preceding the Closing Date.
However, if the Pinnacle Average Stock Price is less than $28.00 per share,
the Exchange Ratio shall be further adjusted to .9286 and Financial Security
shall have the option to terminate the Merger Agreement unless not later than
two days prior to the Closing Date, Pinnacle agrees to further adjust the
Exchange Ratio to equal the quotient of $26.00 divided by the Pinnacle Average
Stock Price. Conversely, if the Pinnacle Average Stock Price exceeds $37.00 per
share, the Exchange Ratio shall be further adjusted to .8378 and Pinnacle shall
have the option to terminate the Merger Agreement unless not later than two days
prior to the Closing Date, Financial Security agrees to further adjust the
Exchange Ratio to equal the quotient of $31.00 divided by the Pinnacle Average
Stock Price.
The market price of Pinnacle Common Stock to be received in the Merger is
subject to fluctuation and such fluctuation may result in an increase or
decrease in the value of the Stock Distribution or the Combined Distribution to
be received by Financial Security stockholders in the Merger.
Neither Financial Security nor Pinnacle is required to exercise its right to
terminate the Merger Agreement based on the market value of Pinnacle Common
Stock at the Effective Time. No decision
11
<PAGE>
can be made unless and until it can reasonably be anticipated that the Pinnacle
Average Stock Price will trigger the termination rights whereupon the
appropriate board of directors will make a determination based on the relevant
circumstances existing at that time. You are advised to obtain a current market
quotation for the shares of Pinnacle Common Stock. See "COMPARATIVE STOCK PRICES
AND DIVIDEND INFORMATION."
The Cash Distribution is not subject to any possible adjustment in
connection with the Pinnacle Average Stock Price. See "THE MERGER -- Merger
Consideration" and "-- Election Procedures".
In addition, the Merger Consideration may be adjusted pursuant to changes in
the value of the Bennett Portfolio as discussed under "THE MERGER -- Termination
and Termination Fee" and "BUSINESS OF FINANCIAL SECURITY -- Loan Portfolio."
In addition, each option to purchase shares of Financial Security Common
Stock shall be converted at the Effective Time into such number of shares of
Pinnacle Common Stock as are equal in value to (i) the product of (A) the number
of shares of Financial Security Common Stock subject to Financial Security stock
options; (B) the Exchange Ratio; and (C) the Pinnacle Average Stock Price; less
(ii) the aggregate exercise price for the number of shares of Financial Security
Common Stock subject to the options.
RECOMMENDATION OF THE BOARDS OF DIRECTORS
The Board of Directors of each of Pinnacle and Financial Security
unanimously recommends that the stockholders of their respective companies vote
FOR approval of the Merger Agreement. The Boards of Directors of both Pinnacle
and Financial Security, after consideration of the terms and conditions of the
Merger Agreement and other factors deemed relevant, believe that the terms of
the Merger Agreement are fair to, and in the best interests of, Pinnacle and its
stockholders and Financial Security and its stockholders, respectively. See "THE
MERGER -- Background of the Merger," "-- Reasons for the Merger" and "--
Recommendations of the Boards of Directors."
OPINION OF FINANCIAL ADVISOR
Financial Security has received the opinion of Hovde Financial, Inc., an
investment banking firm ("Hovde"), that the Merger Consideration to be received
by the holders of Financial Security Common Stock pursuant to the terms of the
Merger is fair to the Financial Security stockholders from a financial point of
view. Hovde's opinion is directed only to the consideration to be received by
the holders of Financial Security Common Stock and does not constitute a
recommendation to any holders of Financial Security Common Stock as to how such
holders of Financial Security Common Stock should vote at the Financial Security
Meeting or as to any other matter. For additional information concerning Hovde
and its opinion, see "THE MERGER -- Opinion of Financial Advisor". The opinion
of such firm is attached as Appendix II to this Joint Proxy
Statement/Prospectus.
ELECTION PROCEDURES
Each Financial Security stockholder will have the opportunity to make a
Stock Election, a Cash Election, or a Combined Election. ENCLOSED WITH THIS
JOINT PROXY STATEMENT/PROSPECTUS IS THE ELECTION FORM FOR USE BY THE
STOCKHOLDERS OF FINANCIAL SECURITY WHEREBY STOCKHOLDERS MAY INDICATE A STOCK
ELECTION, CASH ELECTION OR COMBINED ELECTION. IN ORDER FOR AN ELECTION FORM TO
BE DEEMED TO BE EFFECTIVE, SUCH ELECTION FORM MUST BE PROPERLY COMPLETED AND
DULY EXECUTED BY THE FINANCIAL SECURITY STOCKHOLDERS AND RETURNED TO HARRIS
TRUST AND SAVINGS BANK (THE "EXCHANGE AGENT") BY 5:00 P.M., CHICAGO TIME, ON THE
DAY PRIOR TO THE DATE OF THE FINANCIAL SECURITY MEETING OR SEPTEMBER 10, 1996
(THE "ELECTION DEADLINE").
Each separate entry on Financial Security's list of stockholders shall be
presumed to represent a separate and distinct holder of record of Financial
Security Common Stock. Shares held of record by a bank, trust company, broker,
dealer or other recognized nominee shall be deemed to be held by a single holder
unless the nominee advises the Exchange Agent otherwise, in which case, each
beneficial owner will be treated as a separate holder and, either directly or
through such nominee, may submit a separate Election Form. Any election may be
revoked or changed by the person submitting an Election
12
<PAGE>
Form or any other person to whom the subject shares are subsequently transferred
by submission of a later dated Election Form properly completed and duly
executed, received by the Exchange Agent by the Election Deadline.
Any stockholder who fails to deliver a properly completed and duly executed
Election Form to the Exchange Agent by the Election Deadline shall be deemed to
have made no election (a "No Election," in which case, such holder's shares
shall be deemed to be "No Election Shares"). No Election Shares will be treated
as Stock Election Shares for purposes of determining the type and amount of the
Merger Consideration payable pursuant to the Merger.
In the event the number of shares of Pinnacle Common Stock distributable in
respect of the Stock Election Shares and the Combined Election Shares is less
than fifty-five percent (55%) of the Merger Consideration or such greater amount
as required by the Minimum Share Notice (as defined below), the Exchange Agent
will reallocate the Merger Consideration payable to each holder of the Cash
Election Shares pro rata (based upon the number of Cash Election Shares owned by
such holder as compared with the total number of Cash Election Shares owned by
all holders) such that holders of Cash Election Shares will receive the number
of shares of Pinnacle Common Stock which in the aggregate will equal fifty-five
percent (55%) of the Merger Consideration or the amount set forth in the Minimum
Share Notice. The balance of the Merger Consideration, if any, will be paid in
cash. The Minimum Share Notice is the notice that the law firm of Muldoon,
Murphy & Faucette, counsel to Financial Security ("Muldoon"), will issue to the
Exchange Agent if the total number of shares of Pinnacle Common Stock issuable
to all holders of the Stock Election Shares and Combined Election Shares is
insufficient to allow Muldoon to issue its opinion concerning the tax free
nature of the Merger.
Following consummation of the Merger, the Exchange Agent will distribute the
applicable Merger Consideration in exchange for shares of Financial Security
Common Stock. See "THE MERGER -- Election Procedures" and "-- Surrender of
Certificates".
CLOSING DATE
The Closing Date of the Merger will be within thirty (30) business days
after (i) the expiration of all applicable waiting periods in connection with
approvals of governmental authorities and (ii) all conditions to the
consummation of the Merger have been satisfied or waived in accordance with the
terms of the Merger Agreement, or at another time agreed to in writing by
Pinnacle and Financial Security. Subject to obtaining all requisite approvals,
Pinnacle and Financial Security currently anticipate that the Merger will be
consummated in September, 1996. See "THE MERGER -- Effective Time and Closing
Date".
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the terms of the Merger Agreement, Financial Security has agreed
that until the Effective Time, it will conduct its business in the usual,
regular and ordinary course consistent with past practice and prudent banking
practice and use its best efforts to maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the appropriate services of its officers and key
employees. In addition, Financial Security has agreed to consult with Pinnacle
prior to taking certain action as well as not to pay cash dividends on shares of
Financial Security Common Stock prior to October 22, 1996, without the prior
approval of Pinnacle. Pinnacle has agreed that until the Effective Time, it and
the Pinnacle Subsidiary Banks will carry on their respective businesses in the
usual, regular and ordinary course consistent with past practice and prudent
banking practice. See "THE MERGER -- Conduct of Business of Financial Security
Pending the Merger"; " -- Conduct of Business of Pinnacle Pending the Merger."
CONDITIONS TO THE CONSUMMATION OF THE MERGER AND REGULATORY APPROVALS
Consummation of the Merger is subject to satisfaction of a number of
conditions, including approval of the Merger Agreement by the stockholders of
Pinnacle and Financial Security, the receipt
13
<PAGE>
of all regulatory approvals required in connection with the Merger Agreement and
the transactions contemplated thereby, receipt of opinions of counsel and the
satisfaction of other customary closing conditions. See "THE MERGER --
Conditions to Consummation of the Merger."
Pinnacle has filed applications with the OTS and the Federal Reserve for
prior approval to consummate the Merger. Such applications are currently
pending. See "THE MERGER -- Regulatory Approvals." There can be no assurance as
to whether or when the regulatory approvals will be obtained.
All of the conditions to consummation of the Merger may be waived at any
time by the party for whose benefit they were created, with the exception of
conditions relating to approval of the Merger Agreement by Financial Security
and Pinnacle, the receipt of all regulatory approvals, the requirement that the
Registration Statement be declared effective under the Securities Act, and the
requirement that Pinnacle Common Stock be listed on the Nasdaq National Market.
The Merger Agreement may be amended or supplemented at any time by written
agreement of the parties upon the approval of the Pinnacle Board and the
Financial Security Board. See "THE MERGER -- Waiver and Amendment."
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time of the Merger, whether prior to or after its approval by the stockholders
of Pinnacle and Financial Security, by mutual consent of the parties in writing,
or by either party upon the occurrence of specified events. The Merger Agreement
provides that either party may terminate the Merger Agreement if the Merger is
not consummated by March 31, 1997, but the parties can extend that date by
mutual consent to a date to be determined by them. The Merger Agreement may also
be terminated as a result of an increase or decrease in the Pinnacle Average
Stock Price as discussed herein. In addition, Pinnacle may terminate the Merger
Agreement based on a decline in the value of certain office equipment leases
held by Security Federal unless Financial Security agrees to reduce the Merger
Consideration to reflect such decline. Pinnacle's and Financial Security's
rights to terminate the Merger Agreement are more fully described in "THE MERGER
- -- Merger Consideration," "-- Waiver and Amendment" and "-- Termination and
Termination Fee" and "BUSINESS OF FINANCIAL SECURITY -- Loan Portfolio."
TERMINATION FEE
Under the Merger Agreement, upon the occurrence of specified events,
Financial Security must pay Pinnacle a fee of $600,000 (the "Termination Fee").
The specified events relate generally to the Financial Security Board failing to
support the Merger and unopposed offers by, or transactions or proposed
transactions with, third parties. The Termination Fee may discourage competing
offers from third parties to acquire Financial Security and is intended to
increase the likelihood that the Merger will be consummated. See "THE MERGER --
Termination and Termination Fee."
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes. See "THE
MERGER -- Accounting Treatment" and "PRO FORMA FINANCIAL STATEMENTS."
RESALES OF PINNACLE COMMON STOCK BY AFFILIATES
The resale of Pinnacle Common Stock issued to "affiliates" (as such term is
defined by Rule 145 as promulgated by the SEC under the Securities Act) of
Financial Security in connection with the Merger will be subject to certain
restrictions. Such shares may only be sold pursuant to (i) a separate
registration statement relating to such affiliates' shares of Pinnacle Common
Stock, (ii) the terms and conditions of Rule 145 under the Securities Act, or
(iii) some other exemption from registration. See "THE MERGER -- Resales of
Pinnacle Common Stock by Affiliates."
14
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Financial Security's management and of the Financial
Security Board have certain interests in the Merger that are in addition to
their interests as stockholders of Financial Security generally. These interests
include, among others, provisions in the Merger Agreement relating to
indemnification, and the continuation of certain employee benefits. See "THE
MERGER -- Management and Operations After the Merger." The Merger Agreement also
provides that Pinnacle will honor the terms of the employment agreements and
change in control agreements between Financial Security and current officers and
employees, and all provisions for vested benefits or other vested amounts earned
or accrued through the Effective Time. In addition, the Merger Agreement
provides for accelerated vesting of Financial Security options and their
exchange for Pinnacle Common Stock.
The Financial Security Board was aware of these interests and considered
them among other matters in approving the Merger Agreement and the transactions
contemplated thereby. See "THE MERGER -- Interests of Certain Persons in the
Merger."
CERTAIN TAX CONSEQUENCES OF THE MERGER
It is a condition to the obligation of Pinnacle and Financial Security to
consummate the Merger that Pinnacle and Financial Security shall have received
an opinion of Muldoon, counsel to Financial Security, to the effect that the
Merger will be treated as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). Assuming the
Merger is so treated, no gain or loss will be recognized for federal income tax
purposes by Pinnacle or Financial Security as a result of the Merger or by a
holder of Financial Security Common Stock upon receipt solely of Pinnacle Common
Stock pursuant to the Merger. Cash received by a holder of Financial Security
Common Stock (i) in consideration of his or her shares of Financial Security
Common Stock pursuant to a Cash Distribution or a Combined Distribution, or (ii)
in lieu of a fractional share interest in Pinnacle Common Stock will be treated
as received in exchange for such Financial Security Common Stock or such
fractional share interest in Pinnacle Common Stock, as the case may be, and gain
or loss will be recognized for federal income tax purposes, measured by the
difference between the amount of cash received and the adjusted tax basis of the
share of Financial Security Common Stock surrendered or portion thereof
allocable to a fractional share interest in Pinnacle, as the case may be. Such
gain or loss should be capital gain or loss if such share of Financial Security
Common Stock or fractional share interest in Pinnacle is held as a capital asset
by such stockholder and will be long-term capital gain or loss if held for more
than one year at the Effective Time. However, if the cash payment has the effect
of a distribution of a dividend, the amount of taxable income recognized
generally will equal the amount of cash received; such income generally will be
taxable as a dividend; and no loss (or other recovery of such stockholder's tax
basis for the shares of Financial Security Common Stock surrendered in the
exchange) generally will be recognized by such stockholder. The determination of
whether a cash payment has the effect of a distribution of a dividend will be
made pursuant to the provisions and limitations of Section 302 of the Code,
taking into account the constructive stock ownership rules of Section 318 of the
Code. PINNACLE AND FINANCIAL SECURITY STOCKHOLDERS ARE URGED TO CONSULT THEIR
TAX ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF VARIOUS STATE, LOCAL AND FOREIGN TAX
LAWS. See "THE MERGER -- Conditions to the Merger" and "-- Certain Tax
Consequences of the Merger."
CERTAIN DIFFERENCES IN RIGHTS OF STOCKHOLDERS
Upon completion of the Merger, stockholders of Financial Security who
receive shares of Pinnacle Common Stock in exchange for Financial Security
Common Stock will become stockholders of Pinnacle and their rights as such will
be governed by Pinnacle's Certificate of Incorporation and By-laws, and will be
governed by Illinois law. The rights of stockholders of Pinnacle are different
in certain respects from the rights of stockholders of Financial Security. For a
summary of these differences, see "COMPARATIVE RIGHTS OF STOCKHOLDERS."
15
<PAGE>
COMMON STOCK LISTING
Pinnacle has agreed to cause the shares of Pinnacle Common Stock to become
listed on the Nasdaq National Market including the shares to be issued in the
Merger. The obligation of each of Pinnacle and Financial Security to consummate
the Merger is subject to the listing of shares of Pinnacle Common Stock on the
Nasdaq National Market. See "THE MERGER -- Common Stock Listing" and "RISK
FACTORS."
DISSENTERS' RIGHTS
Under the provisions of the Delaware General Corporation Law (the "DGCL"),
holders of Financial Security Common Stock who assert dissenters' rights will
have a statutory right to have the value of their shares appraised. To perfect
this right, a holder of Financial Security Common Stock must not vote such
shares in favor of the Merger at the Financial Security Meeting (this may be
done by marking the proxy either to vote against the approval of the Merger
Agreement or to abstain from voting thereon or by not voting at all) and must
take such other action as is required by the provisions of Section 262 of the
DGCL including delivering written demand for appraisal of such Financial
Security Common Stock. See "THE MERGER -- Dissenters' Rights" and Appendix III
hereto.
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION
Pinnacle Common Stock and Financial Security Common Stock are listed for
trading on the Nasdaq SCM and the Nasdaq National Market, respectively under the
symbols "PINN" and "FNSC," respectively. The following table sets forth, for the
periods indicated, the high and low sales prices per share of Pinnacle Common
Stock and Financial Security Common Stock on the Nasdaq SCM and the Nasdaq
National Market, respectively, as well as the quarterly cash dividends per share
paid by Pinnacle on the shares of Pinnacle Common Stock. No dividends on
Financial Security Common Stock have been paid with the exception of a special
dividend of $1.00 per share paid on February 7, 1995.
<TABLE>
<CAPTION>
PINNACLE COMMON
CASH DIVIDENDS FINANCIAL SECURITY
STOCK (1) PER SHARE OF COMMON STOCK
-------------------- PINNACLE COMMON --------------------
QUARTER ENDED HIGH LOW STOCK HIGH LOW
- ------------------------------------------------- --------- --------- ----------------- --------- ---------
March 31, 1993................................... 32.50 30.00 .24 15.13 12.75
<S> <C> <C> <C> <C> <C>
June 30, 1993.................................... 36.75 31.00 .24 15.25 13.13
September 30, 1993............................... 34.00 31.50 .24 15.00 12.25
December 31, 1993................................ 36.50 33.00 .24 15.25 14.00
March 31, 1994................................... 36.50 30.50 .27 15.50 14.88
June 30, 1994.................................... 33.00 30.50 .27 20.00 14.75
September 30, 1994............................... 33.00 26.50 .27 18.75 17.50
December 31, 1994................................ 30.50 26.75 .27 18.50 14.75
March 31, 1995................................... 31.50 26.75 .29 18.25 14.25
June 30, 1995.................................... 33.25 29.00 .29 17.75 16.25
September 30, 1995............................... 32.00 28.00 .29 20.00 16.50
December 31, 1995................................ 34.00 29.00 .29 22.25 19.00
March 31, 1996................................... 34.00 30.50 .31 26.25 20.75
June 30, 1996.................................... 34.50 28.00 .31 26.50 24.00
</TABLE>
- ------------------------
(1) Stock prices are rounded to nearest 1/8.
16
<PAGE>
The following table sets forth the last reported sales price per share of
Pinnacle Common Stock and Financial Security Common Stock on the Nasdaq SCM and
the Nasdaq National Market, respectively, on April 19, 1996, the last date
before the execution of the Merger Agreement on which shares of Pinnacle Common
Stock or Financial Security Common Stock traded, and on July 26, 1996, the
latest practicable trading day before the printing of this Joint Proxy
Statement/Prospectus, and equivalent per share prices for Financial Security
Common Stock based on the Pinnacle Common Stock prices:
<TABLE>
<CAPTION>
EQUIVALENT PRICE
FINANCIAL PER FINANCIAL
SECURITY COMMON SECURITY
PINNACLE COMMON STOCK STOCK SHARE (1)
----------------------- --------------- --------------------
<S> <C> <C> <C>
April 19, 1996 $ 31.50 $ 24.50 $ 27.73
July 26, 1996 $ 30.00 $ 25.875 $ 26.41
</TABLE>
- ------------------------
(1) Represents the equivalent of one share of Financial Security Stock
calculated by multiplying the last reported sales price per share of
Pinnacle Common Stock on the indicated date by the Exchange Ratio, (.8803).
The market price of Pinnacle Common Stock will fluctuate between the date of
this Joint Proxy Statement/Prospectus and the Effective Time. Fluctuations in
the market price of Pinnacle Common Stock may result in an increase or decrease
in the value of the Stock Distribution or the Combined Distribution to be
received by holders of Financial Security Common Stock in the Merger. See "THE
MERGER."
As of the Pinnacle Record Date, the 4,302,716 outstanding shares of Pinnacle
Common Stock were held by approximately 335 record owners and, as of the
Financial Security Record Date, the 1,550,846 outstanding shares of Financial
Security Common Stock were held by approximately 240 record owners, not
including the number of persons or entities holding stock in nominee or street
name through various brokers or banks.
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents Pinnacle and Financial Security's historical
per share data for the periods specified. The information is based on the
historical financial statements of Pinnacle and Financial Security. The pro
forma income statement data disclose adjustments assuming the Merger was
consummated at the beginning of the periods indicated. The pro forma balance
sheet data disclose adjustments assuming the Merger was consummated on the date
indicated. The pro forma income statement data do not purport to be indicative
of the results of future operations or the actual results that would have
occurred had the Merger been consummated at the beginning of the period
presented. The pro forma data give effect to the Merger and are based on
numerous assumptions and estimates. The pro forma financial data is provided for
comparative purposes only. The information presented below should be read in
conjunction with the historical and pro forma financial information included
elsewhere in the Joint Proxy Statement/Prospectus and with the separate
consolidated financial statements of both Pinnacle and Financial Security,
including applicable notes, included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
PER SHARE OF PINNACLE COMMON
STOCK (UNAUDITED)
----------------------------
FOR THE FOR THE
THREE MONTHS YEAR ENDED
ENDED MARCH 31 DECEMBER 31
-------------- -----------
1996 1995
-------------- -----------
<S> <C> <C>
Historical
Net income -- fully diluted................ $ 0.36 $ 2.83
Book value................................. 17.90 18.05
Dividends.................................. 0.31 1.16
Pro forma (Maximum) [A]
Net income -- fully diluted................ $ 0.34 $ 2.38
Book value................................. 21.49 21.75
Dividends.................................. 0.23 0.87
Pro forma (Minimum) [B]
Net income -- fully diluted................ $ 0.34 $ 2.51
Book value................................. 20.11 20.36
Dividends.................................. 0.26 0.98
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OF FINANCIAL
SECURITY COMMON STOCK
(UNAUDITED)
----------------------------
FOR THE FOR THE
THREE MONTHS YEAR ENDED
ENDED MARCH 31 DECEMBER 31
-------------- -----------
1996 1995
-------------- -----------
<S> <C> <C>
Historical
Net income -- fully diluted................ $ 0.35 $ 1.33
Book value................................. 25.85 25.92
Dividends.................................. -- 1.00
Pro forma (Maximum) [A]
Net income -- fully diluted................ $ 0.30 $ 2.10
Book value................................. 18.92 19.15
Dividends.................................. 0.20 0.77
Pro forma (Minimum) [B]
Net income -- fully diluted................ $ 0.30 $ 2.21
Book value................................. 17.70 17.92
Dividends.................................. 0.23 0.86
</TABLE>
- ------------------------
[A] Assumes maximum amount of Pinnacle shares issued, or 100% of the purchase
price of $47,150,000, which equates to 1,456,362 shares at $32.375 per
share.
[B] Assumes minimum amount of Pinnacle shares issued, or 55% of the purchase
price of $47,150,000, which equates to 800,999 shares at $32.375 per share.
18
<PAGE>
PINNACLE CONSOLIDATED HISTORICAL SUMMARY FINANCIAL DATA
The selected financial data and other data presented below are qualified in
their entirety by reference to the consolidated financial statements of Pinnacle
incorporated by reference herein. Interim unaudited data at and for the three
months ended March 31, 1996 and 1995 reflect, in the opinion of management of
Pinnacle, all adjustments consisting of normal recurring adjustments necessary
for the fair presentation of such data. Results of the three months ended March
31, 1996 are not necessarily indicative of the results that may be achieved for
the full year.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31 YEARS ENDED DECEMBER 31
---------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 12,306 $ 14,262 $ 53,297 $ 42,920 $ 40,779 $ 42,054 $ 44,362
Interest expense..................... 6,415 6,169 25,739 16,640 17,670 20,233 23,708
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income................ 5,891 8,093 27,558 26,280 23,109 21,821 20,654
Provision for loan losses............ -0- 75 -0- 900 1,700 1,753 680
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses................... 5,891 8,018 27,558 25,380 21,409 20,068 19,974
Other income......................... 1,761 1,919 7,225 5,461 5,616 5,413 4,934
Net securities gains (losses)........ 264 346 4,731 (9,845) 8,740 10,950 4,741
Other expense........................ 5,665 6,055 23,882 21,060 20,467 20,282 18,133
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.................. 2,251 4,228 15,632 (64) 15,298 16,149 11,516
Income taxes (benefit)............... 694 822 3,139 (2,319) 4,005 3,235 978
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting for income
taxes............................... 1,557 3,406 12,493 2,255 11,293 12,914 10,538
Cumulative effect of change in
accounting for income taxes....... -0- -0- -0- -0- 1,700 -0- -0-
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 1,557 $ 3,406 $ 12,493 $ 2,255 $ 12,993 $ 12,914 $ 10,538
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Per common share data:
Earnings per share -- fully diluted
Income before cumulative effect of
change in accounting for income
income taxes...................... $ 0.36 $ 0.77 $ 2.83 $ 0.51 $ 2.50 $ 2.81 $ 2.25
Net income....................... 0.36 0.77 2.83 0.51 2.87 2.81 2.25
Book value......................... 17.90 16.68 18.05 15.62 15.81 14.03 12.33
Dividends paid..................... 0.31 0.29 1.16 1.08 0.96 0.88 0.80
Average common and common equivalent
shares outstanding on a fully
diluted basis....................... 4,382 4,434 4,419 4,460 4,528 4,597 4,685
At end of period:
Total assets....................... $ 807,489 $ 813,184 $ 818,697 $ 684,892 $ 722,382 $ 746,195 $ 580,501
Loans.............................. 318,032 314,735 309,600 248,404 248,076 241,918 195,940
Portfolio funds.................... 425,109 423,192 443,755 389,316 420,742 453,007 336,744
Deposits........................... 703,392 703,928 712,805 599,879 633,613 660,756 509,474
Notes payable...................... 20,700 29,700 20,600 5,400 -0- 14,509 7,400
Stockholders' equity............... 77,935 73,684 78,961 68,836 70,856 63,295 56,919
Selected financial ratios:
Return on average assets........... 0.78% 1.67% 1.55% 0.32% 1.80% 1.94% 1.86%
Return on average equity........... 8.72 20.68 18.09 3.35 18.88 21.49 19.50
Net interest margin................ 3.33 4.58 3.90 4.28 3.70 3.87 4.36
Dividend payout.................... 87.18 37.62 40.89 213.70 33.22 31.13 35.48
Average equity to average assets... 8.93 8.08 8.55 9.61 9.52 9.05 9.53
Allowance for loan losses to period
end loans......................... 1.90 2.00 1.95 1.70 1.43 1.24 1.28
Net charge-offs to average loans... (0.05) (0.16) 0.05 0.09 0.48 0.75 0.52
Nonperforming assets to period end
assets............................ 0.92 0.94 1.01 0.54 1.29 0.74 1.33
</TABLE>
19
<PAGE>
FINANCIAL SECURITY CONSOLIDATED HISTORICAL SUMMARY FINANCIAL DATA
The selected financial data and other data presented below are qualified in
their entirety by reference to the consolidated financial statements of
Financial Security Corp., by reference herein. Interim unaudited data at and for
the three months ended March 31, 1996 and 1995 reflect, in the opinion of
management of Financial Security, all adjustments consisting of normal recurring
adjustments necessary for the fair presentation of such data. Results of the
three months ended March 31, 1996 are not necessarily indicative of the results
that may be achieved for the full year.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
-------------- ----------------------------------------------------------
1996 1995 1994 1993 1992 (2) 1991 (1)
-------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.................... $ 273,965 $ 277,057 $ 272,362 $ 261,596 $ 238,458 $ 219,106
Loans receivable, net........... 186,639 190,496 198,201 199,498 162,627 179,149
Loans held for sale, net........ 1,581 3,483 7,411 -- -- --
Interest-earning deposits....... 9,508 6,627 3,616 9,416 4,444 2,244
Federal funds sold.............. -- 746 850 1,200 1,200 --
Securities held-to-maturity..... 1,152 1,341 29,733 20,613 2,994 15,989
Securities available-for-sale... 55,349 54,135 10,184 15,532 52,533 9,613
Purchased mortgage servicing
rights......................... 9,033 8,616 7,766 -- -- --
Foreclosed real estate, net..... 1,191 1,321 3,799 3,734 6,828 5,166
Deposits........................ 188,777 193,845 186,555 199,522 197,323 187,986
Borrowed funds.................. 41,500 39,345 42,417 19,789 1,160 7,800
Stockholders' equity,
substantially restricted....... 39,372 38,768 38,690 37,835 34,791 18,947
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
QUARTER ENDED AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------------
MARCH 31, 1996 1995 1994 1993 1992 (2) 1991 (1)
-------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets (4).......... 0.79% 0.75% 0.72% 1.59% 0.72% (0.26)%
Return on average stockholders' equity
(4).................................. 5.64% 5.69% 5.01% 10.75% 8.45% (2.90)%
Average stockholders' equity to
average assets....................... 14.06% 13.12% 14.40% 14.78% 8.50% 8.90%
Stockholders' equity, substantially
restricted to total assets........... 14.37% 13.99% 14.21% 14.46% 14.59% 8.45%
Interest rate spread during period.... 2.75% 2.78% 3.43% 4.10% 4.21% 3.41%
Net interest margin (3)............... 3.31% 3.30% 3.99% 4.71% 4.53% 3.84%
Non-performing loans to total loans... 3.02% 2.01% 3.13% 3.86% 5.60% 6.78%
Non-performing assets to total
assets............................... 2.57% 2.00% 3.81% 4.37% 6.68% 7.90%
Allowance for loan losses to loans
receivable, net...................... 1.24% 1.16% 1.57% 1.90% 2.35% 1.60%
Allowance for loan losses to non-
performing loans..................... 41.21% 57.85% 49.98% 49.25% 41.90% 23.68%
Allowance for loan losses to non-
performing assets.................... 33.23% 41.24% 31.71% 33.18% 23.94% 16.61%
Average interest-earning assets to
average interest-bearing
liabilities.......................... 1.12X 1.11X 1.15X 1.16X 1.07X 1.07X
Net interest income to noninterest
expenses............................. 1.18X 1.22X 1.39X 1.51X 1.99X 1.44X
Noninterest expenses to average assets
(4).................................. 2.56% 2.49% 2.72% 2.95% 2.16% 2.22%
Number of deposit accounts............ 16,635 16,979 15,827 15,985 16,664 16,473
Loan originations..................... $ 1,467 $ 21,643 $ 23,054 $ 32,281 $ 17,513 $ 26,478
</TABLE>
- ------------------------------
(1) Includes Security Federal and its subsidiary only.
(2) Includes Financial Security since December 29, 1992.
(3) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(4) Annualized.
20
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 (2) 1991 (1)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income....................... $ 5,081 $ 4,996 $ 21,235 $ 19,644 $ 19,688 $ 20,728 $ 20,604
Total interest expense...................... 2,983 2,938 12,657 9,623 8,716 10,726 12,823
--------- --------- --------- --------- --------- --------- ---------
Net interest income before provision for
loan losses.............................. 2,098 2,058 8,578 10,021 10,972 10,002 7,781
Provision for loan losses................... 75 100 100 200 572 1,800 2,256
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses.............................. 2,023 1,958 8,478 9,821 10,400 8,202 5,525
Noninterest income:
Equity in earnings of limited partnership
investment in purchased mortgage
servicing rights......................... 228 185 668 136 -- -- --
Gain (loss) on sale of:
Mutual funds............................ -- -- -- (10) (39) (51) 42
Securities held-to-maturity............. -- -- -- (33) -- -- 1
Securities available-for-sale........... -- 25 152 (89) 360 21 (8)
Trading account securities.............. -- -- -- -- -- 153 --
Loans................................... 61 -- 76 -- -- -- --
Insurance commissions..................... 17 20 69 76 94 99 86
Other..................................... 178 87 176 160 273 191 142
--------- --------- --------- --------- --------- --------- ---------
Total noninterest income................ 484 317 1,141 240 688 413 263
Noninterest expense:
Compensation and benefits................. 832 757 2,885 2,752 2,789 2,265 2,155
Office occupancy and equipment............ 151 157 716 686 634 595 594
Federal deposit insurance premiums........ 115 110 457 493 455 438 397
Loss from foreclosed real estate
operations............................... 107 97 259 243 286 26 152
Provision for loss on foreclosed real
estate................................... -- -- 79 579 430 198 131
Prior conversion costs.................... -- -- -- -- -- -- 614
Provision for loss on investments......... 138 127 893 410 1,005 -- --
Other..................................... 428 469 1,750 2,021 1,682 1,513 1,371
--------- --------- --------- --------- --------- --------- ---------
Total noninterest expense............... 1,771 1,717 7,039 7,184 7,281 5,035 5,414
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle... 736 558 2,580 2,877 3,807 3,580 374
Income tax expense.......................... 188 54 468 970 1,400 1,905 931
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative effect
of change in accounting principle.......... $ 548 $ 504 $ 2,112 $ 1,907 $ 2,407 $ 1,675 $ (557)
Cumulative effect of change in accounting
principle.................................. -- -- -- -- 1,508 -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income (loss)........................... $ 548 $ 504 $ 2,112 $ 1,907 $ 3,915 $ 1,675 $ (557)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Primary earnings per share.................. $ 0.35 $ 0.31 $ 1.35 $ 1.17 $ 2.28 -- --
Fully diluted earnings per share............ $ 0.35 $ 0.31 $ 1.33 $ 1.17 $ 2.27 -- --
</TABLE>
- ------------------------------
(1) Includes Security Federal and its subsidiary only.
(2) Includes Financial Security since December 29, 1992.
21
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONCERNING PINNACLE AND THE PINNACLE
SUBSIDIARY BANKS IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY.
DEPENDENCE ON KEY PERSONNEL
Pinnacle is highly dependent on the continued services of its executive
officers, including Mr. John J. Gleason, Chairman of the Board; Mr. John J.
Gleason, Jr., Vice Chairman of the Board and Chief Executive Officer; Mr.
William P. Gleason, President and Mr. Kenneth C. Whitener, Jr., Executive Vice
President and Chief Investment Officer. Mr. John J. Gleason is the father of Mr.
John J. Gleason, Jr. and Mr. William P. Gleason. Pinnacle does not have an
employment agreement with any of these officers. The loss of the services of any
of these officers or of certain other key personnel could adversely affect
Pinnacle. Pinnacle is the beneficiary of a $3,000,000 key-person term life
insurance policy on Mr. John J. Gleason.
HOLDING COMPANY STRUCTURE
Pinnacle is a holding company whose principal asset is all of the
outstanding common stock of the Pinnacle Subsidiary Banks. Pinnacle's ability to
pay its expenses and dividends to stockholders depends primarily on receipt of
sufficient dividends from the Pinnacle Subsidiary Banks. Dividend payments by
financial institutions are subject to limitations under state and federal
banking laws and regulations. The Pinnacle Subsidiary Banks had the capacity to
pay dividends of $2.2 million as of April 1, 1996 without prior regulatory
approval and have the ability to pay future dividends based on the future
earnings of the Pinnacle Subsidiary Banks. The Pinnacle Subsidiary Banks paid
dividends of $10 million in 1995 and $2.3 million in 1996 (through March 31,
1996). Pinnacle believes that existing federal and state laws and regulations
will not have a material effect on the ability of the Pinnacle Subsidiary Banks
to continue paying dividends to Pinnacle in accordance with its dividend policy.
INVESTMENT PORTFOLIO
Pinnacle's investment portfolio consists primarily of U.S. Government
securities. At March 31, 1996, eighty-seven percent (87%) of total investment
portfolio assets were invested in U.S. Government securities and thirteen
percent (13%) were invested in other investment securities including mortgage
backed and collateralized mortgage obligations, state and municipal banks,
corporate bonds and equity securities. At that same date, Pinnacle's holdings of
below investment grade fixed maturity securities were immaterial. The fair value
of Pinnacle's investments varies with changes in economic and market conditions.
Pinnacle's investment portfolio is accounted for as available for sale. As a
result, unrealized gains or losses on securities held by Pinnacle are recorded
as an adjustment to stockholders' equity. In addition, management undertakes
sales of securities based on the slope of the yield curve and its assessment of
interest rate risk at different maturities. These sales can result in
significant gains or losses on the sale of securities which can materially
affect Pinnacle's net income. The fair value of Pinnacle's securities at March
31, 1996 exceeded the carrying value by $7.7 million.
IMPACT OF GOVERNMENT MONETARY POLICIES
The earnings of banks and bank holding companies are affected by the
policies of regulatory authorities including the Federal Reserve which regulates
the money supply. Among the methods employed by the Federal Reserve are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These methods are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may also affect interest rates charged on loans or paid on deposits. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial and savings banks in the past and are expected
to continue to do so in the future.
22
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The Pinnacle Subsidiary Banks' allowance for loan losses is maintained at a
level considered adequate by management to absorb anticipated losses. The amount
of future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond the Pinnacle
Subsidiary Banks' control and such losses may exceed current estimates. At March
31, 1996, Pinnacle had total nonperforming loans of approximately $7,185,000. At
the same date, Pinnacle's allowance for loan losses was $6,040,000, or 1.90% of
total loans and eighty-four percent (84%) of total nonperforming loans. There
can be no assurance, however, that such allowance will be adequate to cover
actual losses.
COMPETITIVE BANKING ENVIRONMENT
Intense competition exists in all aspects of business in which Pinnacle and
the Pinnacle Subsidiary Banks are presently engaged, not only with other
commercial banks and trust companies but also with thrifts, finance companies,
personal loan companies, credit unions, leasing companies, money market mutual
funds, investment firms, mortgage bankers, and other financial institutions
serving the metropolitan areas of Chicago and the Quad-Cities.
Commercial and savings banks compete on the basis of price, including
interest rates paid on deposits and charged on loans, convenience and quality of
service. This competition includes banks which are many times larger than the
Pinnacle Bank Subsidiaries, including banks in the primary marketing areas of
each Pinnacle Subsidiary Bank which have recently become affiliated through
parent holding companies owning significantly larger banking institutions. Each
Pinnacle Subsidiary Bank is encountering increased competition from non-bank
financial institutions. Thrift deposits constitute a substantial portion of all
financial institutions' deposits in Illinois. Thrifts are able to compete
aggressively with commercial banks in the important area of consumer lending.
Credit unions and small loan companies each are significant factors in the
consumer loan market. Insurance companies, investment firms and retailers are
all significant competitors for various types of business. Many of the
competitors of the Pinnacle Subsidiary Banks are larger and have greater
resources than the Pinnacle Subsidiary Banks, and there are no assurances that
the Pinnacle Subsidiary Banks will be able to compete effectively against such
companies in the future.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of April 30, 1996, the directors and executive officers of Pinnacle owned
approximately fifty-one percent (51%) of the outstanding Pinnacle Common Stock.
As of the same date, Pinnacle's Chairman of the Board, John J. Gleason,
Pinnacle's Vice Chairman and Chief Executive Officer, John J. Gleason, Jr., and
Pinnacle's Executive Vice President and Chief Investment Officer, Kenneth C.
Whitener, Jr., owned in the aggregate approximately 30% of the outstanding
Pinnacle Common Stock. While the percentage ownership of Pinnacle Common Stock
held by Pinnacle's officers and directors will be reduced by the issuance of
shares of Pinnacle Common Stock to holders of Financial Security Common Stock
pursuant to the Merger, the officers and directors of Pinnacle will own a
significant percentage of the issued and outstanding shares of Pinnacle Common
Stock after the Effective Time of the Merger. See "DESCRIPTION OF PINNACLE
CAPITAL STOCK -- Security Ownership of Management."
LIMITED LIQUIDITY OF PINNACLE COMMON STOCK
Although there presently is a public market for the Pinnacle Common Stock on
the Nasdaq SCM, trading volume is limited. In 1995, the total volume of shares
traded was 221,188 for a daily average of 864 shares. As of June 30, 1996, total
trading volume in 1996 has been 211,254 shares for a daily average of 1,677
shares. Because of the limited trading volume in shares of Pinnacle Common
Stock, the market price for shares of Pinnacle Common Stock could be subject to
broad fluctuations dependent upon the demand for and supply of shares of
Pinnacle Common Stock available for purchase and sale. In addition, because of
the limited trading volume in shares of Pinnacle Common Stock, investors may not
be able to liquidate their shares of Pinnacle Common stock without the
possibility of triggering or suffering a decline in the market price of Pinnacle
Common Stock. While it is a condition
23
<PAGE>
to each party's obligations to consummate the Merger Agreement that Pinnacle
Common Stock be approved for listing on the Nasdaq National Market, there can be
no assurance that trading volume will increase.
In addition, due to the limited trading volume in shares of Pinnacle Common
Stock, it is possible that the Pinnacle Average Stock Price -- the average of
the closing prices per share of Pinnacle Stock reported by the Nasdaq SCM on the
ten trading days on which one or more trades actually occurs immediately prior
to the second business day preceding the consummation of the Merger -- will not
accurately reflect the value of Pinnacle Common Stock at the Effective Time. In
the event of strong demand to purchase shares of Pinnacle Common Stock during
the ten day measuring period prior to the Effective Time, the Pinnacle Average
Stock Price may be artificially inflated. Similarly, weak demand for the shares
of Pinnacle Common Stock during the ten day measuring period prior to the
Effective Time may artificially deflate the Pinnacle Average Stock Price.
THE MEETINGS
This Joint Proxy Statement/Prospectus is being provided to the stockholders
of Pinnacle and Financial Security in connection with the Pinnacle Meeting and
the Financial Security Meeting. The meetings will be held on the date, at that
time, in the locations and to consider the matters set forth under the
subheadings "-- Pinnacle Meeting" and "-- Financial Security Meeting". The
Pinnacle Board of Directors and the Financial Security Board of Directors are
soliciting proxies for use at their respective meetings. The applicable form of
proxy is being provided to the respective holders of Pinnacle Common Stock and
Financial Security Common Stock with this Joint Proxy Statement/ Prospectus.
PINNACLE MEETING
MEETING DATE. The Pinnacle Meeting will be held at 2215 York Road, Oak
Brook, Illinois 60521, on September 11, 1996, at 10:00 a.m., Chicago time, and
at the place, date and time designated for any and all adjournments or
postponements thereof. This Joint Proxy Statement/Prospectus is being sent to
holders of Pinnacle Common Stock and accompanies a form of proxy (the "Pinnacle
proxy") which is being solicited by the Pinnacle Board of Directors for use at
the Pinnacle Meeting and at any and all adjournments or postponements thereof.
RECORD DATE. The Pinnacle Board of Directors has fixed the close of
business on July 26, 1996 as the date for determining holders of Pinnacle Common
Stock who will be entitled to notice of, and to vote at, the Pinnacle Meeting.
Only holders of record of Pinnacle Common Stock at the close of business on the
Pinnacle Record Date will be entitled to notice of and to vote at the Pinnacle
Meeting. As of the Pinnacle Record Date, there were outstanding and entitled to
vote at the Pinnacle Meeting 4,302,716 shares of Pinnacle Common Stock.
Each holder of record of shares of Pinnacle Common Stock on the Pinnacle
Record Date will be entitled to cast one vote per share at the Pinnacle Meeting
on the proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby including the Merger and the issuance by Pinnacle of shares
of Pinnacle Common Stock to holders of Financial Security Common Stock (other
than Pinnacle or any of its subsidiaries) electing to receive Pinnacle Common
Stock in consideration therefor and Financial Security stock options that are
exchanged for shares of Pinnacle Common Stock in connection with the Merger.
Such vote may be exercised in person or by properly executed proxy. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding shares of Pinnacle Common Stock entitled to vote at the
Pinnacle Meeting is necessary to constitute a quorum. With a quorum, or in the
absence of such, the affirmative vote of the majority of shares represented at
the Pinnacle Meeting may authorize adjournment of the meeting. Abstentions and
broker non-votes (the proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owners or other
persons as to certain proposals on
24
<PAGE>
which such beneficial owners or persons are entitled to vote their shares but
with respect to which the brokers or nominees have no discretionary power to
vote without such instructions) will be treated as shares present at the
Pinnacle Meeting for purposes of determining the presence of a quorum.
MATTERS TO BE CONSIDERED. At the Pinnacle Meeting, holders of shares of
Pinnacle Common Stock will vote on the proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger, and
the issuance by Pinnacle of shares of Pinnacle Common Stock to former holders of
Financial Security Common Stock (other than Pinnacle or any of its subsidiaries)
electing to receive Pinnacle Common Stock in consideration therefor and
Financial Security stock options that are exchanged for shares of Pinnacle
Common Stock in connection with the Merger. Pursuant to Section 11.20 of the
IBCA, Pinnacle stockholders would not be entitled to vote on the proposal to
approve and adopt the Merger Agreement if the shares of Pinnacle Common Stock to
be issued in connection with the Merger did not exceed twenty percent (20%) of
the shares of Pinnacle Common Stock outstanding immediately prior to the
Effective Time. While Pinnacle Common Stock must constitute fifty-five percent
(55%) of the aggregate consideration payable by Pinnacle in connection with the
Merger, it is not certain how many shares of Pinnacle Common Stock will be
issued in connection with the Merger and whether such shares will exceed twenty
percent (20%) of the shares of Pinnacle Common Stock outstanding immediately
prior to the Effective Time. As a result, Pinnacle has scheduled the Pinnacle
Meeting to approve and adopt the Merger Agreement. Approval and adoption of the
Merger Agreement is a condition to, and required for, consummation of the
Merger. See "THE MERGER -- Conditions to the Merger."
VOTE REQUIRED. The affirmative vote of the holders of two-thirds of the
outstanding shares of Pinnacle Common Stock is required for approval and
adoption of the Merger Agreement. Therefore, abstentions and broker non-votes
will have the same effect as votes against the approval of the Merger. With a
quorum, or in the absence of such, the affirmative vote of a majority of the
shares represented at the Pinnacle Meeting may authorize the adjournment of the
meeting.
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY CARD OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE
"AGAINST" THE MERGER AGREEMENT.
SECURITY OWNERSHIP. As of the Pinnacle Record Date, directors and executive
officers of Pinnacle held in the aggregate 2,192,632 shares of Pinnacle Common
Stock (excluding option shares), or approximately 50.96% of the then outstanding
shares of Pinnacle Common Stock entitled to vote at the Pinnacle Meeting. The
directors and executive officers of Pinnacle have indicated their intention to
vote such shares in favor of the approval and adoption of the Merger Agreement
at the Pinnacle Meeting. Accordingly, holders of an additional 15.71% of the
outstanding shares of Pinnacle Common Stock entitled to vote must vote such
shares in favor of the Merger Agreement for such proposal to be approved. As of
such date, neither Financial Security and its subsidiaries, nor, to the
knowledge of Financial Security, the directors and executive officers of
Financial Security and their affiliates, held any outstanding shares of Pinnacle
Common Stock.
Pursuant to the Merger Agreement, affiliates of Pinnacle or the Pinnacle
Subsidiary Banks, including officers, employees, directors or holders of greater
than ten percent (10%) of the outstanding shares of Pinnacle Common Stock have
agreed to not purchase any Pinnacle Common Stock during the thirty business days
prior to the consummation of the Merger.
PROXIES. Shares of Pinnacle Common Stock represented by properly executed
proxies received prior to or at the Pinnacle Meeting will, unless such proxies
have been revoked, be voted at the Pinnacle Meeting and any adjournments or
postponements thereof, in accordance with the instructions indicated in the
proxies. IF NO INSTRUCTIONS ARE INDICATED ON A PROPERLY EXECUTED PINNACLE PROXY,
THE SHARES WILL BE VOTED IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Any Pinnacle proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it at any time before it is voted, either by
delivering to the Corporate Secretary of Pinnacle a
25
<PAGE>
written notice of revocation bearing a later date than the date of the Pinnacle
proxy or a later dated proxy relating to the same shares or by attending the
Pinnacle Meeting and voting in person. Attendance at the Pinnacle Meeting will
not in itself constitute the revocation of a proxy.
The Pinnacle Board is not aware of any business to be acted upon at the
Pinnacle Meeting other than as described herein. If however, other matters are
properly brought before the meeting, or any adjournment thereof, the persons
appointed as proxies will have the discretion to vote or act thereon according
to their best judgment.
In addition to solicitation by mail, directors, officers and employees of
Pinnacle, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Pinnacle, personally or by telephone,
telegram or other forms of communication. Brokerage houses, nominees.
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy materials to beneficial owners. See "THE
MERGER -- Expenses."
HOLDERS OF PINNACLE COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO PINNACLE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
FINANCIAL SECURITY MEETING
MEETING DATE. The Financial Security Meeting will be held at 1209 North
Milwaukee Avenue, Chicago, Illinois September 11, 1996 at 3:00 p.m. Chicago
time, and at the place, date and time designated for any and all adjournments or
postponements thereof. This Joint Proxy Statement/ Prospectus is being sent to
holders of Financial Security Common Stock and accompanies a form of proxy (the
"Financial Security proxy") which is being solicited by the Financial Security
Board for use at the Financial Security Meeting and at any and all adjournments
or postponements thereof.
RECORD DATE. The Financial Security Board has fixed the close of business
on July 26, 1996 as the date for determining holders of Financial Security
Common Stock who will be entitled to notice of, and to vote at, the Financial
Security Meeting. Only holders of record of Financial Security Common Stock at
the close of business on the Financial Security Record Date are entitled to
notice of and to vote at the Financial Security Meeting. As of the Financial
Security Record Date there were outstanding and entitled to vote at the Security
Federal Meeting 1,550,846 shares of Financial Security Common Stock.
Each holder of record of shares of Financial Security Common Stock on the
Financial Security Record Date will be entitled to one vote for each share
registered in his or her name on each matter presented to a vote of the
stockholders at the Financial Security Meeting, except as described below. As
provided in Financial Security's Certificate of Incorporation, recordholders of
Financial Security Common Stock who beneficially own in excess of ten percent
(10%) of the outstanding shares of Financial Security Common Stock (the
"Financial Security Limit") are not entitled to any vote with respect to the
shares held in excess of the Financial Security Limit. A person or entity is
deemed to beneficially own shares owned by an affiliate of, as well as a person
acting in concert with, such person or entity. A vote may be exercised in person
or by properly executed proxy. The presence, in person or by properly executed
proxy, of the holders of a majority of outstanding shares of Financial Security
Common Stock entitled to vote at the Financial Security Meeting is necessary to
constitute a quorum. With a quorum, or in the absence of such, the affirmative
vote of a majority of shares represented at the Financial Security Meeting may
authorize adjournment of the meeting. Abstentions and broker non-votes will be
treated as shares present at the Financial Security Meeting for determining the
presence of the quorum.
MATTERS TO BE CONSIDERED. At the Financial Security Special Meeting,
holders of shares of Financial Security Common Stock will vote on a proposal to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger.
26
<PAGE>
VOTE REQUIRED. The affirmative vote of the holders of a majority of the
outstanding shares of Financial Security Common Stock is required for approval
and adoption of the Merger Agreement. Therefor, abstentions and broker non-votes
will have the same effect as votes against the approval of the Merger Agreement.
With a quorum, or in the absence of such, the affirmative vote of a majority of
the shares represented at the Financial Security Meeting may authorize the
adjournment of the meeting. Approval of the Merger by the stockholders of
Financial Security is a condition to, and required for, consummation of the
Merger. See "THE MERGER -- Conditions to the Merger."
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY CARD OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE
"AGAINST" THE MERGER AGREEMENT.
SECURITY OWNERSHIP. As of the Financial Security Record Date, 1996, the
directors and executive officers of Financial Security held in the aggregate
225,187 shares of Financial Security Common Stock (excluding option shares), or
approximately 14.52% of the voting power of the then outstanding shares of
Financial Security Common Stock entitled to vote at the Financial Security
Meeting. The directors and executive officers of Financial Security have
indicated their intention to vote such shares in favor of the approval and
adoption of the Merger Agreement at the Financial Security Meeting. Accordingly,
holders of an additional 35.49% of the outstanding shares of Financial Security
Common Stock entitled to vote must vote such shares in favor of the Merger
Agreement in order for such proposal to be approved. As of such date, neither
Pinnacle and its subsidiaries, nor, to the knowledge of Pinnacle, the directors
and executive officers of Pinnacle and their affiliates, held any outstanding
shares of Financial Security Common Stock.
Pursuant to the Security Federal Savings and Loan Association Employee Stock
Ownership Plan (the "ESOP"), each participant is entitled to direct the trustee
with respect to voting of the shares of Financial Security Common Stock
allocated to such participant's accounts. First Bankers Trust Company, N.A. has
been appointed as the corporate trustee for the ESOP (the "ESOP Trustee").
Subject to its duties under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), the ESOP Trustee will vote all allocated shares held in
the ESOP in accordance with the instructions received. As of the Financial
Security Record Date, 51,439 of the 115,909 shares of Financial Security Common
Stock in the ESOP had been allocated to participating employees. Under the ESOP,
unallocated shares held in the suspense account will be voted by the ESOP
Trustee in a manner calculated to most accurately reflect the instructions
received from participants regarding the allocated stock, subject to the
provisions of ERISA.
PROXIES. Shares of Financial Security Common Stock represented by properly
executed proxies received prior to or at the Financial Security Meeting will,
unless such proxies have been revoked, be voted at the Financial Security
Meeting and any adjournments or postponements thereof in accordance with the
instructions indicated in the proxies. If no instructions are indicated on a
properly executed Financial Security proxy, the shares will be voted in favor of
the approval and adoption of the Merger Agreement.
Any Financial Security proxy given pursuant to this solicitation or
otherwise may be revoked by the person giving it at any time before it is voted
by delivering to the Corporate Secretary of Financial Security a written notice
of revocation bearing a later date than the Financial Security proxy or a later
dated proxy relating to the same shares of Financial Security Common Stock or by
attending the Financial Security Meeting and voting in person. Attendance at the
Financial Security Meeting will not in itself constitute the revocation of a
proxy. If a stockholder's shares are not registered in his own name the
stockholder will need additional documentation from the record holder to vote
personally at the Financial Security Meeting.
The Financial Security Board is not aware of any business to be acted upon
at the Financial Security Meeting other than as described herein. IF, HOWEVER,
OTHER MATTERS ARE PROPERLY BROUGHT BEFORE THE FINANCIAL SECURITY MEETING, OR ANY
ADJOURNMENT THEREOF, THE PERSONS APPOINTED AS PROXIES WILL HAVE THE DISCRETION
TO VOTE OR ACT THEREON ACCORDING TO THEIR BEST JUDGEMENT.
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In addition to solicitation by mail, Morrow & Co., a proxy solicitation
firm, will assist Financial Security in soliciting proxies for the Financial
Security Meeting and will be paid a fee estimated to be $5,000, plus
out-of-pocket expenses. Proxies may also be solicited personally or by telephone
by directors, officers, and employees of Financial Security, who will not be
specifically compensated for such services. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to Financial Security beneficial owners and will be reimbursed for
their reasonable expenses incurred in sending proxy material to beneficial
owners. The cost of soliciting proxies in the form enclosed herewith will be
borne by Financial Security. See "THE MERGER -- Expenses."
HOLDERS OF FINANCIAL SECURITY COMMON STOCK ARE REQUESTED TO COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO FINANCIAL SECURITY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
HOLDERS OF FINANCIAL SECURITY COMMON STOCK SHOULD NOT FORWARD STOCK
CERTIFICATES WITH THEIR PROXY CARDS. A LETTER OF TRANSMITTAL SETTING FORTH
INSTRUCTIONS REGARDING THE SURRENDER OF SUCH CERTIFICATES WILL BE FURNISHED TO
THE FINANCIAL SECURITY STOCKHOLDERS PROMPTLY AFTER THE EFFECTIVE TIME OF THE
MERGER.
THE MERGER
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS CONCERNING THE
TERMS OF THE MERGER IS NOT COMPLETE AND IS QUALIFIED BY REFERENCE TO THE MERGER
AGREEMENT, WHICH IS ATTACHED AS APPENDIX I AND INCORPORATED BY REFERENCE HEREIN.
ALL STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
Pursuant to the Merger Agreement, Financial Security will be merged with and
into Pinnacle with Pinnacle being the surviving corporation in the Merger. As
soon as possible after the conditions to consummation of the Merger described
below have been satisfied or waived, and unless the Merger Agreement has been
terminated as provided below, Pinnacle and Financial Security will file articles
of merger with the Secretary of State of the State of Illinois and a certificate
of merger with the Secretary of State of the State of Delaware for the Merger.
The Merger will become effective at that time and on the date specified in the
articles of merger and the certificate of merger.
Upon consummation of the Merger, and depending upon their election, the
stockholders of Financial Security will be entitled to receive either the Stock
Distribution, the Cash Distribution, or the Combined Distribution in
consideration for their shares of Financial Security Common Stock held and
thereupon shall cease to be stockholders of Financial Security, and the separate
existence and corporate organization of Financial Security shall cease. Pinnacle
shall succeed to all the rights, responsibilities and property of Financial
Security. The members of the Board of Directors of Pinnacle and the officers of
Pinnacle immediately prior to the Effective Time will be the members of the
Board of Directors and the officers of Pinnacle immediately after the Effective
Time. The name of the surviving corporation in the Merger will be "Pinnacle Banc
Group, Inc.".
BACKGROUND OF THE MERGER
Originally chartered in 1907 as a federally-chartered building and loan
association, Security Federal converted to a stock form of organization (the
"Conversion") and formed Financial Security as its holding company in December
1992. The period subsequent to the Conversion has been one of continued and
substantial change in the banking industry, characterized by heightened
regulatory scrutiny, and intensifying competition and consolidation.
As part of Financial Security's continuing efforts to enhance stockholder
value and in response to the changing banking industry environment, Financial
Security interviewed a number of investment banking firms during late 1994 and
1995. On September 21, 1995, Financial Security selected Hovde
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to provide investment advisory services. In particular, the Financial Security
Board hired Hovde to provide direction and guidance with regard to methods of
enhancing stockholder value on a going forward basis, including remaining
independent, acquiring another financial institution or branches of another
financial institution, or being acquired.
In mid-November 1995, the Financial Security Board, taking into account
Hovde's previous presentation as well as the continuing consolidation of the
banking industry, particularly in the Midwest, decided to explore possible
merger opportunities with another financial institution as a possible method of
enhancing stockholder value. The Financial Security Board authorized Hovde to
identify prospective merger partners, provide advice regarding any preliminary
indications of interest, and assist in any negotiations that might occur. Hovde
contacted approximately 32 potential merger partners, which were chosen based on
criteria established by Hovde and Financial Security. As a result of these
contacts, 24 financial institutions entered into confidentiality agreements with
Financial Security and received confidential information packets regarding
Financial Security. Financial Security received preliminary expressions of
interest, which were within parameters set by Financial Security and Hovde, from
five potential acquirors. Additional parties submitted indications of interest
that were unacceptable to Financial Security because of pricing levels or timing
constraints. Subsequent to conducting preliminary due diligence, Financial
Security received three written and two verbal updated or revised preliminary
indications of interest.
On March 1, 1996, the Financial Security Board met to consider, among other
things, the preliminary indications of interest. At this meeting, a report was
presented by Hovde discussing the preliminary indications of interest and the
potential acquirors. The presentation included information regarding potential
acquirors, a review of the preliminary terms of each proposal and an analysis of
numerous other recent transactions involving thrift institutions of similar size
and involving thrift institutions in the Midwest. The Financial Security Board
authorized Hovde to continue to develop the terms of the preliminary indications
of interest.
On March 11, 1996, the Financial Security Board met to further consider two
of the five indications of interest and interviewed the two institutions which
submitted such indications of interest. At the meeting, Hovde made a
presentation regarding the terms and structure of the proposed transactions.
Additionally, Financial Security's legal counsel made a presentation regarding
the Financial Security Board's fiduciary responsibilities. Following the
presentation and a discussion, the Financial Security Board decided to pursue
Pinnacle's indication of interest which provided for the exchange of shares for
consideration of $27.87 per share in stock or a combination of cash and stock;
however, the Financial Security Board authorized such action only if Pinnacle
increased its offer to $28.50 per share. The Financial Security Board declined
to pursue the second indication of interest primarily because of the pricing
level, which was below the Pinnacle offer, the form of consideration and tax
implications of such consideration.
On March 14, 1996, the Financial Security Board held its regular meeting and
legal counsel and its financial advisors were present by phone. The Financial
Security Board considered the revised offer of Pinnacle which had been increased
to $28.50. At the meeting, Hovde presented the following financial analysis:
contribution analysis, financial implications of the acquisition analysis and
comparative stockholder rates of return analysis. The Financial Security Board
discussed these items as well as other material items of the Pinnacle offer. The
Financial Security Board authorized the negotiation of a definitive merger
agreement by management, Hovde and its legal counsel.
During the next several weeks the parties conducted due diligence and
negotiated specific terms and conditions of the Merger. On April 11, 1996, the
Financial Security Board held its regular meeting to consider the proposed
merger with Pinnacle. At the meeting, Financial Security's legal counsel and
Hovde made presentations regarding the proposed transaction. The Financial
Security Board was presented a draft merger agreement, and the Financial
Security Board reviewed its terms and conditions with legal counsel. The Hovde
presentation included a comparative analysis of numerous other transactions
involving institutions with similar asset size and equity levels located
nationwide,
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in the Midwest and in Illinois only. In addition, the Hovde presentation
included a contribution analysis, a discounted cash flow analysis, a financial
implications to stockholders analysis, and a comparative stockholder return
analysis discussed in greater detail below. At the conclusion of its
presentation Hovde gave its opinion that the Merger Consideration to be received
was fair, from a financial point of view, to Financial Security's stockholders.
Following the presentations and a discussion by the Financial Security Board,
the Financial Security Board authorized management and legal counsel to finalize
the negotiations of the definitive agreement.
On April 22, 1996, the Financial Security Board held a special meeting.
After a discussion of the final terms of the Merger Agreement and an update by
Hovde of its financial presentation, the Financial Security Board approved the
Merger Agreement, authorized its execution and recommended approval of the
Merger Agreement by stockholders. Subsequently, the Merger Agreement was
executed and a press release was issued announcing the Merger.
REASONS FOR THE MERGER
PINNACLE. Pinnacle's corporate objective is to enhance shareholder value by
effectively leveraging Pinnacle's equity base and to achieve returns on equity
and assets in excess of peer group performance. One of the methods that
management utilizes to accomplish this objective is the acquisition of other
financial institutions. In negotiating the terms of the Merger and in
considering its recommendation for the approval of the Merger Agreement, the
Pinnacle Board considered a number of factors, including, without limitation:
the business, operations and financial condition of Financial Security; the
prospects of the combined institution; the increased market presence and
enhanced opportunities for growth made possible by the Merger; the growth of
Pinnacle's loan portfolio and attendant increase in Pinnacle's loan to asset
ratio; an increase in the liquidity of shares of Pinnacle Common Stock; the
ability to consummate the acquisition with a minimal increase in debt; the
growth of Pinnacle's total assets to a figure in excess of one billion dollars;
and the expectation that the Merger generally will be a tax-free transaction to
Pinnacle and its stockholders. In view of the variety of factors considered in
connection with its evaluation of the Merger, the Pinnacle Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. THE
PINNACLE BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF ITS
STOCKHOLDERS AND RECOMMENDS THE STOCKHOLDERS VOTE FOR ADOPTION AND APPROVAL OF
THE MERGER AGREEMENT.
FINANCIAL SECURITY. The Financial Security Board, with the assistance of
outside financial and legal advisors has evaluated the financial, legal and
market conditions bearing on the decision to recommend the Merger. The terms of
the Merger, including the price, are a result of arm's length negotiations
between representatives of Pinnacle and Financial Security. In reaching its
determination that the Merger Agreement is fair to, and in the best interest of
Financial Security and holders of Financial Security Common Stock, the Financial
Security Board considered a number of factors, from a short and long term
perspective, including, without limitation, the following:
(i) the Financial Security Board's familiarity with and review of Financial
Security's business, financial condition, results of operations,
management, and prospects, including but not limited to its potential
growth, development, productivity and profitability, and the business
risks associated therewith;
(ii) the environment in which Financial Security currently operates and will
be likely to operate in the future, including national and local
economic conditions, the competitive environment for financial
institutions generally, the increased regulatory burden on financial
institutions generally and the trend toward consolidation in the
financial services industry, particularly in Financial Security's
market area;
(iii) information concerning the business, operations, asset quality and
prospects of Pinnacle;
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(iv) the oral and written presentations and the oral and written opinions of
Financial Security's financial advisor, Hovde, that the Merger
Consideration was fair to the holders of Financial Security Common Stock
from a financial point of view;
(v) the Financial Security Board's belief that the terms of the proposed
form of Merger Agreement with Pinnacle were attractive in that it would
allow Financial Security stockholders to elect to receive stock, cash or
a combination thereof as specified in the Merger Agreement and
potentially permit stockholders who receive stock to defer any tax
liability and to become stockholders in Pinnacle, an institution with
strong operations, management, and earnings performance;
(vi) the expectation that Pinnacle will continue to provide quality service
to the community and customers served by Financial Security and the
expectation that Pinnacle would likely maintain Security Federal's
offices;
(vii) the compatibility of the respective business and management
philosophies of Financial Security and Pinnacle;
(viii) the addition of products and services, as well as greater convenience
through additional locations, which will be afforded Financial Security
customers as a result of the Merger; and
(ix) the alternative strategic courses available to Financial Security,
including remaining independent or exploring other indications of
interest from other potential acquirors.
Certain members of the Board of Directors have interests in addition to
their interests as stockholders generally, including certain payments that will
be made as a result of the Merger under various benefit plans of Financial
Security. See "-- Interests of Certain Persons in the Merger."
In view of the variety of factors considered in connection with its
evaluation of the Merger, the Financial Security Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. THE
FINANCIAL SECURITY BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF ITS STOCKHOLDERS AND RECOMMENDS THE STOCKHOLDERS VOTE FOR ADOPTION
AND APPROVAL OF THE MERGER AGREEMENT.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
PINNACLE. The Pinnacle Board of Directors has unanimously approved and
adopted the Merger Agreement and the transactions contemplated thereby and has
determined that the Merger Agreement is fair to, and in the best interests of,
Pinnacle and its stockholders. THE PINNACLE BOARD OF DIRECTORS THEREFOR
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AT THE PINNACLE MEETING. For a discussion of the factors considered by the
Pinnacle Board of Directors in reaching its decision to approve the Merger
Agreement, see "-- Reasons for the Merger -- Pinnacle."
FINANCIAL SECURITY. The Financial Security Board has approved and adopted
the Merger Agreement and the transactions contemplated thereby and has
determined that the Merger Agreement is fair to, and in the best interests of,
Financial Security and its stockholders. THE FINANCIAL SECURITY BOARD OF
DIRECTORS THEREFOR UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AT THE FINANCIAL SECURITY SPECIAL MEETING. For a discussion
of the factors considered by the Financial Security Board of Directors in
reaching its decision to approve the Merger Agreement, see "-- Background of the
Merger" and "-- Reasons for the Merger -- Financial Security."
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OPINION OF FINANCIAL SECURITY'S FINANCIAL ADVISOR
Hovde has delivered to the Financial Security Board its opinion that, based
upon and subject to the various considerations set forth in its written opinion
dated April 22, 1996, the Merger Consideration is fair from a financial point of
view to the stockholders of Financial Security as of such date. In requesting
Hovde's advice and opinion, no limitations were imposed by Financial Security
upon Hovde with respect to the investigations made or procedures followed by it
in rendering its opinion.
The opinion has been updated as of July 26, 1996 and the full text of that
opinion which describes the procedures followed, assumptions made, matters
considered and limitations on the review undertaken, is attached hereto as
Appendix II. Stockholders of Financial Security should read this opinion in its
entirety.
HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE MERGER CONSIDERATION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER OF FINANCIAL SECURITY AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT
THE FINANCIAL SECURITY SPECIAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE SET
FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The following is a brief summary of the analyses performed by Hovde in
connection with its fairness opinion:
During the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of Pinnacle and Financial Security and material prepared in
connection with the Merger, including, among other things, the following: (i)
the Merger Agreement; (ii) certain publicly available information concerning
Financial Security and Pinnacle, including the consolidated financial statements
of Financial Security and Pinnacle for each of the three years ended December
31, 1995, and the balance sheet and income statement of Financial Security and
Pinnacle for the subsequent quarterly period ended March 31, 1996; (iii) the
nature and terms of recent acquisition and merger transactions involving thrift
institutions and thrift holding companies that Hovde considered reasonably
similar to Financial Security in size, financial character, operating character,
historical performance and geographic market; and (iv) financial and other
information provided to Hovde by the management of Pinnacle and Financial
Security. Hovde conducted meetings with members of senior management of
Financial Security and Pinnacle for purposes of reviewing the future prospects
of Financial Security and Pinnacle. Hovde also took into account its experience
in other transactions, as well as its knowledge of the commercial banking and
thrift industries and its general experience in securities valuations.
In rendering its opinion, Hovde assumed, without independent verification,
the accuracy and completeness of the financial and other information it reviewed
and has relied upon the accuracy of the representations of the parties contained
in the Merger Agreement. Hovde has not made any independent evaluation or
appraisal of any properties, assets or liabilities of Financial Security. Hovde
assumed and relied upon the accuracy and completeness of the publicly available
and other financial and other information provided to it, relied upon the
representations and warranties of Pinnacle and Financial Security made pursuant
to the Merger Agreement, and did not independently attempt to verify any of such
information.
In connection with its opinion, Hovde performed various analyses with
respect to Financial Security. The following is a brief summary of such
analyses, certain of which were presented to the Financial Security Board by
Hovde prior to the execution of the Merger Agreement. These analyses have been
updated as of the mailing of this Joint Proxy Statement/Prospectus.
ANALYSIS OF THE MERGER CONSIDERATION. Hovde reviewed the value of the
Merger Consideration to be received by each Financial Security stockholder.
Hovde calculated that the Merger Consideration
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equated to approximately 121.62% of Financial Security's fully diluted tangible
book value at December 31, 1995, a multiple of approximately 22.3 times
Financial Security's earnings for the 12 months ended December 31, 1995, and a
premium to core deposits of approximately 5.18%.
SUMMARY OF PROPOSALS. Hovde summarized the sales process, the parties
contacted and the level of interest expressed by each party, including the value
of the aggregate consideration offered to the stockholders of Financial
Security.
Hovde also compared the significant terms of the Pinnacle proposal to that
of the other bidders submitting proposals, including the value of the
consideration offered. This analysis showed, among other things, that the value
of the Pinnacle proposal of $28.50 per share of Financial Security Common Stock
was considered higher than the value per share offered by the other bidders,
especially given that the stockholders of Financial Security could elect three
different options with respect to the form of consideration, including an all
stock, tax-deferred exchange. Hovde examined the trading price and volume for
Pinnacle Common Stock and the relationship between the trading characteristics
of the common stocks of the other companies, as well as to a peer group of
comparable companies.
ANALYSIS OF SELECTED MERGERS. As part of its analysis, Hovde reviewed four
sets of mergers: (i) selected mergers involving thrifts headquartered anywhere
in the United States announced between January 1, 1988 and March 31, 1996 in
which the total assets of the seller were greater than $100 million and the
tangible equity/asset ratio was greater than twelve percent (12%) (the
"Nationwide Mergers"); (ii) selected mergers involving thrifts headquartered in
the Midwest announced between January 1, 1992 and March 31, 1996 in which the
total assets of the seller were greater than $100 million and the tangible
equity/asset ratio was greater than twelve percent (12%) (the "Midwestern
Mergers"); (iii) all mergers involving thrifts headquartered in Illinois
completed since January 1, 1993 and announced before March 31, 1996 in which the
total assets of the seller were greater than $100 million and the tangible
equity/asset ratio was greater than twelve percent (12%) (the "Illinois
Mergers"); and (iv) selected mergers involving thrifts headquartered anywhere in
the United States announced between January 1, 1988 and March 31, 1996 in which
the total assets of the seller were greater than $100 million and the
non-performing assets to total assets ratio was between two percent (2%) and
five percent (5%) (the "High Non-Performers"). The Nationwide Mergers consisted
of 40 mergers involving thrifts headquartered anywhere in the United States; the
Midwestern Mergers consisted of 13 mergers of thrifts headquartered in the
Midwest; the Illinois Mergers consisted of four thrifts headquartered in
Illinois; and the High Non-Performers consisted of 61 mergers involving thrifts
headquartered anywhere in the United States. For each transaction, Hovde
calculated the multiple of the offer value to the acquired company's: (i)
earnings per share ("EPS") for the twelve months preceding ("LTM") the
announcement date of the transaction; (ii) book value per share; (iii) tangible
book value per share; and (iv) the tangible book premium to core deposits.
The calculations for the Nationwide Mergers yielded a range of multiples of
offer value to LTM EPS of 10.0 times to 44.6 times, with an average of 19.0
times and a median of 16.4 times; a range of multiples of offer value to book
value of 0.77 times to 1.44 times, with an average of 1.19 times and a median of
1.22 times; a range of multiples of offer value to tangible book value of 0.77
times to 1.44 times, with an average of 1.20 times and a median of 1.23 times;
and a range of tangible book premium to core deposits of -3.70% to 13.48%, with
an average of 4.74% and a median of 5.44%.
The calculations for the Midwestern Mergers yielded a range of multiples of
offer value to LTM EPS of 12.9 times to 44.6 times, with an average of 22.0
times and a median of 17.0 times; a range of multiples of offer value to book
value of 1.04 times to 1.36 times, with an average of 1.22 times and a median of
1.23 times; a range of multiples of offer value to tangible book value of 1.04
times to 1.36 times, with an average of 1.22 times and a median of 1.23 times;
and a range of multiples of tangible book premium to core deposits of 1.47% to
6.61%, with an average of 5.03% and a median of 5.44%.
The calculations of the Illinois Mergers yielded a range of multiples of
offer value to LTM EPS of 12.9 times to 27.6 times, with an average of 17.6
times and a median of 14.9 times; a range of multiples of offer value to book
value of 1.04 times to 1.36 times, with an average of 1.19 times and a median of
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1.19 times; a range of multiples of offer value to tangible book value of 1.04
times to 1.36 times, with an average of 1.19 times and a median of 1.19 times;
and a range of tangible book premium to core deposits of 1.47% to 5.44%, with an
average of 3.77% and a median of 4.09%.
The calculations of the High Non-Performers yielded a range of multiples of
offer value to LTM EPS of 4.6 times to 37.1 times, with an average of 16.4 times
and a median of 14.2 times; a range of multiples of offer value to book value of
0.43 times to 1.94 times, with an average of 1.28 times and a median of 1.28
times; a range of multiples of offer value to tangible book value of 0.63 times
to 2.06 times, with an average of 1.35 times and a median of 1.29 times; and a
range of tangible book premium to core deposits of -3.70% to 14.03%, with an
average of 3.61% and a median of 3.10%.
Hovde compared these multiples with the corresponding multiples for the
Merger, valuing the shares of Pinnacle Common Stock that would be received
pursuant to the Merger Agreement at $28.50 per share of Financial Security
Common Stock. In calculating the multiples for the Merger, Hovde used Financial
Security's EPS for the 12 months ended December 31, 1995, book value per share
and tangible book value per share as of December 31, 1995, and Hovde calculated
that Financial Security's LTM EPS, book value per share, tangible book value per
share and tangible book premium to core deposits were 22.3 times, 1.21 times,
1.21 times, and 5.18%, respectively.
No company or transaction used in the above analysis as a comparison is
identical to Financial Security, Pinnacle or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other facts that
could affect the public trading value of the companies to which they are being
compared.
CONTRIBUTION ANALYSIS. Hovde prepared a contribution analysis showing
percentages of assets, deposits, common equity, and 1995 and estimated 1996 net
income contributed to the combined company on a pro forma basis by Financial
Security and Pinnacle. This analysis showed, assuming Pinnacle's stock price was
at $32.375 per share, that Financial Security, as of December 31, 1995, would
contribute 25.28% of pro forma consolidated total assets, 21.38% of deposits,
32.93% of common equity, 14.46% of 1995 net income and 15.48% of estimated 1996
net income. The stockholders of Financial Security would own approximately
24.98% of the pro forma common shares outstanding of Pinnacle, assuming
Pinnacle's stock price was at $32.375 per share.
FINANCIAL IMPLICATIONS TO FINANCIAL SECURITY STOCKHOLDERS. Hovde prepared
an analysis of the financial implications of the Pinnacle offer to a Financial
Security stockholder. This analysis indicated that on a pro forma equivalent
basis, at a $28.50 price per share of Financial Security Common Stock with
Pinnacle trading at $32.375 per share, a stockholder of Financial Security would
achieve an increase in earnings per share of over sixty-one percent (61%), an
increase in per share dividends of over nine percent (9%) and a decrease in
fully diluted book value per share of approximately twenty-one percent (21%) in
1996 as a result of the consummation of the Merger.
COMPARATIVE STOCKHOLDER RETURNS. Hovde presented an analysis of comparative
theoretical stockholder returns in several scenarios, including Financial
Security remaining independent, Financial Security being acquired in 2000 and
Financial Security being acquired by Pinnacle at $28.50 per share. This
analysis, which was based on the net present value of projected dividend streams
and projected 1996 common stock valuations (using current price-to-earnings
multiples), indicated total stockholder returns of 9.77% if Financial Security
remained independent, 12.84% for a merger in 2000 on the terms specified in the
following paragraph, and 18.11% based on the acceptance of the offer from
Pinnacle at $28.50 per share with the Pinnacle Common Stock trading at an
assumed price of $32.375 per share.
DISCOUNTED CASH FLOW ANALYSIS. Hovde performed a discounted cash flow
analysis to determine a present value per share of Financial Security Common
Stock assuming Financial Security continued to operate as a stand-alone entity
and was acquired at a later date. This present value was determined by
projecting Financial Security's after-tax net income for the five years ended
December 31, 1996
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through 2000. Projected net income was determined through consultation with
Financial Security's management and generally included aggressive growth in
assets (ranging from a low of three percent (3%) in 1996 and increasing to five
percent (5%) in 2000), as well as progressively higher net income as a percent
of average assets (increasing from 0.72% for 1996 to 1.05% for the twelve months
ended December 31, 2000). "Terminal value" per share of Financial Security's
Common Stock was determined by applying a price to earnings multiple of 20.24
times against Financial Security's projected earnings at December 31, 2000. The
present value of the terminal value was then determined using an annual discount
rate of thirteen percent (13%). The above calculations resulted in a present
value per fully diluted share of Financial Security Common Stock of $26.90 per
share.
Although the summary set forth above does not purport to be a complete
description of the analysis performed by Hovde, the material analysis performed
by Hovde in rendering its opinion has been summarized above. However, the
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Hovde believes that its analysis and the
summary set forth above must be considered as a whole and that selecting
portions of its analysis, without considering all factors and analysis, would
create an incomplete view of the process underlying the analysis by which Hovde
reached its opinion. In addition, Hovde may have given various analyses more or
less weight than other analyses, but no analysis was given materially more
weight than any other analysis. Also, Hovde may have deemed various assumptions
more or less probable than other assumptions so that the ranges of valuations
resulting from any particular analysis described above should not be taken to be
Hovde's view of the actual value of Financial Security or the combined company.
In performing its analysis, Hovde made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Financial Security and
Pinnacle. The analysis performed by Hovde is not necessarily indicative of
actual value or actual future results, which may be significantly more or less
favorable than suggested by such analysis. Such analysis was prepared solely as
part of Hovde's analysis of the fairness of the Merger Consideration, from a
financial point of view, to the holders of Financial Security Common Stock. The
analysis does not purport to be an appraisal or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. Hovde used in its analysis
various projections of future performance prepared by the management of
Financial Security. The projections are based on numerous variables and
assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those assumed in the projections and any related analysis.
Hovde's opinion does not address the relative merits of the Merger as compared
to any other business combination in which Financial Security might engage. In
addition, as described above, Hovde's opinion to the Financial Security Board
was one of many factors taken into consideration by the Financial Security Board
in making its determination to approve the Merger Agreement.
Based upon the foregoing analyses and other investigations and assumptions
set forth in its opinions, without giving specific weight to any one factor or
comparison, Hovde determined that the Merger Consideration was fair from a
financial point of view to the stockholders of Financial Security.
THE SUMMARY OF THE PRESENTATION BY HOVDE TO THE FINANCIAL SECURITY BOARD AS
SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
PRESENTATION. THE PREPARATION OF A FAIRNESS OPINION INVOLVES VARIOUS
DETERMINATIONS AS TO THE MOST APPROPRIATE AND RELEVANT METHODS OF FINANCIAL
ANALYSES AND THE APPLICATION OF THOSE METHODS TO THE PARTICULAR CIRCUMSTANCES,
AND, THEREFOR, SUCH AN OPINION IS NOT READILY SUSCEPTIBLE TO SUMMARY
DESCRIPTION. FURTHERMORE, IN ARRIVING AT ITS OPINION, HOVDE DID NOT ATTRIBUTE
ANY PARTICULAR WEIGHT TO ANY ANALYSIS OR FACTOR CONSIDERED BY IT, BUT RATHER
MADE QUALITATIVE JUDGMENTS AS TO THE SIGNIFICANCE AND RELEVANCE OF EACH ANALYSIS
AND FACTOR. ACCORDINGLY, HOVDE BELIEVES THAT ITS ANALYSES AND THE SUMMARY SET
FORTH ABOVE MUST BE CONSIDERED AS A WHOLE AND THAT SELECTING PORTIONS OF ITS
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ANALYSES, WITHOUT CONSIDERING ALL FACTORS AND ANALYSES, COULD CREATE AN
INCOMPLETE VIEW OF THE PROCESS UNDERLYING THE ANALYSES SET FORTH IN ITS REPORT
TO THE FINANCIAL SECURITY BOARD AND ITS FAIRNESS OPINION. IN PERFORMING ITS
ANALYSES, HOVDE MADE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE,
GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, MANY OF WHICH ARE
BEYOND THE CONTROL OF PINNACLE OR FINANCIAL SECURITY. THE ANALYSES PERFORMED BY
HOVDE ARE NOT NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL FUTURE
PERFORMANCE.
Hovde will receive a fee of approximately $470,000 for services rendered in
connection with advising Financial Security regarding the Merger Agreement,
including the fairness opinion and financial advisory services provided to
Financial Security, plus reimbursement of out-of-pocket expenses. As of the date
of this Joint Proxy Statement/Prospectus, Hovde has received $127,874 of such
fee.
MERGER CONSIDERATION
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Financial Security Common Stock outstanding immediately
prior to consummation of the Merger will be converted into and represent the
right to receive (upon a Financial Security stockholder's election) either (i)
.8803 shares of Pinnacle Common Stock, subject to adjustment (the "Stock
Distribution"); (ii) $28.50 in cash (the "Cash Distribution") (provided that the
number of shares of Financial Security Common Stock subject to an election to
receive cash will not exceed 45% of the outstanding shares of Financial Security
Common Stock); or (iii) an amount in cash equal to 30% of the Cash Distribution
and shares of Pinnacle Common Stock equal to 70% of the Stock Distribution (the
"Combined Distribution" and together with the Stock Distribution and the Cash
Distribution, the "Merger Consideration"). The Merger Agreement provides that
the Exchange Ratio, shall be adjusted to reflect any split, combination, stock
dividend or stock distribution with respect to Pinnacle Common Stock effected by
Pinnacle prior to the Effective Time.
The Exchange Ratio is equal to the quotient of the agreed value of Financial
Security Common Stock per share, $28.50, divided by the per share value of
Pinnacle Common Stock during a ten day trading period prior to the execution of
the Merger Agreement, $32.375.
Pursuant to the Merger Agreement, if the Pinnacle Average Stock Price (as
defined below) is less than $30.00 per share but greater than $27.99 per share,
the Exchange Ratio shall be adjusted to equal the quotient of $26.00 divided by
the Pinnacle Average Stock Price. However, if the Pinnacle Average Stock Price
is greater than $35.00 per share but does not exceed $37.00 per share, the
Exchange Ratio shall be adjusted to equal the quotient of $31.00 divided by the
Pinnacle Average Stock Price. The Pinnacle Average Stock Price is defined as the
average of the closing prices per share of Pinnacle Common Stock reported by the
Nasdaq SCM on the ten trading days on which one or more trades actually occur
immediately prior to the second business day preceding the Closing Date.
However, if the Pinnacle Average Stock Price is less than $28.00 per share,
the Exchange Ratio shall be further adjusted to .9286 and Financial Security
shall have the option to terminate the Merger Agreement unless not later than
two days prior to the Closing Date, Pinnacle agrees to further adjust the
Exchange Ratio to equal the quotient of $26.00 divided by the Pinnacle Average
Stock Price. Conversely, if the Pinnacle Average Stock Price exceeds $37.00 per
share, the Exchange Ratio shall be further adjusted to .8378 and Pinnacle shall
have the option to terminate the Merger Agreement unless not later than two days
prior to the Closing Date, Financial Security agrees to further adjust the
Exchange Ratio to equal the quotient of $31.00 divided by the Pinnacle Average
Stock Price.
The market price of Pinnacle Common Stock to be received in the Merger is
subject to fluctuation and such fluctuation may result in an increase or
decrease in the value of the Stock Distribution or the Combined Distribution to
be received by Financial Security stockholders in the Merger.
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Neither Financial Security nor Pinnacle is required to exercise its right to
terminate the Merger Agreement based on the market value of Pinnacle Common
Stock at the Effective Time. No decision can be made unless and until it can
reasonably be anticipated that the Pinnacle Average Stock Price will trigger the
termination rights whereupon the Boards will make a determination based on the
relevant circumstances existing at that time.
The Cash Distribution is not subject to any possible adjustment in
connection with the Pinnacle Average Stock Price.
Pursuant to the Merger Agreement, options to purchase shares of Financial
Security Common Stock shall be converted at the Effective Time into shares of
Pinnacle Common Stock. See "THE MERGER -- Interests of Certain Persons in the
Merger".
ELECTION PROCEDURES
Each Financial Security stockholder will have the opportunity to elect
whether to receive either the Stock Distribution (a "Stock Election," in which
case, such holder's shares shall be deemed to be "Stock Election Shares"), the
Cash Distribution (a "Cash Election," in which case, such holder's shares shall
be deemed to be "Cash Election Shares"), or a Combined Distribution (a "Combined
Election," in which case, such holder's shares shall be deemed to be "Combined
Election Shares"). ENCLOSED WITH THIS JOINT PROXY STATEMENT/PROSPECTUS IS AN
ELECTION FORM FOR USE BY THE STOCKHOLDERS OF FINANCIAL SECURITY (THE "ELECTION
FORM") WHEREBY STOCKHOLDERS MAY INDICATE A STOCK ELECTION, CASH ELECTION OR
COMBINED ELECTION. IN ORDER FOR AN ELECTION FORM TO BE DEEMED TO BE EFFECTIVE,
SUCH ELECTION FORM MUST BE PROPERLY COMPLETED AND DULY EXECUTED BY THE FINANCIAL
SECURITY STOCKHOLDERS AND RETURNED TO HARRIS TRUST AND SAVINGS BANK (THE
"EXCHANGE AGENT") BY 5:00 P.M., CHICAGO TIME, ON THE DAY PRIOR TO THE DATE OF
THE FINANCIAL SECURITY MEETING OR SEPTEMBER 10, 1996 (THE "ELECTION DEADLINE").
Each separate entry on Financial Security's list of stockholders shall be
presumed to represent a separate and distinct holder of record of Financial
Security Common Stock. Shares held of record by a bank, trust company, broker,
dealer or other recognized nominee shall be deemed to be held by a single holder
unless the nominee advises the Exchange Agent otherwise, in which case, each
beneficial owner will be treated as a separate holder and, either directly or
through such nominee, may submit a separate Election Form. Any election may be
revoked or changed by the person submitting an Election Form or any other person
to whom the subject shares are subsequently transferred by submission of a later
dated Election Form properly completed and duly executed, received by the
Exchange Agent by the Election Deadline.
Any stockholder who fails to deliver a properly completed and duly executed
Election Form to the Exchange Agent by the Election Deadline shall be deemed to
have made no election (a "No Election," in which case, such holder's shares
shall be deemed to be "No Election Shares"). No Election Shares will be treated
as Stock Election Shares for purposes of determining the type and amount of the
Merger Consideration payable pursuant to the Merger.
In the event the number of shares of Pinnacle Common Stock distributable in
respect of the Stock Election Shares and the Combined Election Shares is less
than fifty-five percent (55%) of the Merger Consideration or such greater amount
as required by the Minimum Share Notice (as defined below), the Exchange Agent
will reallocate the Merger Consideration payable to each holder of the Cash
Election Shares pro rata (based upon the number of Cash Election Shares owned by
such holder as compared with the total number of Cash Election Shares owned by
all holders) such that holders of Cash Election Shares will receive the number
of shares of Pinnacle Common Stock which in the aggregate will equal fifty-five
percent (55%) of the Merger Consideration or the amount set forth in the Minimum
Share Notice. The balance of the Merger Consideration, if any, will be paid in
cash. The amount of cash will be determined by computing the value of the Merger
Consideration which each such holder is entitled to receive pursuant to the
Merger by multiplying the number of shares of Financial Security Common Stock
owned at the Effective Time by the per share value of the Merger Consideration
and subtracting from the amount described above the value of the shares of the
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Pinnacle Common Stock to be issued. The Minimum Share Notice is the notice that
Muldoon, Murphy and Faucette, counsel to Financial Security ("Muldoon") will
issue to the Exchange Agent if the total number of shares of Pinnacle Common
Stock issuable to all holders of Stock Election Shares and Combined Election
Shares is insufficient to allow Muldoon to issue its opinion concerning the tax
free nature of the Merger.
SURRENDER OF CERTIFICATES
Within ten (10) days after the Effective Time, the Exchange Agent is
required to mail to each holder of record of Financial Security Common Stock a
letter of transmittal and instructions for use in effecting the surrender of
such holder's Financial Security Common Stock certificates.
FINANCIAL SECURITY STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE
EXCHANGE AGENT.
Upon surrender to the Exchange Agent of one or more certificates of
Financial Security Common Stock, together with a properly completed letter of
transmittal, the Exchange Agent will cause to be issued and mailed the Merger
Consideration after receipt of all required documentation pursuant to the Merger
Agreement. The surrendered certificates of Financial Security Common Stock will
thereupon be canceled. A Pinnacle Common Stock certificate may be issued in a
name other than the name in which the surrendered Financial Security Common
Stock certificate is registered only if a certificate representing such
Financial Security Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect a transfer to the new name and
by evidence that any applicable stock transfer taxes have been paid.
No dividends or other distributions declared after the Effective Time with
respect to Pinnacle Common Stock payable to the holders of record thereof after
the Effective Time shall be paid to the holder of any unsurrendered certificate
of Financial Security Common Stock until such holder of record shall have
surrendered such Financial Security Common Stock certificate in good and proper
form. After the subsequent surrender and exchange of a certificate, the holder
thereof shall be entitled to receive any such dividends or distributions,
without interest thereon, which theretofore became payable with respect to
Pinnacle Common Stock represented by such certificate. Any shares of Pinnacle
Common Stock or cash in the exchange fund maintained by the Exchange Agent and
not exchanged for Financial Security Common Stock certificates within eighteen
months after the Effective Time shall be returned by the Exchange Agent to
Pinnacle which shall thereafter act as exchange agent subject to the rights of
holders of unsurrendered Pinnacle Common Stock certificates.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Pinnacle Common
Stock will be issued upon the surrender for exchange of certificates
representing Financial Security Common Stock, no dividend or distribution of
Pinnacle will relate to any fractional shares, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
Pinnacle stockholder. Each Financial Security stockholder who would be entitled
to a fractional share of Pinnacle Common Stock in the Merger will receive a cash
payment (without interest) determined by multiplying (i) the Pinnacle Average
Stock Price by (ii) the fractional share interest to which the holder would
otherwise be entitled pursuant to the terms of the Merger Agreement.
EFFECTIVE TIME AND CLOSING DATE
The Effective Time of the Merger will be the time and date specified in the
articles of merger to be filed with the Secretary of State of the State of
Illinois and the certificate of merger to be filed with the Secretary of State
of the State of Delaware. Such filing will occur only after the receipt of all
requisite regulatory approvals and the approval of the Merger by the requisite
votes of Pinnacle's and Financial Security's respective stockholders and the
satisfaction or waiver of all other conditions to the Merger. The Closing Date
of the Merger will be within thirty (30) business days after the expiration of
all
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applicable waiting periods in connection with approvals of governmental
authorities and all conditions to the consummation of the Merger have been
satisfied or waived in accordance with the terms of the Merger Agreement, or at
another time agreed to in writing by Pinnacle and Financial Security.
Subject to obtaining all requisite approvals, Pinnacle and Financial
Security currently anticipate that the Merger will be consummated in September,
1996. The Merger Agreement provides that either party may terminate the Merger
Agreement if the Merger is not consummated by March 31, 1997, but the parties
can extend that date by mutual consent to a date to be determined by them. See
"-- Waiver and Amendment" and "-- Termination and Termination Fee."
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, each of Pinnacle and Financial Security has made
certain customary representations and warranties relating to, among other
things, the parties' respective organization, authority relative to the Merger
Agreement, capitalization, subsidiaries, required consents and approvals, taxes,
employee benefit plans, material contracts, litigation, compliance with
applicable laws, environmental matters, the reliability of financial statements
and the absence of material adverse changes in the parties' businesses,
financial condition, operations or properties. Pursuant to the Merger Agreement,
it is a condition to consummation of the Merger that the representations and
warranties contained in the Merger Agreement be true and correct in all material
respects on the dates of the Merger Agreement and as of the Effective Time. See
"--Conditions to Consummation of the Merger." For detailed information on the
representations and warranties contained in the Merger Agreement, see the Merger
Agreement attached hereto as Appendix I and incorporated by reference herein.
CONDUCT OF BUSINESS OF FINANCIAL SECURITY PENDING THE MERGER
Financial Security has agreed that until the Effective Time of the Merger,
it will conduct its business in the usual, regular and ordinary course
consistent with past practice and prudent banking practice and use its best
efforts to maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain the
appropriate services of its officers and key employees. Without limiting the
generality of the foregoing, Financial Security has agreed that it will not, and
it will not cause its subsidiaries to, without the prior written consent of
Pinnacle:
(i) Amend its certificate of incorporation, charter or by-laws;
(ii) Issue any shares of its or their capital stock or issue or grant any
stock options, warrants or commitments regarding issuance of its
capital stock;
(iii) Increase or reduce the number of shares of its or their capital stock
or otherwise modify, change or amend the voting rights with preferences
attributable to any such capital stock;
(iv) Except as required by business necessity or as required by law, adopt or
modify any of its employee benefit plans;
(v) Except as contemplated by the Merger Agreement, enter into any amendment
of any contract of employment or take or grant any general or individual
wage or salary increase other than in the ordinary course of business or
any increase in the manner or amount of compensation or fringe benefits
payable to its employees;
(vi) Sell, transfer or lease any of its assets or properties having a book
value in excess of $200,000 except in the ordinary course of business
(other than securities, classified assets or real estate owned having a
book value less than $1,000,000);
(vii) Waive, release, transfer or change in any respect leases, licenses or
agreements other than in the ordinary course of business;
(viii) Subject any asset or property to a lien or other encumbrance other than
in the ordinary course of business which would not have a material
adverse effect on Pinnacle;
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(ix) Enter into any leases, licenses or agreements obligating payments in
excess of $25,000 per annum;
(x) Declare, set aside, pay or make a dividend or redeem any shares of
Financial Security Common Stock, except for the payment of quarterly
cash dividends not to exceed after tax earnings for the quarter prior to
such dividend as the Financial Security Board may declare beginning on
October 22, 1996;
(xi) Incur any indebtedness for borrowed money except for deposit liabilities
and otherwise incurred in the ordinary course of business;
(xii) Cancel or compromise any debt or claim which has not previously been
charged off, other than in the ordinary course of business and in an
aggregate amount which would not have a material adverse effect on
Financial Security or on any of its stockholders;
(xiii) Change its method of accounting in effect as of December 31, 1995,
except as required by changes in generally accepted accounting
principles or by regulatory agencies;
(xiv) Settle any claim, action or proceeding involving any liability for
payments in excess of $50,000, or which would place material
restrictions on the operations of Financial Security;
(xv) Fail to notify Pinnacle promptly of its receipt of any letter from any
regulatory authority advising that it is contemplating issuing any
order, direct or extraordinary supervisory letter to it;
(xvi) Fail to remain in compliance with any capital requirements of any
regulatory agency to which it is subject;
(xvii) Fail to maintain and keep its properties in as good repair and
condition as at the execution of the Merger Agreement except for
ordinary wear and tear;
(xviii) Except in the ordinary course of business and consistent with
applicable laws and regulations, make any loan or loan commitment to
any of its officers, directors or stockholders holding more than five
percent (5%) of the issued and outstanding shares of Financial Security
Common Stock;
(xix) Make, commit to make or commit to renew, any loan or purchase agreement,
or commit to purchase any securities, for an amount in excess of
$1,000,000; or
(xx) Agree to make any commitment to take any action or do any of the
foregoing.
CONDUCT OF BUSINESS OF PINNACLE PENDING THE MERGER
Pinnacle has agreed that until the Effective Time, it and the Pinnacle
Subsidiary Banks will carry on their respective businesses in the usual, regular
and ordinary course consistent with past practice and prudent banking practices.
Without limiting the generality of the foregoing, Pinnacle has agreed that it
will not, and will not cause the Pinnacle Subsidiary Banks to, without the prior
written consent of Financial Security:
(i) Take any action that would cause the representations and warranties
contained in the Merger Agreement to fail to be true and correct or that
would materially effect the ability of Pinnacle or any of the Pinnacle
Subsidiary Banks to perform its covenants and agreements contained in
the Merger Agreement or to consummate the transactions contemplated
thereby;
(ii) Take any action that would materially effect or delay the ability of
Financial Security or Pinnacle to obtain any necessary approvals,
consents or waivers of any governmental entity required to consummate
the transactions contemplated by the Merger Agreement;
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(iii) Consolidate with or merge into any other person or convey, transfer or
lease its properties and assets substantially as an entirety to any
person unless such person shall expressly assume the obligations of
Pinnacle under the Merger Agreement;
(iv) Declare or pay any dividend on, or make any other distributions with
respect of Pinnacle Common Stock except for regular dividends and
distributions in Pinnacle Common Stock;
(v) Amend its certificate of incorporation or by-laws; or
(vi) Authorize or enter into any agreement or commitment to do any of the
foregoing.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Pinnacle and Financial Security to consummate
the Merger are subject to the satisfaction or waiver, at or prior to the
Effective Time, of the following conditions, including, but not limited to: (i)
the Merger Agreement shall have been approved by the requisite votes of the
holders of Pinnacle Common Stock and Financial Security Common Stock; (ii) all
necessary regulatory approvals, consents or waivers required to consummate the
Merger shall have been obtained and shall remain in full force and effect and
all statutory waiting periods in respect thereof shall have expired; (iii) the
Registration Statement on Form S-4 filed with the SEC relating to the shares of
Pinnacle Common Stock to be issued in the Merger shall have been declared
effective and shall not be subject to a stop order; (iv) neither Pinnacle nor
Financial Security shall be subject to any order, decree or injunction which
enjoins or prohibits the consummation of the Merger; (v) Pinnacle shall have
received all state securities law and "blue sky" authorizations necessary to
consummate the transactions contemplated by the Merger Agreement; (vi) the
shares of Pinnacle Common Stock shall have been approved for listing on the
Nasdaq National Market; and (vii) Muldoon shall have issued an opinion to
Pinnacle and Financial Security to the effect that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code.
In addition, the obligation of Pinnacle to consummate the Merger is subject
to the satisfaction by Financial Security or waiver by Pinnacle of the following
conditions: (i) Financial Security shall have performed or complied in all
material respects with all covenants and agreements required by the Merger
Agreement to be performed by or complied with by it at or prior to the Effective
Time except where the failure to perform such obligation, covenant or agreement
would not, individually or in the aggregate, result in a material adverse effect
on Financial Security or its subsidiaries; and (ii) the representations and
warranties of Financial Security contained in the Merger Agreement shall be true
and correct in all material respects on the date of the Merger Agreement and as
of the Effective Time, as well as other customary closing conditions, such as
receipt of legal opinions and officers' certificates.
In addition, the obligation of Financial Security to consummate the Merger
is subject to the satisfaction by Pinnacle or waiver by Financial Security of
the following conditions: (i) Pinnacle shall have performed or complied in all
material respects with all covenants and agreements required by the Merger
Agreement to be performed by or complied with by it at or prior to the Effective
Time except where the failure to perform such obligation, covenant or agreement
would not, individually or in the aggregate, result in a material adverse effect
on Pinnacle or its subsidiaries; (ii) the representations and warranties of
Pinnacle contained in the Merger Agreement shall be true and correct in all
material respects on the date of the Merger Agreement and as of the Effective
Time; and (iii) Financial Security shall have received an updated fairness
opinion from Hovde upon mailing of this Joint Proxy Statement/Prospectus, as
well as other customary closing conditions such as receipt of legal opinions and
officer certificates.
REGULATORY APPROVALS
The Merger is subject to prior approval by the OTS under HOLA. Section 10(e)
of HOLA requires that the application be evaluated by taking into consideration
the financial and managerial resources and the future prospects of Pinnacle and
Financial Security and their respective subsidiaries, the risks to the federal
deposit insurance funds and the convenience and needs of relevant communities.
In
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addition, Section 10(e)(2) of HOLA requires that the Director of the OTS not
approve any proposed acquisition (i) which would result in a monopoly, or which
would be in furtherance of any combination or conspiracy to monopolize or to
attempt to monopolize the savings and loan business in any part of the United
States, or (ii) the effect of which, in any section of the country, may be
substantially to lessen competition, or tend to create a monopoly, or which in
any other manner would be in restraint of trade, unless it finds that the
anti-competitive effects of the proposed acquisition are clearly outweighed in
the public interest by the probable effect of the acquisition in meeting the
convenience and needs of the communities to be served. The OTS has the authority
to deny an application if it concludes that the combined organization would have
an inadequate capital position. Furthermore, the OTS must also assess the
records of the depository institution subsidiaries of both parties under the
Community Reinvestment Act of 1977, as amended (the "CRA"). The CRA requires
that the OTS analyze, and take into account when evaluating an application, each
institution's record of meeting the credit needs of its local communities,
including low- and moderate-income neighborhoods, consistent with safe and sound
operation. The OTS may also request additional information. The OTS procedures
provide for publication of notice of the application and public comment and/or
requests for agency hearings. Pinnacle filed its application with the OTS on
June 12, 1996, and the application is currently pending.
In addition, the Merger is subject to prior approval of the Federal Reserve
pursuant to Section 4 of the BHC Act. Under Section225.23(a) of the Federal
Reserve's Regulation Y, Pinnacle is required to give notice to the Federal
Reserve requesting prior approval of Pinnacle's proposal to acquire Financial
Security. The Federal Reserve's procedures involve public notice of the receipt
of the notice application and an opportunity for public comment and/or requests
for agency hearings on the application. In evaluating a notice application of
this nature, the Federal Reserve considers, among other things, the financial
and managerial resources of the notificant and its subsidiaries and the company
to be acquired and the effect of the proposed transaction on those resources.
Generally, the Federal Reserve considers whether the proposed transaction by the
notificant can reasonably be expected to produce benefits to the public (such as
greater convenience, increased competition and gains in efficiency) that
outweigh any possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, and unsound banking
practices). The Federal Reserve also considers the CRA records of the relevant
depository institution's subsidiaries of both parties. The Federal Reserve may
also deny the notice application if the notificant fails to provide all
information requested by the Federal Reserve. Pinnacle filed its notice
application on July 1, 1996, and the notice is currently pending.
The Merger cannot proceed in the absence of all regulatory approvals. See
"-- Conditions to the Merger." Pinnacle and Financial Security have agreed to
take all reasonable actions necessary to obtain approvals and comply with the
requirements of the OTS and the Federal Reserve. Although no significant
difficulties are anticipated in obtaining regulatory approval, there can be no
assurance that such approvals will be obtained or that there will not be delays
in processing the applications.
Pinnacle and Financial Security are not aware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any other approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance that any such approval or action, if needed, could be obtained,
and if such approval or actions are obtained, there can be no assurance as to
the timing thereof.
WAIVER AND AMENDMENT
Prior to the Effective Time of the Merger and subject to applicable law,
Pinnacle and Financial Security may extend the time for performance of any
obligations of the other under the Merger Agreement, waive any inaccuracies in
the representations and warranties of the other contained in the Merger
Agreement and waive compliance with any agreements or conditions of the other
contained in the Merger Agreement. Subject to applicable law, Pinnacle and
Financial Security may also amend the Merger Agreement at any time before or
after approval of the Merger Agreement by the
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stockholders of Pinnacle and Financial Security, provided that any amendment
effected after approval of such stockholders may not adversely affect such
stockholders, including by the alteration of the amount or kind of the Merger
Consideration.
NO SOLICITATION
Financial Security has agreed that neither it and its subsidiaries, nor any
of their respective officers, directors, employees, representatives, agents or
affiliates (including, without limitation, any investment banker, attorney, or
accountant retained by Financial Security or any of its subsidiaries), will,
directly or indirectly, initiate, solicit or knowingly encourage any inquiries
or the making of any proposal or offer (including, without limitation, any
proposal or offer to stockholders of Financial Security) with respect to a
merger, consolidation or similar transaction involving any purchase of all or
any significant portion of assets or any equity securities of Financial Security
or any of its subsidiaries (any such proposal, an "Acquisition Proposal").
Pursuant to the Merger Agreement, Financial Security will notify Pinnacle
promptly of the relevant details relating to all inquiries and proposals which
it may receive relating to any Acquisition Proposal. Notwithstanding the
foregoing, Financial Security may engage in negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person or entity related to an Acquisition Proposal if, the Financial Security
Board of Directors, after consultation with outside legal counsel, determines in
good faith that such action is necessary for the Financial Security Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law and promptly notifies Pinnacle of any inquiries, proposals, negotiations or
discussions in respect of any such Acquisition Proposal together with details as
to the identity of the persons making such inquiry, proposals or seeking such
negotiations or discussions and the terms and conditions thereof.
TERMINATION AND TERMINATION FEE
The Merger Agreement may be terminated at any time prior to the Effective
Time of the Merger, by: (i) the mutual consent of Pinnacle and Financial
Security, as expressed by a majority vote of their respective Boards of
Directors; (ii) either Pinnacle or Financial Security as expressed by their
respective Boards of Directors, if the Merger has not occurred by March 31,
1997, provided that the failure of the Merger to so occur will not be due to the
failure to perform or comply with any covenant or agreement contained in the
Merger Agreement by the party seeking to terminate; (iii) either Pinnacle or
Financial Security (provided the party seeking termination is not then in
material breach of any representation, warranty, covenant or other agreement
contained in the Merger Agreement) if the other party to the Merger Agreement
has (A) failed to perform or comply with any covenant or agreement contained in
the Merger Agreement which failure or non-compliance is material in the context
of the transactions contemplated by the Merger Agreement, or (B) made any
inaccuracies, omissions or breaches in the representations, warranties,
covenants or agreements contained in the Merger Agreement the circumstances of
which either individually or in the aggregate have, or reasonably could be
expected to have a material adverse effect on the other party, which have not
been cured within 30 days after the date on which written notice of such breach
is given to the party committing such breach; (iv) either Financial Security or
Pinnacle by written notice to the other party if (A) any approval, consent or
waiver of a governmental authority required to permit consummation of the Merger
shall have been denied; (B) any governmental authority issues a final
unappealable order enjoining or otherwise prohibiting consummation of the
Merger; or (C) the holders of Financial Security Common Stock or Pinnacle Common
Stock fail to approve and adopt the Merger Agreement; provided no party shall
have the right to terminate the Merger Agreement pursuant to this clause (iv) if
the occurrence of item (A), (B) or (C) is attributable to the party's failure to
perform or observe the covenants and agreements set forth in the Merger
Agreement; (v) Pinnacle, if there has occurred an event, condition, change or
occurrence which, individually or in the aggregate, has had or could reasonably
be expected to result in a material adverse effect on Financial Security, and
Financial Security shall not have remedied such event, condition, change or
occurrence within 30 days from notice of termination; (vi) Pinnacle, if the
Pinnacle Average Stock Price exceeds $37.00 per share and Financial Security
does not agree to decrease the Exchange Ratio to equal the quotient of $31.00
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divided by the Pinnacle Average Stock Price; (vii) Financial Security, if the
Pinnacle Average Stock Price is less than $28.00 per share and Pinnacle does not
agree to increase the Exchange Ratio to equal the quotient of $26.00 divided by
the Pinnacle Average Stock Price; and (viii) Pinnacle, if five days prior to the
Closing Date, the value of certain office equipment leases which were purchased
by Security Federal from Bennett Funding Group, Inc. (the "Bennett Portfolio")
has decreased by an amount in excess of $375,000 before any related tax savings
and Financial Security does not agree two days prior to the Closing Date to
reduce the consideration payable pursuant to the Merger Agreement by the amount
of the loss in the Bennett Portfolio in excess of $375,000 less any tax savings
attributable to the loss. See "BUSINESS OF FINANCIAL SECURITY -- Loan
Portfolio."
If, prior to October 22, 1997, the Merger has not been consummated and (i)
any person other than Pinnacle acquires beneficial ownership of fifty percent
(50%) or more of the then outstanding Financial Security Common Stock; (ii)
Financial Security, without Pinnacle's prior written consent, (A) enters into an
agreement to engage in an Acquisition Transaction (as defined below) with a
party other than Pinnacle or (B) the Financial Security Board recommends that
the stockholders of Financial Security approve or accept an Acquisition
Transaction with a third party, or (iii) if a bona fide proposal is made by a
third party to engage in an Acquisition Transaction and after such proposal is
made (A) Financial Security breaches the Merger Agreement which materially
impairs Financial Security's ability to consummate the Merger and such breach
entitles Pinnacle to terminate the Merger Agreement; (B) the Financial Security
Meeting is not held or is canceled prior to the termination of the Merger
Agreement for reasons other than Pinnacle's fault or (C) Financial Security's
Board of Directors withdraws or modifies its recommendation in a manner adverse
to Pinnacle, then, in such case, Financial Security is required to pay Pinnacle
a termination fee of $600,000 following such termination. Notwithstanding the
foregoing, Financial Security will not be obligated to pay the termination fee
if Financial Security validly terminates the Merger Agreement under certain
conditions. For purposes of the Merger Agreement, "Acquisition Transaction"
means a (x) merger or consolidation, or any similar transaction, involving
Financial Security, (y) purchase, lease or other acquisition of all or
substantially all of the assets of Financial Security or (z) purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of securities representing fifty percent (50%) or more of the voting
power of Financial Security; provided the term "Acquisition Transaction" does
not include any internal merger or consolidation involving only Financial
Security and/or its subsidiaries.
In the event of the termination and abandonment of the Merger Agreement and
the Merger pursuant to the above, the Merger Agreement, other than provisions
relating to confidentiality of information obtained by the parties and to the
payment of expenses relating to the Merger, shall become void and of no effect,
without any liability on the part of any party or its directors or officers,
provided that nothing contained in the Merger Agreement will serve to relieve
any party from liability for a willful breach of the Merger Agreement.
ACCOUNTING TREATMENT
The Merger is to be accounted for as a purchase in accordance with generally
accepted accounting principles as outlined in Accounting Principles Board
Opinion No. 16, "Business Combinations." Under the purchase method of
accounting, the excess of purchase price paid over the fair market value of
assets and liabilities acquired (goodwill) is recorded as an intangible asset
and such asset is amortized as an expense over the period estimated to be
benefitted. Under the purchase method of accounting, the reported income of
Pinnacle will include the results of operations of Financial Security only as of
and from the Effective Time.
EXPENSES
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses, except Pinnacle and Financial
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Security shall each pay one-half of the costs incurred in connection with the
printing and mailing of the Registration Statement and this Joint Proxy
Statement/Prospectus. All fees payable to Hovde in connection with the Merger
will be paid by Financial Security.
RESALES OF PINNACLE COMMON STOCK BY AFFILIATES
The shares of Pinnacle Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued pursuant to the terms of the Merger
Agreement to any holder of Financial Security Common Stock or to any holder of
Financial Security stock options who may be deemed to be an "affiliate" of
Financial Security for purposes of Rule 145 under the Securities Act. Affiliates
may not sell their shares of Pinnacle Common Stock acquired in connection with
the Merger except pursuant to an effective registration statement under the
Securities Act covering such shares or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
Financial Security has agreed in the Merger Agreement to use its reasonable
efforts to cause each director, executive officer and other person who may be
deemed an affiliate (for purposes of Rule 145) of such party to execute and
deliver a written agreement providing that such person will not sell, pledge,
transfer or otherwise dispose of the shares of Pinnacle Common Stock to be
received by such person upon consummation of the Merger except in compliance
with applicable provisions of the Securities Act.
This Joint Proxy Statement/Prospectus cannot be used for resales of Pinnacle
Common Stock received by any person who may be deemed an "affiliate" of Pinnacle
or Financial Security.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Pursuant to the Merger Agreement, the current directors and executive
officers of Pinnacle will be the directors and executive officers of the
surviving corporation in the Merger. Following the consummation of the Merger,
Security Federal will become a wholly owned subsidiary of Pinnacle. In the
future, Pinnacle may merge Security Federal into Pinnacle Bank. After
consummation of the Merger, Security Federal will conduct its business largely
as presently conducted.
All persons who are employees of Financial Security or Security Federal
immediately prior to the Effective Time shall, after the Effective Time, become
employees of Pinnacle, one of the Pinnacle Subsidiary Banks or Security Federal.
Pinnacle has agreed to use its best efforts to reasonably identify within (30)
thirty days of the Effective Time the employees of Financial Security and
Security Federal to whom Pinnacle intends to offer employment; provided,
however, that Pinnacle shall not have any duty or obligation to continue to
employ any former employees of Financial Security or Security Federal beyond the
Effective Time.
Pinnacle will pay a severance benefit to each person, other than those
persons who have entered into written agreements with Financial Security and
Security Federal and that are identified in the Merger Agreement, who is an
employee of Financial Security or Security Federal at the Effective Time of the
Merger and who is terminated without cause within twelve months of the Effective
Time. Terminated employees shall receive any benefit provided to similarly
situated employees of Pinnacle upon termination including four weeks of salary
plus one additional week of salary for every year of credited service up to a
maximum of sixteen weeks. For purposes of the foregoing, former employees of
Financial Security and Security Federal will receive credit for service with
Financial Security or Security Federal to the same extent and in the manner as
if such employees had been employed by Pinnacle.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Financial Security's management may be deemed to have
interests in the Merger in addition to their interests as stockholders of
Financial Security generally. In each case, the Board of Directors of Financial
Security was aware of their potential interests, and considered them, among
other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
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INDEMNIFICATION. Pursuant to the Merger Agreement, Pinnacle has agreed
that, for a period of six years following the Effective Time (or until the final
disposition of any claims made during that time period), it will indemnity the
present and former directors and officers of Financial Security or its
subsidiaries against any costs or expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages or liabilities incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, and whether or not the
indemnified party is a party thereto, arising out of matters existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement), whether asserted or claimed prior to, at
or after the Effective Time, to the fullest extent permitted under Delaware law
or, if greater, as provided in Financial Security's Certificate of Incorporation
in effect on the date of the Merger Agreement. In addition, Pinnacle and
Financial Security have agreed that Financial Security shall obtain officers and
directors liability insurance at Financial Security's current levels and scope
for all persons who are officers and directors of Financial Security and
Security Federal for a period of six years after the Effective Time, provided
the aggregate cost of such insurance shall not exceed $50,000. In connection
with the execution of the Merger Agreement, each of the directors of Financial
Security and its subsidiaries stated that they were unaware of any acts or
omissions in his or her capacity as a director and/or officer of Financial
Security or its subsidiaries which would give rise to a claim for
indemnification from Financial Security or its subsidiaries which are reasonably
likely to have a material adverse effect on Financial Security or its
subsidiaries.
EMPLOYMENT AGREEMENTS. Financial Security and Security Federal have
employment agreements with Ivan F. Kovac, Daniel K. Augustine, Patrick Hunt and
Frank Swiderski.
Pursuant to the employment agreements, if termination, voluntary or
involuntary, results from a change in control of Financial Security or Security
Federal, the executive, or in the event of death, his beneficiary, would be
entitled to a severance payment equal to the greater of (i) three times the
executive's average annual compensation including any commissions, bonuses,
benefit plan contributions, fees and severance payments for the past three
years, or (ii) the payments otherwise remaining under the terms of the
employment agreement. Financial Security or Security Federal would also continue
the executive's life, health, accident, dental and disability coverage for the
remaining unexpired terms of the agreements. In the event of a change in
control, the severance payment to the executive will be limited to one (1)
dollar less than the triggering amount as described in Section 280G of the Code,
the triggering amount being equal to approximately three times the average of
the past five years of taxable income received by the executive from Financial
Security or Security Federal, but only if such limiting amount is greater than
the amount of the severance payment set out in the employment agreement less any
applicable excise tax required on such severance payment under Sections 280G and
4999 of the Code. The Merger would constitute a change in control under the
agreements.
Pursuant to the Merger Agreement, Pinnacle will honor, in accordance with
their terms, all existing employment agreements unless otherwise mutually agreed
to by Pinnacle and the individual executive officer. In connection with the
execution of the Merger Agreement, Messrs. Kovac, Augustine, Hunt and Swiderski
entered into letters of understanding providing for the amendment of their
respective employment agreements limiting any change in control payment to an
amount equal to one dollar less than the amount which would trigger 280G of the
Code. As a result, lump sum severance payments of $414,801, $484,557, $164,430
and $273,924 will be paid to Messrs. Kovac, Augustine, Hunt and Swiderski,
respectively. If the Merger is not consummated prior to December 31, 1996, the
payment will be subject to adjustment. Pinnacle may negotiate new employment
agreements with certain of the executive officers.
Messrs. Augustine, Hunt and Swiderski also may enter into consulting
agreements with Pinnacle in the amount of $204,000, $36,200 and $25,000,
respectively. Pinnacle believes that the continued service of these executives
will assist in fully preserving the ongoing business operation of Security
Federal.
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In addition, Financial Security and Security Federal have change in control
agreements with Messrs. Preissner, Yamtich and Sylvestrak. Each change in
control agreement provides that following a change in control of Financial
Security or Security Federal, if the executive's employment is terminated or if
the executive terminates his employment following his demotion, loss of title,
office or significant authority, a reduction in his compensation, or relocation
of his principal place of employment, the executive would be entitled to receive
a payment equal to three times his then current annual salary. Financial
Security and Security Federal would also continue the executive's life, medical,
dental and disability coverage for a period of thirty-six months following a
change in control. As a result, if the executives are terminated, a severance
payment of $201,000, $210,900 and $222,300 would be paid to Messrs. Preissner,
Yamtich, and Sylvestrak, respectively. The Merger would constitute a change in
control under the agreements.
Pursuant to the Merger Agreement, Pinnacle will honor, in accordance with
their terms, all existing change in control contracts unless otherwise mutually
agreed to by Pinnacle and the individual officer. Pinnacle may negotiate new
change in control agreements with certain officers.
STOCK OPTIONS. Each option to purchase shares of Financial Security Common
Stock shall be converted at the Effective Time into such number of shares of
Pinnacle Common Stock as are equal in value to (i) the product of (A) the number
of shares of Financial Security Common Stock subject to Financial Security stock
options, (B) the Exchange Ratio and (C) the Pinnacle Average Stock Price, less
(ii) the aggregate exercise price for the number of shares of Financial Security
Common Stock subject to Financial Security stock options. No fractional shares
shall be issued by Pinnacle with regard to Financial Security stock options.
EFFECT ON FINANCIAL SECURITY EMPLOYEE BENEFITS PLANS. All employees of
Financial Security immediately prior to the Effective Time of the Merger who are
employed by Pinnacle or any of the Pinnacle Bank Subsidiaries immediately
following the Effective Time of the Merger ("Transferred Employees") may
participate in pension and welfare plans maintained by Pinnacle after the
Effective Time to which they are eligible based on their length of service,
compensation, job classification, and position, including, where applicable, any
incentive compensation plan. Pinnacle shall provide to employees of Financial
Security and Security Federal who become employees of Pinnacle, a Pinnacle
Subsidiary Bank or Security Federal, employee benefits on terms and conditions
which, when taken as a whole, are substantially the same as those provided by
Pinnacle or the Pinnacle Subsidiary Banks to their similarly situated officers
and employees. Except as otherwise prohibited by law, Transferred Employees'
service with Financial Security will be recognized as service with Pinnacle for
purposes of eligibility to participate and vest, if applicable (but not for
purposes of benefit accrual) under Pinnacle's benefit plans.
Pinnacle will assume and honor in accordance with their terms all existing
written employment, severance, change in control and other compensation
agreements, including the Supplemental Employee Stock Retirement Plan and the
Supplemental Retirement Agreement between Financial Security and any of its
subsidiaries, and any officer, director or employee of Financial Security or any
of its subsidiaries. Pursuant to the Merger Agreement, Financial Security shall
(i) make a sufficient contribution to the Security Federal Savings and Loan
Association Retirement Plan (the "Security Federal Pension") to fully fund the
Security Federal Pension on a termination basis; (ii) terminate the Security
Federal Pension on or prior to the Effective Time and (iii) terminate the
Security Federal Savings and Loan Association Employee Stock Ownership Plan (the
"Security Federal ESOP") and the Security Federal ESOP loan shall be repaid;
provided, however, a final determination letter shall be obtained from the IRS
before termination of the plans.
In addition, all grants and awards under the Financial Security option and
award plans will become fully vested upon the consummation of the Merger. With
respect to any outstanding share awards, employees will be able to elect to
receive either the Stock Election, Cash Election or Combination Election.
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OTHER AGREEMENTS. Mr. Robert Genetski, a member of the Financial Security
Board of Directors and the Director of Research and Asset Management Chicago
Capitol, Inc., has provided economic forecasting, commentary and consultation
for Pinnacle on an as-needed basis since July 1990. Mr. Genetski receives $1,000
per quarter from Pinnacle in consideration of such services. The Financial
Security Board of Directors was aware of Mr. Genetski's relationship with
Pinnacle throughout the negotiation of the Merger Agreement.
CERTAIN TAX CONSEQUENCES OF THE MERGER
It is a condition to the obligation of Pinnacle and Financial Security to
consummate the Merger that Pinnacle and Financial Security shall have received
an opinion of Muldoon, counsel to Financial Security, to the effect that the
Merger will be treated as a reorganization within the meaning of Section
368(a)of the Code. Assuming the Merger is so treated, no gain or loss will be
recognized for federal income tax purposes by Pinnacle or Financial Security as
a result of the Merger or by a holder of Financial Security Common Stock, upon
receipt solely of Pinnacle Common Stock pursuant to the Merger. Cash received by
a holder of Financial Security Common Stock (i) in consideration of his or her
shares of Financial Security Common Stock pursuant to a Cash Distribution or a
Combined Distribution, or (ii) in lieu of a fractional share interest in
Pinnacle Common Stock will be treated as received in exchange for such Financial
Security Common Stock or such fractional share interest in Pinnacle Common
Stock, as the case may be, and gain or loss will be recognized for federal
income tax purposes, measured by the difference between the amount of cash
received and the adjusted tax basis of the share of Financial Security Common
Stock surrendered or portion thereof allocable to a fractional share interest in
Pinnacle, as the case may be. Such gain or loss should be capital gain or loss
if such share of Financial Security Common Stock or fractional share interest in
Pinnacle is held as a capital asset by such stockholder and will be long-term
capital gain or loss if held for more than one year at the Effective Time.
However, if the cash payment has the effect of a distribution of a dividend, the
amount of taxable income recognized generally will equal the amount of cash
received; such income generally will be taxable as a dividend; and no loss (or
other recovery of such stockholder's tax basis for the shares of Financial
Security Common Stock surrendered in the exchange) generally will be recognized
by such stockholder. The determination of whether a cash payment has the effect
of a distribution of a dividend will be made pursuant to the provisions and
limitations of Section 302 of the Code, taking into account the constructive
stock ownership rules of Section 318 of the Code.
IMPACT OF SECTION 302 OF THE CODE. The determination of whether a cash
payment has the effect of the distribution of a dividend generally will be made
in accordance with the provisions of Section 302 of the Code. A cash payment to
a Financial Security stockholder will be considered not to have the effect of
the distribution of a dividend under Section 302 of the Code and such
stockholder will recognize capital gain or loss only if the cash payment (i)
results in a "complete redemption" of such stockholder's actual and constructive
stock interest, (ii) results in a "substantially disproportionate" reduction in
such stockholder's actual and constructive stock interest, or (iii) is "not
essentially equivalent to a dividend."
A cash payment will result in a "complete redemption" of a stockholder's
stock interest and such stockholder will recognize capital gain or loss if such
stockholder does not actually or constructively own any stock after the receipt
of the cash payment. A reduction in a stockholder's stock interest will be
"substantially disproportionate" and such stockholder will recognize capital
gain or loss if (i) the percentage of outstanding shares actually and
constructively owned by such stockholder after the receipt of the cash payment
is less than eighty percent (80%) of the percentage of outstanding shares
actually and constructively owned by such stockholder immediately prior to the
receipt of the cash payment. A cash payment will qualify as "not essentially
equivalent to a dividend" and a stockholder will recognize capital gain or loss
if it results in a meaningful reduction in the percentage of outstanding shares
actually and constructively owned by such stockholder. No specific tests apply
to determine whether a reduction in a stockholder's ownership interest is
meaningful; rather, such determination will be made based on all the facts and
circumstances applicable to such Financial Security stockholder. No general
guidelines dictating the appropriate interpretation of facts and circumstances
have
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been announced by the courts or issued by the Internal Revenue Service (the
"Service"). However, the Service has indicated in Revenue Ruling 76-385 that a
minority stockholder (I.E., a holder who exercises no control over corporate
affairs and whose proportionate stock interest is minimal in relation to the
number of shares outstanding) generally is treated as having had a "meaningful
reduction" in interest if a cash payment reduces such holder's actual and
constructive stock ownership to any extent.
With regard to Financial Security stockholders who receive Pinnacle Common
Stock and cash in the Merger, the determination of whether a cash payment has
the effect of a distribution of a dividend will be made as if the Financial
Security Common Stock exchanged for cash in the Merger had instead been
exchanged in the Merger for shares of Pinnacle Common Stock followed immediately
by a redemption of such shares by Pinnacle for the cash payment (a "deemed
Pinnacle redemption"). Under this analysis, the determination of whether a cash
payment qualifies as a substantially disproportionate reduction of interest or
is not essentially equivalent to a dividend will be made by comparing (i) the
stockholder's actual and constructive stock interest in Pinnacle before the
deemed Pinnacle redemption (determined as if such stockholder had received
solely Pinnacle Common Stock in the Merger) with (ii) such stockholder's actual
and constructive stock interest in Pinnacle after the deemed Pinnacle
redemption.
With regard to Financial Security stockholders who receive only cash (i) in
exchange for shares of Financial Security Common Stock pursuant to the Merger,
or (ii) as a result of the exercise of appraisal rights, Muldoon has noted in
its opinion that many tax practitioners believe that the determination of
whether a cash payment has the effect of a distribution of a dividend should be
made in accordance with the deemed Pinnacle redemption analysis discussed above;
i.e., as if the Financial Security Common Stock exchanged for cash in the Merger
had instead been exchanged in the Merger for shares of Pinnacle Common Stock
followed immediately by a redemption of such shares by Pinnacle for the cash
payment. However, under the traditional analysis, which apparently continues to
be used by the Service, Section 302 of the Code will apply as though the cash
payment were made by Financial Security in a hypothetical redemption of
Financial Security Common Stock immediately prior to, and in a transaction
separate from, the Merger (a "deemed Financial Security redemption").
Accordingly, under the traditional analysis, the determination of whether a cash
payment results in a complete REDEMPTION of interest, qualifies as a
substantially disproportionate reduction of interest or is not essentially
equivalent to a dividend will be made by comparing (x) the stockholder's actual
and constructive stock interest in Financial Security before the deemed
Financial Security redemption, with (y) such stockholder's actual and
constructive stock interest in Financial Security after the deemed Financial
Security redemption (but before the Merger). The law is unclear regarding
whether the approach of the Service is correct, and Muldoon has rendered no
opinion on the correctness of the Service's approach. Muldoon has noted in its
opinion that because the traditional analysis, as applied by the Service, is
more likely to result in DIVIDEND TREATMENT than the deemed Pinnacle redemption
analysis, each Financial Security stockholder who receives solely cash in
exchange for all of the Financial Security Common Stock he or she actually owns
should discuss with his or her tax advisor which analysis is applicable.
The determination of ownership for purposes of the three foregoing tests
will be made by taking into account both shares owned actually by such
stockholder and shares owned constructively by such stockholder pursuant to
Section 318 of the Code. Under Section 318 of the Code, a stockholder will be
deemed to own stock that is actually or constructively owned by certain members
of his or her family (spouse, children, grandchildren and parents) and other
related parties including, for example, certain entities in which such
stockholder has a direct or indirect interest (including partnerships, estates,
trusts and corporations), as well as shares of stock that such stockholder (or
related person) has the right to acquire upon exercise of an option or
conversion right. Section 302(c)(2) of the Code provides certain exceptions to
the family attribution rules for the purpose of determining whether a complete
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redemption of a stockholder's interest has occurred for purposes of Section 302
of the Code. These exceptions apply only to Financial Security stockholders who
receive, in the Merger, solely cash in return for the Financial Security Common
Stock they actually own.
BECAUSE THE DETERMINATION OF WHETHER A PAYMENT WILL BE TREATED AS HAVING THE
EFFECT OF THE DISTRIBUTION OF A DIVIDEND WILL GENERALLY DEPEND UPON THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH FINANCIAL SECURITY STOCKHOLDER,
FINANCIAL SECURITY STOCKHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF CASH RECEIVED IN THE MERGER.
Each Financial Security stockholder's ability to elect the type of
consideration he or she receives pursuant to the Merger affords each such
stockholder the opportunity to select that type of consideration which will best
serve his or her personal tax and financial planning needs. However, each
Financial Security stockholder should be aware that his or her ability to
satisfy (or, alternatively, fail to satisfy) any of the foregoing tests and
thereby avoid (or, alternatively, obtain) dividend treatment may be affected by
any redesignation of the stockholder's election by the Exchange Agent.
Each party's obligation to consummate the Merger is subject to the condition
that it shall have received from Muldoon an opinion to the effect that the tax
consequences of the Merger will in all material respects be as described in this
section and that such opinion shall not have been withdrawn. Such opinion is
subject to the conditions and assumptions stated therein and relies upon various
representations made by Pinnacle, Financial Security and certain stockholders of
Financial Security. The opinion is attached as an exhibit to the Registration
Statement and copies of the opinion will be available, without charge, to
Pinnacle and Financial Security stockholders upon written request. An opinion of
counsel, unlike a private letter ruling from the Service, has no binding effect
on the Service. The Service could take a position contrary to the opinion of
Muldoon and, if the matter is litigated, a court may reach a decision contrary
to the opinion. The Service is not expected to issue a ruling on the tax
consequences of the Merger, and no such ruling has been requested.
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS
AND CIRCUMSTANCES OF EACH FINANCIAL SECURITY STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE
FOREGOING DISCUSSION MAY NOT APPLY TO EACH FINANCIAL SECURITY STOCKHOLDER.
The following represents a summary of the opinion of Muldoon of the material
federal income tax consequences of the Merger to Pinnacle, Financial Security
and holders of Financial Security Common Stock. The discussion is based upon the
Code, regulations promulgated by the United States Treasury Department, rulings
of the Service and judicial and administrative decisions in effect as of the
date hereof, all of which are subject to change at any time, possibly with
retroactive effect. This summary assumes that shares of Financial Security
Common Stock are held as "capital assets" within the meaning of Section 1221 of
the Code (i.e., property generally held for investment). In addition, this
summary does not address all of the tax consequences that may be relevant to a
holder of Financial Security Common Stock in light of such holder's particular
circumstances or to holders subject to special rules, such as foreign persons,
financial institutions, tax-exempt organizations or insurance companies. In
addition, this discussion does not address the tax consequences to holders of
options under the Financial Security stock option plans or to holders of
Financial Security Common Stock who received such stock as compensation. The
opinion of counsel referred to in this section will be based on facts existing
at the date hereof and at the Effective Time and, in rendering the opinion of
counsel referred to in this section, such counsel assumes the absence of changes
in existing facts and will require and rely upon representations contained in
certificates of officers of Pinnacle, Financial Security and others.
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HOLDERS OF FINANCIAL SECURITY COMMON STOCK SHOULD CONSULT THEIR TAX ADVISERS
AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
If the Merger occurs in accordance with the Merger Agreement, the Merger
will constitute a "reorganization" for federal income tax purposes under Section
368(a) of the Code, with the following federal income tax consequences:
(1) Financial Security stockholders who receive solely shares of
Pinnacle Common Stock in exchange for their Financial Security Common Stock
pursuant to the Merger will recognize no gain or loss, except with respect
to cash received in lieu of fractional shares, if any, as discussed below.
(2) A Financial Security stockholder who receives only cash (i) in
exchange for shares of Financial Security Common Stock pursuant to the
Merger, or (ii) as a result of the exercise of appraisal rights, will
realize gain or loss for federal income tax purposes (determined separately
as to each block of Financial Security Common Stock exchanged) in an amount
equal to the difference between (x) the amount of cash received by such
stockholder, and (y) such stockholder's tax basis for the shares of
Financial Security Common Stock surrendered in exchange therefor, provided
that the cash payment does not have the effect of the distribution of a
dividend. Any such gain or loss will be recognized for federal income tax
purposes and will be treated as capital gain or loss. However, if the cash
payment does have the effect of the distribution of a dividend, the amount
of taxable income recognized generally will equal the amount of cash
received; such income generally will be taxable as a dividend; and no loss
(or other recovery of such stockholder's tax basis for the shares of
Financial Security Common Stock surrendered in the exchange) generally will
be recognized by such stockholder. The determination of whether a cash
payment has the effect of the distribution of a dividend will be made
pursuant to the provisions and limitations of Section 302 of the Code,
taking into account the constructive stock ownership rules of Section 318 of
the Code. See "-- Impact of Section 302 of the Code," above.
(3) A Financial Security stockholder who receives shares of Pinnacle
Common Stock and cash in exchange for shares of Financial Security Common
Stock in the Merger will realize a gain (determined separately as to each
block of Financial Security Common Stock exchanged) if (i) the sum of the
amount of cash and the fair market value of the shares of Pinnacle Common
Stock received by such stockholder exceeds (ii) such stockholder's tax basis
for the shares of Financial Security Common Stock surrendered in exchange
therefor. The amount of such gain that is recognized for federal income tax
purposes will be limited to the amount of cash received. If the amount of
cash received exceeds the amount of gain realized, only the amount of gain
realized will be recognized for federal income tax purposes. Any such gain
recognized will be taxable as capital gain, provided that the cash payment
does not have the effect of the distribution of a dividend. Any loss
realized will not be recognized for federal income tax purposes. Under
section 356 of the Code, the determination of whether a cash payment has the
effect of the distribution of a dividend generally will be made in
accordance with the provisions and limitations of Section 302 of the Code,
taking into account the constructive stock ownership rules of Section 318 of
the Code. See "-- Impact of Section 302 of the Code" above.
(4) The aggregate adjusted tax basis of the shares of Pinnacle Common
Stock received by each Financial Security stockholder in the Merger
(including any fractional share of Pinnacle Common Stock deemed to be
received, as described in paragraph (6) below), will be equal to the
aggregate adjusted tax basis of the shares of Financial Security Common
Stock surrendered, decreased by the amount of any cash received and
increased by the amount of any gain (or dividend) recognized.
51
<PAGE>
(5) The holding period of the shares of Pinnacle Common Stock (including
any fractional share of Pinnacle Common Stock deemed to be received, as
described in paragraph (6) below) will include the holding period of the
shares of Financial Security Common Stock exchanged therefor.
(6) A Financial Security stockholder who receives cash in the Merger in
lieu of a fractional share of Pinnacle Common Stock will be treated as if
the fractional share had been received in the Merger and then redeemed by
Pinnacle in return for the cash. The receipt of such cash will cause the
recipient to recognize capital gain or loss equal to the difference between
the amount of cash received and the portion of such holder's adjusted tax
basis in the shares of Pinnacle Common Stock allocable to the fractional
share.
CERTAIN DIFFERENCES IN RIGHTS OF STOCKHOLDERS
Upon completion of the Merger, stockholders of Financial Security who
receive shares of Pinnacle Common Stock in exchange for Financial Security
Common Stock will become stockholders of Pinnacle and their rights as such will
be governed by Pinnacle's Articles of Incorporation and By-laws, and will be
governed by Illinois law. The rights of stockholders of Pinnacle are different
in certain respects from the rights of stockholders of Financial Security. For a
summary of these differences, see "COMPARATIVE RIGHTS OF STOCKHOLDERS."
COMMON STOCK LISTING
Pinnacle has agreed to cause the shares of Pinnacle Common Stock to become
listed on the Nasdaq National Market including the shares to be issued in the
Merger. The obligation of each of Pinnacle and Financial Security to consummate
the Merger is subject to the approval of trading on the Nasdaq National Market
of the shares of Pinnacle Common Stock. See "RISK FACTORS."
52
<PAGE>
PRO FORMA CAPITALIZATION (UNAUDITED)
The following table sets forth, in thousands, as of March 31, 1996, the pro
forma capitalization of Pinnacle upon completion of the Merger assuming the
issuance of 1,456,362 common shares of Pinnacle, or 100% of the purchase price.
This table should be read in conjunction with the financial statements and notes
thereto which appear elsewhere herein. The table assumes that the Merger was
consummated on March 31, 1996.
Maximum Amount of Pinnacle Shares Issued:
<TABLE>
<CAPTION>
PINNACLE FINANCIAL PRO FORMA PINNACLE
PRE-PURCHASE SECURITY ADJUSTMENTS POST-PURCHASE
------------ --------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable.......................................... $ 20,700 $ -0- $ -0- $ 20,700
------------ --------- ------------ -------------
------------ --------- ------------ -------------
Stockholders' equity:
Preferred Stock
1,000 shares authorized, none issued................. -0- -0- -0- -0-
Common stock, $4.69 par value.......................... 20,410 18 6,827A 27,237
20,000,000 shares authorized (19)B
Pre-merger: 1C
4,354,138 issued and outstanding
Pro forma:
5,810,500 issued and outstanding
Surplus................................................ 18,001 16,730 40,323A 58,324
(18,039)B
1,309C
Retained earnings...................................... 32,987 27,536 (27,536)B 32,987
Treasury stock......................................... -0- (3,826) 3,826B -0-
Benefit plans, net..................................... -0- (892) 892B -0-
Unrealized gains in securities available for sale, net
of deferred taxes..................................... 6,537 (194) -0- 6,343
------------ --------- ------------ -------------
Total stockholders' equity......................... $ 77,935 $ 39,372 $ 7,584 $ 124,891
------------ --------- ------------ -------------
------------ --------- ------------ -------------
</TABLE>
- ------------------------
[A] Issuance of 1,456,362 shares of common stock at $32.375 per share
representing 100% of the purchase price of $47,150,000.
[B] Elimination of Financial Security equity accounts in accordance with the
purchase method of accounting.
[C] Exercise of 131,039 Financial Security stock options at $10 per share.
53
<PAGE>
PRO FORMA CAPITALIZATION (UNAUDITED)
The following table sets forth, in thousands, as of March 31, 1996, the pro
forma capitalization of Pinnacle upon completion of the Merger assuming the
issuance of 800,999 common shares of Pinnacle, or 55% of the purchase price.
This table should be read in conjunction with the financial statements and notes
thereto which appear elsewhere herein. The table assumes that the Merger was
consummated on March 31, 1996.
Minimum Amount of Pinnacle Shares Issued:
<TABLE>
<CAPTION>
PINNACLE FINANCIAL PRO FORMA PINNACLE
PRE-PURCHASE SECURITY ADJUSTMENTS POST-PURCHASE
------------ --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable........................................... $ 20,700 $ -0- $ 5,017C $ 25,717
------------ --------- ------------- -------------
------------ --------- ------------- -------------
Stockholders' equity:
Preferred Stock
1,000 shares authorized, none issued.................. -0- -0- -0- -0-
Common stock, $4.69 par value........................... 20,410 18 3,755A 24,165
20,000,000 shares authorized (19)B
Pre-merger: 1D
4,354,138 issued and outstanding
Pro forma:
5,155,137 issued and outstanding
Surplus................................................. 18,001 16,730 22,178A 40,179
(18,039)B
1,309D
Retained earnings....................................... 32,987 27,536 (27,536)B 32,987
Treasury stock.......................................... -0- (3,826) 3,826B -0-
Benefit plans, net...................................... -0- (892) 892B -0-
Unrealized gains in securities available for sale, net
of deferred taxes...................................... 6,537 (194) -0- 6,343
------------ --------- ------------- -------------
Total stockholders' equity.......................... $ 77,935 $ 39,372 $ (13,633) $ 103,674
------------ --------- ------------- -------------
------------ --------- ------------- -------------
</TABLE>
- ------------------------
[A] Issuance of 800,999 shares of common stock at $32.375 per share representing
55% of the purchase price of $47,150,000.
[B] Elimination of Financial Security equity accounts in accordance with the
purchase method of accounting.
[C] Additional debt to be incurred by Pinnacle for a part of the cash portion of
the purchase price. The cash portion of the purchase price is estimated to
be $21,217,000, in which the remaining portion not funded by debt will be
funded by a special dividend and excess cash. See Notes to Pro Forma
Statements.
[D] Exercise of 131,039 Financial Security stock options at $10 per share.
54
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma consolidated statements of condition as of
March 31, 1996 and the unaudited pro forma condensed consolidated statements of
income for the three months ended March 31, 1996 and for the year ended December
31, 1995 have been prepared to reflect the proposed Merger between Pinnacle and
Financial Security as if the Merger had occurred on January 1, 1995
after giving effect to the pro forma adjustments described in the Notes to Pro
Forma Statements, which are based on estimates made for the purpose of preparing
these pro forma financial statements. The total Merger Consideration, the number
of shares of Pinnacle Common Stock issued, the amount of cash payments to
Financial Security stockholders, debt financing needed, cost recorded in excess
of fair value of net assets acquired, pro forma earnings per share, and book
value per share could vary based on changes in the Pinnacle Average Stock Price.
The actual adjustments to the accounts of Financial Security will be made on the
basis of more exact appraisals and evaluations that will be made as of the
effective date of the transaction and may, therefore, differ from those
reflected in these pro forma financial statements. In the opinion of Pinnacle's
management, the estimates used in the preparation of these pro forma financial
statements are reasonable under the circumstances. If the Merger is consummated
as described above, the transaction will be accounted for as a purchase.
Accordingly, the consolidated results of operations of Financial Security and
Pinnacle will be included in the consolidated financial statements of Pinnacle
for periods subsequent to the Effective Time of the Merger.
These pro forma financial statements should be read in conjunction with the
historical financial statements and related notes of Pinnacle and Financial
Security presented elsewhere in the Joint Proxy Statement/Prospectus. The
unaudited pro forma consolidated statements of condition at March 31, 1996 are
not necessarily indicative of the combined financial position had the
transaction been effective at March 31, 1996. The unaudited pro forma
consolidated statements of income are not necessarily indicative of either the
results of operations that would have occurred had the Merger been effective at
the beginning of each period or of the future results of operations of Pinnacle.
55
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEAR
ENDED ENDED
Maximum Amount of Pinnacle Shares Issued: [A] MARCH 31, 1996 DECEMBER 31, 1995
------------------- -----------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C>
Earnings:
Net interest income.................................................... $ 7,917 $ 35,847
Provision for loan losses.............................................. 75 100
Net income............................................................. 1,962 13,998
Net income per share -- fully diluted.................................. 0.34 2.38
Balance Sheet: (end of period)
Total assets........................................................... $ 1,089,920
Loans, net of unearned income.......................................... 510,901
Deposits............................................................... 892,441
Notes payable.......................................................... 20,700
Stockholders' equity................................................... 124,891
Common shares issued and outstanding................................... 5,811
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEAR
ENDED ENDED
Minimum Amount of Pinnacle Shares Issued: [B] MARCH 31, 1996 DECEMBER 31, 1995
------------------- -----------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C>
Earnings:
Net interest income.................................................... $ 7,618 $ 34,502
Provision for loan losses.............................................. 75 100
Net income............................................................. 1,756 13,111
Net income per share -- fully diluted.................................. 0.34 2.51
Balance Sheet: (end of period)
Total assets........................................................... $ 1,073,720
Loans, net of unearned income.......................................... 510,901
Deposits............................................................... 892,441
Notes payable.......................................................... 25,717
Stockholders' equity................................................... 103,674
Common shares issued and outstanding................................... 5,155
</TABLE>
- ------------------------
[A] Assumes maximum amount of Pinnacle shares issued, or 100% of the purchase
price of $47,150,000 which equates to 1,456,362 shares at $32.375 per share.
[B] Assumes minimum amount of Pinnacle shares issued, or 55% of the purchase
price of $47,150,000 which equates to 800,999 shares at $32.375 per share.
56
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
AT MARCH 31, 1996
MAXIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
PINNACLE FINANCIAL PRO FORMA PINNACLE
PRE-PURCHASE SECURITY ADJUSTMENTS POST- PURCHASE
------------ ----------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks............................ $ 24,012 $ 794 $ 1,310D $ 26,116
Federal funds sold................................. 2,900 2,900
Interest-bearing deposits.......................... 2,747 9,508 12,255
Securities......................................... 422,362 58,576 480,938
Loans.............................................. 318,032 190,561 2,308D 510,901
Less: allowance for loan losses.................... (6,040) (2,342) (8,382)
------------ ----------- ---------------- -------------
Net loans........................................ 311,992 188,219 2,308 502,519
PMSRs.............................................. 9,033 9,033
Premises and equipment............................. 16,516 3,086 (1,850)D 17,752
Goodwill and other intangibles..................... 18,706 6,698D 25,404
Other assets....................................... 8,254 4,749 13,003
------------ ----------- ---------------- -------------
Total............................................ $ 807,489 $ 273,965 $ 8,466 $ 1,089,920
------------ ----------- ---------------- -------------
------------ ----------- ---------------- -------------
Liabilities:
Deposits........................................... $ 703,392 $ 189,049 $ 892,441
Borrowed funds..................................... 41,500 41,500
Notes payable...................................... 20,700 20,700
Other liabilities.................................. 5,462 4,044 $ (218)D 10,388
1,100E,D
------------ ----------- ---------------- -------------
Total liabilities................................ 729,554 234,593 882 965,029
------------ ----------- ---------------- -------------
Stockholders' equity:
Common stock....................................... 20,410 18 (19)G 27,237
6,827A
1D
Additional paid-in capital......................... 18,001 16,730 (18,039)G 58,324
40,323A
1,309D
Retained earnings.................................. 32,987 27,536 (27,536)G 32,987
Treasury stock..................................... (3,826) 3,826G -0-
Employee benefit plans............................. (892) 892G -0-
Unrealized gain (loss) on securities available for
sale.............................................. 6,537 (194) 6,343
------------ ----------- ---------------- -------------
Total stockholders' equity....................... 77,935 39,372 7,584 124,891
------------ ----------- ---------------- -------------
Total............................................ $ 807,489 $ 273,965 $ 8,466 $ 1,089,920
------------ ----------- ---------------- -------------
------------ ----------- ---------------- -------------
</TABLE>
See notes to pro forma statements.
57
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
AT MARCH 31, 1996
MINIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
PINNACLE FINANCIAL PRO FORMA PINNACLE
PRE-PURCHASE SECURITY ADJUSTMENTS POST- PURCHASE
------------ ----------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks............................ $ 24,012 $ 794 $ 1,310D $ 26,116
8,000B
(21,217)B
8,200B
5,017B
Federal funds sold................................. 2,900 2,900
Interest-bearing deposits.......................... 2,747 9,508 (6,100)B 6,155
Securities......................................... 422,362 58,576 (10,100)B 470,838
Loans.............................................. 318,032 190,561 2,308D 510,901
Less: allowance for loan losses.................... (6,040) (2,342) (8,382)
------------ ----------- ---------------- -------------
Net loans........................................ 311,992 188,219 2,308 502,519
PMSRs.............................................. 9,033 9,033
Premises and equipment............................. 16,516 3,086 (1,850)D 17,752
Goodwill and other intangibles..................... 18,706 6,698D 25,404
Other assets....................................... 8,254 4,749 13,003
------------ ----------- ---------------- -------------
Total............................................ $ 807,489 $ 273,965 $ (7,734) $ 1,073,720
------------ ----------- ---------------- -------------
------------ ----------- ---------------- -------------
Liabilities:
Deposits........................................... $ 703,392 $ 189,049 $ 892,441
Borrowed funds..................................... 41,500 41,500
Notes payable...................................... 20,700 $ 5,017B 25,717
Other liabilities.................................. 5,462 4,044 (218)D 10,388
1,100E,D
------------ ----------- ---------------- -------------
Total liabilities................................ 729,554 234,593 5,899 970,046
------------ ----------- ---------------- -------------
Stockholders' Equity:
Common stock....................................... 20,410 18 (19)G 24,165
3,755A
1D
Additional paid-in capital......................... 18,001 16,730 (18,039)G 40,179
22,178A
1,309D
Retained earnings.................................. 32,987 27,536 (27,536)G 32,987
Treasury stock..................................... (3,826) 3,826G 0
Employee benefit plans............................. (892) 892G 0
Unrealized gain (loss) on securities available for
sale.............................................. 6,537 (194) 6,343
------------ ----------- ---------------- -------------
Total stockholders' equity....................... 77,935 39,372 (13,633) 103,674
------------ ----------- ---------------- -------------
Total............................................ $ 807,489 $ 273,965 $ (7,734) $ 1,073,720
------------ ----------- ---------------- -------------
------------ ----------- ---------------- -------------
</TABLE>
See notes to pro forma statements.
58
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
MAXIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
FINANCIAL PRO FORMA PINNACLE
PINNACLE SECURITY ADJUSTMENTS POST-PURCHASE
--------- ----------- ------------- -------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................................... $ 12,306 $ 5,081 $ (72)F $ 17,315
Interest expense.............................................. 6,415 2,983 9,398
--------- ----------- ------ -------------
Net interest income......................................... 5,891 2,098 (72) 7,917
Provision for loan losses..................................... -0- 75 75
--------- ----------- ------ -------------
Net interest income after provision for loan losses......... 5,891 2,023 (72) 7,842
Other operating income........................................ 1,761 484 2,245
Net securities gains.......................................... 264 -0- 264
Other operating expense....................................... 5,665 1,771 112F 7,536
(12)F
--------- ----------- ------ -------------
Income before income taxes.................................... 2,251 736 (172) 2,815
Provision (benefit) for income taxes.......................... 694 188 (29)I 853
--------- ----------- ------ -------------
NET INCOME.................................................... $ 1,557 $ 548 $ (143) $ 1,962
--------- ----------- ------ -------------
--------- ----------- ------ -------------
Earnings per share:
Fully diluted............................................... $ 0.36 $ 0.35 $ 0.34
Weighted average number of shares outstanding:
Fully diluted............................................... 4,382 1,579 5,838
</TABLE>
MINIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
FINANCIAL PRO FORMA PINNACLE
PINNACLE SECURITY ADJUSTMENTS POST-PURCHASE
--------- ----------- ------------- -------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................................... $ 12,306 $ 5,081 $ (72)F $ 17,103
(212)H
Interest expense.............................................. 6,415 2,983 87C 9,485
--------- ----------- ------ -------------
Net interest income......................................... 5,891 2,098 (371) 7,618
Provision for loan losses..................................... 0 75 75
--------- ----------- ------ -------------
Net interest income after provision for loan losses......... 5,891 2,023 (371) 7,543
Other operating income........................................ 1,761 484 2,245
Net securities gains.......................................... 264 0 264
Other operating expense....................................... 5,665 1,771 112F 7,536
(12)F
--------- ----------- ------ -------------
Income before income taxes.................................. 2,251 736 (471) 2,516
Provision (benefit) for income taxes.......................... 694 188 (122)I 760
--------- ----------- ------ -------------
NET INCOME.................................................... $ 1,557 $ 548 $ (349) $ 1,756
--------- ----------- ------ -------------
--------- ----------- ------ -------------
Earnings per share:
Fully diluted............................................... $ 0.36 $ 0.35 $ 0.34
Weighted average number of shares outstanding:
Fully diluted............................................... 4,382 1,579 5,183
</TABLE>
See notes to pro forma statements.
59
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
MAXIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
FINANCIAL PRO FORMA PINNACLE
PINNACLE SECURITY ADJUSTMENTS POST-PURCHASE
--------- --------- ------------- -------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.............................................. $ 53,297 $ 21,235 (289)F $ 74,243
Interest expense............................................. 25,739 12,657 38,396
--------- --------- ------ -------------
Net interest income........................................ 27,558 8,578 (289) 35,847
Provision for loan losses.................................... 100 100
--------- --------- ------ -------------
Net interest income after provision for loan losses........ 27,558 8,478 (289) 35,747
Other operating income....................................... 7,225 989 8,214
Net securities gains......................................... 4,731 152 4,883
Other operating expense...................................... 23,882 7,039 447F 31,321
(47)F
--------- --------- ------ -------------
Income before income taxes................................. 15,632 2,580 (689) 17,523
Provision (benefit) for income taxes......................... 3,139 468 (82)I 3,525
--------- --------- ------ -------------
NET INCOME................................................... $ 12,493 $ 2,112 $ (607) $ 13,998
--------- --------- ------ -------------
--------- --------- ------ -------------
Earnings per share:
Fully diluted.............................................. $ 2.83 $ 1.33 $ 2.38
Weighted average number of shares outstanding:
Fully diluted.............................................. 4,419 1,587 5,875
</TABLE>
MINIMUM AMOUNT OF PINNACLE SHARES ISSUED
<TABLE>
<CAPTION>
FINANCIAL PRO FORMA PINNACLE
PINNACLE SECURITY ADJUSTMENTS POST-PURCHASE
--------- --------- ------------ -------------
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.............................................. $ 53,297 $ 21,235 $ (289)F $ 73,282
(961)H
Interest expense............................................. 25,739 12,657 384C 38,780
--------- --------- ------------ -------------
Net interest income........................................ 27,558 8,578 (1,634) 34,502
Provision for loan losses.................................... 100 100
--------- --------- ------------ -------------
Net interest income after provision for loan losses........ 27,558 8,478 (1,634) 34,402
Other operating income....................................... 7,225 989 8,214
Net securities gains......................................... 4,731 152 4,883
Other operating expense...................................... 23,882 7,039 447F 31,321
(47)F
--------- --------- ------------ -------------
Income before income taxes................................. 15,632 2,580 (2,034) 16,178
Provision (benefit) for income taxes......................... 3,139 468 (540)I 3,067
--------- --------- ------------ -------------
NET INCOME................................................... $ 12,493 $ 2,112 $ (1,494) $ 13,111
--------- --------- ------------ -------------
--------- --------- ------------ -------------
Earnings per share:
Fully diluted.............................................. $ 2.83 $ 1.33 $ 2.51
Weighted average number of shares outstanding:
Fully diluted.............................................. 4,419 1,587 5,220
</TABLE>
See notes to pro forma statements.
60
<PAGE>
NOTES TO PRO FORMA STATEMENTS
The Merger will be accounted for as a purchase and certain adjustments will have
to be made with respect to the acquired assets and liabilities and related
income and expenses of Pinnacle based on estimated fair market values. The pro
forma adjustments contained in the Pro Forma Consolidated Financial Statements
represent preliminary adjustments. The actual adjustments will be made on the
basis of appraisals and evaluations as of the Effective Date and these
adjustments are not expected to differ materially from the pro forma
information.
The Pro Forma Consolidated Financial Statements have been prepared based on
the maximum and the minimum amount of Pinnacle shares which could be issued in
the Merger.
[A] The maximum amount of Pinnacle common stock, $4.69 par value, which
could be issued in the Merger is 1,456,362 shares, or 100% of the
purchase price of $47,149,720 at a value of $32.375 per share. The
minimum amount of Pinnacle common stock which could be issued in the
Merger is 800,999 shares, or 55% of the purchase price.
[B] The maximum amount of cash (corresponding to the minimum amount of
shares issued) is approximately $21,217,000, or 45% of the purchase
price. Cash to be paid to Financial Security's shareholders will be
incurred as follows:
1. Conversion of certain of Security Federal's securities to fund an
$8,000,000 special dividend to Pinnacle.
2. Use of excess cash in the form of interest-bearing deposits and
securities at Financial Security, in the amount of $8,200,000.
3. The remaining portion will be incurred as debt to Pinnacle in the
amount of $5,017,000.
Securities converted will total $10,100,000 and interest-bearing
deposits used will total $6,100,000.
[C] Pro forma interest expense on the debt incurred has been calculated
based on the average LIBOR rate on similar acquisition debt of Pinnacle
of 6.89% for the first three months of 1996 and 7.65% for 1995.
[D] The following table sets forth the allocation of the excess purchase
price to the specific assets acquired:
<TABLE>
<S> <C>
Total purchase price.................................. $47,150,000
March 31, 1996 equity of Financial Security, net of
SFAS No. 115 adjustment of $(194,000)................ 39,566,000
Exercise of 131,039 Financial Security stock options
at $10 per share..................................... 1,310,000
-----------
Adjusted Financial Security equity.................. 40,876,000
-----------
Excess of purchase price over adjusted equity......... 6,274,000
Plus adjustments to reflect assets at fair value:
Termination benefits.................................. (1,100,000)
Land and buildings.................................... (1,850,000)
Real estate mortgages................................. 2,308,000
-----------
(642,000)
Deferred Taxes........................................ 218,000
-----------
Net................................................... (424,000)
-----------
Excess of cost over fair value of net assets acquired
(goodwill)........................................... $ 6,698,000
-----------
-----------
</TABLE>
61
<PAGE>
NOTES TO PRO FORMA STATEMENTS (CONTINUED)
[E] In accordance with the Emerging Issues Task Force ("EITF") Abstract
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination, costs for the voluntary employee termination
benefits and relocation costs could be assumed by Pinnacle as of the date
of the purchase, and therefore included in the allocation of the
acquisition. These amounts are estimated to be $1,100,000 at this time
and the actual amount, which could differ materially, will be determined
as soon as possible after consummation date in accordance with EITF No.
95-3 and accrued within the appropriate time period.
[F] The amortization of goodwill and other purchase accounting adjustments
is as follows:
<TABLE>
<CAPTION>
ESTIMATED LIFE ANNUAL
(YEARS) AMORTIZATION
--------------- ------------
<S> <C> <C>
Real estate mortages........................... 8 $ 289,000
Land and Buildings............................. 39 (47,000)
Goodwill....................................... 15 447,000
------------
$ 689,000
------------
------------
</TABLE>
[G] Elimination of Financial Security equity accounts is made in accordance
with the purchase method of accounting.
[H] Reflects a reduction in interest income on interest-bearing deposits and
securities of $339,000 and $622,000, respectively, to (i) fund an
$8,000,000 special dividend from Security Federal to Pinnacle and (ii)
the use of excess interest-bearing deposits and securities of $8,200,000
at the parent company only level of Financial Security to fund a part of
the cash portion of the purchase price.
[I] Represents the tax effect at a rate of 34% of the purchase accounting
adjustments, the interest expense which would result from additional
debt, and reduction in interest income on interest-bearing deposits and
securities.
62
<PAGE>
BUSINESS OF PINNACLE
Pinnacle is a multi-bank holding company registered under the BHC Act and a
savings and loan holding company under HOLA, and is engaged in the business of
banking through the ownership of subsidiary banks. At March 31, 1996, Pinnacle
had total consolidated assets of $807,498,000, total loans of $318,032,000,
total deposits of $703,392,000, and total stockholders' equity of $77,935,000.
Pinnacle has twelve banking locations in the metropolitan areas of Chicago and
Quad-Cities, Illinois.
Pinnacle, formerly First Cicero Banc Corporation ("FCBC") was organized
under the laws of the State of Illinois on August 24, 1979 for the purpose of
acquiring the First National Bank of Cicero (the "Cicero Bank"). On April 30,
1988, Pinnacle merged (the "1988 Merger") with First Harvey Banc Corporation
("FHBC"), parent company of First National Bank in Harvey (the "Harvey Bank")
and LaGrange Park Banc Corporation ("LPBC"), parent company of Bank of LaGrange
Park (the "LaGrange Park Bank"). FHBC and LPBC were affiliated with FCBC through
common ownership. In connection with the 1988 Merger, the name of Pinnacle was
changed to its present name.
Since the 1988 Merger, SBH Corp., parent company of Bank of Silvis (the
"Silvis Bank"), was merged into Pinnacle on September 29, 1989. The Berwyn
National Bank (the "Berwyn Bank") was purchased on February 1, 1992. The Henry
County Bank was purchased on March 27, 1992. Batavia Financial Corporation,
parent company of Pinnacle Bank, F.S.B. ("Pinnacle Savings"), was merged into
Pinnacle on December 31, 1992.
On December 7, 1992, the Silvis Bank merged with the Henry County Bank with
the resulting bank named Pinnacle Bank of the Quad-Cities ("Quad-Cities Bank").
On July 9, 1993, the Cicero Bank, Harvey Bank and Berwyn Bank were merged with
and into the LaGrange Park Bank with the resultant bank named Pinnacle Bank. On
January 6, 1995, Acorn Financial Corp. ("AFC") and its subsidiary bank, Suburban
Trust & Savings Bank ("STSB") were purchased. AFC was liquidated into Pinnacle
and STSB was merged into Pinnacle Bank.
Pinnacle owns one hundred percent (100%) of the common stock of Pinnacle
Bank, Quad-Cities Bank and Pinnacle Savings. Pinnacle is a legal entity separate
and distinct from Pinnacle Subsidiary Banks. The major source of Pinnacle's
revenues is dividends from the Pinnacle Subsidiary Banks.
Pinnacle Bank and Quad-Cities Bank are full service commercial banks
encompassing most of the usual functions of commercial and savings banking
including commercial, consumer, and real estate lending; installment credit
lending; collections; safe deposit operations; and other services tailored for
individual customer needs. The banks also offer a full range of deposit services
to individuals and businesses which include demand, savings and time deposits,
as well as providing trust services to customers. Pinnacle Bank provides
nondeposit-based products, including mutual funds and annuities through
affiliation with an independent broker.
Pinnacle Bank, a state banking corporation organized under the laws of
Illinois, was formed on July 9, 1993 through the merger of the Cicero Bank,
Harvey Bank and Berwyn Bank with and into the LaGrange Park Bank. The Cicero
Bank was originally organized in 1921, the Harvey Bank in 1937, the Berwyn Bank
in 1937 and the LaGrange Park Bank in 1962. The Bank's main office is located in
Cicero, Illinois, with full service branches in Harvey, Berwyn, Oak Park,
LaGrange Park and Westmont and limited service facilities in Cicero and North
Riverside. At March 31, 1996, the Bank had total assets of $614 million.
The Quad-Cities Bank was organized as a state banking corporation with the
name Bank of Silvis under the laws of the State of Illinois in 1950. On December
7, 1992, The Henry County Bank, organized as a state banking corporation under
the laws of the State of Illinois in 1968, was merged with and into Bank of
Silvis and the name of the merged entity was changed to Pinnacle Bank of the
Quad-Cities. Pinnacle Bank of the Quad Cities main office is located in Silvis,
Illinois, with a full service branch located in Green Rock, Illinois. Each
community is part of the Quad-Cities area of Illinois. At March 31, 1996,
Pinnacle Bank of the Quad Cities had total assets of $106 million.
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Pinnacle Savings is a federally-chartered savings bank which is principally
engaged in the business of attracting savings and other funds from the general
public and investing these funds, principally by originating residential
mortgage loans and investing in investment grade securities. In addition to
residential mortgage loans, Pinnacle Savings makes commercial, consumer and
installment loans. The bank offers a full range of deposit services including
demand, savings and time deposits.
Pinnacle Savings was originally organized as an Illinois state chartered
savings and loan association in 1909. Pinnacle Savings converted to a federal
mutual charter in 1983. Pinnacle Savings amended its charter in August, 1990 in
connection with the conversion from a mutual thrift to a federal stock savings
bank and changed its name to Batavia Savings Bank, F.S.B. from Batavia Savings
and Loan. Pinnacle Savings' main office is located in Batavia, Illinois with a
full service branch located in Elburn. Currently, Pinnacle Savings is leasing
its previously owned branch in Elburn. A new Elburn branch opened in June 1996.
At March 31, 1996, Pinnacle Savings had total assets of $68 million.
Pinnacle continually seeks acquisition opportunities with other financial
institutions in which it may pay cash or issue shares of Pinnacle Common Stock
or other equity securities. As of the date of this Joint Proxy
Statement/Prospectus, Pinnacle has no present agreements or understandings to
acquire or merge with any other businesses.
Additional information concerning Pinnacle is incorporated by reference
herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
PINNACLE'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
NET INCOME
Consolidated net income was $1,557,000, or $0.36 per share, on a fully
diluted basis for the three months ended March 31, 1996 (the "first quarter"), a
per share decrease of 53% from the $3,406,000, or $0.77 per share earned in the
first three months of 1995. The annualized return on average assets was 0.78%
for the first three months of 1996 and 1.67% for the first three months of 1995.
For each period, the return on average equity was 8.7% and 20.7%, respectively.
Return on average assets and equity for the same periods, calculated using the
effects of SFAS No. 115 would not be materially different.
The primary factor for the lower earnings was a 27% decrease in net interest
income in the first quarter of 1996 compared with the same period of one year
ago. The decrease results with the narrowing of Pinnacle's net interest margin
to 3.33% compared to 4.58% for the first three months of 1995. The relatively
low interest rate environment, coupled with Pinnacle's high volume of U. S.
Government securities and level yield curve have continued to put pressure on
the net interest margin, compressing it throughout 1995 and into the first
quarter of 1996. A decrease in average earning assets has also contributed to
the decrease in the net interest margin.
Other income, excluding net securities gains, decreased 8% compared with the
same period of 1995. Other expenses decreased 6%, more than offsetting the
decrease in other income.
NET INTEREST INCOME
The primary component of Pinnacle's consolidated earnings is net interest
income, or the difference between interest income on earning assets and interest
paid on supporting liabilities. The net interest margin is net interest income
expressed as a percentage of average earning assets. Pinnacle's earning assets
consist of loans, securities, interest-bearing deposits at financial
institutions and Federal funds sold. Supporting liabilities primarily consist of
deposits, short-term borrowings and Pinnacle's notes payable. A portion of
Pinnacle's interest income is earned on tax exempt investments
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such as state and municipal bonds. In an effort to state this tax exempt income
and its resultant yields on a basis comparable to all other taxable investments,
an adjustment is made to analyze this income on a taxable equivalent basis.
During the first three months of 1996, Pinnacle's average earning assets
were $736,820,000, a 2% decrease from the comparable period of the previous
year. The decrease in average assets was primarily in Federal funds sold and
non-taxable securities, as a result of the net decrease in deposits. The net
interest margin for the first three months of 1996 was 3.33%, down from 4.58% of
the same period a year ago. Net interest income on a fully taxable equivalent
basis was $6,143,000 for the first three months of 1996, or 28% lower than the
comparable period in 1995. Actual net interest income decreased 27% as a result
of the shrinkage of both the net interest margin and average earning assets.
The yield earned on total earning assets was 6.82% for the first three
months of 1996 compared to 7.88% for the same period of 1995. The decrease
resulted from the lower level of yields earned on taxable securities and loans.
The average rate on interest-bearing deposits and Federal funds sold remained
relatively flat, increasing by only 3 basis points. The average rate on taxable
securities was 5.38% for the first three months of 1996 compared to 7.13% of the
same period a year ago. The decrease in the yield on taxable securities was
primarily a result of the lower level of rates paid on these securities compared
to those carried a year ago. The average volume of taxable securities increased
$29 million in the comparable period, with the corresponding decrease in
non-taxable securities. The average rate on non-taxable securities increased 63
basis points, while the average balance decreased $22 million. The decrease in
average balances was due to the sale late in the first quarter of 1995 of
certain non-taxable securities which were acquired from AFC with lower rates, as
well as normal maturities of the non-taxable portfolio. The rate earned on loans
decreased 15 basis points due primarily to the decrease in the prime rate since
the first quarter of 1995 as well as generally lower interest rates on certain
types of loans, primarily real estate.
The average cost of interest-bearing liabilities increased only 29 basis
points to 4.06% from 3.77% paid in the first three months of 1995. The average
rate paid on interest-bearing demand deposits and savings deposits remained
relatively flat while rates paid on money market deposits increased 52 basis
points. The average rate paid on other time deposits increased 65 basis points.
Pinnacle has taken action at appropriate intervals to adjust the rates on all
deposit accounts to not only keep them in line with market rates, but to meet
the needs of its particular customer bases. For example, two of the subsidiary
banks have added a third level of interest rates for certain of its high balance
money market customers, with rates comparable to money market mutual funds. This
move was done to lessen the loss of these deposits to those non-bank types of
investments. Management began late in 1994 and throughout 1995 to increase
interest rates on certain time deposits to also keep in line with market rates.
Generally, rates on time deposits have remained flat or dropped slightly in the
first quarter of 1996, however, the effect of the increases in previous quarters
has added to the increase in these rates paid. The increase in rates paid on
other time deposits have caused customers to switch their savings deposits into
other time deposits, as evidenced by the decrease in the average balance in
savings deposits and the corresponding increase in the average balance of other
time deposits.
The average balance in short-term borrowings decreased $2 million, primarily
resulting from less liquidity needs at Pinnacle's savings bank. The average rate
paid on notes payable decreased 94 basis points as these notes are tied to
either prime or LIBOR-based indices, which have decreased since the first
quarter of 1995. The average balance in notes payable decreased approximately $8
million due to paydowns by Pinnacle.
Although the average balance of interest-bearing liabilities decreased from
the first quarter of 1995, the increase in rates paid, as well as the shift of
deposits to higher paying deposit categories, resulted in total interest expense
being $245,000 higher in the first three months of 1996 compared to the same
period of 1995.
A detailed Analysis of Net Interest Income for the three month periods ended
March 31, 1996 and 1995 is included on Page 80.
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PROVISION FOR LOAN LOSSES
Management records a provision for loan losses in an amount sufficient to
maintain the allowance for loan losses at a level commensurate with the risks in
the loan portfolio. The allowance for loan losses is adjusted through charges to
current income based on factors such as past loan loss experience, management's
evaluation of known potential losses in the loan portfolio, and prevailing
economic conditions.
There was no provision for loan losses in the first three months of 1996
compared to $75,000 for the first three months of 1995. In the fourth quarter of
1995, Pinnacle reversed the provision for loan losses made in the first quarter
due to several factors, including the level of allowance for possible loan
losses to total loans, which has been steadily increasing for the last five
years, management's assessment of the overall adequacy for allowance for loan
losses, as well as the downward trend of net charge-offs to loans. Pinnacle had
net recoveries of $17,000 in the first three months of 1996 compared to net
recoveries of $52,000 in 1995. The allowance for loan losses was $6,040,000, or
1.90% of total loans, at March 31, 1996, compared to 1.95% at December 31, 1995.
Total nonperforming assets totalled $7,399,000, down $900,000 from a total
of $8,299,000 at December 31, 1995. Nonperforming assets consisted of $5,331,000
in nonaccrual loans, $946,000 in loans past due greater than 90 days and still
accruing, $908,000 in restructured loans, and $214,000 in other real estate
owned. Over fifty percent of these nonperforming assets resulted from the
acquisition of AFC in 1995. The investment in impaired loans at quarter end
totalled $5,731,000 and are included in the totals above.
NON-INTEREST INCOME AND EXPENSE
The major components of Pinnacle's non-interest income consist of service
charges on deposit accounts and other banking income, trust fees and net gains
or losses on the sale of securities. Fees on banking services and other income
decreased $235,000. The decrease was due primarily to a $319,000 gain on the
sale of an installment note in the first quarter of 1995. Absent the effect of
that gain, other income increased $84,000, including an increase in fees earned
on the sale of non-bank investment products of $28,000. Trust fees increased 16%
on a period-to-period basis. Total trust assets under management amounted to
$244,000,000, or an 11% increase of a year ago.
Gains on the sale of securities, on a pre-tax basis, were $264,000 in the
first three months of 1996 compared to net gains of $346,000 in the same period
of 1995. The net gains in 1996 are related to the sales in Pinnacle's U. S.
Government securities portfolio.
Security sales relating to Pinnacle's U. S. Government securities portfolio
are made as part of Pinnacle's disciplined portfolio funds management system.
The timing of these sales and the determination of the acceptable maturity for
the reinvestment of the proceeds is made dependent on the slope of the yield
curve and on management's assessment of the acceptable interest rate risk for
Pinnacle. The use of the securities portfolio to manage interest rate risk is
especially crucial to Pinnacle because of the fact that its loan to asset ratio
is an unusually low 39%. This results in a securities portfolio significantly
larger than comparable financial institutions.
Management has always viewed the gains recorded on this program as closely
related to its net interest income as opposed to one-time security gains or
losses. Accordingly, since implementation of the program, the yield on
Pinnacle's U. S. Government portfolio has outperformed the U. S. Treasury yield
by 32 basis points and by including the net gain since inception of the program,
the total yield is 142 basis points higher than the same Index. For the first
quarter of 1996, due to the relative flatness of the yield curve, the portfolio
has only outperformed the Index by 18 basis points and by including the net
gain, by 48 basis points.
Non-interest expense decreased 6% for the first three months of 1996
compared to the same period last year. The decrease was in other expense, which
dropped 26% primarily due to lower FDIC insurance premiums which decreased
$338,000, and a reduction in data processing expenses of $116,000 due to
one-time conversion costs incurred during the first quarter of 1995. Employee
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compensation and benefits increased only 1% on a quarter-to-quarter basis, where
the increase in salaries due to normal raises of approximately 4% were offset by
the planned reduction in staff that occurred after the acquisition of AFC in
1995. Occupancy expense increased 16% due to the increase in certain real estate
tax accruals, as well as greater depreciation due to a new branch building at
one of Pinnacle's subsidiary banks which was put into service in the second
quarter of 1995.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated basis
including the accounts of its subsidiary banks. The provision for income taxes
was $694,000 for the first three months of 1996 compared with $822,000 for the
first three months of 1995. The lower provision for taxes in the first three
months of 1996 was primarily the result of lower pre-tax income in the first
quarter of 1996.
BALANCE SHEET
Total consolidated assets were $807,489,000 at March 31, 1996, or a 1% drop
from year-end 1995. The decrease, primarily in cash and cash equivalents, was
the result of the reduction in deposits, primarily demand and savings deposits.
Pinnacle's securities portfolio is its most significant balance sheet asset.
Total securities were $422,362,000 at March 31, 1996 and consisted of U. S.
Government securities amounting to $367,952,000, mortgage-backed securities and
CMO's of $9,565,000, state and municipal bonds of $24,571,000, and corporate and
other securities of $20,274,000. The total securities outstanding at March 31,
1996 was down 1% from year-end 1995, however, the portfolio at quarter-end
retained relatively the same mix.
U. S. Government securities amounted to $367,952,000, or 46% of assets at
March 31, 1996. The average maturity of these securities was approximately four
months. Certain U. S. Government securities (primarily U. S. Treasury bills) are
part of Pinnacle's term taxable securities strategy which has been designed to
manage Pinnacle's interest rate risk and to take advantage of the slope in the
yield curve. The decision to undertake intermittent sales of these securities is
based on management's assessment of economic conditions. For example, management
will undertake sales of securities based on the slope of the yield curve and its
determination that the reinvestment of the proceeds into a longer or shorter
term security is an acceptable alternative given management's assessment of
interest rate risk. At March 31, 1996, U. S. Government securities had gross
unrealized losses of $261,000 on a pre-tax basis.
Other securities held by Pinnacle, amounting to $54,410,000, at March 31,
1996, consisted of mortgage-backed, CMO's, state and municipal, and corporate
and equity securities. At quarter end, these securities had gross unrealized
gains of $8,003,000 and gross unrealized losses of $39,000 on a pre-tax basis.
Currently, Pinnacle is not using derivative products for hedging or other
purposes.
Total loans amounted to $318,032,000 at March 31, 1996, up 3% from year-end
1995. The increase was part of a strategic effort on management's part to
increase the loan portfolio without sacrificing credit quality of the portfolio.
The increase was primarily in commercial loans, which increased 5% or
approximately $4,400,000. At March 31, 1996, 28% of the loans were commercial,
real estate loans amounted to 56%, and installment loans were 16% of the
portfolio. Pinnacle's loan to asset ratio was 39% at March 31, 1996.
Goodwill and other intangibles amounted to $18,706,000, or 24% of
stockholders' equity, at March 31, 1996.
Total deposits were $703,392,000 at March 31, 1996, or 1% lower than
year-end 1995. The decrease in deposits was primarily in transaction accounts,
including both noninterest-bearing and interest-bearing demand of approximately
$7,100,000, which balances fluctuate based on customer needs and are not as rate
sensitive as savings and time deposits. There was also an approximate $4,700,000
drop in savings deposits. Offsetting the drop in savings deposits was an
increase in other time deposits of approximately $2,300,000. Management believes
the drop in savings deposits is the
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result of the customers attempting to earn higher rates by moving to non-bank
products and special term deposits at other financial institutions or
brokerage-type companies. Changing demographics of certain of the banking center
locations has also led to the shift and loss of deposits. Management continues
to take an active role to increase and maintain interest rates on deposits and
provide products to reduce the disintermediation of funds. As evidenced by the
shift in deposits to other time deposits, customers are more willing to commit
their funds to defined periods of time; Pinnacle's rates and new deposit
products are not only attracting new customers, but maintaining existing
customers. At March 31, 1996, the percentage of total deposits for each category
were: Noninterest-bearing deposits, 13%; Interest-bearing demand deposits, 12%;
Savings accounts (including money market accounts), 36%; and Other time
deposits, 39%.
Pinnacle's notes payable were $20,700,000 at March 31, 1996. Outstandings
consist of $18,000,000 remaining on the note used to purchase AFC, and
$2,700,000 drawn on Pinnacle's revolving line which is used for purchasing
equity securities and other corporate needs. At year-end 1995, outstandings
consisted of $20,000,000 on the AFC note and $600,000 drawn on the revolving
line.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $77,935,000 at March 31, 1996 and
$78,961,000 at December 31, 1995. The ratio of equity to assets was 9.65% and
9.64% at each period end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage Capital
Ratio with a minimum level of Tier One capital to total assets of 3.00%. Tier
One capital consists of common stock, additional paid-in capital, retained
earnings and is exclusive of Pinnacle's allowance for loan losses, goodwill and
other intangibles, and unrealized gains (losses) on securities available for
sale. In addition, the Board has issued Risk-Based Capital Guidelines with a
minimum standard of total regulatory capital to risk weighted assets of 8.00%.
The structure of Pinnacle's balance sheet results in a Risk-Based Capital Ratio
significantly in excess of the guidelines.
The following table provides an analysis of the minimum capital requirements
(as defined), ratios and the excess over the minimum which Pinnacle holds as
capital as of March 31, 1996, in thousands (except percentages).
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Leverage Capital.......................................... 3.00% $ 23,663 6.74% $ 52,693 $ 29,030
Risk-based Capital:
Tier One................................................ 4.00 12,726 16.56 52,693 39,967
Total (Tier Two)........................................ 8.00 25,452 17.81 56,670 31,218
</TABLE>
At December 31, 1995, Pinnacle's total risk-based capital ratio was 18.09%.
In addition, each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At March 31, 1996, Pinnacle and each of its subsidiary banks was in
compliance with the current capital guidelines and are considered
"well-capitalized" under regulatory standards.
Book value per share was $17.90 at March 31, 1996 compared to $18.05 at
December 31, 1995. Dividends amounting to $0.31 per share were paid in the first
three months of 1996.
LIQUIDITY
As characteristic of the banking industry, Pinnacle's indicators of
liquidity are principally its deposit base, loan and investment portfolios. On a
short term basis, adjustments are made in these categories based on deposit
fluctuations and loan demand. Longer term, liquidity is determined by growth
objectives, rate pricing policies and the ability to borrow debt or raise
equity. In general,
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Pinnacle is able to meet deposit withdrawals and to fund loan demand through
earnings and the maturity or sale of securities. Pinnacle would also be able to
respond to short term cash flow needs through short term borrowings. On a longer
term basis, Pinnacle has the ability to incur debt or to raise equity through
the sale of preferred or common stock.
Pinnacle's cash flows are comprised of three general types. Cash flows from
operating activities are primarily Pinnacle's net income. Cash flows from
investing activities consist of loans made to and collected from customers; and
purchases, sales and maturities of securities available for sale. Cash flows
from financing activities are determined by Pinnacle's deposit base and from
Pinnacle's ability to borrow and repay debt and issue or repurchase stock. For
the three months ended March 31, 1996, cash flows were generated from a
$9,400,000 decrease in securities. Cash flow uses and needs included a
$9,400,000 decrease in deposits, an $8,400,000 net loan principal advanced, and
$1,400,000 to pay dividends. Pinnacle's net cash position decreased $14,500,000
with the decrease primarily in Federal funds sold of $11,200,000 and the
remainder in cash and due from banks.
Pinnacle's subsidiary banks have a relatively stable base of deposits and
any increased loan demand can be sufficiently funded without a material change
in its balance sheet. Pinnacle's corporate strategy includes profitable
acquisitions. Certain acquisitions would be primarily funded with debt.
Reductions of debt would be made from Pinnacle's earnings.
At March 31, 1996, Pinnacle had a line of credit of $10,000,000 with an
unaffiliated bank from which $2,700,000 had been drawn. The outstanding
$18,000,000 note related to the AFC acquisition and is secured by the stock of
Pinnacle's subsidiary banks.
Regulatory requirements exist which influence Pinnacle's liquidity and cash
flow needs. These requirements include the maintenance of satisfactory capital
ratios on a consolidated and subsidiary bank basis, restrictions on the amount
of dividends which a subsidiary bank may pay and reserve requirements with the
Federal Reserve Bank. Based on these restrictions, at April 1, 1996, bank
subsidiaries could have declared approximately $2,244,000 in dividends without
requesting approval of the applicable Federal or State regulatory agency. In
addition, Pinnacle has made loan commitments which could result in increased
cash flow requirements for loans. Management is of the opinion that these
regulatory requirements and loan commitments will not have a significant impact
on the liquidity of Pinnacle. Management is not aware of any known trends,
events or uncertainties that will have, or that are reasonably likely to have, a
material effect on Pinnacle except the pending acquisition of Financial
Security. Management is also not aware of any current recommendations by the
regulatory authorities which, if implemented, would have an adverse material
effect on Pinnacle. There are several issues which have been pending before
Congress, including recapitalization of the SAIF fund, and the elimination of
the Thrift Charter. The recapitalization of the SAIF fund is estimated to cost
Pinnacle Bank approximately $1,000,000 on a pre-tax basis.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, Pinnacle adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The standard
requires evaluation of impairment of long-lived assets to be reviewed when
indicators of impairment are present. Indicators of impairment include, but are
not limited to a significant decrease in the market value of an asset or a
significant change in the manner an asset is used. The cost of the impaired
asset is then compared to its fair value, and any impairment is recorded in
current earnings. There was no effect of the adoption of this standard on the
financial position and results of operations of Pinnacle.
In October, 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. The statement is effective for fiscal years beginning after December
15, 1995. This statement establishes accounting and reporting standards for
stock-based awards, such as stock options, granted in fiscal years beginning
after December 15, 1994. SFAS No. 123 establishes a fair value of accounting for
stock options, with compensation expense reported for the fair value of these
types of instruments in
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current earnings. Entities may elect not to adopt the fair value method of
accounting, but are required to make pro forma disclosures of net income and
earnings per share as if the statement was adopted. Pinnacle has elected not to
adopt the provisions of SFAS No. 123 and will make pro forma disclosures on the
effects, which are anticipated to be immaterial, in the 1996 Annual Report to
Shareholders.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
NET INCOME
Consolidated net income was $12,493,000, or $2.83 per share, on a fully
diluted basis in 1995, an increase from the $2,255,000, or $0.51 per share,
earned in 1994. The return on average assets was 1.55% for 1995 and 0.32% for
1994. For each year, the return on average equity was 18.1% and 3.4%,
respectively. Return on average assets and equity for 1995, calculated including
the effects of SFAS No. 115 would not be materially different.
Net income for 1995 included pre-tax securities gains of $4,730,000 compared
with $(9,845,000) of net securities losses in 1994. The majority of the
securities gains were taken in the second quarter of 1995 and were part of the
ongoing term portfolio management system which Pinnacle has followed since 1988.
Net interest income increased 5%, primarily as a result of the increase in
average earning assets of 14% due to the acquisition of Acorn Financial Corp
("AFC").
Other factors contributing to the improved earnings for Pinnacle was a
decrease in the provision for loan losses and the increase in other operating
income due to the acquisition. Other operating expense was up 13% also primarily
due to the acquisition.
The results for 1995 include the acquisition of AFC and its subsidiary bank,
Suburban Trust & Savings Bank, on January 6, 1995. AFC was liquidated into
Pinnacle and concurrent with the liquidation, Suburban Trust & Savings Bank
("Suburban") was merged with Pinnacle Bank, a wholly-owned subsidiary of
Pinnacle. The acquisition was accounted for as a purchase. Results of operations
of Suburban, including purchase accounting adjustments, are included in the
operating results of Pinnacle Bank.
NET INTEREST INCOME
Pinnacle's average earning assets were $744,318,000 in 1995, or 14% higher
than the previous year. The increase in average earning assets was due to the
acquisition. The net interest margin for 1995 was 3.90% compared to 4.28% for
1994. The decrease in the net interest margin has been the result of the
relatively low level of interest rates coupled with the structure of Pinnacle's
balance sheet, its low loan-to-deposit ratio, and high volume of short-term U.
S. Government securities. Net interest income on a fully tax-equivalent basis
was $29,019,000 in 1995, or 4% higher than in 1994. Actual net interest income
increased 5%.
The yield earned on total earning assets was 7.36% in 1995 compared to 6.83%
in 1994. The increase resulted from a higher level of interest rates in the
entire year of 1995 compared to 1994. As a result of the reinvestment of
securities proceeds from the term portfolio management system into higher
yielding securities, the average rate on taxable securities was 6.16% for 1995
compared to 5.29% of a year ago. The average volume of taxable securities
increased $11,851,000 due to the acquisition of Suburban. This, coupled with the
increased yield, increased interest income on taxable securities by $3,909,000.
The average yield earned on loans increased to 8.54% for 1995 compared to 8.31%
of a year ago. While the increase in the yield on average loans is not large,
the ratio of average loans to average earning assets was 41.6% in 1995 compared
to 38% of a year ago. The average volume of loans increased to $309,818,000 or
25% in 1995 due to the acquisition. The average yield earned on short-term
investments increased 124 basis points to 5.55% in 1995 while average balances
increased $17,395,000. Total interest income, on a fully taxable equivalent
basis, increased $10,206,000 due to both the positive effect of the increase in
interest rates and the increase in the level of average earning assets.
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The average cost of interest-bearing liabilities increased 100 basis points
to 4.02% in 1995 from 3.02% in 1994. The average rate paid on interest-bearing
demand and savings deposits increased 35 basis points. The average rate paid on
money market deposits increased 38 basis points. Pinnacle has taken action at
appropriate intervals to adjust the rates paid on these accounts in order to
keep these accounts in line with market rates. The average rate paid on other
time deposits has had the largest increase due to changes in the level of
interest rates, with a 145 basis point increase. Absent the effect of the
acquisition, the average balances in certain of the deposit categories,
including savings deposits and money market deposits have decreased while other
time deposits have increased. Management believes the decrease in savings
deposits is partially the result of the previous low interest rate environment
where customers attempted to achieve higher yields by switching funds to
non-bank investments or special-term deposits at other financial institutions.
Additionally, certain of the banking locations are in older, mature
neighborhoods where the deposits are being lost due to death, moving, or
changing demographics of the neighborhood. Management has taken steps to limit
the disintermediation of funds by raising interest rates in certain time deposit
categories beginning in the latter half of 1994 and continuing through 1995.
Special-term deposits have also been introduced. Management has also added other
deposit options including free checking, as well as non-bank investment choices,
for its customer base. While the non-bank investment option does not necessarily
retain or attract new deposits, the fee income generated offsets some of the
cost of lost deposits. These steps have resulted in new accounts and current
customers' committing their funds to longer time periods as evidenced by the
increase in average time deposit balances. All these moves by management have,
however, added to the increase in the rate paid on certain deposit categories as
indicated above.
The average balance in short-term borrowings decreased due to the greater
availability of investible funds resulting from the acquisition. The average
balance in notes payable increased to $24,684,000 due to the acquisition of AFC.
The average rate paid on notes payable has increased as the rates paid on these
notes are tied to either prime or LIBOR-based indices, which have increased
since 1994.
As a result of the increase in rates paid, as well as average balances,
total interest expense was $9,099,000 higher in 1995 compared to 1994.
PROVISION FOR LOAN LOSSES
Effective January 1, 1995, Pinnacle adopted Statements of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan", and its amendment No. 118, "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosure". The adoption of these standards
did not have any effect on the financial position and results of operations of
Pinnacle.
Management's system of review of the loan portfolio and the attendant
determination of the adequacy of the allowance for loan losses is made up of a
number of factors. The most significant part of the system is the independent
credit review system which reviews all commercial credits in excess of $100,000
and all commercial real estate credits in excess of $250,000 on an annual basis
at a minimum, with problem credits reviewed more often as necessary. An
informed, judgmental determination is made of the risk associated with loans
which have received low grades under the credit review system. This estimated
risk as well as any valuation allowances related to impaired loans are taken
into account in determining the allowance for loan losses. In addition, the
allowance includes additional reserves for coverage of unidentified risks.
In addition to the credit review system, on a quarterly basis an internal
report provides an analysis of the adequacy of the allowance for management and
the Board of Directors. This analysis focuses on allocations based on loan
review ratings and historical charge-off and recovery data. Management also
reviews the status of all watch list credits on a monthly basis. The process and
the amount of the allowance and of the provision have also been subject to the
review of external auditors
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and banking regulatory authorities. Management believes that it has an effective
system of credit review assessment demonstrated by the fact that Pinnacle has
not recorded a significant loss from a loan that had not been previously
identified as a watch list credit by the loan review process.
There was no provision for loan losses in 1995 compared to $900,000 for
1994. Pinnacle had net charge-offs of $151,000, or 0.05% of average loans, in
1995 compared to net charge-offs of $218,000, or 0.09% of average loans in 1994.
The allowance for loan losses was $6,023,000, or 1.95% of loans, at December 31,
1995, compared to 1.70% of loans at year-end 1994. The decrease in the provision
for loan losses to zero from $900,000 of a year ago was made due to several
circumstances, including the level of allowance for possible loan losses to
total loans, which has been steadily increasing for the last five years,
management's assessment of the overall adequacy of the allowance for loan
losses, as well as the downward trend of net charge-offs to average loans.
At December 31, 1995, nonperforming loans, defined as nonaccrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $8,015,000 compared with $1,300,000 at the previous year end. While this
increase is significant, approximately 50% of these loans are attributed to the
acquisition in 1995. At the date of the acquisition, AFC was required by
Pinnacle to have a reserve of at least 2.5% of total loans to cover the
potential problem loans in the portfolio as well as those loans which were noted
during the due diligence performed by Pinnacle. A restructured loan which was
acquired from AFC, included in the above total, is current and performing as
agreed. Loans considered impaired under SFAS No. 114 include nonaccrual loans,
restructured loans, and loans classified as at least doubtful under Pinnacle's
credit risk classification system. All of Pinnacle's impaired loans are included
in the nonperforming category.
In addition, Pinnacle held $284,000 classified as other real estate owned
("OREO") at December 31, 1995. Other real estate includes property acquired
through foreclosure or deed in lieu of foreclosure. These assets are carried at
the lower of fair value less estimated cost to sell or cost. Losses arising at
the time of acquisition of property in full or partial satisfaction of loans are
recorded as loan losses. Subsequent losses or expenses on the property are
charged to other expenses. Income received on the property is recorded as an
offset to expense. During 1995, all property carried at December 31, 1994 was
sold with no significant impact on the results of operations. The remaining OREO
consists of three properties from AFC which are actively being offered for sale.
Total nonperforming assets were $8,299,000, or 2.68% of total loans plus
other real estate owned at December 31, 1995. Total nonperforming assets were
1.01% of total assets at year end.
NET SECURITIES GAINS
In 1995, a significant factor contributing to Pinnacle's higher net income
was net securities gains. On a pre-tax basis, net securities gains were
$4,730,000 compared to losses of $(9,845,000) in 1994. The net gains realized in
1995 consisted of gross gains of $5,079,000 and gross losses of $349,000.
The majority of the net securities gains recorded by Pinnacle related to its
U. S. Government securities portfolio. Sales of these securities resulted in net
securities gains of $3,586,000 recorded in 1995 and net securities losses of
$(11,392,000) recorded in 1994. The securities sales were made as part of
Pinnacle's disciplined portfolio funds management system. The majority of the
gain taken on securities transactions was in the second quarter and consisted of
U. S. Government securities with a maximum maturity of less than one year. At
December 31, 1995, the U. S. Government securities had a remaining maturity of
four months.
The timing of these sales and the determination of the acceptable maturity
for the reinvestment of the proceeds was made dependent on the slope of the
yield curve and on management's assessment of the acceptable interest rate risk
for Pinnacle. The use of the securities portfolio to manage interest rate risk
is especially crucial to Pinnacle because of the fact that its loan to asset
ratio was a low 38% at December 31, 1995. This results in a securities portfolio
significantly larger than comparable financial institutions. The maximum term of
any U. S. Government security held as part of Pinnacle's term portfolio strategy
is four years although at year-end, the longest maturity of any single issue was
four
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months based on management's assessment of interest rate risk. Management views
the portion of the net gains recorded on this program due to slope as closely
related to its net interest income as opposed to a one-time item. While
management believes that its system of portfolio strategy, as it relates to the
slope of the yield curve, will continue to add dollars to earnings above the
base yield on securities, management also recognizes that in a period of rising
interest rates, any rise in the interest margin would be offset by losses taken
through the term portfolio strategy. While this scenario occurred in 1994, the
proceeds of those sales and subsequent sales in 1995 were reinvested at higher
interest rates, and the loss in 1994 was recovered by the resulting increase in
the net interest margin prior to the original maturity of the securities sold in
1994. Since implementation of the program, the average yield on these securities
has outperformed the U. S. Treasury Index by 31 basis points and by including
the net gain for the period, the total yield is 145 basis points higher than the
same Index.
The net securities gains recorded in 1995 included gains of $695,000 related
to Pinnacle's equity investment program which consists of preferred and common
stock investments in other financial institutions. The remaining gains relate to
the sale of securities acquired through the AFC purchase.
OTHER NON-INTEREST INCOME
The major components of Pinnacle's other non-interest income consist of
service charges on deposit accounts, other banking income and trust fees. Fees
on banking services and other income were $4,918,000 for 1995 compared to
$3,704,000 in 1994, an increase of 33%. The primary source of banking fee income
in 1995 was deposit service charges totalling $3,139,000, an increase of 32%
from the $2,379,000 level of 1994, due to the acquisition. Also included in
other banking income was a gain of approximately $319,000 relating to the sale
of an installment note included in Other Assets. Trust fees increased 31% on a
year-to-year basis. Trust assets under management at year end amounted to $241
million at December 31, 1995, or 44% above the total one year earlier. Both the
increase in trust fees and trust assets resulted from the acquisition.
NON-INTEREST EXPENSE
Non-interest expense totalled $23,882,000, an increase of 13% in 1995
compared to 1994. Employee compensation and benefits increased 27%, primarily
due to the acquisition, higher profit incentive bonus accruals due to higher
1995 earnings and general employee raises. Occupancy expense totalled
$3,137,000, up 70% from 1994. While the acquisition of AFC added to the
increase, occupancy expense also included a planned write-off of $434,000
relating the demolition of an old branch office building (a new building
contiguous to the old site was opened in June, 1995) and a $150,000 accrual for
a lease buy out on a storage facility which occurred in January, 1996. Other
expense decreased 16%. These expenses were reduced by approximately $364,000 as
a result of the FDIC insurance premium rebate. Also included in other operating
expenses in 1994 was a loss contingency charge of $750,000 relating to
litigation which was settled in the last quarter of 1995. Legal expenses also
decreased on a year-to-year basis, down $310,000. This decrease was the result
of the settlement of several pending litigation items as well as sale in early
1995 of certain pieces of OREO. Other expenses relating to that OREO also
decreased $154,000. Offsetting these decreases were increases in equipment and
data processing costs associated with the conversion to a new data processing
system for Pinnacle that was completed in 1995 as well as expenses related to
the acquisition of AFC.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated basis
including the accounts of its subsidiary banks. Due to the higher level of
pre-tax income in 1995, there was a tax provision of $3,139,000 in 1995 compared
to a benefit of $(2,319,000) in 1994. The primary components of Pinnacle's net
deferred tax asset at December 31, 1995 are differences between the book and tax
bases of securities and other assets, allowance for loan losses, purchase
accounting adjustments, deferred compensation and deferred loan fees. At
December 31, 1995, Pinnacle had a consolidated Federal net
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operating loss carryforward of $3,641,000, which if not used, expires from the
years 1999 to 2001. The majority of the Federal net operating loss carryforward
relates to the parent company and is subject to significant limitations on its
usage.
There was no provision for state income taxes in 1995 compared to a benefit
of $(761,000) in 1994. There was no state tax benefit in 1995 due to the
significant holdings of U. S. Government securities which are exempt from state
tax. Additionally, all carryback claims for losses were utilized in 1994, with
carryforwards remaining. The tax benefit in 1994 related to low pre-tax earnings
for Pinnacle and the ability to carryback losses for state tax purposes for a
refund of previously paid taxes. At December 31, 1995, Pinnacle had, for state
tax purposes, a net operating loss carryforward of $23,549,000 which expires in
the years 2010 and 2011.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
DECEMBER 31, 1993
NET INCOME
Consolidated net income was $2,255,000, or $0.51 per share, on a fully
diluted basis in 1994, a per share decrease of 82% from the $12,993,000, or
$2.87 per share earned in 1993. The return on average assets was 0.32% for 1994
and 1.80% for 1993. For each year, the return on average equity was 3.4% and
18.9%, respectively. Return on average assets and equity for 1994, calculated
including the effects of SFAS No. 115 would not be materially different.
Net income for 1994 included pre-tax securities losses of $(9,845,000)
compared with $8,741,000 of net securities gains in 1993. The majority of the
securities losses were taken in the second quarter of 1994 and were part of the
ongoing term portfolio management system which Pinnacle has followed since 1988.
While the rising interest rate environment created the losses taken in the
portfolio, the proceeds of those transactions were reinvested in
higher-yielding, shorter-term securities which, in turn, had a direct positive
impact on the net interest margin in 1994. Net interest income increased
$3,171,000, or 14% over 1993. In 1994, there was a decrease in the provision for
loan losses of $800,000, or 47%. Other operating income decreased 3%, while
other operating expense increased 3%. Due to the effect of the securities losses
in 1994, there was an income tax benefit of $(2,319,000) versus a provision of
$4,005,000 in 1993.
NET INTEREST INCOME
Pinnacle's average earning assets were $652,080,000 in 1994, or 3% lower
than the previous year. The decrease in average earning assets was due to the
corresponding decrease in deposits, primarily in other time deposits. The net
interest margin for 1994 was 4.28% compared to 3.70% for 1993. The increase in
the net interest margin resulted from the reinvestment of proceeds from the
securities transactions into higher-yielding securities, a higher ratio of loans
to average earning assets in 1994 and the general lag in the repricing of core
savings deposits in an increasing interest rate environment. Net interest income
on a fully tax-equivalent basis was $27,912,000 in 1994, or 12% higher than in
1993. Actual net interest income increased 14%.
The yield earned on total earning assets was 6.83% in 1994 compared to 6.31%
in 1993. The increase resulted from a higher level of interest rates in 1994
compared to 1993. As a result of the reinvestment of securities proceeds in
higher yielding securities, the average rate on taxable securities was 5.29% for
1994 compared to 4.56% of a year ago. While the average volume of taxable
securities declined $21,932,000 due to the reduction in deposits, the increase
in yield earned on taxable securities more than offset the decline in volume and
thus increased interest income on taxable securities by $1,682,000. The average
yield earned on loans increased to 8.31% for 1994 compared to 8.21% of a year
ago. While the increase in the yield on average loans is not large, the ratio of
loans to average earning assets was 38% in 1994 compared to 35% of a year ago.
The average volume of loans increased $9,174,000 or 4% in 1994. The average
yield earned on short-term investments increased 139 basis
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points to 4.31% in 1994. Total interest income, on a fully taxable equivalent
basis, increased $1,940,000 with the positive effect of the increase in interest
rates outweighing the decrease in the level of average earning assets.
The average cost of interest-bearing liabilities declined 7 basis points to
3.02% in 1994 from 3.09% in 1993. The average rate paid on interest-bearing
demand and savings deposits declined 22 basis points. This drop is much less
than the drop in 1993 from 1992 of 70 basis points. Due to the rapidly
increasing interest rate environment, Pinnacle has taken action at appropriate
intervals to adjust the rates paid on these accounts in order to keep these
accounts in line with market rates. The average balance of these accounts
dropped $7,352,000 or 2% from 1993. The average rate paid on time deposits,
conversely, has increased 8 basis points. The average balance of these accounts
has decreased $14,242,000, or 7% from a year ago. Management believes that the
decline in these deposits is the result of the previous low interest rate
environment and the customer's attempt to achieve higher yields by switching
funds to non-bank investments or special-term deposits at other financial
institutions. Management has taken steps by raising interest rates in certain
time deposit categories in the last six months of 1994 to limit the
disintermediation of these funds. This move by management has added to the
increase in the average rate paid on time deposits which, until the fourth
quarter of 1994, had declined 15 basis points. Total interest expense was
$1,030,000 lower in 1994 compared to 1993, primarily as a result of the decrease
in average balances of interest-bearing deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $900,000 for 1994 compared to $1,700,000
for 1993. Pinnacle had net charge-offs of $218,000, or 0.09% of average loans,
in 1994 compared to net charge-offs of $1,154,000, or 0.48% of average loans in
1993. The net charge-off amount recorded in 1993 was primarily the result of
charge-offs totalling $1,232,000 related to two loans secured by commercial real
estate. The allowance for loan losses was $4,229,000, or 1.70% of loans, at
December 31, 1994, compared to 1.43% of loans at year-end 1993. The decrease in
the provision for loan losses of $800,000 at year-end 1994, compared with the
previous year-end, was reflective of the decreased level of non-performing
assets.
At December 31, 1994, nonperforming loans, defined as nonaccrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $1,300,000 compared with $5,868,000 at the previous year end. The decrease
in nonperforming loans is attributable to the payment of principal in full of
one loan totalling $1,300,000; the return to accrual of a loan totalling
$1,900,000 which has continued to perform, with principal reductions in excess
of $1,000,000; and the return to accrual of a loan which is adequately secured
by real estate and on which payments are current. If non-accrual loans had been
accruing interest at their original terms in 1994, additional interest income
would have amounted to $66,000.
NET SECURITIES LOSSES
In 1994, the most significant factor contributing to Pinnacle's lower net
income was net securities losses. On a pre-tax basis, net securities losses were
$(9,845,000) compared to gains of $8,740,000 in 1993. The net losses realized in
1994 consisted of gross losses of $12,440,000 and gross gains of $2,595,000.
The majority of the net securities losses recorded by Pinnacle related to
its U. S. Government securities portfolio. Sales of these securities resulted in
net securities losses of $11,392,000 recorded in 1994 and net securities gains
of $7,311,000 recorded in 1993. The securities sales were made as part of
Pinnacle's disciplined portfolio funds management system. The majority of the
loss taken on securities transactions was in the second quarter and consisted of
U. S. Government securities with a maximum maturity of 24 months. During the
third quarter, the average maturity was shortened with little loss taken.
Additional losses of approximately $3,200,000 recorded in the final quarter of
1994 were taken on these U. S. Government securities with the continued intent
of shortening the average maturity of the term portfolio. At December 31, 1994,
the U. S. Government securities had a remaining maturity of five months.
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The timing of these sales and the determination of the acceptable maturity
for the reinvestment of the proceeds was made dependent on the slope of the
yield curve and on management's assessment of the acceptable interest rate risk
for Pinnacle. The use of the securities portfolio to manage interest rate risk
is especially crucial to Pinnacle because of the fact that its loan to asset
ratio was a low 36% at December 31, 1994. This results in a securities portfolio
significantly larger than comparable financial institutions. While the majority
of the losses taken on the term portfolio in 1994 resulted from the significant
rise in interest rates since the beginning of 1994, management continues to feel
that its system of portfolio strategy as it relates to the slope of the yield
curve will continue to add dollars to earnings above the base yield on
securities. Because of the rising interest rate environment of 1994 and despite
the shortening of the average maturity throughout the year, reinvestment of the
proceeds of the securities sales were made at yields greater than the rates on
securities sold, thus offsetting the effect of the losses by increasing the net
interest margin.
The net securities gains recorded in 1994 included gains of $1,772,000
related to Pinnacle's equity investment program which consists of preferred and
common stock investments in other financial institutions. The remaining gains
were recorded on the term portfolio early in the first quarter of 1994.
OTHER NON-INTEREST INCOME
The major components of Pinnacle's other non-interest income consist of
service charges on deposit accounts, other banking income and trust fees. Fees
on banking services and other income were $3,704,000 for 1994 compared to
$3,903,000 in 1993, a decrease of 5%. The primary source of banking fee income
in 1994 was deposit service charges totalling $2,379,000, a drop of 10% from the
$2,632,000 level of 1993. A significant portion of the drop in service charges
related to business deposit accounts. In a rising interest rate environment,
these customers earn greater credit on their balances, thus offsetting fees
charged. Trust fees increased 3% on a year-to-year basis. Trust assets under
management at year end amounted to $167 million at December 31, 1994, or 2%
above the total one year earlier.
NON-INTEREST EXPENSE
Non-interest expense totalled $21,060,000, an increase of 3% in 1994
compared to 1993. Employee compensation and benefits decreased 1%, primarily as
a result of lower profit incentive bonus accruals due to lower 1994 earnings.
Occupancy expense totalled $1,848,000, down 4%. Other general expenses amounted
to $8,072,000, up 11%. Included in other general expenses was a provision of
$750,000 for issues currently in litigation. Without these reserves, other
expenses would have been unchanged.
INCOME TAXES
Due to the high level of securities losses in 1994, there was a tax benefit
of $(2,319,000) in 1994 compared to a provision for $4,005,000 in 1993. The
primary components of Pinnacle's deferred tax asset at December 31, 1994 are
differences between the book and tax bases of securities and other assets,
provision for loan losses, purchased accounting adjustments, deferred
compensation and deferred loan fees. At December 31, 1994, Pinnacle had a
consolidated net operating loss carryforward of $3,641,000, which if not used,
expires from the years 1999 to 2001. The majority of the net operating loss
carryforward relates to the parent company and is subject to significant
limitations on its usage.
The provision for state income taxes in 1994 was a tax benefit in the amount
of $(761,000) compared to a benefit of $(108,000) in 1993. The tax benefit in
1994 related to low pre-tax earnings for Pinnacle and from Pinnacle's
significant holdings of U. S. Government securities, which are exempt from state
tax, and the ability to carryback losses for state tax purposes for a refund of
previously paid taxes.
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BALANCE SHEET
Total assets were $818,697,000 at December 31, 1995, or 20% higher than
total assets of $684,892,000 at year-end 1994. The increase in total assets
relates to the acquisition of AFC on January 6, 1995.
SECURITIES
Pinnacle's securities portfolio is its most significant Balance Sheet asset.
Total securities were $426,929,000 at December 31, 1995 and consisted of U. S.
Government securities of $370,545,000; MBS's and CMO's totalling $10,306,000;
State and municipal bonds of $25,839,000 and Corporate and other securities of
$20,238,000. Total securities outstanding increased 10% from 1994. The increase
was primarily due to the acquisition of AFC. Certain securities acquired from
AFC which were not within Pinnacle's investment guidelines were sold with
proceeds reinvested primarily in U. S. Government securities.
Currently, Pinnacle is not using any derivative products for hedging or
other purposes.
Pinnacle adopted SFAS No. 115, effective January 1, 1994 and classified all
securities held by Pinnacle as available for sale. As a result, all securities
are carried on the Balance Sheet at fair value, with corresponding (after tax)
valuation adjustments included in stockholders' equity. During the year, the
change in the valuation adjustment was an increase of $4,004,000 resulting in
total unrealized gains, net of tax, of $7,052,000 at December 31, 1995.
LOANS
Total loans were $309,600,000 at December 31, 1995, an increase of 25% over
loans outstanding of $248,404,000 at December 31, 1994. All categories of loans
increased due to the acquisition, with the greatest increase in commercial real
estate loans. Absent the effects of the acquisition, loans increased
approximately $3,000,000, with the majority of the increase in both residential
and commercial real estate loans. Pinnacle's loan to asset ratio increased to
38% at December 31, 1995; although it remains significantly lower than the
industry average. Factors which contribute to the low loan to asset ratio
include the market areas in which certain of the banks are located as well as
certain acquisitions in recent years, such as Berwyn National Bank acquired in
1991 with a 13% loan to asset ratio and the acquisition of $120 million in
deposits of the Berwyn branch of Olympic Federal Savings Association in 1992
with no corresponding loans. Management's goal is to increase this ratio through
quality loan growth across a consistent spectrum of commercial, consumer and
real estate borrowers. Management targets borrowers who are or will be full
relationship banking customers as opposed to single product loan customers.
At December 31, 1995, Pinnacle's mix of loans consisted of 57% in real
estate loans, 27% in commercial loans and 16% in consumer loans, which remained
substantially consistent with the mix at December 31, 1994. Commercial loans
declined while consumer installment loans increased. A substantial portion of
Pinnacle's loans are owner-occupied, one-to-four family residences, as well as
consumer related with home equity and home improvement loans. This mix is in
line with Pinnacle's focus on increasing the importance of retail lending.
DEPOSITS
Total deposits were $712,805,000 at December 31, 1995, or 19% higher than
year-end 1994. The majority of the increase in deposits is a result of the
acquisition.
Absent the effect of the acquisition, savings deposits have dropped
approximately $21,000,000 and money market deposits have dropped approximately
$9,000,000. Other time deposits have increased approximately $21,000,000.
Management believes the drop in savings and money market deposits is the result
of the low interest rate environment in years prior to 1994 where customers
earned similar rates on their savings deposits as they would have with time
deposits without long-term commitment of funds. As the rates began to rise,
customers attempted to earn higher rates by moving to non-bank products and
special term deposits at other financial institutions or brokerage-
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type companies. Changing demographics of certain of the banking center locations
has also led to the shift and loss of deposits. During the last half of 1994,
and continuing throughout 1995, management has taken steps to increase and
maintain interest rates on deposits and provide products to reduce the
disintermediation of funds. Deposits have shifted from savings and money market
deposits into time deposits, indicating customers are more willing to commit
their funds for defined periods of time.
Pinnacle's deposit base continues to be made up of a high amount of low cost
core deposits in comparison with peer group institutions. However, the impact on
earnings of this deposit base has been somewhat offset in the current
environment due to increased rates paid on these deposits. Also, the increase in
rates paid on time deposits caused a shift from savings and money market
accounts to time deposits.
GOODWILL
Goodwill and other intangibles amounted to $19,177,000, or 24% of
stockholders' equity, at December 31, 1995. Goodwill and other intangibles
relate to premiums paid in Pinnacle's acquisitions. The increase from year-end
1994 was the result of the acquisition of AFC, where approximately $13,000,000
in goodwill was recorded.
SHORT-TERM BORROWINGS
Short-term borrowings are being made on a day-to-day basis to fund banking
liquidity needs when necessary. There were no short-term borrowings at December
31, 1995.
NOTES PAYABLE
Pinnacle had $20,600,000 outstanding in notes payable at December 31, 1995,
compared to $5,400,000 at December 31, 1994. During 1995, Pinnacle increased
their borrowings by $23,000,000 to acquire AFC. An additional $8,800,000 was
used for the repurchase common stock, the purchase of equity securities, and
other corporate needs. Repayments of $16,600,000 were made from dividends from
subsidiary banks, and sales and dividends of equity securities. Pinnacle had a
revolving line of credit of $7,000,000 at December 31, 1995, of which $600,000
has been drawn.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $78,961,000 at December 31, 1995
up 15% from $68,836,000 at December 31, 1994. The ratio of equity to assets was
9.64% and 10.05% at each year end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage Capital
Ratio with a minimum level of Leverage capital to total assets of 3.00%.
Leverage capital is the same as Tier One capital, and consists of common stock,
additional paid-in capital and retained earnings, and is exclusive of Pinnacle's
allowance for loan losses, goodwill and other intangibles, and unrealized gain
on securities available for sale, net of tax. As of December 31, 1995 and
December 31, 1994, Pinnacle's Leverage Capital Ratio amounted to 6.60% and
8.54%, respectively. In addition, the Board has issued Risk-Based Capital
Guidelines with a minimum standard of Tier One regulatory capital to risk
weighted assets of 4.00%, and Total (Tier One plus Tier Two) regulatory capital
to risk weighted assets of 8.00%. Tier Two capital consists of Pinnacle's
allowance for loan losses up to a maximum of 1.25% of risk weighted assets. The
structure of Pinnacle's balance sheet results in a Risk-Based Capital Ratio
significantly in excess of the guidelines. At December 31, 1995, and December
31, 1994, Pinnacle's total risk-based capital ratio was 18.09% and 23.85%,
respectively, assuming the deduction of all goodwill and other intangibles in
compliance with the guidelines. The reduction in the total risk based capital
ratio was the result of the AFC acquisition, where certain of the assets
acquired had higher risk weightings.
78
<PAGE>
The following table provides an analysis of the minimum capital requirements
and the excess over the minimum which Pinnacle holds as capital, as of December
31, 1995, in thousands.
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Leverage Capital.................................................................... 3.00% $23,986 6.60% $52,732 $28,746
Risk-based Capital:
Tier One.......................................................................... 4.00 12,528 16.84 52,732 40,204
Total (Tier Two).................................................................. 8.00 25,056 18.09 56,647 31,591
</TABLE>
In addition, each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At December 31, 1995, Pinnacle and each of its subsidiary banks was
in compliance with the current capital guidelines.
Book value per share was $18.05 at December 31, 1995 compared to $15.62 at
December 31, 1994. During 1995, Pinnacle repurchased 45,755 shares of its common
stock at market prices in privately negotiated and market transactions as part
of its announced stock repurchase program. Dividends amounting to $1.16 per
share were paid in 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Pinnacle's cash flows are comprised of three general types. Cash flows from
operating activities are primarily Pinnacle's net income. Cash flows from
investing activities consist of loans made to and collected from customers; and
purchases, sales and maturities of securities available for sale. Cash flows
from financing activities are determined by Pinnacle's deposit base and from
Pinnacle's ability to borrow and repay debt and issue or repurchase stock. For
1995, cash flows were generated from a $34,435,000 net decrease in securities, a
$12,458,000 decrease in interest-bearing deposits, and a $15,200,000 net
increase in notes payable. Cash flow uses and needs included $5,045,000 from
earnings, an $18,044,000 decrease in deposits, a $4,800,000 decrease in
short-term borrowings, net cash of $14,800,000 to purchase AFC and $6,840,000 to
pay dividends and repurchase common stock. Pinnacle's net cash position
increased $21,108,000 with the majority of the increase in Federal funds sold.
Pinnacle's subsidiary banks have a relatively stable base of deposits and
any increased loan demand can be sufficiently funded without a material change
in its balance sheet. Pinnacle's corporate strategy includes acquisitions. These
acquisitions, such as the AFC acquisition, are primarily funded with debt.
Reductions of debt would be made from Pinnacle's earnings. At December 31, 1995,
Pinnacle had a line of credit of $7,000,000 with an unaffiliated bank.
Subsequent to year end, this line of credit was increased to $10,000,000.
Regulatory requirements exist which influence Pinnacle's liquidity and cash
flow needs. These requirements include the maintenance of satisfactory capital
ratios on a consolidated and subsidiary bank basis, restrictions on the amount
of dividends which a subsidiary bank may pay and reserve requirements with the
Federal Reserve Bank. Based on these restrictions, at January 1, 1996, bank
subsidiaries could have declared approximately $2,715,000 in dividends without
requesting approval of the applicable Federal or State regulatory agency. In
addition, Pinnacle has made loan commitments which could result in increased
cash flow requirements for loans. Management is of the opinion that these
regulatory requirements and loan commitments will not have a significant impact
on the liquidity of Pinnacle. Management is not aware of any known trends,
events or uncertainties that will have, or that are reasonably likely to have, a
material effect on Pinnacle. Pending before Congress is a plan to recapitalize
the SAIF fund for thrifts and banks which have "Oakar" deposits (deposits
purchased from failed thrift institutions). This plan includes potential
one-time charges of $0.85 per $100 of deposits on thrift deposits and $0.66 per
$100 of "Oakar" deposits. After this recapitalization, the insurance rate would
then be the same rate as now assessed by the FDIC, which is currently at the
minimum of $2,000 per year for "well-capitalized" banks. This one-time charge,
anticipated to be levied in 1996, would cost the Pinnacle banks approximately
$1,000,000 on a before tax basis.
Management had no significant commitments for capital expenditures at
December 31, 1995.
79
<PAGE>
PINNACLE'S STATISTICAL DISCLOSURE
The following tables are presented as of March 31, 1996, or for the three
months ended March 31, 1996. Please refer to Pinnacle's Annual Report on Form
10-K for the year ended December 31, 1995, herein incorporated by reference, for
additional discussion on information presented in the tables.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
ANALYSIS OF NET INTEREST INCOME
The statements below show, for the periods indicated, the daily average
balance outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average inter-
est rate earned or paid thereon. Except for percentages, all data is in
thousands of dollars.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits and Federal funds sold...................... $ 8,034 $ 101 5.03% $ 19,137 $ 1,063 5.55%
Taxable securities.................................................... 393,900 5,302 5.38 379,223 23,347 6.16
Nontaxable securities................................................. 22,370 673 12.03 36,140 3,895 10.78
Loans................................................................. 312,516 6,482 8.30 309,818 26,454 8.54
-------- -------- ----- -------- -------- -----
Total interest-earning assets..................................... 736,820 12,558 6.82 744,318 54,759 7.36
Noninterest-earning assets:
Cash and due from banks............................................... 23,676 23,755
Allowance for loan losses............................................. (6,031) (6,383)
Other assets.......................................................... 45,105 46,455
-------- --------
Total assets...................................................... $799,570 $808,145
-------- --------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits...................................... $ 88,198 $ 449 2.04% $ 86,573 $ 1,732 2.00%
Savings deposits...................................................... 208,095 1,556 2.99 219,852 6,852 3.12
Money market deposits................................................. 44,622 362 3.25 50,732 1,489 2.94
Other time deposits................................................... 270,366 3,689 5.46 258,569 13,664 5.28
Short-term borrowings................................................. 124 2 6.45 589 39 6.62
Notes payable......................................................... 19,714 357 7.24 24,684 1,964 7.96
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities................................ 631,119 6,415 4.06 640,999 25,740 4.02
Noninterest-bearing liabilities:
Demand deposits....................................................... 90,233 91,481
Other liabilities..................................................... 6,810 6,588
Stockholders' equity.................................................. 71,408 69,077
-------- --------
Total liabilities and stockholders' equity........................ $799,570 $808,145
-------- --------
--------
Net interest income and margin............................................ $ 6,143 3.33% $ 29,019 3.90%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------- --------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits and Federal funds sold...................... $ 1,742 $ 75 4.31% $ 6,224 $ 182 2.92%
Taxable securities.................................................... 367,372 19,438 5.29 389,304 17,756 4.56
Non-taxable securities................................................ 34,966 4,429 12.67 40,439 5,070 12.54
Loans................................................................. 248,000 20,611 8.31 238,826 19,605 8.21
-------- -------- ----- -------- -------- -----
Total interest-earning assets..................................... 652,080 44,553 6.83 674,793 42,613 6.31
Noninterest-earning assets:
Cash and due from banks............................................... 18,107 18,581
Allowance for loan losses............................................. (4,068) (3,542)
Other assets.......................................................... 33,542 33,473
-------- --------
Total assets...................................................... $699,661 $723,305
-------- --------
-------- --------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits...................................... $ 74,565 $ 1,376 1.85% $ 75,235 $ 1,487 1.98%
Savings deposits...................................................... 215,662 5,721 2.65 222,344 6,446 2.90
Money market deposits................................................. 50,509 1,295 2.56 54,021 1,349 2.50
Other time deposits................................................... 195,657 7,496 3.83 209,899 7,877 3.75
Short-term borrowings................................................. 10,989 470 4.28 2,728 88 3.23
Notes payable......................................................... 3,857 283 7.34 7,183 424 5.90
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities................................ 551,239 16,641 3.02 571,410 17,671 3.09
Noninterest-bearing liabilities:
Demand deposits....................................................... 74,827 75,839
Other liabilities..................................................... 6,358 7,162
Minority interest..................................................... -0- 68
Stockholders' equity.................................................. 67,237 68,826
-------- --------
Total liabilities and stockholders' equity........................ $699,661 $723,305
-------- --------
-------- --------
Net interest income and margin............................................ $ 27,912 4.28% $ 24,942 3.70%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based on a Federal income tax rate of 34% for each year. The fully taxable
equivalent adjustments to interest income for the three months ended March 31,
1996 and the years ended December 31, 1995, 1994, and 1993 were, in thousands,
$252, $1,462, $1,632, and $1,833, respectively. The average balance of
nonaccrual loans is included in the total loans category in each year. The
average balances do not include the effects of SFAS No. 115.
81
<PAGE>
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL
The following table show the changes in interest income and interest expense
attributable to rate and volume variances.
<TABLE>
<CAPTION>
1994 VERSUS
1995 VERSUS 1994 1993
------------------------ ---------------
CHANGE DUE TO CHANGE DUE TO
--------------- TOTAL --------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits at banks and Federal funds sold................... $ 749 $ 239 $ 988 $ (131) $ 24 $ (107)
Taxable securities.......................................................... 627 3,282 3,909 (1,000) 2,682 1,682
Nontaxable securities....................................................... 149 (683) (534) (686) 45 (641)
Loans....................................................................... 5,138 705 5,843 753 253 1,006
------ ------- ------- ------- ------ -------
Total interest income..................................................... 6,663 3,543 10,206 (1,064) 3,004 1,940
------ ------- ------- ------- ------ -------
Interest paid on:
Interest-bearing demand deposits............................................ 221 136 357 (13) (98) (111)
Savings deposits............................................................ 111 1,020 1,131 (194) (531) (725)
Money market deposits....................................................... 6 188 194 (88) 34 (54)
Other time deposits......................................................... 2,411 3,756 6,167 (534) 153 (381)
Short-term borrowings....................................................... (445) 14 (431) 266 116 382
Notes payable............................................................... 1,528 153 1,681 (196) 55 (141)
------ ------- ------- ------- ------ -------
Total interest expense.................................................... 3,832 5,267 9,099 (759) (271) (1,030)
------ ------- ------- ------- ------ -------
Net interest income........................................................... $2,831 $(1,724) $ 1,107 $ (305) $3,275 $ 2,970
------ ------- ------- ------- ------ -------
------ ------- ------- ------- ------ -------
</TABLE>
The change due to volume is calculated by multiplying the change in volume
by the prior year's rate.
The change due to rate is calculated by multiplying the change in rate by
the prior year's volume.
The change attributable to both volume and rate has been allocated to the
rate column.
82
<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
181-365
1-90 DAYS 91-180 DAYS DAYS OVER 1 YEAR TOTAL
----------- ----------- ----------- ----------- -----------
(AT MARCH 31, 1996; DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Interest-bearing deposits..................... $ 4,561 $ 591 $ -0- $ 495 $ 5,647
Taxable securities............................ 373,760 2,484 212 2,323 378,779
Tax-exempt securities......................... -0- 50 2,175 22,346 24,571
Loans, net.................................... 78,990 15,025 22,074 195,378 311,467
----------- ----------- ----------- ----------- -----------
Total....................................... 457,311 18,150 24,461 220,542 720,464
----------- ----------- ----------- ----------- -----------
Cumulative total............................ $ 457,311 $ 475,461 $ 499,922 $ 720,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Rate Sensitive Liabilities:
Interest-bearing demand....................... $ 133,128 $ -0- $ -0- $ -0- $ 133,128
Savings deposits.............................. 207,676 -0- -0- -0- 207,676
Time deposits................................. 83,584 72,535 58,928 56,336 271,383
Notes payable................................. 20,700 -0- -0- -0- 20,700
----------- ----------- ----------- ----------- -----------
Total....................................... 445,088 72,535 58,928 56,336 632,887
----------- ----------- ----------- ----------- -----------
Cumulative total............................ $ 445,088 $ 517,623 $ 576,551 $ 632,887
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cumulative gap.............................. $ 12,223 $ (42,162) $ (76,629) $ 87,577
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cumulative ratio of earning assets to
interest-bearing liabilities................... 1.03x 0.92x 0.87x 1.14x
</TABLE>
This table details Pinnacle's interest rate sensitive position at March 31,
1996. The table is one method of monitoring the interest rate risk of Pinnacle.
Interest rate risk arises when the maturity or repricing of assets differs
significantly from the maturity or repricing of liabilities.
The table presents a static gap analysis which does not fully capture the
true dynamics of interest rate changes including the timing and/or the degree of
interest rate changes. Pinnacle analyzes on a continuing basis the effects that
changes in interest rates would have on its interest rate sensitive position and
finds the following gap acceptable in light of its balance sheet mix and current
interest and economic environment.
A ratio greater than 1.00x of earning assets to interest-bearing liabilities
indicates that an increase in interest rates would generally result in an
increase in net income for Pinnacle. Conversely, a ratio less than 1.00x of
earning assets to interest-bearing liabilities indicates that an increase in
interest rates would generally result in a decrease in net income for Pinnacle.
Shifts in the structure of interest sensitive assets and liabilities are made by
management in response to interest rate movements. These changes would be made
primarily through the purchase and sale of securities. All securities owned by
Pinnacle are available for sale and the proceeds from a sale of these securities
could be reinvested in an alternative maturity range in order to respond to a
change in interest rates. Table 6 includes savings deposits as repricing within
the earliest period presented. Management believes that in reality these
deposits have longer term repricing characteristics because of the infrequency
of repricing and because these deposits are fairly price inelastic and bear
relatively low interest rates. If these deposits were included in the longest
term category, the cumulative ratio of earning assets to interest-bearing
liabilities would be 4.39x for 1-90 days; 2.69x for 91-180 days; and 2.12x for
181-365 days.
83
<PAGE>
INVESTMENT PORTFOLIO
The following table presents the book value of securities, in thousands, at
the dates indicated:
<TABLE>
<CAPTION>
MARCH DECEMBER 31
31, ----------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U. S. Treasury and Federal agency securities.............................................. $367,952 $370,545 $316,200 $337,771
State and municipal (1)................................................................... 24,571 25,839 35,171 38,199
Mortgage-backed securities and floating rate collateralized mortgage obligations (1)...... 9,565 10,307 14,764 29,417
Corporate and other (1)................................................................... 20,274 20,238 20,365 14,030
-------- -------- -------- --------
Total securities........................................................................ $422,362 $426,929 $386,500 $419,417
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------------
(1) Held for investment in 1993.
The following table shows the maturities of securities in thousands at March
31, 1996 and weighted average fully taxable equivalent yields:
<TABLE>
<CAPTION>
U.S. TREASURY
AND FEDERAL
AGENCY STATE AND
SECURITIES MUNICIPAL
--------------- ---------------
<S> <C> <C> <C> <C>
One year or less................................................................................ $363,763 5.06 % $ 2,874 12.00 %
One year to five years.......................................................................... 3,758 3.28 9,645 12.84
Five to ten years............................................................................... 431 4.74 10,496 12.63
Over ten years.................................................................................. -0- 0.00 1,556 14.89
No fixed maturity............................................................................... -0- 0.00 -0- 0.00
-------- ----- ------- ------
$367,952 5.04 % $24,571 12.78 %
-------- ----- ------- ------
-------- ----- ------- ------
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES,
FLOATING RATE
COLLATERALIZED
MORTGAGE
OBLIGATIONS,
CORPORATE AND
OTHER DEBT
SECURITIES EQUITY SECURITIES TOTAL
----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
One year or less...................................................... $ 1,002 7.99% $ -0- 0.00% $367,639 5.12%
One year to five years................................................ 253 9.35 -0- 0.00 13,656 10.14
Five years to ten years............................................... -0- 0.00 -0- 0.00 10,927 12.32
Over ten years........................................................ -0- 0.00 -0- 0.00 1,556 14.89
No fixed maturity..................................................... 9,573 7.79 19,011 5.40 28,584 6.20
------- --- ------- --- -------- --------
$10,828 7.88% $19,011 5.40% $422,362 5.58%
------- --- ------- --- -------- --------
------- --- ------- --- -------- --------
</TABLE>
Securities included in the category of no fixed maturity are mortgage-backed
securities and floating rate collateralized mortgage obligations, due to their
ability to prepay, as well as equity securities.
The average tax-equivalent yield by maturity includes the weighted average
yields on tax-exempt obligations which have been computed on a fully taxable
equivalent basis assuming a tax rate of 34% for March 31, 1996.
84
<PAGE>
LOAN PORTFOLIO
The following table sets forth the outstanding loans, in thousands, at the
following dates:
<TABLE>
<CAPTION>
MARCH DECEMBER 31
31, ------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial and other.................................................. $ 88,432 $ 83,939 $ 68,788 $ 74,855 $ 82,118 $ 86,666
Consumer.............................................................. 51,896 49,464 38,982 38,442 43,806 45,728
Real estate:
Residential......................................................... 137,211 135,086 119,520 112,138 92,811 36,198
Commercial.......................................................... 41,217 42,073 22,220 24,170 25,185 30,219
-------- -------- -------- -------- -------- --------
Total gross loans................................................... 318,756 310,562 249,510 249,605 243,920 198,811
Unearned income....................................................... 724 962 1,106 1,529 2,002 2,871
-------- -------- -------- -------- -------- --------
Net loans............................................................. $318,032 $309,600 $248,404 $248,076 $241,918 $195,940
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The following table sets forth the maturity distribution of the following
categories of loans at December 31, 1995, in thousands.
<TABLE>
<CAPTION>
REMAINING MATURITY
---------------------------------------------
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Commercial and other............................................................... $ 47,442 $ 34,072 $ 2,425 $ 83,939
Real estate:
Residential...................................................................... 8,729 39,960 86,397 135,086
Commercial....................................................................... 11,479 26,210 4,384 42,073
-------- ---------- ---------- --------
$ 67,650 $ 100,242 $93,206 $261,098
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
Of the loans listed in the maturity schedule above, a total of $193,448 are
due after one year; $174,498 of these loans have predetermined interest rates
and $18,950 of these loans have floating interest rates. There has been no
significant change since year end in the maturity distribution as disclosed
above.
COLLATERAL AND APPRAISAL GUIDELINES
Subsidiary banks of Pinnacle make loans which are collateralized by
different types of assets. A collateral guideline manual is maintained by each
bank which details collateral requirements for any collateralized loan which a
bank may make. The loan operations area has responsibility for monitoring all
compliance with collateral requirements. Collateral requirements for the most
commonly funded loans include an 85% - 95% (depending on maturity) loan-to-value
ratio for loans secured by U. S. Government securities, 70% for NYSE traded
stock, 65% for AMEX and 50% for all other common stocks, with the exception of
control stocks which are not acceptable as collateral. Commercial loans for
working capital can have a maximum loan-to-value ratio of 80% against eligible
accounts if secured by receivables, a maximum of 50% if secured by inventory and
a maximum of 80% if secured by equipment. Real estate loans can have a maximum
loan-to-value ratio of 80% unless private mortgage insurance is provided for
advances over 80%. Commercial real estate loans typically are funded at a lower
loan-to value ratio and require the personal guarantee of the borrower(s). Home
equity loans require a loan-to-value ratio of 80% of the appraised value less
any debt.
Loans made by subsidiary banks of Pinnacle which are collateralized by real
estate require an appraisal prior to funding of the loan. These loans are
reappraised when management believes that the financial condition or resources
of the borrower have deteriorated or when the collectibility of the loan is in
question. Loans collateralized by real estate are not necessarily reappraised on
an annual or quarterly basis by policy; however, all loans secured by real
estate, with immaterial exceptions, are made in the local market area served by
Pinnacle subsidiaries and each of these areas is closely monitored by management
for economic changes. A new appraisal is required for any loan which
85
<PAGE>
undergoes foreclosure or is transferred into other real estate owned. Updated
appraisals on other real estate owned are completed as required by regulatory
authorities, or if management believes a material change in the value of a
property has taken place.
The current loan policies in effect for collateral and appraisals are
similar and consistent with the policies in place in prior years.
RISK ELEMENTS
Nonaccrual, Past Due, and Restructured Loans. The following table
represents information regarding the aggregate amount of nonaccrual, past due,
and restructured loans in thousands:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
----------- -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual........................................ $ 5,331 $ 4,791 $ 748 $ 5,283 $ 2,646 $ 3,294
Past due 90 days or more and still accruing....... 946 2,293 552 585 1,067 2,713
Restructured...................................... 908 931 -0- -0- -0- 1,629
----------- --------- --------- --------- --------- ---------
Nonperforming loans............................. $ 7,185 $ 8,015 $ 1,300 $ 5,868 $ 3,713 $ 7,636
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Other real estate owned........................... $ 214 $ 284 $ 2,416 $ 3,444 $ 1,803 $ 87
Ratios:
Nonperforming loans/total loans................. 2.26% 2.59% 0.52% 2.37% 1.53% 3.90%
Nonperforming assets/total assets............... 0.92 1.01 0.54 1.29 0.74 1.33
Net charge-offs/average loans................... (0.05) 0.05 0.09 0.48 0.75 0.52
Allowance for loan losses/total loans........... 1.90 1.95 1.70 1.43 1.24 1.28
Allowance for loan losses/nonperforming loans... 84.06 75.15 325.28 60.44 80.82 32.96
</TABLE>
A discussion regarding the nonperforming assets listed above is contained
within the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Loan Concentrations. Loan concentrations are defined as amounts loaned to a
multiple number of borrowers engaged in similar activities, which would cause
them to be similarly impacted by economic or other conditions. Although Pinnacle
has a diversified loan portfolio, a substantial natural geographic concentration
of credit risk exists within Pinnacle's defined customer market areas. These
geographic market areas include the Chicago metropolitan area and the
Quad-Cities metropolitan area of Illinois and Iowa.
Adoption of Statements of Financial Accounting Standards "SFAS" Nos. 114 and
118. Effective January 1, 1995, Pinnacle adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", and its amendment No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosure". There
was no effect on the financial position and results of operations of Pinnacle as
a result of adopting these statements. No changes were required to Pinnacle's
accounting policies to loans, charge-offs, and interest income as a result of
adopting these statements. Loans considered impaired under these statements
include nonaccrual loans, restructured loans, and loans classified as at least
doubtful under Pinnacle's credit risk classification system. Total investment in
impaired loans was $5,731,000 at March 31, 1996 which consisted of $3,452,000 in
commercial loans and $2,279,000 in real estate loans. All of Pinnacle's impaired
loans are included in the nonperforming category.
Nonaccrual Loan Policy. Pinnacle follows banking regulatory guidelines with
respect to classifying loans on a nonaccrual basis. Loans are placed on
nonaccrual when the loan becomes past due over
86
<PAGE>
90 days with no intervening activity or when the collection in full of interest
and principal is doubtful. Thereafter, no interest is taken into income unless
received in cash or until such time as the borrower demonstrates the ability to
pay interest and principal.
Loans to Affiliates. Loans are made in the normal course of business to
directors, officers and principal holders of equity securities of Pinnacle and
its subsidiary banks. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions with
others and do not involve more than a normal risk of collectibility. Changes in
such loans during the three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994 were as follows:
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1993............................ $4,799,647
Additions............................................... 3,803,250
Collections............................................. (4,951,303)
----------
BALANCE AT DECEMBER 31, 1994............................ $3,651,594
Additions............................................... 1,694,049
Collections............................................. (2,290,628)
----------
BALANCE AT DECEMBER 31, 1995............................ $3,055,015
Additions............................................... 478,709
Collections............................................. (173,483)
----------
BALANCE AT MARCH 31, 1996............................... $3,360,241
----------
----------
</TABLE>
87
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at the end of each period and
daily average balances; changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off, by loan
category; and additions to the allowance which have been charged to operating
expense.
<TABLE>
<CAPTION>
PERIOD
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
----------- ---------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Average loans outstanding......... $ 312,516 $ 309,818 $ 248,000 $ 238,826 $ 185,797 $ 200,551
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Total loans at period end......... $ 318,032 $ 309,600 $ 248,404 $ 248,076 $ 241,918 $ 195,940
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Allowance for loan losses at
beginning of period.............. $ 6,023 $ 4,229 $ 3,547 $ 3,001 $ 2,517 $ 2,542
Balance acquired.................. -0- 1,945 -0- -0- 130 347
Loans charged off:
Commercial and other............ -0- 257 186 769 692 877
Consumer........................ 7 115 78 107 313 309
Real estate..................... -0- -0- 42 552 667 5
----------- ----------- ----------- ----------- ----------- -----------
Total......................... 7 372 306 1,428 1,672 1,191
----------- ----------- ----------- ----------- ----------- -----------
Recoveries of loans previously
charged off:
Commercial and other............ 1 168 14 126 198 72
Consumer........................ 23 53 65 86 74 67
Real estate..................... -0- -0- 9 62 1 -0-
----------- ----------- ----------- ----------- ----------- -----------
Total......................... 24 221 88 274 273 139
----------- ----------- ----------- ----------- ----------- -----------
Net loans charged off
(recovered)...................... (17) 151 218 1,154 1,399 1,052
----------- ----------- ----------- ----------- ----------- -----------
Provision charged to expense...... -0- -0- 900 1,700 1,753 680
----------- ----------- ----------- ----------- ----------- -----------
Allowance for loan losses at end
of period........................ $ 6,040 $ 6,023 $ 4,229 $ 3,547 $ 3,001 $ 2,517
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Ratio of net charge-offs to
average loans outstanding........ (0.05)% 0.05% 0.09% 0.48% 0.75% 0.52%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Pinnacle's subsidiary banks do not allocate the allowance for loan losses by
specific loan categories. However, bank disclosure guidelines issued by the SEC
request management to allocate the total allowance for loan losses into certain
categories. Accordingly, management has allocated the allowance for loan losses
by loan category based on historical charge-off experience and management's
evaluation of potential losses in the loan portfolio. The specific allocations
are not intended to be indicative of future charge-offs. The unallocated portion
of the allowance for loan losses represents
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<PAGE>
that portion of the allowance which has not been specifically allocated by the
analysis performed. The percent of loans in each category to total loans and the
allocation of the allowance for loan losses at March 31, 1996 and December 31 of
each year, in thousands, is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 1995 1994
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -------------------------------------------- ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and other........................ $ 1,457 27.8% $ 1,366 27.1% $ 1,051 27.7%
Consumer.................................... 39 16.2 36 15.7 147 15.4
Real estate................................. 1,034 56.0 858 57.2 826 56.9
Unallocated................................. 3,510 -- 3,763 -- 2,205 --
----------- ----- ----------- ----- ----------- -----
$ 6,040 100.0% $ 6,023 100.0% $ 4,229 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
<CAPTION>
1993 1992 1991
------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -------------------------------------------- ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and other........................ $ 1,710 30.2% $ 1,503 33.9% $ 1,401 44.2%
Consumer.................................... 540 54.7 453 17.7 464 22.0
Real estate................................. 750 15.1 430 48.4 251 33.8
Unallocated................................. 547 -- 615 -- 401 --
----------- ----- ----------- ----- ----------- -----
$ 3,547 100.0% $ 3,001 100.0% $ 2,517 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area. Control
of loan quality is continually monitored by management. Management's system of
review of the loan portfolio and the attendant determination of the adequacy of
the allowance for loan losses is made up of a number of factors. The most
significant part of the system is the independent credit review system which
reviews all commercial credits in excess of $100,000 and all commercial real
estate credits in excess of $250,000 on an annual basis at a minimum, with
problem credits reviewed more often as necessary. An informed, judgmental
determination is made of the risk associated with loans which have received low
grades under the credit review system. This estimated risk is taken into account
in determining the allowance for loan losses. In addition, the allowance
includes a substantial reserve for coverage of unidentified risks.
In addition to the credit review system, on a quarterly basis an internal
report provides an analysis of the adequacy of the allowance for management and
the Board of Directors. This analysis focuses on allocations based on loan
review ratings and historical charge-off and recovery data. Management also
reviews the status of all watch list credits on a monthly basis. The process and
the amount of the allowance and of the provision have also been subject to the
review of external auditors and banking regulatory authorities, and management
believes that it has an effective system of credit review assessment
demonstrated by the fact that Pinnacle has not recorded a significant loss that
had not been previously identified as a watch list credit by the loan review
process.
DEPOSITS
Reference is made to (I.) Distribution of Assets, Liabilities and
Stockholders' Equity for data regarding average daily deposits and rates paid
thereon for the period ended March 31, 1996 and the years ended December 31,
1995, 1994 and 1993. The aggregate amount of certificates of deposit, in
denominations of $100,000 or more, by maturity, as of March 31, 1996 are shown
below, in thousands.
<TABLE>
<S> <C>
Three months or less...................................... $ 17,833
Over three months through six months...................... 9,495
Over six months through twelve months..................... 5,149
Over twelve months........................................ 3,850
---------
Total................................................... $ 36,327
---------
---------
</TABLE>
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<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for the
period ended March 31, 1996 and for the years ended December 31, 1995, 1994 and
1993. The return on average assets and the return on average stockholders'
equity is calculated by dividing net income for the period by average assets or
average stockholders' equity, respectively. The dividend payout ratio is
calculated by dividing total dividends paid by net income.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
------------ -------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Return on average assets............................................ 0.78% 1.55% 0.32% 1.80%
Return on average stockholders' equity.............................. 8.72 18.09 3.35 18.88
Dividend payout ratio............................................... 87.18 40.89 213.70 33.22
Average stockholders' equity to average assets...................... 8.93 8.55 9.61 9.52
</TABLE>
SHORT-TERM BORROWINGS
The following table shows the distribution of short-term borrowings and the
weighted average interest rates thereon for the period ended March 31, 1996 and
the years ended December 31, 1995, 1994 and 1993. Also provided is the maximum
amount of short-term borrowings as well as weighted average interest rates for
the same periods. Dollars are in thousands.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
------------ -------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amount outstanding at end of period............................ $ -0- $ -0- $ 4,800 $ 13,600
Weighted average interest rate at end of period................ N/A N/A 6.73% 3.40%
Average amount outstanding during the period................... $ 124 $ 589 $ 10,989 $ 2,728
Weighted average interest rate during the period............... 6.45% 6.62% 4.28% 3.23%
Maximum amount outstanding at any month's end.................. $ -0- $ 2,500 $ 22,200 $ 14,000
</TABLE>
In the first quarter of 1996, substantially all short-term borrowings at the
Pinnacle Subsidiary Banks were done on an intercompany basis.
BUSINESS OF FINANCIAL SECURITY
Financial Security Corp. was incorporated under Delaware law in July, 1991.
On December 29, 1992, Financial Security acquired Security Federal, as a part of
Security Federal's conversion from a federally chartered mutual savings
association to a federally chartered stock savings association. Financial
Security is a savings and loan holding company and is subject to regulation by
the OTS, the FDIC and the SEC. Currently, Financial Security does not transact
any material business other than through its subsidiary, Security Federal. At
March 31, 1996, Financial Security had total consolidated assets of
$273,965,000, total loans of $188,219,000, including loans held for sale, total
deposits of $188,777,000 and total stockholders equity of $39,372,000.
Security Federal was organized in 1907 as a federally chartered building and
loan association. In 1937, Security Federal converted to a federally chartered
savings and loan association. Security Federal is a member of the federal home
loan bank system, and its deposit accounts are insured to the maximum allowable
amount by the FDIC. Security Federal conducts business through its two offices
which are located in Chicago and Niles, Illinois. Security Federal's principal
business has been and continues to be attracting retail deposits from the
general public, and investing those deposits, together with funds generated from
operations and borrowings, primarily in one-to-four family residential mortgage
loans and, to a lesser extent, multi-family residential mortgage loans,
mortgage-backed securities, purchased mortgage servicing rights, U.S. Government
and federal agency securities, and other investment securities.
Additional information concerning Financial Security is incorporated by
reference herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
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<PAGE>
FINANCIAL SECURITY'S MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
GENERAL
Financial Security's results of operations are primarily dependent upon its
net interest income which is the difference between interest on its
interest-earning assets, such as loans, mortgage-backed securities and
investment securities, and interest paid on its interest-bearing liabilities,
such as deposits and borrowings. Net interest income is directly affected by the
relative amounts of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on such amounts. Financial Security's results
of operations are also affected by the provision for loan losses and the level
of non-interest income and expenses. Non-interest income includes transactional
fees, loan servicing fees, fees on purchased mortgage servicing rights, real
estate operations and fees and commissions from the sales of insurance products
through its operating subsidiary. Non-interest expenses primarily consist of
salaries and employee benefits, occupancy expenses, federal deposit insurance
premiums and other operating expenses.
The operating results of Financial Security are also significantly affected
by general economic and competitive conditions, the monetary and fiscal policies
of federal agencies and the policies of agencies that regulate financial
institutions. The cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made. General
economic conditions affect the loan demand and the availability of funds for
lending activities.
During the first quarter of 1996, the yields on long-term investments (such
as mortgage loans and U.S. Treasury bonds) have increased moderately, while the
yields on short-term investments have remained relatively stable. During the
first quarter, Financial Security's yield on interest earning assets decreased
from 8.16% to 8.02% and the cost of funds decreased from 5.38% for fiscal 1995
to 5.27% due to a reduction in deposit rates from 5.10% to 4.97% and borrowing
costs from 6.87% to 6.79% which resulted in a net interest margin of 3.31% as
compared to 3.30% at year end 1995.
LIQUIDITY & CAPITAL RESOURCES
Financial Security's primary sources of funds are deposits and proceeds from
principal and interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rate cycles, economic
conditions and competition.
Liquidity management for Financial Security is both a daily and long-term
function of management's strategy. Financial Security's subsidiary thrift
association is required to maintain minimum levels of qualifying liquid assets
which are defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon percentage of deposits and short-term borrowings. The required
ratio is currently 5.0%. At March 31, 1996, Security Federal's liquidity ratio
was 6.2%.
Financial Security continues to maintain adequate liquidity with
approximately $10.3 million held in cash and cash equivalents and $56.9 million
in investments classified as available-for-sale and loans classified as or
held-for-sale at March 31, 1996. If necessary, Security Federal has additional
secured borrowing ability with the Federal Home Loan Bank of Chicago. Security
Federal will continue to use advances from the Federal Home Loan Bank-Chicago if
they prove to be a less costly source of funds or can be invested at a positive
rate of return.
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<PAGE>
Management's interest rate sensitivity strategy is designed to provide a
relatively stable stream of net interest income in moderately varying interest
rate environments. Having relatively high levels of cash, cash equivalents, and
short to intermediate term securities helps achieve this objective.
Financial Security's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows from operating activities,
consisting primarily of interest and dividends received; less interest paid on
deposits, were $3.3 million for the three months ended March 31, 1996. Net cash
provided by investing activities was $2.3 million for the three months ended
March 31, 1996. Disbursements for loan originations, and the purchase of
investments available for sale totaled $12.9 million, these were offset by
principal collected on loans, mortgage-backed securities, and maturity of
securities totaling $14.5 million. Net cash used in financing activities
amounted to $3.5 million for the three months ended March 31, 1996.
At March 31, 1996, Financial Security had outstanding commitments of
$949,000, all of which were fixed rate loans, with rates ranging from 6.25% to
10.50%. In addition, Financial Security had $1.0 million in unused lines of
credit under its home equity loan program. The weighted average rate on those
lines is 9.44%. Financial Security anticipates that it will have sufficient
funds available to meet its current commitments. Certificates of deposit
scheduled to mature in one year or less from March 31, 1996, totaled $91.6
million. Management believes that a significant portion of such deposits will
remain with Financial Security and that their maturity and repricing will not
have a material adverse impact.
The current FHLB-Chicago advances mature on a tiered basis over the next
four years. Management intends to monitor these advances during their terms and
repay or renegotiate such advances as required.
CHANGES IN FINANCIAL CONDITION FOR THE THREE MONTHS ENDED MARCH 31, 1996
TOTAL ASSETS
Total assets as of March 31, 1996, amounted to $274.0 million as compared to
$277.1 million at December 31, 1995, a decrease of $3.1 million or 1.1%. Total
loans as of March 31, 1996, including loans held for sale, amounted to $188.2
million as compared to $194.0 million at December 31, 1995, a decrease of $5.8
million or 3.0%. The decrease in loans resulted from a decrease in loan demand
and the sales of $1.7 million from loans held-for-sale. During the three months
ended March 31, 1996, Financial Security originated $1.4 million in loans as
compared to $5.2 million in the comparable period in 1995, while loan payments
increased from $4.4 million in 1995 to $5.0 million in 1996. Total securities
amounted to $56.5 million as of March 31, 1996, as compared to $55.5 million in
1995, an increase of $1,000,000 or 1.8%.
TOTAL DEPOSITS
Total deposits at March 31, 1996, amounted to $188.8 million as compared to
$193.8 million at December 31, 1995, a decrease of $5 million or 2.6%. The
decrease in deposits is due mainly to a decrease in certificates of deposit at
the Niles office from $16.6 million to $12.3 million. Advances from the Federal
Home Loan Bank increased $2.8 million from $38.7 at December 31, 1995, to $41.5
million at March 31, 1996, while the weighted average rate decreased from 6.66%
at December 31, 1995, to 6.48% at March 31, 1996.
STOCKHOLDERS' EQUITY
Stockholders' equity at March 31, 1996, amounted to $39.4 million as
compared to $38.8 million as of December 31, 1995, an increase of $600,000. This
increase was due to net income of $548,000, proceeds from the exercise of
employee stock options of $344,000 and contributions and vesting of employment
benefit plans of $79,000 which was partially offset by a net decrease in market
value of the available-for-sale portfolio of $366,000. As of March 31, 1996, the
book value per outstanding
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<PAGE>
share of common stock was $25.85 as compared to $25.92 at December 31, 1995. The
primary reasons for this decrease were the exercise of shareholder options and
the fluctuation in the market value of the available-for-sale portfolio.
The OTS has established three capital standards for thrifts:
- Tangible capital ratio equal to 1.5% of adjusted total assets
- Core capital ratio equal to 3.0% of adjusted total assets
- Risk-based ratio equal to 8.0% of risk weighted assets
Financial Security's subsidiary significantly exceeds each of the regulatory
capital requirements at March 31, 1996. The following table represents Security
Federal's capital ratios:
<TABLE>
<CAPTION>
LEVERAGE
TANGIBLE (CORE) RISK-BASED
CAPITAL CAPITAL CAPITAL
----------- ------------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Required Capital Ratio....................................... 1.50% 3.00% 8.00%
Actual Capital Ratio......................................... 11.40 11.09 21.30
Actual Capital............................................... $ 30,345 $ 29,442 $ 30,836
Required Capital............................................. 3,995 7,962 11,581
Excess Capital............................................... 26,350 21,480 19,255
</TABLE>
The OTS issued final regulations which set forth the methodology for
calculating an interest rate-risk component that is being incorporated in the
OTS regulatory capital rules. Under the new regulations, only savings
institutions with "above normal" interest rate-risk exposure are required to
maintain additional capital. The OTS has deferred implementation of this
regulation. As of March 31, 1996, Security Federal was not subject to any
interest rate-risk component.
NON PERFORMING ASSETS
Non-performing assets at March 31, 1996, amounted to $7.0 million or 2.6% of
total assets as compared to $5.5 million or 2.0% at December 31, 1995. Total
non-performing loans and leases amounted to $5.7 million or 3.0% of total loans
as compared to 2.1% as of December 31, 1995. The primary reason for the increase
in non-performing loans and assets is the commercial office equipment leases
purchased from Bennett Funding Group, Inc., totaling $1.6 million. On March 28,
1996, the U.S. Attorney's office in New York City charged Patrick Bennett and
Bennett Funding Group, Inc., a Syracuse NY company ("Bennett") with securities
fraud and perjuring in connection with Bennett's offering of up to $80 million
in short-and-medium-term notes. In addition, the SEC filed suit against Mr.
Bennett and his related companies. On April 1, 1996, Bennett filed for Chapter
11 bankruptcy protection and ceased payments to investors. It is uncertain what
effect, if any, the Bennett litigation will have on Financial Security.
Therefore Financial Security has classified the leases as non-performing and
placed them on non-accrual status. The lease payments are currently being
received by the bankruptcy trustee. It is anticipated that Financial Security
will experience a temporary loss of interest on the leases until they can be
transferred from the trustee to Security Federal. However, there can be no
assurance the additional losses will not be incurred due to the pending
litigation against Bennett.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
INTEREST INCOME
Interest income for the three months ended March 31, 1996, amounted to $5.1
million as compared to $5.0 million for the comparable period in 1995, an
increase of $.1 million or 2.0%. This increase was attributable primarily to a
decrease in the average balances outstanding on interest earning assets which
was offset by an increase in the annualized yield from 7.56% in 1995 to 8.02% in
1996.
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<PAGE>
INTEREST EXPENSE
Interest expense for the three months ended March 31, 1996, amounted to $3.0
million compared to 2.9 million for the comparable period in 1995, an increase
of $40,000 or 1.4%. This increase was due primarily to increased cost of funds
from 5.13% for the quarter ended March 31, 1995, as compared to 5.27% for the
comparable period in 1996.
NET INTEREST
Net interest income for the three months ended March 31, 1996, amounted to
$2.1 million, an increase of $41,000 or .02% over 1995. Net interest margin at
March 31, 1996, amounted to 3.31% as compared to 2.92% at March 31, 1995. The
effect of the increase in rates was offset by decreased balances outstanding
during the quarter.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $75,000 for the quarter ended March 31, 1996,
due to the Bennett leases. While management believes that its allowances for
losses are at an adequate level, there can be no assurance that losses will not
exceed estimated amounts. Management continues to monitor the allowance in
relation to the performance of Financial Security's loan portfolio, the economy
and changes in real estate values. (See "Non-Performing Assets" above.)
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 1996, amounted to
$484,000 as compared to $317,000 for the comparable period in 1995, an increase
of $167,000 or 52.7%. This increase was primarily attributable to increased
gains on sale of assets of $103,000 and increased income from purchased mortgage
servicing rights of $43,000.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 1996, was $1.8
million as compared to $1.7 million for the three months ended March 31, 1995 as
cost reductions in occupancy, data processing, legal fees, and advertising were
offset by increases in compensation, federal deposit insurance premiums, loss on
R.E.O. operations and provision for losses on securities.
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31, 1996, amounted to
$188,000 as compared to $54,000 for the comparable period in 1995. This increase
was primarily due to increased pre-tax income for the first quarter of 1996 and
tax credits pertaining to a low income housing project which were recorded in
the first quarter of 1995.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
GENERAL
Financial Security is a Chicago based thrift holding company which completed
its initial public offering on December 29, 1992, along with the simultaneous
conversion of its only subsidiary, Security Federal Savings and Loan Association
of Chicago from a federally chartered mutual savings association to a federally
chartered stock savings association. Although Security Federal is primarily a
local lender, Security Federal has a substantial concentration of out-of-market
purchased and participation loans (see Note 4 to the Consolidated Financial
Statements for the Year Ended December 31, 1995 regarding these concentrations.)
On November 10, 1994, Security Federal opened its first branch office at 5697 W.
Touhy Avenue, Niles, Illinois in order to better serve its customer base and tap
into new deposit and lending markets. As of December 31, 1995 deposits at the
Niles Branch totaled $17.0 million.
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<PAGE>
On January 5, 1995, Financial Security announced its intention to continue
its stock repurchase program by purchasing an additional five percent of its
outstanding shares in the open market. The third repurchase was completed on
March 10, 1995 and a total of 78,456 shares were repurchased at an average price
of $17.73 per share.
Financial Security conducts no significant business other than holding
investment securities. All references to Financial Security include Security
Federal and its subsidiary, Security Federal Service Corp. unless otherwise
indicated, except that references to Financial Security prior to December 29,
1992, are to Security Federal and its subsidiary on a consolidated basis.
Financial Security's results of operations are primarily dependent on net
interest income which is the difference between interest income on its loan,
mortgage backed securities and investment portfolios and its cost of funds,
consisting of interest paid on deposits and borrowed funds. Financial Security's
operating expenses principally consist of employee compensation, occupancy
expense, federal insurance premiums and other general and administrative
expenses. Financial Security's results of operations are significantly affected
by general economic competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND
Security Federal's deposits are insured by the Savings Association Insurance
Fund (the "SAIF") of the FDIC. The ratio of the SAIF's insurance reserves to
total SAIF-insured deposits remains below the statutorily designated reserve
ratio of 1.25%. Legislation pending before the Congress would recapitalize the
SAIF to the designated reserve ratio by imposing a special assessment, of 85 to
90 basis points on total deposits, against SAIF-insured institutions. Financial
Security is presently unable to determine the amount of any special assessment
Security Federal will be required to pay. It is anticipated that the special
assessment will have to be paid in a lump sum, rather than in periodic
installments, and is, therefore, likely to have a major one-time impact on the
earnings of Security Federal.
In addition, other pending legislation includes the requirement that
federally chartered thrifts convert to national banks or state chartered
institutions, which may restrict future joint venture development projects, as
well as recapturing a portion of bad debt reserves. Management cannot predict
the ultimate impact the final legislation and regulatory actions will have on
Financial Security and its operations.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114 ("SFAS
114"). "Accounting by Creditors for Impairment of a Loan" is effective for
fiscal years beginning after December 15, 1994. Financial Security adopted SFAS
114 on January 1, 1995. The adoption of SFAS 114 did not have a material impact
on Financial Security's earnings or financial condition.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115 ("SFAS 115"). Effective
January 1, 1994, Financial Security adopted the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities". SFAS 115
requires corporations to classify securities as either held-to-maturity, trading
or available-for-sale. In the fourth quarter of 1995, the Financial Accounting
Standards Board announced that they would grant institutions, such as Financial
Security, a one-time opportunity to reclassify securities when it issued "A
Guide to Implementation of Statement 115". Under this provision, Financial
Security could reclassify securities from "held-to-maturity" without "tainting"
the rest of the portfolio. In December, 1995, Financial Security transferred
$24.6 million of its investment securities and mortgage-backed and related
securities from held-to-maturity to available-for-sale. This transfer gives
Financial Security greater flexibility in administering its portfolio.
STATEMENT OF FIANNCIAL ACCOUNTING STANDARDS NO. 122 ("SFAS 122"). On May
12, 1995, the Financial Accounting Standards Board issued SFAS 122. This
statement provides for capitalization of Mortgage Servicing Rights (MSRs) when
mortgage loans (whether originated or purchased) are subsequently sold with the
MSRs retained. This statement applies to MSRs resulting from mortgage
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<PAGE>
loans only, and will be effective for fiscal years beginning after December 15,
1995. Management believes that SFAS 122 will not have material impact on
Financial Security's earnings or financial condition.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 123 ("SFAS 123"). In
October of 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation". SFAS 123 encourages entities to use a
fair value based method to account for stock based compensation plans. If such a
fair value method is not adopted, entities must disclose the proforma effect on
net income and on earnings per share had the accounting method been adopted.
This statement applies to years beginning after December 15, 1995. Management
does not believe that this statement will have a material effect on earnings or
the financial position of Financial Security.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL
Financial Security recorded net income of $2.1 million, or $1.35 per primary
share, for the fiscal year ended December 31, 1995 compared to $1.9 million or
$1.17 per primary share for fiscal 1994, an increase of $200,000 or 10.53%. The
increase in net income was due primarily to increased noninterest income of
$901,000, decreased legal fees of $133,000, decreased professional fees of
$178,000 and decreased income tax expense of $502,000 which was partially offset
by a decrease in net interest income of $1.4 million.
INTEREST INCOME
Interest income for 1995 amounted to $21.2 million as compared to $19.6
million for 1994, an increase of $1.6 million or 8.16%. This increase was
attributable primarily to an increase in the average yield on interest-earning
assets from 7.83% at December 31, 1994 to 8.16% at December 31, 1995 and
increased average balances outstanding from $251.0 million at December 31, 1994
to $260.2 million at December 31, 1995.
INTEREST EXPENSE
Interest expense for 1995 amounted to $12.7 million as compared to $9.6
million for 1994, an increase of $3.1 million or 32.29%. This increase was due
to an increase in average deposits in 1995 of $13.2 million and increased
average borrowings of $3.3 million, along with an increase in average cost of
funds from 4.40% for the year ended December 31, 1994 to 5.38% for the year
ended December 31, 1995.
PROVISION FOR LOAN LOSSES
For fiscal 1995 total provision for loan losses amounted to $100,000 as
compared to $200,000 for fiscal 1994, a decrease of $100,000 or 50.0%. This
decrease in the provision reflects continued improvements in the level of
non-performing loans which decreased to $4.0 million from $6.6 million, a
reduction of $2.6 million or 39.4%. While management believes its allowances for
losses are adequate, there can be no assurance that losses will not exceed
estimated amounts. Management continues to monitor the allowance in relation to
the performance of Financial Security's loan portfolio, the economy and changes
in real estate values.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
Net interest income for fiscal 1995 amounted to $8.5 million as compared to
$9.8 million for fiscal 1994, a decrease of $1.3 million or 13.27%. During
fiscal 1995 the average yield on interest earning assets increased from 7.83%
for the year ended December 31, 1994 to 8.16% for the year ended December 31,
1995 while the average rate on interest bearing liabilities increased from 4.40%
for the year ended December 31, 1994 to 5.38% for the year ended December 31,
1995. This resulted in a reduction in the net interest margin from 3.99% for the
year ended December 31, 1994 to 3.30% for the year ended December 31, 1995.
96
<PAGE>
NONINTEREST INCOME
Noninterest income for fiscal 1995 amounted to $1.1 million as compared to
$.2 million for fiscal 1994, an increase of $900,000 or 450.0%. The reasons for
this increase was increased income on purchased mortgage servicing rights of
$532,000 and profits on sale of loans and securities available for sale of
$229,000 as compared to losses recorded in 1994 of $132,000.
NONINTEREST EXPENSE
Noninterest expense for fiscal 1995 amounted to $7.0 million as compared to
$7.2 million for fiscal 1994, a decrease of $200,000 or 2.78%. This decrease is
primarily due to reductions in legal fees of $133,000 and other professional
fees of $178,000 and a decrease in the provision for foreclosed real estate of
$500,000 offset by an increase in the provision for loss on securities of
$483,000 (see Changes in Financial Condition, non-performing assets) and
moderate increases in other operating expenses.
INCOME TAX EXPENSE
Income tax expense for 1995 amounted to $468,000 as compared to $970,000 for
1994, a decrease of $502,000. This decrease was due primarily to the tax effect
of credits related to a low-income housing project and a reversal of the
valuation allowance for various deferred tax assets.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
DECEMBER 31, 1993.
GENERAL
Financial Security recorded net income of $1.9 million, or $1.17 per share,
for the fiscal year ended December 31, 1994 compared to $2.4 million or $1.40
per share before the effect of a change in accounting for income taxes in 1993,
a decrease of $0.23 or 16.4%. The decrease in net income before the change in
accounting for income taxes was primarily due to a decrease in gains on sale of
securities of $482,000 and increased interest expense of $908,000, which was
partially offset by decreases in provision of loan losses of $372,000, non
interest expense of $98,000 and income tax expense of $430,000.
INTEREST INCOME
Interest income for 1994 amounted to $19.6 million as compared to $19.7
million for 1993, a decrease of $44,000 or 0.5%. The decrease was the direct
result of lower yields on loan and investments which were partially offset by an
increase in the average balance of interest earning assets of $17.9 million or
7.7%. The yield on average earning assets was 7.83% in 1994 as compared to 8.45%
in 1993.
INTEREST EXPENSE
Interest expense for 1994 amounted to $9.6 million as compared to $8.7
million for 1993, an increase of $908,000 or 10.3%. During 1994, interest on
borrowings increased $1.2 million while interest on deposits decreased $335,000.
The average costs of deposits decreased .10% from 4.34% in 1993 to 4.24% in
1994, while the average cost of borrowed funds increased 1.08% from 4.59% in
1993 to 5.67% in 1994.
PROVISION FOR LOAN LOSSES
Provision for loan losses for 1994, amounted to $200,000 as compared to
$572,000 for 1993, a decrease of $372,000 or 67.0%. The decreased in the level
of loan loss provision reflects the continued decrease in nonperforming loan
balances during 1994 ($6.5 million or 3.2% of total loans as compared to $7.7
million or 3.9% at December 31, 1993 and $9.6 million or 5.7% at December 31,
1992.) During this two year period loan loss reserves have increased to 50.0% of
nonperforming loans at December 31, 1994 from 49.25% at December 31, 1993.
NONINTEREST INCOME
Noninterest income for 1994 amounted to $240,000 as compared to $688,000 for
1993, a decrease of $448,000 or 65.1%. This decrease was due primarily to
decreases in gains on sales of investments of
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<PAGE>
$482,000 and other non-operating income of $113,000, (1993 included an
out-of-court settlement of a law suit of $133,000), which were partially offset
by new income of $136,000 from purchased mortgage servicing rights.
NONINTEREST EXPENSE
Total noninterest expense for 1994 amounted to $7.2 million as compared to
$7.3 million for 1993, a decrease of $100,000 or 1.4%. Increases in occupancy
expense of $52,000, deposit insurance premiums of $38,000, legal fees of
$65,000, provision for loss on foreclosed real estate of $149,000 and other
operating expense of $339,000 were offset by decreases in compensation and
benefits of $37,000, loss from foreclosed real estate operations of $43,000 and
provision for loss from investments of $595,000. Financial Security continues to
account for its impaired CMOs on a cost recovery basis and its impaired FHA
Title 1 participations on a cash basis. During 1994, provisions for losses on
these investments amounted to $410,000, and allowances for losses on these
securities amounted to $1.3 million at December 31, 1994.
INCOME TAX EXPENSE
Federal and state income tax expense decreased $430,000 or 30.7% to $970,000
for 1994 as compared to $1.4 million for 1993. Income tax expense as a percent
of pretax earnings was 33.7% in 1994 and 36.8% in 1993. The primary reasons for
the decreased effective tax rate when compared to statutory rates were due to
significantly higher interest earned on Federal Agency securities which is
nontaxable for state income tax purposes, and a new tax credit of $95,000
received on a low income housing project.
CHANGES IN FINANCIAL CONDITION FOR THE YEAR ENDED DECEMBER 31, 1995
TOTAL ASSETS
As of December 31, 1995, total assets amounted to $277.1 million as compared
to $272.4 million at December 31, 1994, an increase of $4.7 million or 1.73%.
Total loans as of December 31, 1995, including loans held for sale, amounted to
$194.0 million as compared to $205.6 million at December 31, 1994, a decrease of
$11.6 million or 5.6%, due to decreased loan demand and reallocation of funds
into purchased mortgage servicing rights. During the year ended December 31,
1995, Financial Security originated $21.6 million in loans as compared to $23.1
million during 1994. Total investment securities amounted to $55.5 million as of
December 31, 1995 as compared to $39.9 million at December 31, 1994, an increase
of $15.6 million or 39.1% primarily in intermediate to long term callable
federal agency securities, and was funded primarily by the increase in deposits
and repayments on loans.
TOTAL DEPOSITS
As of December 31, 1995, total deposits amounted to $193.8 million as
compared to $186.6 million as of December 31, 1994, an increase of $7.2 million
or 3.9%. The increase in deposits is primarily the result of an expanded
customer base due to the operation of our Niles, Illinois office which grew from
$0.5 million at December 31, 1994 to $17.0 million as of December 31, 1995. The
proceeds of these deposits were used to reduce reliance on jumbo certificates,
repay FHLB advances and invested in intermediate to long-term callable
securities.
STOCKHOLDERS' EQUITY
At December 31, 1995, stockholders' equity amounted to $38.8 million as
compared to $38.7 million as of December 31, 1994, an increase of $100,000. This
increase was due to the payment of $1.6 million in dividends and the third stock
repurchase of $1.4 million during the first quarter of 1995; which were offset
by earnings of $2.1 million during 1995, a recovery of net unrealized losses of
$315,000 on available-for-sale securities and net unrealized gains on
available-for-sale securities of $173,000 in 1995. As of December 31, 1995, book
value per share of common stock was $25.92 as compared to $24.70 as of December
31, 1994.
98
<PAGE>
NON-PERFORMING ASSETS
At December 31, 1995, non-performing assets amounted to $5.5 million or 2.0%
of total assets, as compared to $10.4 million or 3.81% of total assets as of
December 31, 1994, a decrease of $4.9 million or 47.1%. The largest component of
non-performing assets was in non-accruing classified loans ninety days or more
delinquent totaling $4.0 million, composed primarily of 1 to 4 family
residential mortgages. The remainder of Financial Security's non-performing
assets is in foreclosed real estate, consisting of 17 properties with an
aggregate carrying value of $1.3 million and defaulted FHA Title I
Collateralized Mortgage Obligations with a net carrying value of $270,000.
Financial Security's investment in the defaulted collateralized mortgage
obligations (CMO) is net of a specific reserve of $1,643,171 and $969,330 at
December 31, 1995 and 1994, respectively. Financial Security's Tranche "B"
investment is subordinate to Tranche "A". The reserve has been established by
management to cover estimated losses. In May of 1995, interest payments were
discountined by the servicer. This investment has no liquid market and is
impaired due to high delinquency and loss rates. Management has been unable to
get any information as to the remaining value of these securities. In 1995, the
reserve was increased by $674,000.
LIQUIDITY & CAPITAL RESOURCES
Financial Security's primary sources of funds are deposits and proceeds from
principal and interest payments on loans. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rate cycles, economic
conditions and competition.
Liquidity management for Financial Security is both a daily and long-term
function of management's strategy. Financial Security's subsidiary thrift
association is required to maintain minimum levels of qualifying liquid assets
which are defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon percentage of deposits and short-term borrowings. The required
ratio is currently 5.0%. At December 31, 1995 Security Federal's liquidity ratio
was 5.8%
Financial Security continues to maintain adequate liquidity with
approximately $8.2 million held in cash or overnight funds and $57.6 million in
investments and loans classified as available-for-sale. If necessary, Security
Federal has additional secured borrowing ability with the Federal Home Loan Bank
of Chicago. Security Federal will continue to use advances from the Federal Home
Loan Bank of Chicago if they continue to be a less costly source of funds or can
be invested at a positive rate of return.
Management's interest rate sensitivity strategy is designed to provide a
relatively stable stream of net interest income in moderately varying interest
rate environments. Having relatively high levels of cash, cash equivalents, and
short to intermediate term securities helps achieve this objective.
Financial Security's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows from operating activities,
consisting primarily of interest and dividends received, less interest paid on
deposits, were $6.1 million for the year ended December 31, 1995. Net cash used
in investing activities was $4.1 million for the year ended December 31, 1995.
Disbursements for loan originations, purchase of loans receivable, and the
purchase of investments available for sale totaled $58.9 million, these were
partially offset by principal collected on loans, mortgage-backed securities,
and sales and maturities of securities totaling $52.1 million. Net cash provided
by financing activities amounted to $33,000 for the year ended December 31,
1995. Receipt of $7.3 million in deposits was offset by the completion of a $1.4
million repurchase program, the payment of a special dividend to shareholders of
$1.6 million and the net repayment of $3.1 million borrowed funds.
At December 31, 1995, Financial Security had outstanding commitments of
$863,000, all of which were fixed rate loans, with rates ranging from 7.00% to
9.00%. In addition, Financial Security had $870,000 in unused lines of credit
under its home equity loan program. The weighted average rate on
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<PAGE>
those lines is 9.66%. Financial Security anticipates that it will have
sufficient funds available to meet its current commitments. Certificates of
deposit scheduled to mature in one year or less from December 31, 1995 totaled
$89.9 million. Management believes that a significant portion of such deposits
will remain with Financial Security and that their maturity and repricing will
not have a material adverse impact.
The current FHLB of Chicago advances mature on a tiered basis over the next
four years. Management intends to monitor these advances during their terms and
repay or negotiate such advances as required.
CAPITAL RESOURCES
The OTS requires that Security Federal maintain specified levels of capital
pursuant to its regulations. At December 31, 1995, Security Federal had tangible
capital of $30.0 million, or 11.15% of total assets, core capital of $29.1
million or 10.85% of total assets, which are $25.9 million and $21.0 million
above the minimum requirements of 1.5% and 3.0%, respectively. On December 31,
1995, Security Federal had risk-based capital of $30.5 million (including $29.1
million in core capital) or 20.95% of risk-weighted assets of $145.4 million.
This amount was $18.8 million above the 8.0% requirement in effect on that date.
Security Federal is a well capitalized institution under the Prompt Corrective
Action Regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto have been prepared
in accordance with generally accepted accounting principles, which generally
requires the measurement of financial position and operating results in terms of
historical dollars (except for available-for-sale securities which are at fair
value) without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of Financial Security's operations. Unlike most industrial
companies, nearly all the assets and liabilities of Financial Security are
monetary in nature. As a result, interest rates have a greater impact on
Financial Security's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
100
<PAGE>
FINANCIAL SECURITY'S STATISTICAL DISCLOSURE
The following tables are presented as of March 31, 1996, or for the three
months ended March 31, 1996. Please refer to Financial Security's Annual Report
10-KSB for the year ended December 31, 1995, which is herein incorporated by
reference for the required tables as of December 31, 1995, and the related
discussion on information presented in the tables.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
ANALYSIS OF NET INTEREST INCOME
The following table sets forth certain information relating to the
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets and liabilities, respectively, for the periods shown. Interest earned
includes fees which are considered adjustments to yields. Balances of
nonperforming loans are included in the average balances. Except for
percentages, all data is in thousands of dollars.
101
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
----------------------------- ----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (3) BALANCE INTEREST COST
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans...................... $186,087 $3,896 8.37% $195,785 $ 16,818 8.59%
Other loans......................... 5,356 111 8.29 7,386 588 7.96
Interest-earning deposits and
federal funds sold................. 3,708 53 5.72 3,251 107 3.29
Securities held-to-maturity and
available-for-sale................. 44,704 751 6.72 38,674 2,531 6.54
FHLB Stock.......................... 2,166 35 6.46 2,150 143 6.65
Mortgage-backed securities
held-to-maturity and
available-for-sale................. 11,379 235 8.26 12,905 1,048 8.12
-------- -------- --- -------- -------- -------
Total interest-earning assets......... 253,400 5,081 8.02 260,151 21,235 8.16
-------- --- -------- -------
Noninterest-earning assets............ 23,207 23,036
-------- --------
Total assets.......................... $276,607 $283,187
-------- --------
-------- --------
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Passbook accounts................... $ 50,274 $ 357 2.83 $ 51,330 $ 1,476 2.88
NOW accounts........................ 2,988 17 2.28 2,947 65 2.22
Money market accounts............... 2,244 17 3.03 2,594 77 2.97
Certificate accounts................ 133,235 1,953 5.86 141,505 8,506 6.01
Borrowed funds...................... 37,689 640 6.79 36,885 2,533 6.87
-------- -------- --- -------- -------- -------
Total interest-bearing liabilities.... 226,430 2,983 5.27 235,261 12,657 5.38
-------- --- -------- -------
Noninterest-bearing liabilities....... 11,293 10,772
-------- --------
Total liabilities..................... 237,723 246,033
Stockholders' equity.................. 38,884 37,154
-------- --------
Total liabilities and stockholders'
equity............................... $276,607 $283,187
-------- --------
-------- --------
Interest rate spread (1).............. 2.75% 2.78%
--- -------
--- -------
Net interest income................... $2,098 $ 8,578
-------- --------
-------- --------
Net earning assets.................... $ 26,970 $ 24,890
-------- --------
-------- --------
Net yield on average interest-earning
assets (2)........................... 3.31% 3.30%
--- -------
--- -------
Ratio of interest-earning assets to
interest-bearing liabilities......... 1.12 1.11
-------- --------
-------- --------
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
---------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans...................... $194,194 $ 15,878 8.18% $167,872 $ 15,675 9.34%
Other loans......................... 8,739 699 8.00 4,360 399 9.15
Interest-earning deposits and
federal funds sold................. 5,774 193 3.34 5,260 124 2.36
Securities held-to-maturity and
available-for-sale................. 26,628 1,636 6.14 36,313 2,194 6.04
FHLB Stock.......................... 1,950 116 5.95 1,840 108 5.87
Mortgage-backed securities
held-to-maturity and
available-for-sale................. 13,732 1,122 8.17 17,431 1,188 6.82
-------- -------- ------- -------- -------- ---
Total interest-earning assets......... 251,017 19,644 7.83 233,076 19,688 8.45
-------- ------- -------- ---
Noninterest-earning assets............ 13,096 13,404
-------- --------
Total assets.......................... $264,113 $246,480
-------- --------
-------- --------
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Passbook accounts................... $ 54,095 $ 1,553 2.87 $ 51,967 $ 1,553 2.99
NOW accounts........................ 2,618 58 2.22 2,313 51 2.20
Money market accounts............... 4,238 126 2.97 4,819 151 3.13
Certificate accounts................ 134,121 6,543 4.88 139,280 6,860 4.93
Borrowed funds...................... 23,668 1,343 5.67 2,201 101 4.59
-------- -------- ------- -------- -------- ---
Total interest-bearing liabilities.... 218,740 9,623 4.40 200,580 8,716 4.35
-------- ------- -------- ---
Noninterest-bearing liabilities....... 7,328 9,473
-------- --------
Total liabilities..................... 226,068 210,053
Stockholders' equity.................. 38,045 36,427
-------- --------
Total liabilities and stockholders'
equity............................... $264,113 $246,480
-------- --------
-------- --------
Interest rate spread (1).............. 3.43% 4.10%
------- ---
------- ---
Net interest income................... $ 10,021 $ 10,972
-------- --------
-------- --------
Net earning assets.................... $ 32,277 $ 32,496
-------- --------
-------- --------
Net yield on average interest-earning
assets (2)........................... 3.99% 4.71%
------- ---
------- ---
Ratio of interest-earning assets to
interest-bearing liabilities......... 1.15 1.16
-------- --------
-------- --------
</TABLE>
- ----------------------------------
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Average Yield/Cost is Annualized.
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<PAGE>
RATE VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
changes in interest rates and changes in volume. For each category of
interest-earning and interest-bearing liabilities, information is provided on
changes attributable to (1) changes in volume (i.e., changes in volume
multiplied by the prior year's rate) and (2) changes in rate (i.e., changes in
rate multiplied by the prior year's balance). For purposes of this table,
changes attributable to both rate and volume, which cannot be segmented, have
been allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED
QUARTER ENDED MARCH DECEMBER 31, 1995
31, 1996 COMPARED TO COMPARED TO
QUARTER ENDED YEAR ENDED
MARCH 31, 1995 DECEMBER 31, 1994
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------- -------------------------
VOLUME RATE NET VOLUME RATE NET
------ ----- ----- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net....................... $(763) $ 681 $ (82) $ 136 $ 804 $ 940
Other loans............................... (81) (24) (105) (108) (3) (111)
Mortgage-backed securities................ (136) 116 (20) (68) (6) (74)
Interest-earning deposits................. (87) 93 6 (84) (2) (86)
Investment securities..................... 551 (267) 284 748 147 895
FHLB Stock................................ 1 1 2 13 14 27
------ ----- ----- ------ ------- -------
Total interest-earning assets............. $(515) $ 600 $ 85 $ 637 $ 954 $ 1,591
------ ----- ----- ------ ------- -------
INTEREST-BEARING LIABILITIES:
Deposits.................................. $ (94) $ 85 $ (9) $ 166 $ 1,678 $ 1,844
Borrowed funds............................ 70 (16) 54 802 388 1,190
------ ----- ----- ------ ------- -------
Total interest-bearing liabilities........ (24) 69 45 968 2,066 3,034
------ ----- ----- ------ ------- -------
Net change in net interest income......... $(491) $ 531 $ 40 $(331) $(1,112) $(1,443)
------ ----- ----- ------ ------- -------
------ ----- ----- ------ ------- -------
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
COMPARED TO
YEAR ENDED
DECEMBER 31, 1993
INCREASE (DECREASE)
-----------------------
VOLUME RATE NET
------ ------- ------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net....................... $2,301 $(2,098) $ 203
Other loans............................... 389 (89) 300
Mortgage-backed securities................ (271 ) 205 (66)
Interest-earning deposits................. 16 53 69
Investment securities..................... (586 ) 28 (558)
FHLB Stock................................ 6 2 8
------ ------- ------
Total interest-earning assets............. $1,855 $(1,899) $ (44)
------ ------- ------
INTEREST-BEARING LIABILITIES:
Deposits.................................. $(142 ) $ (193) $ (335)
Borrowed funds............................ 1,026 216 1,242
------ ------- ------
Total interest-bearing liabilities........ 884 23 907
------ ------- ------
Net change in net interest income......... $ 971 $(1,922) $ (951)
------ ------- ------
------ ------- ------
</TABLE>
103
<PAGE>
INVESTMENT ACTIVITIES
The following tables present the mortgage-backed securities for the periods
indicated.
<TABLE>
<CAPTION>
QUARTER
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
----------- -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
At beginning of period........................................... $ 1,044 $ 17,816 $ 18,187 $ 17,200
Mortgage-backed securities purchased............................. -- 569 1,406 9,433
Transfer from (to) securities
available-for-sale.............................................. -- (14,557) 1,830 (4,780)
Provision for loss on Investments................................ (41) (126) (200) --
Amortization and repayments...................................... (49) (2,658) (3,407) (3,666)
----------- --------- --------- ---------
At end of period................................................. $ 954 $ 1,044 $ 17,816 $ 18,187
----------- --------- --------- ---------
----------- --------- --------- ---------
<CAPTION>
QUARTER
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
----------- -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:(1)
At beginning of period........................................... $ 14,421 $ -- $ 1,830 $ --
Transfer from (to) securities
held-to-maturity................................................ -- 14,557 (1,830) 4,780
Provision for loss on Investments................................ (97) -- -- (245)
Amortization and repayments...................................... (821) (136) -- (2,705)
----------- --------- --------- ---------
At end of period................................................. $ 13,503 $ 14,421 $ -- $ 1,830
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
- ------------------------
(1) At amortized cost.
104
<PAGE>
The following table sets forth certain information regarding the carrying
and market value of Financial Security's securities portfolio and
mortgage-backed securities on the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------ --------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING DEPOSITS:
FHLB daily investments...................... $ 1,770 $ 1,770 $ 1,312 $ 1,312 $ 2,549 $ 2,549
Mutual fund -- Federated Liquid Cash........ 7,738 7,738 52 52 49 49
Money market account........................ -- -- 4,903 4,903 1,018 1,018
-------- ------- -------- ------- -------- -------
Total interest-earning deposits........... $ 9,508 $ 9,508 $ 6,267 $ 6,267 $ 3,616 $ 3,616
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
FEDERAL FUNDS SOLD............................ $ -- $ -- $ 746 $ 746 $ 850 $ 850
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
STOCK IN FHLB................................. $ 2,075 $ 2,075 $ 2,188 $ 2,188 $ 2,105 $ 2,105
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
INVESTMENT SECURITIES HELD-TO-MATURITY:
U.S. Government obligations................. $ -- $ -- $ -- $ -- $ 30 $ 25
Certificates of Deposit..................... 198 198 298 298 987 987
FHLMC notes................................. -- -- -- -- 2,000 1,936
Subordinated debt........................... -- -- -- -- 1,900 1,820
Structured notes
FHLB...................................... -- -- -- -- 7,000 5,985
Mortgage-backed securities
GNMA...................................... -- -- -- -- 5,388 5,051
FHLMC..................................... -- -- -- -- 4,961 4,748
FNMA...................................... -- -- -- -- 6,113 5,722
FHA Title 1 (1)........................... 803 803 890 890 1,254 1,254
Community Investment Corp................. 151 151 153 153 100 100
-------- ------- -------- ------- -------- -------
Total securities held-to-maturity........... $ 1,152 $ 1,152 $ 1,341 $ 1,341 $29,733 $27,628
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
U.S. Government obligations................. $ 1,064 $ 1,061 $ 1,069 $ 1,069 $ 2,050 $ 1,977
Certificates of Deposit..................... -- -- -- -- -- --
Government of Israel notes.................. -- -- -- -- -- --
FHLB notes.................................. 31,091 30,846 23,245 23,402 2,999 2,901
FHLMC notes................................. -- -- -- -- -- --
FNMA notes.................................. 2,000 2,006 3,999 4,019 1,998 1,814
Federal Farm Credit Bureau.................. 300 301 301 302 -- --
Stock in St. Paul Bancorp................... 241 254 241 255 -- --
Stock in FHLMC.............................. 1,020 1,015 1,020 1,035 1,020 980
Stock in Fidelity Bancorp................... -- -- -- -- 120 103
Corporate notes............................. 2,300 2,371 2,300 2,393 400 382
CMOs (1).................................... 173 173 270 189 944 944
Mutual funds
Structured notes............................ -- -- -- -- 165 165
FHLB debentures........................... 3,000 2,834 6,000 5,848
FNMA debentures........................... 997 1,000 996 1,079 994 920
Mortgage-backed securities..................
GNMA 4,576 4,590 4,824 4,850 -- --
FHLMC..................................... 3,836 3,889 4,230 4,348 -- --
FNMA...................................... 5,091 5,009 5,366 5,346 -- --
FHA Title 1............................... -- -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total investment securities
available-for-sale......................... $55,689 $55,349 $53,861 $54,135 $10,690 $10,186
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
TOTAL......................................... $68,424 $68,084 $64,403 $64,677 $46,994 $44,385
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
<CAPTION>
1993
------------------
CARRYING MARKET
VALUE VALUE
-------- -------
<S> <C> <C>
INTEREST-EARNING DEPOSITS:
FHLB daily investments...................... $ 4,814 $ 4,814
Mutual fund -- Federated Liquid Cash........ 506 506
Money market account........................ 4,096 4,096
-------- -------
Total interest-earning deposits........... $ 9,416 $ 9,416
-------- -------
-------- -------
FEDERAL FUNDS SOLD............................ $ 1,200 $ 1,200
-------- -------
-------- -------
STOCK IN FHLB................................. $ 1,840 $ 1,840
-------- -------
-------- -------
INVESTMENT SECURITIES HELD-TO-MATURITY:
U.S. Government obligations................. $ 30 $ 29
Certificates of Deposit..................... 396 396
FHLMC notes................................. -- --
Subordinated debt........................... -- --
Structured notes
FHLB...................................... 2,000 1,980
Mortgage-backed securities
GNMA...................................... 5,505 5,610
FHLMC..................................... 6,875 7,034
FNMA...................................... 5,807 5,903
FHA Title 1 (1)........................... -- --
Community Investment Corp................. -- --
-------- -------
Total securities held-to-maturity........... $20,613 $20,952
-------- -------
-------- -------
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
U.S. Government obligations................. $ 1,041 $ 1,110
Certificates of Deposit..................... 95 95
Government of Israel notes.................. 156 156
FHLB notes.................................. 1,002 1,010
FHLMC notes................................. 1,030 1,087
FNMA notes.................................. 3,813 3,743
Federal Farm Credit Bureau.................. -- --
Stock in St. Paul Bancorp................... -- --
Stock in FHLMC.............................. 1,020 1,070
Stock in Fidelity Bancorp................... 113 113
Corporate notes............................. 400 398
CMOs (1).................................... 1,155 1,155
Mutual funds
Structured notes............................ 2,798 2,798
FHLB debentures...........................
FNMA debentures........................... 992 967
Mortgage-backed securities..................
GNMA -- --
FHLMC..................................... -- --
FNMA...................................... -- --
FHA Title 1............................... 1,830 1,830
-------- -------
Total investment securities
available-for-sale......................... $15,445 $15,532
-------- -------
-------- -------
TOTAL......................................... $48,515 $48,940
-------- -------
-------- -------
</TABLE>
- ------------------------------
(1) See "Delinquencies and Classified Assets -- Classified Assets" in the Form
10-KSB for the fiscal year ended December 31, 1995 which is incorporated by
reference herein.
105
<PAGE>
The following table sets forth certain information regarding carrying value,
weighted average yields and maturities of Financial Security's investment
securities and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------------------------------------------
ONE YEAR OR LESS ONE TO 5 YEARS FIVE TO 10 YEARS
--------------------- --------------------- ---------------------
ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD-TO-MATURITY
Certificates of Deposit................. $ 198 6.25% $-- --% $ -- --%
FHA Title 1 mortgage-backed
securities............................. -- -- -- -- 803 9.84%
Community Investment Corp. mortgage
pools.................................. -- -- -- -- -- --
-------- --- -------- ----- -------- -----
Total securities held-to-maturity....... $ 198 6.25% $-- 0.00% $ 803 9.84%
-------- --- -------- ----- -------- -----
-------- --- -------- ----- -------- -----
SECURITIES AVAILABLE-FOR-SALE
U.S. Government securities.............. $ 20 6.25% $1,014 6.88% $ -- 0.00%
FHLB debentures......................... -- -- 1,000 6.18% 28,097 7.56%
Federal Farm Credit Bureau.............. -- -- 300 6.75% -- --
FNMA Notes.............................. -- -- -- -- 2,000 7.61%
Stock in FHLMC.......................... -- -- -- -- -- --
Stock in St. Paul Bancorp............... -- -- -- -- -- --
Investment grade corporate notes........ 400 5.10% 1,900 9.00%
Collateralized Mortgage Obligations..... -- -- -- -- -- --
Structured notes
FHLB debentures....................... 1,000 4.88% 1,000 6.13% 1,000 9.00%
FNMA debentures....................... -- -- 997 4.73% -- --
Mortgage-backed securities (1)
GNMA.................................. -- -- 6 12.00% 9 10.00%
FHLMC................................. 614 8.00% 1,228 6.18% -- --
FNMA.................................. -- -- 1,744 6.12% 672 6.00%
-------- --- -------- ----- -------- -----
Total investment securities
available-for-sale..................... $2,034 5.88% $7,289 6.09% $33,678 7.65%
-------- --- -------- ----- -------- -----
-------- --- -------- ----- -------- -----
<CAPTION>
MORE THAN 10 YEARS TOTAL INVESTMENT SECURITIES
--------------------- -----------------------------------------------
ANNUALIZED ANNUALIZED
WEIGHTED AVERAGE APPROXIMATE WEIGHTED
CARRYING AVERAGE LIFE IN AMORTIZED MARKET AVERAGE
VALUE YIELD YEARS COST VALUE YIELD
-------- ---------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD-TO-MATURITY
Certificates of Deposit................. $ -- --% 0.5 $ 198 $ 198 6.25%
FHA Title 1 mortgage-backed
securities............................. -- -- 8.9 803 803 9.84%
Community Investment Corp. mortgage
pools.................................. 151 6.89% 18.6 151 151 6.89%
-------- --- --- --------- ----------- ---
Total securities held-to-maturity....... $ 151 6.89% 8.7 $ 1,152 $ 1,152 8.84%
-------- --- --- --------- ----------- ---
-------- --- --- --------- ----------- ---
SECURITIES AVAILABLE-FOR-SALE
U.S. Government securities.............. $ 30 6.00% 1.5 $ 1,064 $ 1,061 6.84%
FHLB debentures......................... 1,994 7.13% 9.2 31,091 30,846 7.49%
Federal Farm Credit Bureau.............. -- -- 2.2 300 301 6.75%
FNMA Notes.............................. -- -- 9.4 2,000 2,006 7.61%
Stock in FHLMC.......................... -- -- -- 1,020 1,015 7.90%
Stock in St. Paul Bancorp............... -- -- -- 241 254
Investment grade corporate notes........ -- -- 4.3 2,300 2,371 8.32%
Collateralized Mortgage Obligations..... 173 0.00% 11.5 173 173 0.00%
Structured notes
FHLB debentures....................... -- -- 4.2 3,000 2,834 6.67%
FNMA debentures....................... -- -- 1.5 997 1,000 4.73%
Mortgage-backed securities (1)
GNMA.................................. 4,561 6.41% 25.6 4,576 4,590 6.42%
FHLMC................................. 1,994 7.10% 10.3 3,836 3,889 6.95%
FNMA.................................. 2,675 7.24% 15.6 5,091 5,009 6.69%
-------- --- --- --------- ----------- ---
Total investment securities
available-for-sale..................... $11,427 6.75% 10.2 $55,689 $55,349 7.07%
-------- --- --- --------- ----------- ---
-------- --- --- --------- ----------- ---
</TABLE>
- ----------------------------------
(1) Maturity information for mortgage-backed securities held-to-maturity is
presented based on final maturity date.
106
<PAGE>
LOAN PORTFOLIO
The following table sets forth the composition of Financial Securitys' loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------ ---------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family......... $127,993 67.44% $129,810 67.14% $126,314 62.27%
Multifamily................. 40,174 21.17 40,914 21.16 44,211 21.80
Commercial.................. 13,222 6.97 13,575 7.02 16,983 8.37
Construction and Land....... 398 0.21 400 0.21 414 0.20
Rehabilitation.............. -- -- -- -- 4,197 2.07
-------- -------- -------- -------- -------- --------
Total mortgage loans...... 181,787 95.79 184,699 95.53 192,119 94.71
OTHER LOANS:
Direct finance leases....... 3,538 1.86 4,124 2.13 7,078 3.51
Home Improvement(1)......... 1,088 0.57 1,176 0.61 1,768 0.87
Loans on savings accounts... 378 0.20 436 0.23 444 0.21
Home Equity loans........... 2,999 1.58 2,901 1.50 1,435 0.70
Other....................... -- -- -- -- 1 0.00
-------- -------- -------- -------- -------- --------
Total other loans......... 8,003 4.21 8,637 4.47 10,726 5.29
-------- -------- -------- -------- -------- --------
Total loans receivable...... 189,790 100.00% 193,336 100.00% 202,845 100.00%
-------- -------- --------
-------- -------- --------
LESS:
Loans in process............ -- -- 26
Deferred income, net........ 537 280 595
Allowance for loan losses... 2,341 2,285 3,294
Reserve for uncollected
capitalized interest(2).... 273 275 729
-------- -------- --------
Loans receivable, net....... $186,639 $190,496 $198,201
-------- -------- --------
-------- -------- --------
Loans Held for Sale......... $ 1,581 $ 3,483 $ 7,411
-------- -------- --------
-------- -------- --------
<CAPTION>
1993 1992 1991
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family......... $124,489 60.76% $ 96,907 57.22% $117,196 63.39%
Multifamily................. 46,684 22.79 37,040 21.87 28,516 15.42
Commercial.................. 19,696 9.61 23,189 13.69 20,861 11.28
Construction and Land....... 489 0.24 1,907 1.13 3,800 2.06
Rehabilitation.............. 5,739 2.80 6,592 3.89 9,997 5.41
-------- -------- -------- -------- -------- --------
Total mortgage loans...... 197,097 96.20 165,635 97.80 180,370 97.56
OTHER LOANS:
Direct finance leases....... 4,867 2.38 -- -- -- --
Home Improvement(1)......... 2,412 1.18 3,179 1.88 4,014 2.18
Loans on savings accounts... 495 0.24 489 0.29 427 0.23
Home Equity loans........... -- -- -- -- -- --
Other....................... 2 0.00 63 0.03 62 0.03
-------- -------- -------- -------- -------- --------
Total other loans......... 7,776 3.80 3,731 2.20 4,503 2.44
-------- -------- -------- -------- -------- --------
Total loans receivable...... 204,873 100.00% 169,366 100.00% 184,873 100.00%
-------- -------- --------
-------- -------- --------
LESS:
Loans in process............ 39 713 295
Deferred income, net........ 867 1,729 1,963
Allowance for loan losses... 3,796 3,815 2,874
Reserve for uncollected
capitalized interest(2).... 673 482 592
-------- -------- --------
Loans receivable, net....... $199,498 $162,627 $179,149
-------- -------- --------
-------- -------- --------
Loans Held for Sale......... $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
- ----------------------------------
(1) Does not include $307,000, $506,000, $864,000, $1.4 million and $2.1 million
of unearned interest netted against the balance of the home improvement
loans at December 31, 1995, 1994, 1993, 1992, and 1991. See "Loan
Participations and Purchased Loans", "Delinquencies and Classified Assets"
and "Nonperforming Assets" under Item 1. Business in the Form 10-KSB for the
fiscal year ended December 31, 1995 incorporated herein by reference.
(2) As certain of Security Federal loans have become delinquent 90 days or more,
the interest that would have been earned has been added to the principal
balance of the loan (capitalized) pursuant to Security Federal's loan
documents. Security Federal's reserve for uncollected capitalized interest
was $273,000 at March 31, 1996. Security Federal's policy is to reserve 100%
of capitalized interest for those loans delinquent 90 days or more.
107
<PAGE>
The following table sets forth Financial Security's loan originations and
loan purchases, sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
QUARTER
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------
1996 1995 1994 1993
--------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of period................ $ 184,699 $192,119 $197,097 $165,635
Mortgage loans originated:
One- to four-family............... 1,278 18,725 18,302 21,170
Multi-family...................... 91 2,340 3,980 9,758
Commercial real estate............ -- 91 -- 195
Construction and Land............. -- -- 93 161
--------- -------- -------- --------
Total mortgage loans
originated..................... 1,369 21,156 22,375 31,284
--------- -------- -------- --------
Mortgage loans purchased:
One- to four-family............... -- -- 9,680 33,960
Multi-family...................... -- -- -- 5,302
Commercial........................ -- -- -- --
Construction and Land............. -- -- -- --
--------- -------- -------- --------
Total mortgage loans
purchased...................... -- -- 9,680 39,262
--------- -------- -------- --------
Total mortgage loans originated
and purchased.................. 1,369 21,156 32,055 70,546
Transfer of mortgage loans to
foreclosed real estate............. (243) (1,940) (3,274) (814)
Mortgage Loans Sold................. (751) -- -- --
Principal repayments................ (3,287) (26,636) (33,759) (38,270)
--------- -------- -------- --------
At the end of period.................. $ 181,787 $184,699 $192,119 $197,097
--------- -------- -------- --------
--------- -------- -------- --------
Other loans:
At beginning of period................ $ 8,637 $ 10,726 $ 7,776 $ 3,731
Other loans originated................ 98 487 679 997
Other loans purchased................. -- -- 4,524 5,181
Principal repayments.................. (732) (2,577) (2,253) (2,133)
--------- -------- -------- --------
At end of period...................... $ 8,003 $ 8,636 $ 10,726 $ 7,776
--------- -------- -------- --------
--------- -------- -------- --------
Loans Held for Sale:
At beginning of period................ $ 3,483 $ 7,411 $ -- $ --
Loans Purchased....................... -- 1,514 9,523 --
Loans Sold............................ (1,638) (4,476) (1,649) --
Transfer of loans to foreclosed real
estate............................... (55)
Principal repayments.................. (209) (966) (463) --
--------- -------- -------- --------
At end of period...................... $ 1,581 $ 3,483 $ 7,411 $ --
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
108
<PAGE>
The following table shows the estimated amortization of the Security
Federal's loan portfolio at December 31, 1995 based on current conventional
terms. Scheduled repayments are reported in the maturity category in which the
payment is due. The table does not include an estimate of prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on loans receivable totalled $30.2 million, $36.5 million and $40.4
million for the years ended December 31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
MORTGAGE LOANS
------------------------------------------------ OTHER LOANS TOTALS
ONE- TO AND LOSSES -----------------------------------
FOUR- MULTI- COMMERCIAL CONSTRUCTION ----------- TOTAL LOANS LOANS HELD
FAMILY FAMILY REAL ESTATE AND LAND OTHER RECEIVABLE FOR SALE TOTAL
--------- --------- ----------- ------------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year................. $ 2,335 $ 2,602 $ 2,132 $ 37 $ 428 $ 7,534 $ -- $ 7,534
--------- --------- ----------- ----- ----------- ----------- ----------- ---------
After 1 year
1 to 3 years................ 12,099 7,991 2,553 225 3,092 25,960 -- 25,960
3 to 5 years................ 17,929 4,919 1,397 -- 2,930 27,175 35 27,210
5 to 10 years............... 18,053 7,477 1,812 98 2,187 29,627 8 29,635
10 to 20 years.............. 42,797 4,697 2,372 40 -- 49,906 136 50,042
Over 20 years............... 36,597 13,228 3,309 -- -- 53,134 3,304 56,438
--------- --------- ----------- ----- ----------- ----------- ----------- ---------
Total due after 1 year........ 127,475 38,312 11,443 363 8,209 185,802 3,483 189,285
--------- --------- ----------- ----- ----------- ----------- ----------- ---------
Total amounts due............... $ 129,810 $ 40,914 $ 13,575 $ 400 $ 8,636 $ 193,336 $ 3,483 $ 196,819
--------- --------- ----------- ----- ----------- ----------- ----------- ---------
--------- --------- ----------- ----- ----------- ----------- ----------- ---------
Less:
Loans in process.............. $ -- $ -- $ --
Unearned discounts, premiums
and deferred loan fees,
net.......................... 280 -- 280
Allowance for loan losses..... 2,285 -- 2,285
Reserve for uncollected
capitalized interest......... 275 -- 275
----------- ----------- ---------
Loans receivable net.......... $ 190,496 $ 3,483 $ 193,979
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The following table sets forth at December 31, 1995, the dollar amount of
all loans due after December 31, 1996.
<TABLE>
<CAPTION>
DUE OR REPRICE AFTER DECEMBER 31,
1996
---------------------------------
FIXED ADJUSTABLE TOTAL
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family...................................... $ 90,097 $ 37,378 $ 127,475
Multi-family............................................. 18,229 20,083 38,312
Commercial real estate................................... 8,167 3,276 11,443
Construction and land.................................... 363 -- 363
Other loans and leases..................................... 5,308 2,901 8,209
--------- ----------- ---------
Total loans receivable..................................... 122,164 63,638 185,802
Loans held for sale........................................ 104 3,379 3,483
--------- ----------- ---------
Total loans receivable and loans held for sale............. $ 122,268 $ 67,018 $ 189,285
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
109
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table shows delinquencies in Financial Security's loan
portfolio for the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT DECEMBER 31, 1995
--------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family.......... 19 $1,448 55 $3,165 24 $1,825 47 $3,003
Multi-family................ 2 640 3 762 -- -- 3 362
Commercial real estate...... 2 190 1 203 1 46 4 585
Construction and Land....... -- -- -- -- -- -- -- --
Rehabilitation.............. -- -- -- -- -- -- -- --
-- -- --
--------- ------ --------- --------- ---------
Total mortgage loans...... 23 2,278 59 4,130 25 1,871 54 3,950
Other loans (1)............... 8 28 521 1,550 10 30 -- --
-- -- --
--------- ------ --------- --------- ---------
Total loans............... 31 $2,306 580 $5,680 35 $1,901 54 $3,950
-- -- --
-- -- --
--------- ------ --------- --------- ---------
--------- ------ --------- --------- ---------
Delinquent loans to total
loans........................ 1.23% 3.02% 0.98% 2.01%
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
--------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family.......... 41 $1,997 39 $2,642 52 $2,511 66 $4,080
Multi-family................ 1 88 5 1,955 5 374 8 840
Commercial real estate...... 7 1,634 10 1,549 8 1,562 12 1,262
Construction and Land....... 1 70 -- -- -- -- -- --
Rehabilitation.............. 1 270 2 444 4 1,231 4 1,368
-- --
--------- --------- ------ --------- ------ ---------
Total mortgage loans...... 51 4,059 56 6,590 69 5,678 90 7,550
Other loans (1)............... 1 84 -- -- 16 57 25 158
-- --
--------- --------- ------ --------- ------ ---------
Total loans............... 52 $4,143 56 $6,590 85 $5,735 115 $7,708
-- --
-- --
--------- --------- ------ --------- ------ ---------
--------- --------- ------ --------- ------ ---------
Delinquent loans to total
loans........................ 2.01% 3.13% 2.87% 3.86%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ----------------------------------------
(1) Delinquent other loans primarily include the Bennett Leases. See discussion
of non performing assets below and in "-- Financial Security's Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
110
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans and
real estate owned by Financial Security at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage loans delinquent > 90 days........................ $4,130 $3,950 $ 6,590 $ 7,550 $ 8,803 $11,280
Non-accrual other loans delinquent > 90 days........................... 1,550 -- -- 158 303 858
------------ ------ ------- ------- ------- -------
Total non-performing loans........................................... 5,680 3,950 6,590 7,708 9,106 12,138
Total foreclosed real estate, net of allowance for losses.............. 1,191 1,321 3,799 3,734 6,828 5,166
Other non-performing assets (1)........................................ 173 270 -- -- -- --
------------ ------ ------- ------- ------- -------
1,364 1,591 3,799 3,734 6,828 5,166
------------ ------ ------- ------- ------- -------
Total non-performing assets.......................................... $7,044 $5,541 $10,389 $11,442 $15,934 $17,304
------------ ------ ------- ------- ------- -------
------------ ------ ------- ------- ------- -------
Non-performing loans to total loans (2)................................ 3.02% 2.01% 3.13% 3.86% 5.60% 6.78%
------------ ------ ------- ------- ------- -------
------------ ------ ------- ------- ------- -------
Total non-performing assets to total assets (2)........................ 2.57% 2.00% 3.81% 4.37% 6.68% 7.90%
------------ ------ ------- ------- ------- -------
------------ ------ ------- ------- ------- -------
</TABLE>
- ------------------------
(1) Net of specific reserves of approximately $1.6 million and $1.5 million at
March 31, 1996 and May 31, 1995, respectively.
(2) Increase primarily due to the Bennett Leases. See discussion of non
performing assets below and in "-- Financial Security's Management's
Discussion and Analysis of Financial Condition and Results of Operations."
111
<PAGE>
The following table sets forth Financial Security's allowance for loan
losses at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
QUARTER ENDED MARCH
31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period......... $ 2,285 $ 3,294 $ 3,294 $ 3,796 $ 3,815 $ 2,874 $ 947
Transfer of other allowances........... -- 360 360 --
Provision for loan losses.............. 75 100 100 200 572 1,800 2,256
Charge-offs (1)........................ (25) (346) (1,576) (723) (678) (889) (367)
Recoveries............................. 6 15 107 21 87 30 38
--------- --------- ---------- --------- --------- --------- ---------
Balance at end of period............... $ 2,341 $ 3,423 $ 2,285 $ 3,294 $ 3,796 $ 3,815 $ 2,874
--------- --------- ---------- --------- --------- --------- ---------
--------- --------- ---------- --------- --------- --------- ---------
Allocation of allowance for specific
loan losses........................... $ 947 $ 1,701 $ 889 $ 1,627 $ 472 $ 555 $ 60
--------- --------- ---------- --------- --------- --------- ---------
--------- --------- ---------- --------- --------- --------- ---------
Ratio of net charge-offs during the
period to average loans outstanding
during the period..................... 0.01% 0.16% 0.72% 0.35% 0.34% 0.49% 0.18%
Ratio of allowance for loan losses to
loans receivable, net................. 1.24% 1.65% 1.16% 1.57% 1.90% 2.35% 1.60%
Ratio of allowance for loan losses to
total non-performing assets at the end
of period (2)......................... 33.23% 33.48% 41.24% 31.71% 33.18% 23.94% 16.61%
Ratio of allowance for loan losses to
non-performing loans at the end of
period................................ 41.21% 52.20% 57.85% 49.98% 49.25% 41.90% 23.68%
</TABLE>
- ------------------------
(1) Charge-offs relate primarily to one- to four-family mortgage loans including
home improvement loans.
(2) Net of specific reserves.
Financial Security holds in its loan portfolio commercial office equipment
leases purchased from Bennett Funding Group, Inc., totaling $1.6 million. On
March 28, 1996, the U.S. Attorney's office in New York City charged Patrick
Bennett and Bennett Funding Group, a Syracuse NY company ("Bennett") with
securities fraud and perjury in connection with Bennett's offering of up to $80
million in short-and-medium-term notes. In addition, the SEC filed suit against
Mr. Bennett and his related companies. On April 1, 1996, Bennett filed for
Chapter 11 bankruptcy protection and ceased payments to investors. It is
uncertain what effect, if any, the Bennett litigation will have on Financial
Security. Therefore Financial Security has classified the leases as
non-performing and placed them on non-accrual status. The lease payments are
currently being received by the bankruptcy trustee. It is anticipated that
Financial Security will experience a temporary loss of interest on the leases
until they can be transferred from the trustee to Security Federal. However,
there can be no assurance the additional losses will not be incurred due to the
pending litigation against Bennett. As of March 31, 1996, $75,000 has been
reserved for potential losses. As of March 31, 1996, $75,000 has been reserved
for potential losses.
112
<PAGE>
The following table sets forth the specific allowances for possible loan
losses by type of loan for the periods indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
---------------------------- ----------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (1)
----------- --------------- ----------- --------------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Specific allowances:
Mortgage loans:
One-to-four family.......... $ 264 67.44% $ 264 67.14% $ 221 62.27%
Multifamily................. 235 21.17 235 21.16 440 21.80
Commercial.................. 120 6.97 120 7.02 -- 8.37
Construction and land....... -- 0.21 -- 0.21 -- 0.20
Rehabilitation.............. -- 0.00 -- 0.00 510 2.07
Other loans:
Direct finance leases....... 75 1.86 -- 2.13 -- 3.49
Home improvement............ 253 0.57 270 0.61 456 0.87
Loans on savings accounts... -- 0.20 -- 0.23 -- 0.22
Home equity loans........... -- 1.58 -- 1.50 -- 0.71
Other....................... -- 0.00 -- 0.00 -- 0.00
----------- ------- ----------- ------- ----------- -------
Total specific allowances....... $ 947 100.00% $ 889 100.00% $ 1,627 100.00%
----------- ------- ----------- ------- ----------- -------
General allowances:
Mortgage loans:
One-to-four family.......... 940 67.44% 937 67.14% 1,041 62.27%
Multifamily................. 295 21.17 295 21.16 363 21.80
Commercial.................. 97 6.97 98 7.02 139 8.37
Construction and land....... 3 0.21 3 0.21 3 0.20
Rehabilitation.............. -- 0.00 -- 0.00 34 2.07
Other loans:
Direct finance leases....... 26 1.86 30 2.13 57 3.49
Home improvement............ 8 0.57 9 0.61 14 0.87
Loans on savings accounts... 3 0.20 3 0.23 4 0.22
Home equity loans........... 22 1.58 21 1.50 12 0.71
Other....................... -- 0.00 -- 0.00 -- 0.00
----------- ------- ----------- ------- ----------- -------
Total general allowances........ 1,394 100.00% 1,396 100.00% 1,667 100.00%
----------- ------- ----------- ------- ----------- -------
Total allowances for loan
losses......................... $ 2,341 $ 2,285 $ 3,294
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
1993 1992 1991
---------------------------- ---------------------------- ----------------------------
AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (1)
----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Specific allowances:
Mortgage loans:
One-to-four family.......... $ -- 60.76% $ -- 57.22% $ -- 63.39%
Multifamily................. 22.79 40 21.87 -- 15.42
Commercial.................. -- 9.61 -- 13.69 -- 11.28
Construction and land....... -- 0.24 -- 1.13 -- 2.06
Rehabilitation.............. -- 2.80 -- 3.89 -- 5.41
Other loans:
Direct finance leases....... -- 2.38 -- 0.00 -- 0.00
Home improvement............ 472 1.18 455 1.88 -- 2.17
Loans on savings accounts... -- 0.24 -- 0.29 -- 0.23
Home equity loans........... -- 0.00 -- 0.00 -- 0.00
Other....................... -- 0.00 60 0.03 60 0.04
----------- ------- ----------- ------- ----------- -------
Total specific allowances....... $ 472 100.00% $ 555 100.00% $ 60 100.00%
----------- ------- ----------- ------- ----------- -------
General allowances:
Mortgage loans:
One-to-four family.......... 2,020 60.76% 1,303 57.22% 591 63.39%
Multifamily................. 758 22.79 518 21.87 396 15.42
Commercial.................. 319 9.61 446 13.69 823 11.28
Construction and land....... 8 0.24 37 1.13 100 2.06
Rehabilitation.............. 93 2.80 717 3.89 599 5.41
Other loans:
Direct finance leases....... 79 2.38 -- 0.00 -- 0.00
Home improvement............ 39 1.18 229 1.88 -- 2.17
Loans on savings accounts... 8 0.24 9 0.29 -- 0.23
Home equity loans........... -- -- 0.00 -- 0.00
Other....................... -- 0.00 1 0.03 305 0.04
----------- ------- ----------- ------- ----------- -------
Total general allowances........ 3,324 100.00% 3,260 100.00% 2,814 100.00%
----------- ------- ----------- ------- ----------- -------
Total allowances for loan
losses......................... $ 3,796 $ 3,815 $ 2,874
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Percent of loans in each category to total loans at the date indicated.
113
<PAGE>
DEPOSITS
The following table sets forth the distribution of deposit accounts at the
dates indicated and the weighted average nominal interest rates on each category
of deposits presented.
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
----------------------------------- -----------------------------------
1996 1995
----------------------------------- -----------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS NOMINAL RATE AMOUNT DEPOSITS NOMINAL RATE
--------- ---------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts................................... $ 51,214 27.13% 2.90% $ 50,682 26.15% 2.90%
NOW and Super NOW accounts.......................... 2,999 1.59 2.25 3,051 1.57 2.25
Demand NOW accounts................................. 955 0.51 0.00 853 0.44 0.00
--------- ---------- --- --------- ---------- ---
Total............................................. 55,168 29.23 2.81 54,586 28.16 2.82
Money market accounts............................... 1,912 1.01 2.95 2,212 1.14 2.95
Certificate accounts:
Within one year................................... 94,417 50.01 5.66 89,796 46.32 5.85
One year to three years........................... 25,271 13.39 6.41 30,459 15.72 6.62
Over three years.................................. 12,009 6.36 6.53 16,792 8.66 6.86
--------- ---------- --- --------- ---------- ---
Total........................................... 131,697 69.76 5.88 137,047 70.70 6.14
--------- ---------- --- --------- ---------- ---
Total deposits...................................... $ 188,777 100.00% 4.95% $ 193,845 100.00% 5.17%
--------- ---------- --- --------- ---------- ---
--------- ---------- --- --------- ---------- ---
<CAPTION>
1994 1993
----------------------------------- -----------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS NOMINAL RATE AMOUNT DEPOSITS NOMINAL RATE
--------- ---------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts................................... $ 52,760 28.28% 2.90% $ 52,942 26.53% 2.90%
NOW and Super NOW accounts.......................... 2,670 1.43 2.25 1,874 0.94 2.25
Demand NOW accounts................................. 563 0.30 0.00 1,014 0.51 0.00
--------- ---------- --- --------- ---------- ---
Total............................................. 55,993 30.01 2.84 55,830 27.98 2.83
Money market accounts............................... 3,395 1.82 2.95 4,662 2.34 2.95
Certificate accounts:
Within one year................................... 66,366 35.58 4.81 78,167 39.18 3.98
One year to three years........................... 34,839 18.67 6.22 22,885 11.47 4.58
Over three years.................................. 25,962 13.92 6.53 37,978 19.03 6.35
--------- ---------- --- --------- ---------- ---
Total........................................... 127,167 68.17 5.55 139,030 69.68 4.72
--------- ---------- --- --------- ---------- ---
Total deposits...................................... $ 186,555 100.00% 4.69% $ 199,522 100.00% 4.15%
--------- ---------- --- --------- ---------- ---
--------- ---------- --- --------- ---------- ---
</TABLE>
114
<PAGE>
The following table presents the deposit activity for the periods indicated.
<TABLE>
<CAPTION>
QUARTER
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
----------- -------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits....................................................... $ 43,036 $ 202,196 $ 194,835 $ 208,318
Withdrawals.................................................... 50,341 205,030 216,082 214,567
----------- ----------- ----------- -----------
Withdrawals in excess of deposits (1).......................... (7,305) (2,834) (21,247) (6,249)
Interest credited on deposits.................................. 2,237 10,124 8,189 8,448
----------- ----------- ----------- -----------
Total increase (decrease) in deposits.......................... $ (5,068) $ 7,290 $ (13,058) $ 2,199
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Withdrawals exceed deposits for the periods indicated primarily due to
Security Federal's efforts to improve it gap position by reducing brokered
certificates of deposit and also due to changing interest rates.
The following tables present, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificate accounts:
2.00% to 2.99%................................................ $ 137 $ 922 $ 11 $ 1,349
3.00% to 3.99%................................................ 714 553 10,879 54,057
4.00% to 4.99%................................................ 8,689 5,054 33,893 36,921
5.00% to 5.99%................................................ 75,811 62,418 36,769 17,676
6.00% to 6.99%................................................ 20,275 34,910 15,923 5,716
7.00% to 7.99%................................................ 25,873 32,931 29,426 20,899
8.00% to 8.99%................................................ 198 259 266 491
9.00% to 9.99%................................................ -- -- -- 1,318
10.00% or greater............................................. -- -- -- 603
------------ ----------- ----------- -----------
Total......................................................... $ 131,697 $ 137,047 $ 127,167 $ 139,030
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 1996
------------------------------------------------
WITHIN ONE TO
ONE YEAR THREE YEARS THEREAFTER TOTAL
--------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificate accounts:
2.00% to 2.99%................................................... $ -- $ 137 $ -- $ 137
3.00% to 3.99%................................................... 714 -- -- 714
4.00% to 4.99%................................................... 8,119 570 -- 8,689
5.00% to 5.99%................................................... 65,762 7,468 2,581 75,811
6.00% to 6.99%................................................... 7,397 5,530 7,348 20,275
7.00% to 7.99%................................................... 12,242 11,654 1,977 25,873
8.00% to 8.99%................................................... 46 49 103 198
9.00% to 9.99%................................................... -- -- -- --
10.00% or greater................................................ -- -- -- --
--------- ----------- ----------- -----------
Total............................................................ $ 94,280 $ 25,408 $ 12,009 $ 131,697
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
115
<PAGE>
The following table presents time deposits greater than $100,000 by maturity
period.
<TABLE>
<CAPTION>
AMOUNT AT
MATURITY PERIOD MARCH 31, 1996
- ------------------------------ --------------
(IN THOUSANDS)
<S> <C>
1 through 3 months............ $ 8,340
3 through 6 months............ 7,385
6 through 12 months........... 7,393
Over 12 months................ 8,333
--------------
Total....................... $31,451
--------------
--------------
</TABLE>
SHORT-TERM BORROWINGS
The following table sets forth certain information regarding borrowed funds
at or for the periods presented.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB ADVANCES
Average balance outstanding...................................... $ 37,470 $ 36,132 $ 22,745 $ 1,106
Maximum amount outstanding at any month-end during the period.... 41,500 43,700 41,600 18,800
Balance outstanding at end of period............................. 41,500 38,700 41,600 18,800
Weighted average interest rate during the period................. 6.69% 6.87% 5.62% 3.36%
Weighted average interest rate at end of period.................. 6.48 6.66 6.99 3.24
ESOP NOTE PAYABLE
Average balance outstanding...................................... $ 220 $ 742 $ 923 $ 1,095
Maximum amount outstanding at any month-end during the period.... 645 817 989 1,160
Balance outstanding at end of period............................. -- 645 817 989
Weighted average interest rate during the period................. 6.94% 6.94% 6.93% 5.70%
Weighted average interest rate at end of period.................. 8.56 8.56 8.03 5.67
TOTAL BORROWINGS
Average Balance outstanding...................................... $ 37,689 $ 36,875 $ 23,668 $ 2,201
Maximum amount outstanding at any month-end during the period.... 41,500 44,517 42,417 19,789
Balance outstanding at end of period............................. 41,500 39,345 42,417 19,789
Weighted average interest rate during the period................. 6.70% 6.87% 5.65% 4.59%
Weighted average interest rate at end of period.................. 6.51 6.69 7.01 3.36
</TABLE>
116
<PAGE>
SUPERVISION AND REGULATION OF PINNACLE
Pinnacle is extensively regulated under both federal and state law as a bank
holding company and a savings and loan holding company. The following
description briefly discusses certain provisions of federal and state laws and
certain regulations and proposed regulations and the potential impact of such
provisions on Pinnacle and the Pinnacle Subsidiary Banks. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions.
GENERAL
At the present time, various bills have been introduced in the United States
Congress and the Illinois state legislature which could result in additional
regulation of the business of Pinnacle and the Pinnacle Subsidiary Banks which
are now or hereafter become affiliated with Pinnacle. Future bills could also be
introduced which could significantly affect the banking industry. It cannot be
predicted whether any such legislation will be adopted or how such adoption
would affect the business of Pinnacle or any of the Pinnacle Subsidiary Banks.
BANK HOLDING COMPANY
As a bank holding company, Pinnacle is subject to the supervision of the
Federal Reserve under the BHC Act. Bank holding companies are required to file
with the Federal Reserve an annual report and such additional information as the
Federal Reserve may require. The Federal Reserve also makes periodic
examinations of bank holding companies and their subsidiaries. As a result of
Pinnacle's acquisition of Pinnacle Savings, Pinnacle is also considered a
non-diversified savings and loan holding company subject to regulatory oversight
by the OTS. As such, Pinnacle is subject to regulation and examination by the
OTS. Pinnacle is required to obtain the prior approval of the Federal Reserve
before it could acquire all or substantially all of the assets of any bank, or
acquire ownership or control of any voting shares of any bank other than a
Pinnacle Subsidiary Bank, if, after such acquisition, it would own or control
more than five percent (5%) of the voting shares of such bank. The BHC Act does
not permit the Federal Reserve to approve the acquisition by Pinnacle of any
voting shares of, or all or substantially all of the assets of, any bank located
outside of the State of Illinois, unless such acquisition is specifically
authorized by the laws of the state in which such bank is located.
The BHC Act limits the activities which may be engaged in by any bank
holding company and its subsidiaries to certain specified activities, including
those activities which the Federal Reserve may find by order or regulation, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of federal
law, require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
117
<PAGE>
The Federal Deposit Insurance Act also provides that amounts received from
the liquidation or other resolution of any insured depository institution by any
receiver must be distributed (after payment of secured claims) to pay the
deposit liabilities of the institution prior to payment of any other general or
unsecured senior liability, subordinated liability, general creditor or
stockholder. This provision would give depositors a preference over general and
subordinated creditors and stockholders in the event a receiver is appointed to
distribute the assets of any of the Pinnacle Subsidiary Banks.
Subsidiary banks of a bank holding company (such as the Pinnacle Subsidiary
Banks) are subject to certain restrictions imposed by the Federal Reserve Act on
any extensions of credit to the bank holding company or any of its subsidiaries,
on investments in the stock or other securities thereof, and on the taking of
such stock or securities as collateral for loans to any borrower. Further, under
the BHC Act and regulations of the Federal Reserve, 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.
BANKS
The operations of Pinnacle Bank and Quad-Cities Bank are subject to federal
and state statutes and regulations applicable to banks chartered under the
banking laws of the State of Illinois and to regulation by the FDIC. The
operations of Pinnacle Savings are subject to federal statutes and regulations
applicable to thrifts chartered under the banking laws of the United States and
to regulation by the OTS. Pinnacle Savings is a member of the Federal Home Loan
Bank of Chicago. The various laws and regulations administered by the regulatory
agencies affect corporate practices, such as payment of dividends, incurring
debt and acquisition of financial institutions and other companies, and affect
business practices, such as payment of interest on deposits, the charging of
interest on loans, types of business conducted and location of offices.
Federal and state banking laws and regulations govern or restrict, among
other things, the scope of a bank's business, the investments a bank may make,
the reserves against deposits a bank must maintain, the loans a bank makes and
the collateral it takes, the activities of a bank with respect to mergers and
consolidations, and the establishment of branches. Each banking regulatory
authority has the authority to prevent a bank from engaging in an unsafe or an
unsound practice in conducting its business. The payment of dividends, depending
upon the financial condition of a bank, could be deemed such a practice.
As subsidiary banks of a bank holding company, the Pinnacle Subsidiary Banks
are subject to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to Pinnacle or any of the Pinnacle Subsidiary Banks, on
investments in the stock or other securities of Pinnacle or any of the Pinnacle
Subsidiary Banks, and on taking such stock or securities as collateral for
loans. Federal statutes and Federal Reserve regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal stockholders of its parent holding company and to related interests of
such principal stockholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a principal stockholder of a
holding company may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship.
Furthermore, Federal statutes prohibit acquisition of "control" of a bank or
bank holding company without prior notice to certain Federal bank regulators.
"Control" is defined in certain cases as acquisition of as little as five
percent (5%) of the outstanding shares. From time to time, various types of
federal and state legislation have been proposed that could result in additional
regulation of, and expansions or restrictions on, the business of the banks. It
cannot be predicted whether any such legislation will be adopted or how such
legislation would affect the business of the banks.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Pinnacle Subsidiary Banks are presently insured by the SAIF
and BIF. Both the SAIF and the BIF, the deposit insurance fund that covers most
commercial bank deposits, are
118
<PAGE>
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 23 and 31 basis points. The BIF presently meets
the required reserve ratio and, therefor, BIF premiums are currently zero,
whereas the SAIF is not expected to meet or exceed the required level until 2001
at the earliest. This situation is primarily due to the statutory requirement
that SAIF members make payments on bonds issued in the late 1980s by the
Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
Legislation has been proposed in Congress to mitigate the effect of the
BIF/SAIF premium disparity. Under the legislation a special assessment would be
imposed on the amount of deposits held by SAIF-member institutions, including
Pinnacle Savings and Security Federal, to recapitalize the SAIF fund. The amount
of the special assessment would be left to the discretion of the FDIC but is
generally estimated at between 75 to 85 basis points of insured deposits. The
legislation would also require that the BIF and the SAIF be merged by January 1,
1998, provided that subsequent legislation is enacted requiring savings
associations to become banks, and that the FICO payments be spread across all
BIF and SAIF members. The payment of the special assessment would have the
effect of immediately reducing the capital of SAIF-member institutions, net of
any tax effect; however, it would not affect Pinnacle Savings' or Security
Federal's compliance with its regulatory capital requirements. Management cannot
predict whether legislation imposing such a fee will be enacted, or, if enacted,
the amount of any special assessment or when and whether ongoing SAIF premiums
will be reduced to a level equal to that of BIF premiums. Management can also
not predict whether or when the BIF and SAIF will merge.
DESCRIPTION OF PINNACLE CAPITAL STOCK
The capital stock of Pinnacle consists of 20,000,000 authorized shares of
Pinnacle Common Stock, $4.69 par value per share, and 1,000 authorized shares of
preferred stock, no par value per share ("Pinnacle Preferred Stock"). The
following summary does not purport to be complete and is subject in all respects
to applicable Illinois law and Pinnacle's Articles of Incorporation and By-laws.
COMMON STOCK
Pinnacle had 4,302,716 shares of Pinnacle Common Stock outstanding as of the
Pinnacle Record Date. Each share of Pinnacle Common Stock is entitled to one
vote on all matters submitted to a vote of stockholders. Holders of Pinnacle
Common Stock are entitled to receive dividends when and as declared by
Pinnacle's Board of Directors out of funds legally available therefor. Dividends
may be paid on the Pinnacle Common Stock only if all dividends on any
outstanding Pinnacle Preferred Stock have been paid or provided for.
The issued and outstanding shares of Pinnacle Common Stock are, and shares
to be issued in the Merger will be when issued, fully paid and non-assessable.
Holders of Pinnacle Common Stock have no preemptive or conversion rights and are
not subject to further calls or assessments by Pinnacle.
In the event of the voluntary or involuntary dissolution, liquidation or
winding up of Pinnacle, holders of Pinnacle Common Stock are entitled to
receive, pro rata, after satisfaction in full of the prior rights of creditors
and holders of Pinnacle Preferred Stock, if any, all of the remaining assets of
Pinnacle available for distribution.
Directors are elected by a vote of the holders of Pinnacle Common Stock.
Harris Trust and Savings Bank acts as the transfer agent and registrar for
the Pinnacle Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth with respect to each (i) beneficial holder of
more than five percent of the outstanding shares of Pinnacle Common Stock, (ii)
director, and (iii) executive officer (denoted by
119
<PAGE>
an asterisk) of Pinnacle, the amount of Pinnacle Common Stock beneficially owned
and the percentage of such class of shares as of the Pinnacle Record Date and
immediately following the Effective Time (presuming all of the Financial
Security stockholders elect the Stock Distribution) and the maximum amount of
shares of Pinnacle Common Stock are issued in the transaction:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF PRO FORMA PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS OF CLASS
- ----------------------------------------------------------------- ------------------ ------------ -----------------
<S> <C> <C> <C>
Richard W. Burke*................................................ 55,543(1) 1.28% 0.96%
Mark P. Burns.................................................... 30,012(2) 0.69 0.52
William J. Finn, Jr.............................................. 95,141(3) 2.19 1.64
Samuel M. Gilman................................................. 30,432 0.70 0.52
Albert Giusfredi................................................. 70,453 1.62 1.21
John J. Gleason*................................................. 890,134(4) 20.48 15.34
John J. Gleason, Jr.*............................................ 111,433(5) 2.56 1.92
William P. Gleason*.............................................. 48,257(6) 1.11 0.83
James L. Greene.................................................. 166,785(7) 3.84 2.87
Donald G. King................................................... 157,120 3.62 2.71
James A. Maddock................................................. 76,133(8) 1.75 1.31
James J. McDonough............................................... 53,217 1.22 0.92
William C. Nickels............................................... 63,190(9) 1.45 1.09
John E. O'Neill.................................................. 14,764 0.34 0.25
James R. Phillip, Jr............................................. 51,496(10) 1.18 0.89
Kenneth C. Whitener, Jr.*........................................ 314,522(11) 7.24 5.42
All Directors and executive officers as a group (16 in total).... 2,228,632 51.23% 38.37%
</TABLE>
- ------------------------
(1) Includes 1,807 shares owned by Mr. Burke's wife and child who reside with
Mr. Burke, to which shares Mr. Burke disclaims beneficial ownership.
(2) Includes 6,500 shares held by Pinnacle Bank as Custodian.
(3) Includes 10,000 shares held by Mr. Finn's wife, to which shares Mr. Finn
disclaims beneficial ownership.
(4) Includes 394,980 shares owned by Gleason & Associates, Inc., of which Mr. J.
Gleason is President and controlling stockholder. Also includes 18,000
shares which Mr. J. Gleason has the right to acquire upon the exercise of
stock options and 186,516 shares held by his spouse and child who reside
with Mr. J. Gleason, to which shares Mr. J. Gleason disclaims beneficial
ownership.
(5) Includes 12,000 shares which Mr. J. Gleason, Jr. has the right to acquire
upon exercise of stock options and 11,598 shares held by his wife and
children.
(6) Includes 18,156 shares held by his children.
(7) Includes 18,363 shares held by Mr. Greene's spouse to which shares Mr.
Greene disclaims beneficial ownership. Also includes 68,981 shares owned by
Jim Greene Associates, Inc. Mr. Greene is President and controlling
stockholder of Jim Greene Associates, Inc.
(8) Includes 51,602 shares owned by Maddock Industries including its profit
sharing plan. Mr. Maddock is President and controlling stockholder of
Maddock Industries. Also includes 695 shares held by a child of Mr. Maddock
who resides with him, to which Mr. Maddock disclaims beneficial ownership.
(9) All shares are owned by a company of which Mr. Nickels is a controlling
stockholder.
(10) Includes 18,141 shares held by a company of which Mr. Phillip is a
controlling stockholder.
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(11) Represents 308,522 shares which are held in trust for the benefit of Mr.
Whitener and 6,000 shares which Mr. Whitener has the right to acquire upon
exercise of stock options.
PREFERRED STOCK
Pinnacle is authorized to issue up to 1,000 shares of Pinnacle Preferred
Stock. At the present time, none of the authorized Pinnacle Preferred Stock is
issued and the Pinnacle Board of Directors has no present plan or commitment for
the issuance of any Pinnacle Preferred Stock. Nevertheless, Pinnacle's Articles
of Incorporation permit the Pinnacle Board to establish the rights and
preferences of the Pinnacle Preferred Stock, in the exercise of their business
judgment, so as to facilitate the structuring of possible future financings and
acquisitions and in meeting other corporate needs which may arise. If
opportunities arise which would make desirable the issuance of preferred stock
through either public offerings or private placements, such stock could be
authorized and issued by the Pinnacle Board without receiving any additional
approval from the Pinnacle stockholders, except as may be required by law or
regulatory authorities or pursuant to the rules of any stock exchange on which
Pinnacle's securities may then be listed. In the event of a hostile attempt to
take over Pinnacle, it might be possible for the Pinnacle Board to issue in a
private transaction a series of preferred stock with rights and preferences
which could impede the completion of such a transaction. The specific terms of
any series of preferred stock would depend primarily on market conditions and
other factors existing at that time of issuance.
The power of the Pinnacle Board to issue Pinnacle Preferred Stock with
voting or other rights which might impede or deter a takeover attempt may make
Pinnacle a less attractive takeover candidate and may deter takeover attempts
not approved by the Pinnacle Board, in which Pinnacle stockholders might receive
for some or all of their shares a substantial premium above market value at that
time the takeover bid is made. Additionally, issuance of the Pinnacle Preferred
Stock could result in a class of securities outstanding that will have certain
preferences with respect to dividends and in liquidation over Pinnacle Common
Stock. Such preferred shares could enjoy certain voting rights, contingent or
otherwise, in addition to those of Pinnacle Common Stock, which could result in
the dilution of the voting rights, net income per share, and net book value of
Pinnacle Common Stock.
DISSENTER'S RIGHTS
Dissenting stockholders of Financial Security who follow the procedures
specified in Section 262 of the DGCL ("Section 262") will be entitled to have
their shares of Financial Security Common Stock appraised by the Delaware Court
of Chancery and to receive payment of the "fair value" of such shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, as determined by such Court. A dissenting stockholder should assume that
neither Financial Security nor Pinnacle will take any action to perfect his or
her appraisal rights. Therefor, a stockholder desiring to exercise appraisal
rights should strictly comply with the procedures set forth in Section 262 and
is urged to consult his or her legal advisor before electing or attempting to
exercise such rights. Failure to follow any of such procedures may result in a
termination or waiver of appraisal rights under Section 262.
The following discussion of the provisions of Section 262 is not intended to
be a complete statement of its provisions and is qualified in its entirety by
reference to the full text of that section, a copy of which is included herein
as Appendix III.
Under Section 262, a dissenting stockholder electing to exercise appraisal
rights must satisfy both of the requirements set forth in paragraphs (1) and (2)
below:
(1) Deliver to Financial Security, before the taking of the vote on the
proposal to adopt and approve the Merger Agreement, a written demand for
appraisal of his or her shares of Financial Security Common Stock which
reasonably informs Financial Security of the identity of the stockholder of
record and that such stockholder intends thereby to demand the appraisal of
his or her shares of Financial Security Common Stock. This written demand is
in addition to and
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separate from any proxy or vote against the proposal to approve and adopt
the Merger. Neither a vote against such proposal nor a proxy directing such
vote shall satisfy the requirement for such written demand. The written
demand for appraisal should be delivered either in person to the Secretary
of Financial Security at the Financial Security Meeting, or by mail
(certified mail, return receipt requested, being the recommended form of
transmittal) to: Secretary, Financial Security Corp., 1209 North Milwaukee
Avenue, Chicago, Illinois 60622 before the vote on the proposal to approve
the Merger; and
(2) Not vote in favor of the Merger Agreement. A failure to vote against
such proposal will not constitute a waiver of appraisal rights. However, any
stockholder who executes a proxy and who desires to perfect his or her
appraisal rights must mark the proxy "Against" the proposal to approve the
Merger Agreement or must abstain because if the proxy is left blank, it will
be voted for such proposal.
The written demand for appraisal must be made by or for the holder of record
of the shares of Financial Security Common Stock as of the Financial Security
Record Date and such shares must be held continuously through the Effective
Time. Accordingly, such demand should be executed by or for such stockholder of
record, fully and correctly, as such stockholder's name appears on his or her
stock certificates. If the shares of Financial Security Common Stock are owned
of record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in such capacity and if the stock is
owned of record by more than one person, in a joint tenancy or tenancy in
common, such demand should be executed by or for all joint owners. An authorized
agent, including one of two or more joint owners, may execute the demand for
appraisal for a stockholder of record. However, the agent must identify the
record owner or owners and expressly disclose the fact that in executing the
demand he or she is acting as agent for such record owner or owners.
If any Financial Security stockholder fails to comply with any of these
conditions and the Merger becomes effective, he will be entitled to receive the
Merger Consideration provided for in the Merger Agreement, but will have no
appraisal rights with respect to his or her shares of Financial Security Common
Stock.
DISSENTING STOCKHOLDERS WHO ARE NOT THE OWNERS OF RECORD OF THEIR SHARES
SHOULD CONSULT THEIR LEGAL COUNSEL REGARDING THE RIGHT OF APPRAISAL WITH RESPECT
TO THEIR SHARES OF FINANCIAL SECURITY COMMON STOCK.
Within ten days after the Effective Time, Pinnacle will notify each former
stockholder of Financial Security who has satisfied the foregoing conditions of
the date on which the Merger became effective. Within 120 days after the
Effective Time, Pinnacle or any such stockholder who has satisfied the foregoing
conditions and is otherwise entitled to appraisal rights under Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of Financial Security Common Stock formerly held by
all stockholders entitled to appraisal rights. If no such petition is filed,
appraisal rights will be lost for all stockholders who had previously demanded
appraisal of their shares of Financial Security Common Stock. Dissenting
stockholders seeking to exercise appraisal rights should assume that Pinnacle
will not file a petition with respect to the appraised value of shares of
Financial Security Common Stock and that Pinnacle will not initiate any
negotiations with respect to the "fair value" of shares of Financial Security
Common Stock. Accordingly, stockholders of Financial Security Common Stock who
wish to exercise their appraisal rights should regard it as their obligation to
take all steps necessary to perfect their appraisal rights in the manner
prescribed in Section 262.
Within 120 days after the Effective Time, any dissenting stockholder who has
complied with the provisions of Section 262 is entitled, upon written request,
to receive from Pinnacle a statement setting forth the aggregate number of
shares of Financial Security Common Stock not voted in favor of the Merger
Agreement and, with respect to which demands for appraisal were received by
Pinnacle,
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the number of holders of such shares of Financial Security Common Stock. Such
statement must be mailed by Pinnacle within ten days after expiration of the
time for delivery of demands for appraisal under Section 262, whichever is
later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the former stockholders
of Financial Security entitled to appraisal rights and will appraise the value
of the shares of Financial Security Common Stock formerly owned by such
stockholders, determining the "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger.
Although Pinnacle and Financial Security believe that the terms of the
Merger are fair, neither can make any representation as to the outcome of any
appraisal of "fair value" as determined by the Delaware Court of Chancery, and
stockholders should recognize that such an appraisal could result in a
determination of a lower, higher or equivalent value. Moreover, Pinnacle may or
may not argue in an appraisal proceeding for a determination of "fair value" by
the Delaware Court of Chancery which is lower than the value of the
consideration received by stockholders of Financial Security pursuant to the
Merger Agreement. In determining the "fair value" of the shares of Financial
Security Common Stock, asset values, dividends, earnings, prospects, the nature
of the enterprise and other facts which could be ascertained as of the Effective
Time of the Merger may be taken into account by the Delaware Court of Chancery.
The Delaware Supreme Court has stated with respect to Section 262 that, among
other things, "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in an appraisal proceeding. In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on the
relevant facts and circumstances, may or may not be a stockholder's exclusive
remedy in connection with mergers similar to the Merger.
The Court of Chancery may also, on application, (i) determine a fair rate of
interest, simple or compound, if any, to be paid to dissenting stockholders in
addition to the value of the Financial Security Common Stock for the period from
the Effective Time of the Merger to the date of payment, (ii) assess costs among
the parties as the court deems equitable and (iii) order all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding including, without limitation, reasonable attorney's fees and fees
and expenses of experts to be charged pro rata against the value of all shares
entitled to appraisal. Determinations by the Court are subject to appellate
review by the Delaware Supreme Court.
Any dissenting stockholder of Financial Security who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time of
the Merger, be entitled to vote the capital stock of Financial Security for any
purpose nor be entitled to the payment of dividends or other distributions on
his or her shares of Financial Security Common Stock.
If no petition for an appraisal is filed within the time provided, or if a
former stockholder of Financial Security delivers to Pinnacle a written
withdrawal of his or her demand for an appraisal and an acceptance of the
consideration payable pursuant to the Merger Agreement, either within 60 days
after the Effective Time or with the written approval of Pinnacle, then the
right of such stockholder to an appraisal will cease and such stockholder shall
be entitled to receive the consideration payable pursuant to the Merger
Agreement, without interest, as if he or she had not demanded appraisal of his
or her shares of Financial Security Common Stock. No pending appraisal
proceeding in the Court of Chancery will be dismissed as to any stockholder
without the approval of the court, which approval may be conditioned on such
terms as the court deems just.
FAILURE TO COMPLY STRICTLY WITH THESE PROCEDURES WILL CAUSE THE STOCKHOLDER
TO LOSE HIS DISSENTER'S RIGHTS.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the Merger, holders of Financial Security Common Stock
may receive shares of Pinnacle Common Stock and become stockholders of an
Illinois corporation and have no further rights as a stockholder of a Delaware
corporation. As Financial Security will not survive the Merger, the Financial
Security Certificate of Incorporation will cease to apply to Financial Security
stockholders who thereafter, while they hold Pinnacle Common Stock, shall be
subject to the Pinnacle Articles of Incorporation. The following is a summary of
certain material differences between the IBCA and the DGCL and the governing
documents of Pinnacle and Financial Security which may affect the interests of
holders of Financial Security Common Stock, but is not meant to be relied upon
as an exhaustive list or a detailed description of the provisions discussed and
is qualified in its entirety by reference to the Pinnacle Articles of
Incorporation and By-Laws and Financial Security's Certificate of Incorporation
and By-Laws, as well as the IBCA and the DGCL.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the IBCA, a special meeting of stockholders may be called by the
president, the board of directors, by the holders of not less than one-fifth of
all the outstanding shares entitled to vote on the matter for which the meeting
is called or by any person authorized by the articles of incorporation or
by-laws to call a special meeting. Pinnacle's By-laws provide that special
meetings of the stockholders for any purpose or purposes may be called at any
time by the Chairman of the Pinnacle Board of Directors, by the President or
Secretary, or by a request of any four of the directors.
The DGCL permits a special meeting of stockholders to be called by the board
of directors or by such person or persons as may be authorized by the
certificate of incorporation or by-laws. The Financial Security By-laws provide
that special meetings of the stockholders of Financial Security may be called by
the Financial Security Board pursuant to a resolution adopted by a majority of
the total number of the Directors which Financial Security would have if there
were no vacancies on the Financial Security Board.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Unless otherwise provided in the articles of incorporation, the IBCA allows
action to be taken by an Illinois corporation without a meeting and without a
vote if a consent in writing setting forth the action to be taken shall be
signed by: (i) all the stockholders entitled to vote with respect to the subject
matter thereof or (ii) the holders of outstanding shares having not less than a
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voting, provided certain notice is given to all stockholders of the corporation.
The Pinnacle Articles of Incorporation do not restrict stockholders from taking
action by written consent.
The DGCL provides that action may be taken without a meeting and without
prior notice if a consent setting forth the action so taken shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, provided the
certificate of incorporation does not state otherwise. Financial Security's
Certificate of Incorporation does not permit stockholder action by written
consent.
REQUIRED STOCKHOLDER VOTE FOR CERTAIN ACTIONS
The IBCA generally requires the approval of a majority of a corporation's
Board of Directors and the holders of more than two-thirds of all the votes
entitled to be cast thereon by each voting group entitled to vote on any plan of
merger or consolidation, plan of share exchange or sale of substantially all of
the assets of a corporation not in the ordinary course of business. The IBCA
also specifies additional voting requirements for affiliated mergers and
transactions that would cause an acquiring person's voting power to meet or
exceed specified thresholds. The Pinnacle Articles of Incorporation neither
impose a super majority voting requirement for certain transactions nor limit
the voting power of large stockholders, in contrast to the Financial Security
Certificate of Incorporation.
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The DGCL provides that in most matters other than the election of directors
and the approval of a plan of merger, the affirmative vote of the majority of
shares present in person or represented by proxy at the meeting and entitled to
vote on the subject matter shall be the act of the stockholders. Directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting entitled to vote on the election of
directors. The certificate of incorporation of any corporation may provide that
at all elections of directors of the corporation, or at elections held under
specified circumstances, each holder of stock or any class or classes of a
series or series thereof shall be entitled to as many votes as shall equal the
number of votes which (except for such provision as to cumulative voting) he
would be entitled to cast with the election of directors with respect to his
shares of stock multiplied by the number of directors to be elected by him, and
he may cast all of such votes for a single director or may distribute them among
the number to be voted for, or any two or more of them as he may see fit. The
Financial Security Certificate of Incorporation does not grant Financial
Security stockholders cumulative voting rights.
The Financial Security Certificate of Incorporation provides that an owner
of shares of Financial Security Common Stock who beneficially owns, directly or
indirectly, in excess of ten percent (10%) of the then outstanding shares of
Financial Security Common Stock (the "Limit") shall not be entitled or permitted
to any vote in respect of the shares held in excess of the Limit. Beneficial
ownership includes (i) shares beneficially owned by such person or any of his
affiliates (as defined in the Financial Security Certificate of Incorporation),
(ii) shares which such person or his affiliates have the right to acquire upon
the exercise of conversion rights or options and (iii) shares as to which such
person and his affiliates have or share investment or voting power, but shall
not include shares beneficially owned by an employee stock ownership plan or
directors, officers and employees of Security Federal or Financial Security or
shares that are subject to a revocable proxy and that are not otherwise
beneficially, or deemed by Financial Security to be beneficially, owned by such
person and his affiliates. The Financial Security Certificate of Incorporation
further provides that this provision limiting voting rights may only be amended
upon the vote of eighty percent (80%) of the stockholders entitled to vote
thereon.
Under the Financial Security Certificate of Incorporation, the affirmative
vote of the holders of at least eighty percent (80%) of the voting power of the
then outstanding shares of stock entitled to vote is required in connection with
any transaction involving an Interested Stockholder (as defined below) except
(i) in cases where the proposed transaction has been approved in advance by a
majority of those members of the Financial Security Board of Directors who are
unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder; or (ii)
if the proposed transaction met certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares in cases where a vote of a majority of the outstanding shares of voting
stock is required for approval. The term "Interested Stockholder" is defined to
include any individual, corporation, partnership or other entity (other than
Financial Security or its subsidiaries) which owns beneficially or controls,
directly or indirectly, ten percent (10%) or more of the outstanding shares of
voting stock of Financial Security. This provision of the Financial Security
Certificate of Incorporation applies to any "Business Combination" which is
defined to include (i) any merger or consolidation of Financial Security or any
of its subsidiaries with or into any Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, transfer, or other disposition to or with any
Interested Stockholder or affiliate of an Interested Stockholder of twenty-five
percent (25%) or more of the consolidated assets of Financial Security; (iii)
the issuance or transfer to any Interested Stockholder or affiliate of an
Interested Stockholder by Financial Security (or any subsidiary) of any
securities of Financial Security in exchange for any assets, cash, securities or
other property (or combination thereof) the value of which equals or exceeds
twenty-five percent (25%) of the combined "Fair Market Value" as defined in
Financial Security's Certificate of Incorporation of the outstanding Financial
Security Common Stock; (iv) the adoption of any plan for the liquidation or
dissolution of Financial Security proposed by or on behalf of any Interested
Stockholder or affiliate
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thereof; and (v) any reclassification of securities, recapitalization, merger or
consolidation of Financial Security which has the effect of increasing the
proportionate share of Financial Security Common Stock or any class of equity or
convertible securities of Financial Security owned directly or indirectly, by an
Interested Stockholder or affiliate thereof.
AMENDMENT OF ARTICLES OR BY-LAWS
The IBCA provides that a corporation may amend its articles of incorporation
at any time and from time to time to add a new provision or to change or remove
an existing provision, provided that the articles as amended contain only such
provisions as are required or permitted in original articles of incorporation at
that time of the amendment. A majority of the whole board of directors may adopt
one or more amendments to its articles of incorporation without stockholder
action in any of the following instances: (i) to remove the names and addresses
of the initial directors if such directors were named in the original articles
of incorporation; (ii) to remove the name and address of the initial registered
agent or the address of the initial registered office, if a statement of change
is on file with the Secretary of State; (iii) to increase, decrease, create or
eliminate the par value of the shares of any class, so long as no class or
series of shares is adversely effected; (iv) to split all of the issued and
authorized, but unissued, shares of any class, whether or not any shares of the
class are issued or outstanding, by multiplying them by a whole number, so long
as no class or series of shares is adversely effected; (v) to change the
corporate name by substituting the word "corporation", "incorporated",
"company", "limited", or the abbreviation "Corp.", "Inc.", "Co.", or "Ltd.", for
a similar word or abbreviation in the name or by adding a geographical
attribution to the name; (vi) to reduce the authorized shares of any class
pursuant to a cancellation statement filed with respect to such shares after
acquisition by the corporation in circumstances in which the articles of
incorporation prohibit reissuance of such shares after acquisition by the
corporation; or (vii) to restate its articles of incorporation as currently
amended, such restated articles to supersede the original articles and all
amendments thereto. Any amendment which may be adopted by the action of both the
directors and the stockholders shall be adopted upon receiving the affirmative
vote of at least two-thirds of the votes of the shares entitled to vote on such
amendment, unless any class or series of shares is entitled to vote as a class
in respect thereof, in which event the proposed amendment shall be adopted upon
receiving the affirmative votes of at least two-thirds of the votes of the
shares of each class or series of shares entitled to vote as a class in respect
thereof and of the total votes of the shares entitled to vote on such amendment.
The articles of incorporation may supersede the two-thirds vote requirement
by specifying any smaller or larger vote requirement not less than a majority of
the votes of shares entitled to vote on the amendment and not less than a
majority of the votes of the shares of each class or series of shares entitled
to vote as a class on the amendment. The Pinnacle Articles of Incorporation do
not supersede the two-thirds vote requirement. Pinnacle's By-laws may be amended
by a majority of either the stockholders or the directors.
The DGCL provides that after a corporation has received payment for any of
its capital stock, it may amend its certificate of incorporation, from time to
time, in as many respects as may be desired, so long as its certificate of
incorporation as amended would contain only such provisions as it would be
lawful and proper to insert in an original certificate of incorporation filed at
that time of the filing of the amendment; and, if a change in stock or the
rights of stockholders, or any exchange, reclassification or cancellation of
stock or rights of stockholders is to be made, such provisions as may be
necessary to effect such change, exchange, reclassification or cancellation. If
the corporation has capital stock, then an amendment to the articles shall be
adopted if a majority of the outstanding stock entitled to vote thereon and a
majority of the outstanding stock of each class entitled to vote thereon as a
class has been voted in favor of the amendment. If the corporation has no
capital stock, then the amendment shall be adopted if a majority of all of the
members of the governing body shall vote in favor of such amendment.
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The Financial Security Certificate of Incorporation requires that certain
amendments thereto receive the affirmative vote of at least eighty percent (80%)
of the voting power of all the then outstanding shares of Financial Security
Common Stock, voting as a single class.
The Financial Security By-laws may be amended or repealed by the affirmative
vote of a majority of the Financial Security Board of Directors; or by the
affirmative vote of at least eighty percent (80%) of the voting power of all the
then outstanding shares of voting stock, voting together as a single class at
any legal meeting.
INSPECTION OF STOCKHOLDER LISTS
Under the IBCA, in order to inspect and copy the corporate records of a
corporation, including the stockholder list, a stockholder must make written
demand upon the corporation, stating with particularity the records sought to be
examined and the purpose therefor. A stockholder's purpose must be proper. In
addition, under the IBCA, all stockholders may, during usual business hours,
inspect and copy, at his or her expense, the stockholder list during the period
beginning ten days prior to a meeting and continuing to the date of the meeting,
and any stockholder may inspect the list at any time during the meeting.
Under the DGCL, a stockholder shall have the right during usual business
hours to inspect for any proper purpose the corporation's records, upon written
demand stating the purpose thereof. A proper purpose means a purpose reasonably
related to such person's interest as a stockholder. In addition, the DGCL
permits any stockholder of record to inspect the stockholder list for a purpose
germane to the meeting during ordinary business hours for the period commencing
at least ten days before a stockholders' meeting and continuing through the
meeting.
APPRAISAL RIGHTS IN MERGERS
Under the IBCA, a stockholder is entitled, under certain circumstances, to
receive payment of the fair value of the stockholder's stock if the stockholder
dissents from a proposed merger or consolidation and either: (i) stockholder
authorization is required for the merger or consolidation; or (ii) the
corporation is a subsidiary that is merged with its parent or another subsidiary
under Section 11.30 of the IBCA. In addition to being applicable generally in
the case of a merger, under the IBCA, dissenters' rights are available in the
case of: (i) a sale or exchange of all or substantially all of the assets of the
corporation; (ii) an amendment of the articles of incorporation that materially
and adversely effects rights in respect of a dissenter's shares; and (iii) any
other corporate action which grants a stockholder such rights pursuant to its
articles of incorporation, by-laws or resolutions. Pinnacle's Articles of
Incorporation and Pinnacle's By-laws do not contain provisions granting Pinnacle
stockholders dissenter's rights.
Pursuant to Section 262 of the DGCL, a holder of capital stock of a Delaware
corporation is generally entitled to receive payment of the appraised value of
his or her shares if such stockholder dissents from a merger or consolidation
and complies with the procedures set forth in Section 262 of the DGCL for
exercising such rights. However, appraisal rights are not available in merger or
consolidation transactions to holders of (i) shares either listed on a national
stock exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 persons, or (ii) shares of the
corporation surviving a merger unless, in either case, holders of such stock are
required by the terms of the merger or consolidation to accept anything other
than (a) shares of the surviving or resulting corporation; (b) shares of stock
of another corporation so listed or held of record by not fewer than 2,000
persons; and/or (c) cash in lieu of fractional shares of such corporations.
Appraisal rights are not available for a sale of assets or an amendment to the
certificate unless made applicable by affirmative provision in the corporation's
certificate of incorporation. See "DISSENTERS' RIGHTS".
DIRECTORS AND CLASSES OF DIRECTORS; VACANCIES AND REMOVAL OF DIRECTORS
The Pinnacle By-laws provide that the number of directors shall be twenty or
such fewer number as is determined by the Pinnacle Board in the notice of the
meeting whereat directors are to be elected.
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In addition, the Pinnacle By-laws provide that any vacancy occurring on the
Pinnacle Board, including a vacancy resulting from an increase in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Pinnacle Board. Directors so chosen
shall hold office for a term expiring at the next following annual meeting of
stockholders at which directors are elected. No decrease in the number of
directors constituting the Pinnacle Board shall shorten the term of any
incumbent director.
The Pinnacle By-laws further provide that any director may be removed, with
or without cause, only by the affirmative vote of the holders of all the shares
of stock outstanding and entitled to vote at a meeting of the stockholders
called for that purpose.
The Financial Security Certificate of Incorporation and By-laws require the
Financial Security Board to be divided into three classes as nearly equal in
number as possible and that the members of each class be elected for a term of
three years and until their successors are elected and qualified, with one class
being elected annually. The Financial Security By-laws provide that the number
of directors shall be designated by the Financial Security Board, except in the
absence of such designation the number shall be six.
The Financial Security By-laws provide that any vacancy occurring in the
Financial Security Board, whether by death, resignation, retirement,
disqualification, removal or other cause, may be filled only by the affirmative
vote of a majority of the remaining directors, though less than a quorum. A
director elected to fill a vacancy shall serve for the unexpired portion of the
term or until his successor is elected and qualified. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Under the Financial Security Certificate of Incorporation, any director may
be removed for cause by the holders of at least eighty percent (80%) of the
outstanding shares, voting together as a single class.
NOTICE OF DIRECTOR NOMINATIONS
Neither Pinnacle's Articles of Incorporation nor By-laws address the
procedure pursuant to which a stockholder may nominate a candidate for the
Pinnacle Board or bring new business before the meeting. Pursuant to the
Exchange Act, a Pinnacle stockholder wishing to present a proposal at the annual
meeting of stockholders must present the proposal at Pinnacle's principal
executive offices not less than 120 calendar days in advance of the date that
Pinnacle's proxy statement is released to its security holders for the previous
year's annual meeting of stockholders. In addition, at the annual meeting of
stockholders, a Pinnacle stockholder would be permitted to present a motion to
nominate a candidate for the Pinnacle Board.
Under Financial Security's By-laws, stockholders may nominate candidates for
the Financial Security Board by delivering or mailing to the principal executive
offices of Financial Security, a nomination not less than ninety days prior to
the date of the meeting at which the election will take place; provided in the
event that stockholders receive less than 100 days notice or prior disclosure of
the date of the meeting at which the election for the Financial Security Board
shall take place, such nomination by the stockholder must be received by
Financial Security not later than the close of business on the tenth day
following the day on which such notice of the day of the meeting was mailed or
public disclosure of said meeting was made. The stockholder nomination must set
forth certain information about the nominee and any information that is required
to be disclosed in solicitations of proxies with respect to director nominees as
required pursuant to Regulation 14A under the Exchange Act. Such notice must
also set forth certain information about the person submitting the notice,
including the name and address of the stockholder and the class and number of
shares of Financial Security Common Stock that are beneficially owned by such
stockholder. The officer of Financial Security presiding at the meeting at which
the election will take place shall disregard nominations not made in accordance
with the foregoing provisions. Under Financial Security's By-Laws, stockholders
128
<PAGE>
must also provide advance notice for certain business to be brought before an
annual meeting. The notice procedure and the information required to be provided
is substantially the same as described above.
DIVIDENDS AND OTHER DISTRIBUTIONS
The IBCA generally provides that a corporation may make distributions to its
stockholders unless, after giving effect to the distribution, (i) the
corporation would be insolvent; or (ii) the net assets of the corporation would
be less than zero or less than the maximum amount payable at the time of
distribution to stockholders having preferential rights in liquidation if the
corporation were then to be liquidated. In addition to the limitations set forth
in the IBCA, there are various regulatory requirements which are applicable to
distributions by holding companies such as Pinnacle. For a description of the
regulatory limitations on distributions by Pinnacle, see "SUPERVISION AND
REGULATION OF PINNACLE".
The DGCL provides that the directors of a corporation, subject to any
restrictions contained in its certificate of incorporation, may declare and pay
dividends upon the shares of its capital stock, or to its members if the
corporation is a non-stock corporation organized for profit, either (i) out of
its surplus, or (ii) in case there shall be no such surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding year. If the capital of the corporation shall have been diminished by
depreciation in the value of its property, or by losses, or otherwise, to an
amount less than the aggregate amount of the capital represented by the issued
and outstanding stock in all classes having a preference upon the distribution
of assets, the directors of such corporation shall not declare and pay out of
such net profits any dividends upon any shares of any classes of its capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets shall have been repaired.
DIRECTOR AND OFFICER DISCRETION
The IBCA provides that the board of directors, committees of the board of
directors, individual directors and individual officers of a corporation may, in
considering the corporation's best long term and short term interests consider
the effects of any action upon employees, suppliers and customers of the
corporation or its subsidiaries, communities in which offices or other
establishments of the corporation or its subsidiaries are located and all other
pertinent factors. The Pinnacle Articles of Incorporation do not address
director and officer discretion.
The DGCL does not contain a comparable provision and, under Delaware law,
the consideration that a board may give to nonstockholder constituencies is less
clear. Financial Security's Certificate of Incorporation provides that Financial
Security's Board, when evaluating any offer of another person to (i) make a
tender or exchange offer for any equity security of Financial Security, (ii)
merge or consolidate Financial Security with another corporation or entity or
(iii) purchase or otherwise acquire all or substantially all of the properties
and assets of Financial Security, may, in connection with the exercise of its
judgment in determining what is the best interest of Financial Security and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on
Financial Security's present and future customers and employees and those of its
subsidiaries; on the communities in which Financial Security and its
subsidiaries operate or are located; on the ability of Financial Security to
fulfill its corporate objectives as a savings and loan holding company and on
the ability of Security Federal to fulfill the objectives of a
federally-chartered stock form savings and loan association under applicable
statutes and regulations. By having these standards in the Financial Security
Certificate of Incorporation, the Financial Security Board may be in a stronger
position to oppose such a transaction if the Financial Security Board concludes
that the transaction would not be in the best interest of Security Federal, even
if the price offered is significantly greater than the then market price of any
equity security of Financial Security.
129
<PAGE>
INDEMNIFICATION
The Pinnacle By-laws provide that to the fullest extent permitted by the
IBCA and any other applicable law, Pinnacle shall indemnify a director or
officer of Pinnacle who is or was a party to any proceeding by reason of the
fact that he is or was such a director or officer or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise. The
Pinnacle Board is empowered, by majority vote of a quorum of disinterested
directors, or by independent legal counsel in a written opinion or by the
stockholders to determine in a specific case to indemnify any director or
officer.
In addition, the Pinnacle Articles of Incorporation provide that a director
shall not be personally liable to Pinnacle or its stockholders for monetary
damages for a breach of fiduciary duty, provided that a director shall remain
liable for monetary damages for any of the following: (i) an act or omission
that is grossly negligent; (ii) a breach of the duty of loyalty to Pinnacle and
its stockholders; (iii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iv) a transaction from
which the director derived an improper personal benefit; and (v) any act or
omission occurring before May 11, 1995, the effective date of the provision.
The DGCL provides that a corporation may indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid and settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct. Such determination shall be made by a (i)
majority vote of a quorum consisting of the directors who are not parties to
such action, suit or proceeding; or (ii) if a quorum is not obtainable, or even
if obtainable a quorum of disinterested directors so direct, by independent
legal counsel in a written opinion; or (iii) by the stockholders.
The Financial Security Certificate of Incorporation provides that each
person who was or is made a party or is threatened to be made a party to any
suit or proceeding by reason of the fact that he or she is or was a director or
officer of Financial Security or was serving at the request of Financial
Security as a director, officer or employee of another corporation shall be
indemnified by Financial Security and held harmless by it to the fullest extent
authorized by the DGCL. In addition, the DGCL provides that a director shall not
be personally liable to Financial Security or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to Financial Security or its
stockholders; (ii) for acts or omissions not in good faith and which involve
intentional misconduct or a knowing violation of loss; (iii) under Section 174
of the DGCL; or (iv) for any transaction from which the director derives an
improper personal benefit.
ANTI-TAKEOVER STATUTES
The IBCA contains certain provisions which are intended to deter certain
acquisitive transactions. The IBCA provides that a corporation may not enter
into a business combination with a holder of fifteen percent or more of the
corporation's outstanding voting shares (an "Interested Stockholder") for three
years after the transaction pursuant to which such stockholder became an
Interested Stockholder, unless: (i) the Interested Stockholder had board
approval for the business combination or the transaction which resulted in the
stockholder becoming an Interested Stockholder; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an Interested
Stockholder, the Interested Stockholder owned at least 85 percent of the
outstanding
130
<PAGE>
voting stock of the corporation not owned by (1) directors or officers of the
corporation or (2) employee stock plans which do not allow individual employees
to decide confidentially whether to tender their shares; or (iii) subsequent to
the time of the transaction which resulted in the stockholder becoming an
Interested Stockholder, the business combination is approved by the board of
directors of the corporation and by two-thirds of the stockholders excluding the
Interested Stockholder, directors and officers and non-confidential tendering
employee plans. A "business combination" is defined as (x) a merger or
consolidation of the corporation with an Interested Stockholder, (y) any sale,
lease, exchange, transfer or other disposition of ten percent (10%) or more of
the assets of the corporation determined on a consolidated basis, or (z) any
transaction which results in the issuance or transfer by the corporation of any
shares of the corporation to the Interested Stockholder subject to certain
exceptions.
In addition, the IBCA provides that a corporation may not enter into any
business combination with a holder of ten percent or more of the corporation's
outstanding voting shares unless: (i) such combination is approved by two-thirds
of the disinterested directors or by 80 percent of the outstanding shares and a
majority of the shares not held by the 10 percent stockholder; or (ii) a fair
price is paid for all shares acquired.
Pursuant to the IBCA, a corporation may elect to not be subject to either of
the foregoing statutes. To date, Pinnacle has not made such election and,
therefor, continues to be subject to these provisions.
The DGCL also contains certain provisions which are intended to deter
certain acquisition transactions. The DGCL provides that a corporation may not
enter into a business combination with an Interested Stockholder for three years
after the transaction pursuant to which such stockholder became an Interested
Stockholder, unless (i) the Interested Stockholder had board approval for the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an Interested Stockholder, the
Interested Stockholder owned at least 85 percent of the outstanding voting stock
of the corporation not owned by (1) directors or officers of the corporation or
(2) employee stock plans which do not allow individual employees to decide
confidentially whether to tender their shares; or (iii) subsequent to the time
of the transaction which resulted in the stockholder becoming an Interested
Stockholder, the business combination is approved by the board of directors of
the corporation and by two-thirds of the stockholders excluding the Interested
Stockholder. The DGCL defines business combinations to include the transactions
deemed a business combination by the IBCA. Pursuant to the DGCL, a corporation
may provide in its charter or by-laws a provision expressly providing that it
shall not be subject to the foregoing statute. To date, Financial Security has
not made such election and, therefor, continues to be subject to the provisions.
FINANCIAL SECURITY STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Financial Security's proxy material
for next year's Annual Meeting of Stockholders, any stockholder proposal to take
action at such meeting must be received at Financial Security's offices at 1209
North Milwaukee Avenue, Chicago, Illinois no later than November 24, 1996. Any
such proposals shall be subject to the requirements of the proxy rules, as
amended, adopted under the Exchange Act.
PINNACLE STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Pinnacle's proxy material for next
year's Annual Meeting of Stockholders, any stockholder proposal to take action
at such meeting must be received at Pinnacle's offices at 2215 York Road, Oak
Brook, Illinois no later than November 18, 1996. Any such proposals shall be
subject to the requirements of the proxy rules, as amended, adopted under the
Exchange Act.
131
<PAGE>
EXPERTS
The consolidated financial statements of Pinnacle and its subsidiaries
incorporated in this Joint Proxy Statement/Prospectus have been included herein
in reliance upon the report of Arthur Andersen LLP, independent public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Financial Security, and its
subsidiaries as of December 31, 1995, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended have been
included herein in reliance upon the report of Crowe, Chizek and Company LLP,
independent auditors, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of Financial Security and its
subsidiaries as of December 31, 1994, and the related consolidated statements of
earnings, changes in stockholders' equity, and cash flows for the two-year
period ended December 31, 1994, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL OPINIONS
The legality of the Pinnacle Common Stock to be issued in the Merger will be
passed on for Pinnacle by Burke, Warren & MacKay, P.C., Chicago, Illinois.
Richard W. Burke, is a director, officer and stockholder of Burke, Warren &
MacKay, P.C., and a director of Pinnacle.
Legal matters will be passed on for Financial Security by Muldoon, Murphy &
Faucette, Washington, D.C. A condition to consummation of the Merger is the
delivery by Muldoon, Murphy & Faucette of an opinion to Pinnacle and Financial
Security concerning certain federal income tax consequences of the Merger. See
"THE MERGER -- Certain Federal Income Tax Consequences."
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Consolidated Balance Sheets at March 31, 1996 (unaudited) and December 31, 1995...... F-2
Consolidated Statements of Income
Three Months ended March 31, 1996 and 1995 (unaudited)............................. F-3
Consolidated Statements of Changes in Stockholders' Equity
Three Months ended March 31, 1996 (unaudited)...................................... F-4
Consolidated Statements of Cash Flows
Three Months ended March 31, 1996 and 1995 (unaudited)............................. F-5
Consolidated Balance Sheets at December 31, 1995 and 1994............................ F-6
Consolidated Statements of Income
For the Years ended December 31, 1995, 1994 and 1993............................... F-7
Consolidated Statements of Changes in Stockholders' Equity
For the Years ended December 31, 1995, 1994 and 1993............................... F-8
Consolidated Statements of Cash Flows
For the Years ended December 31, 1995, 1994 and 1993............................... F-9
Notes to Consolidated Financial Statements........................................... F-10
Independent Public Accountants' Report............................................... F-28
</TABLE>
FINANCIAL SECURITY CORP. AND SUBSIDIARIES
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition
at March 31, 1996 and December 31, 1995 (unaudited)................................ F-29
Consolidated Statements of Earnings
Three Months ended March 31, 1996 and 1995 (unaudited)............................. F-30
Consolidated Statements of Cash Flows
Three Months ended March 31, 1996 and 1995 (unaudited)............................. F-31
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1996.................................................. F-32
Consolidated Statements of Financial Condition
at December 31, 1995 and 1994...................................................... F-34
Consolidated Statements of Earnings
For the Years ended December 31, 1995, 1994 and 1993............................... F-35
Consolidated Statements of Stockholders' Equity
For the Years ended December 31, 1995, 1994 and 1993............................... F-36
Consolidated Statements of Cash Flows
For the Years ended December 31, 1995, 1994 and 1993............................... F-37
Notes to Consolidated Financial Statements........................................... F-39
Independent Auditors Reports......................................................... F-64
</TABLE>
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS:
Cash and due from banks..................................................... $ 24,012,519 $ 27,272,616
Federal funds sold.......................................................... 2,900,000 14,100,000
---------------- ----------------
Total cash and cash equivalents......................................... 26,912,519 41,372,616
Interest-bearing deposits................................................... 2,747,064 2,725,891
Securities:
Available for sale........................................................ 422,361,662 426,928,812
(amortized cost: 3/31/96 -- $414,659,000
12/31/95 -- $418,637,000)
Loans....................................................................... 318,031,624 309,599,860
Less: Allowance for loan losses............................................. (6,040,179) (6,023,011)
---------------- ----------------
Net loans................................................................. 311,991,445 303,576,849
Premises and equipment...................................................... 16,516,190 15,565,402
Goodwill and other intangibles.............................................. 18,705,588 19,177,420
Other assets................................................................ 8,254,450 9,350,293
---------------- ----------------
Total................................................................... $ 807,488,918 $ 818,697,283
---------------- ----------------
---------------- ----------------
LIABILITIES:
Demand deposits:
Noninterest-bearing....................................................... $ 91,206,120 $ 96,714,490
Interest-bearing.......................................................... 87,676,098 89,230,444
Savings deposits............................................................ 253,127,537 257,793,601
Other time deposits......................................................... 271,382,565 269,066,162
---------------- ----------------
Total deposits.......................................................... 703,392,320 712,804,697
Notes payable............................................................... 20,700,000 20,600,000
Other liabilities........................................................... 5,461,334 6,331,771
---------------- ----------------
Total liabilities....................................................... 729,553,654 739,736,468
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock
1,000 shares authorized, none issued...................................... -0- -0-
Common stock, $4.69 par..................................................... 20,410,022 20,505,323
20,000,000 shares authorized; shares issued and outstanding:3/31/96:
4,354,138
12/31/95: 4,374,469
Additional paid-in capital.................................................. 18,001,282 17,897,900
Retained earnings........................................................... 32,987,437 33,505,657
Unrealized gains in securities available for sale........................... 6,536,523 7,051,935
---------------- ----------------
Total stockholders' equity.............................................. 77,935,264 78,960,815
---------------- ----------------
Total................................................................... $ 807,488,918 $ 818,697,283
---------------- ----------------
---------------- ----------------
</TABLE>
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Interest Income:
Loans.......................................................................... $ 6,458,895 $ 6,644,824
Securities:
Taxable...................................................................... 5,301,742 6,502,727
Tax exempt................................................................... 444,026 840,425
Interest-bearing deposits, Federal funds sold and other........................ 101,106 273,997
-------------- --------------
Interest income.............................................................. 12,305,769 14,261,973
-------------- --------------
Interest Expense:
Deposits:
Interest-bearing demand...................................................... 448,996 403,869
Savings...................................................................... 1,918,328 2,094,978
Other time................................................................... 3,688,559 3,070,244
Short-term borrowings.......................................................... 2,157 35,995
Notes payable.................................................................. 356,508 564,254
-------------- --------------
Interest expense............................................................. 6,414,548 6,169,340
-------------- --------------
Net Interest Income............................................................ 5,891,221 8,092,633
Provision for loan losses.................................................... 0 75,000
-------------- --------------
Net interest income after provision for loan losses........................ 5,891,221 8,017,633
-------------- --------------
Other Income:
Banking services and other..................................................... 1,213,770 1,449,196
Trust services................................................................. 546,699 470,636
Net securities gains........................................................... 263,722 346,118
-------------- --------------
Other income................................................................. 2,024,191 2,265,950
-------------- --------------
Other Expense:
Salaries, profit sharing and other employee benefits........................... 3,011,320 2,967,391
Occupancy...................................................................... 678,441 587,175
Amortization of goodwill and other intangibles................................. 471,832 469,643
Other operating expenses....................................................... 1,503,110 2,031,200
-------------- --------------
Other expense................................................................ 5,664,703 6,055,409
-------------- --------------
Income before income taxes....................................................... 2,250,709 4,228,174
Provision for income taxes..................................................... 694,000 822,000
-------------- --------------
Net Income....................................................................... $ 1,556,709 $ 3,406,174
-------------- --------------
-------------- --------------
Weighted average number of common and common equivalent shares outstanding....... 4,381,940 4,432,243
Earnings per share............................................................... $ 0.36 $ 0.77
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Balance, December 31, 1995.................................................... $78,960,815
Net income.................................................................... 1,556,709
Dividends paid................................................................ (1,357,185)
Stock options exercised....................................................... 132,285
Purchase and retirement of common stock....................................... (841,950)
Change in unrealized gains on securities available for sale, net.............. (515,410)
-----------
Balance, March 31, 1996....................................................... $77,935,264
-----------
-----------
</TABLE>
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 1,556,709 $ 3,406,174
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................. 352,188 315,239
Amortization of goodwill and other intangibles........................... 471,832 469,643
Amortization of purchase accounting adjustments.......................... 49,814 25,691
Provision for loan losses................................................ -0- 75,000
Discount accretion....................................................... (5,087,283) (5,781,344)
Premium amortization..................................................... 49,462 56,691
Gain on sale of securities............................................... (263,722) (346,118)
Decrease in interest receivable.......................................... 143,184 275,103
Increase in interest payable............................................. 172,062 636,762
Decrease in other assets................................................. 752,659 1,911,905
Decrease in other liabilities............................................ (1,042,497) (734,974)
Other, net............................................................... 174,306 66,567
---------------- ----------------
Total adjustments...................................................... (4,227,995) (3,029,835)
Net cash provided by (used for) operating activities................... (2,671,286) 376,339
Cash flows from investing activities:
Cash portion of acquisition, net of cash acquired (Note)................... -0- (14,799,803)
Proceeds from sale of securities........................................... 733,653,678 664,425,829
Proceeds from maturities and paydowns of securities........................ 2,625,995 6,066,006
Purchase of securities available for sale.................................. (726,860,929) (649,007,634)
Net decrease (increase) in interest-bearing deposits....................... (21,173) 5,930,417
Net loan principal (advanced) collected.................................... (8,441,250) 9,242,749
Premises and equipment expenditures........................................ (1,365,905) (443,954)
Net cash provided by (used for) investing activities..................... (409,584) 21,413,610
Cash flows from financing activities:
Net decrease in total deposits............................................. (9,412,377) (26,948,587)
Net decrease in short-term borrowings...................................... -0- (4,800,000)
Proceeds from notes payable................................................ 2,900,000 30,300,000
Principal reductions of notes payable...................................... (2,800,000) (6,000,000)
Issuance of common stock................................................... 132,285 417,215
Purchase and retirement of common stock.................................... (841,950) (326,915)
Dividends paid............................................................. (1,357,185) (1,281,430)
---------------- ----------------
Net cash used for financing activities................................... (11,379,227) (8,639,717)
Net increase (decrease) in cash and cash equivalents......................... (14,460,097) 13,150,232
Cash and cash equivalents at beginning of period........................... 41,372,616 20,265,069
---------------- ----------------
Cash and cash equivalents at end of period................................. $ 26,912,519 $ 33,415,301
---------------- ----------------
---------------- ----------------
Cash paid during period for:
Interest................................................................... $ 6,242,486 $ 5,537,121
Income taxes............................................................... 50,000 -0-
</TABLE>
- ------------------------
NOTE: On January 6, 1995, Acorn Financial Corp and its subsidiary, Suburban
Trust & Savings Bank, was purchased by Pinnacle for $23,413,897 in cash.
At the date of purchase, the balance sheet of Acorn included cash and
cash equivalents of $8,614,094 resulting in a net cash position of
$14,799,803.
F-5
<PAGE>
CONSOLIDATED BALANCE SHEETS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks...................................... $ 27,272,616 $ 20,265,069
Federal funds sold........................................... 14,100,000 -0-
------------- -------------
Total cash and cash equivalents............................ 41,372,616 20,265,069
Interest-bearing deposits.................................... 2,725,891 2,815,326
Securities -- Available for sale (Note 3)
(amortized cost: 1995 -- $418,637,073
1994 -- $382,617,989)....................... 426,928,812 386,500,270
Loans (Note 4)............................................... 309,599,860 248,404,294
Less: Allowance for loan losses (Note 5)..................... (6,023,011) (4,228,608)
------------- -------------
Net loans.................................................. 303,576,849 244,175,686
Premises and equipment (Note 6).............................. 15,565,402 9,714,259
Goodwill and other intangibles (Note 2)...................... 19,177,420 7,965,307
Other assets................................................. 9,350,293 13,456,201
------------- -------------
Total...................................................... $ 818,697,283 $ 684,892,118
------------- -------------
------------- -------------
LIABILITIES:
Demand deposits:
Noninterest-bearing........................................ $ 96,714,490 $ 73,921,734
Interest-bearing........................................... 89,230,444 74,699,554
Savings deposits............................................. 257,793,601 251,468,974
Other time deposits.......................................... 269,066,162 199,789,022
------------- -------------
Total deposits............................................. 712,804,697 599,879,284
Short-term borrowings........................................ -0- 4,800,000
Notes payable (Note 8)....................................... 20,600,000 5,400,000
Other liabilities............................................ 6,331,771 5,977,157
------------- -------------
Total liabilities.......................................... 739,736,468 616,056,441
------------- -------------
------------- -------------
Commitments and Contingencies (Notes 13 & 16)
STOCKHOLDERS' EQUITY (NOTES 10 & 11):
Preferred stock.............................................. -0- -0-
1,000 shares authorized, none issued
Common stock, $4.69 par...................................... 20,505,323 20,653,341
20,000,000 shares authorized; shares issued and
outstanding:
1995: 4,374,469; 1994: 4,406,046
Additional paid-in capital................................... 17,897,900 17,550,439
Retained earnings............................................ 33,505,657 27,583,618
Unrealized gain on securities available for sale, net of tax
(Notes 1 & 3)............................................... 7,051,935 3,048,279
------------- -------------
Total stockholders' equity................................. 78,960,815 68,835,677
------------- -------------
Total...................................................... $ 818,697,283 $ 684,892,118
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Loans...................................................... $26,316,430 $20,484,573 $19,495,705
Securities:
Taxable.................................................. 23,347,400 19,437,500 17,755,773
Tax exempt............................................... 2,570,921 2,922,814 3,346,248
Interest-bearing deposits, Federal funds sold and other.... 1,062,640 75,545 181,522
----------- ----------- -----------
Interest income.......................................... 53,297,391 42,920,432 40,779,248
----------- ----------- -----------
Interest Expense:
Deposits:
Interest-bearing demand.................................. 1,731,705 1,376,110 1,486,590
Savings.................................................. 8,340,858 7,015,535 7,795,301
Other time............................................... 13,664,253 7,495,603 7,876,907
Short term borrowings...................................... 38,609 470,347 87,502
Notes payable.............................................. 1,963,897 282,937 423,947
----------- ----------- -----------
Interest expense......................................... 25,739,322 16,640,532 17,670,247
----------- ----------- -----------
Net Interest Income.......................................... 27,558,069 26,279,900 23,109,001
Provision for loan losses (Note 5)......................... -0- 900,000 1,700,000
----------- ----------- -----------
Net interest income after provision for loan losses...... 27,558,069 25,379,900 21,409,001
----------- ----------- -----------
Other Income:
Other income (Note 17)..................................... 7,225,843 5,461,870 5,615,709
Net securities gains (losses).............................. 4,730,481 (9,844,817) 8,740,587
----------- ----------- -----------
Other income (loss)...................................... 11,956,324 (4,382,947) 14,356,296
----------- ----------- -----------
Other Expense:
Salaries, profit sharing and other employee benefits (Note
9)........................................................ 12,050,743 9,459,353 9,578,833
Occupancy (Note 6)......................................... 3,137,414 1,847,694 1,918,996
Amortization of goodwill and other intangibles (Note 2).... 1,885,135 1,680,921 1,680,919
Other expense (Note 17).................................... 6,808,646 8,072,488 7,288,301
----------- ----------- -----------
Other expense............................................ 23,881,938 21,060,456 20,467,049
----------- ----------- -----------
Income (loss) before income taxes............................ 15,632,455 (63,503) 15,298,248
Provision (benefit) for income taxes (Note 7).............. 3,139,000 (2,319,000) 4,005,000
----------- ----------- -----------
Income before cumulative effect of change in accounting for
income taxes................................................ $12,493,455 $ 2,255,497 $11,293,248
Cumulative effect of change in accounting for income taxes
(Note 1).................................................. -0- -0- 1,700,000
----------- ----------- -----------
Net income............................................... $12,493,455 $ 2,255,497 $12,993,248
----------- ----------- -----------
Earnings per share (Note 11):
Primary:
Income before cumulative effect of change in accounting
for income taxes........................................ $2.83 $0.51 $2.50
Cumulative effect of change in accounting for income
taxes................................................. -0- -0- 0.37
----------- ----------- -----------
Net income............................................... $2.83 $0.51 $2.87
----------- ----------- -----------
Fully diluted:
Income before cumulative effect of change in accounting
for income taxes........................................ $2.83 $0.51 $2.50
Cumulative effect of change in accounting for income
taxes................................................. -0- -0- 0.37
----------- ----------- -----------
Net income............................................... $2.83 $0.51 $2.87
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SECURITIES
ADDITIONAL AVAILABLE FOR
PAID-IN RETAINED SALE, NET OF
COMMON STOCK CAPITAL EARNINGS TAX TOTAL
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992............ $ 21,144,080 $ 17,250,084 $ 24,900,350 $ -0- $ 63,294,514
Net income.......................... 12,993,248 12,993,248
Dividends paid -- $0.96 per share... (4,315,840) (4,315,840)
Purchase and retirement of common
stock.............................. (192,539) (1,141,340) (1,333,879)
Exercise of stock options........... 62,207 129,057 191,264
Addition to capital (Notes 7 &
10)................................ 26,542 26,542
-------------- -------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1993............ 21,013,748 17,405,683 32,436,418 -0- 70,855,849
Net income.......................... 2,255,497 2,255,497
Dividends paid -- $1.08 per share... (4,797,510) (4,797,510)
Purchase and retirement of common
stock.............................. (416,427) (2,310,787) (2,727,214)
Exercise of stock options........... 56,020 144,756 200,776
Unrealized gain on securities
available for sale, net of tax
(Notes 1 & 3)...................... 3,048,279 3,048,279
-------------- -------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1994............ 20,653,341 17,550,439 27,583,618 3,048,279 68,835,677
Net income.......................... 12,493,455 12,493,455
Dividends paid -- $1.16 per share... (5,108,673) (5,108,673)
Purchase and retirement of common
stock.............................. (268,379) (1,462,743) (1,731,122)
Exercise of stock options........... 120,361 333,954 454,315
Addition to capital (Notes 7 &
10)................................ 13,507 13,507
Unrealized gain on securities
available for sale, net of tax
(Notes 1 & 3)...................... 4,003,656 4,003,656
-------------- -------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1995............ $ 20,505,323 $ 17,897,900 $ 33,505,657 $ 7,051,935 $ 78,960,815
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 12,493,455 $ 2,255,497 $ 12,993,248
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation...................................... 1,272,478 651,397 717,628
Amortization of goodwill and other intangibles.... 1,885,135 1,680,921 1,680,919
Amortization of purchase accounting adjustments... 147,065 54,245 507,228
Provision for loan losses......................... -0- 900,000 1,700,000
Premium amortization.............................. 246,086 1,467,132 2,792,625
Discount accretion................................ (20,738,014) (6,090,913) (3,186,516)
Increase (decrease) in deferred loan fees......... (182,757) (264,458) (203,606)
(Gain) loss on sales of securities................ (4,730,481) 9,844,817 (8,740,587)
Decrease (increase) in interest receivable........ 406,622 2,875,195 (150,139)
Deferred income taxes............................. 824,000 (401,000) 1,417,000
Cumulative effect of change in accounting for
income taxes..................................... -0- -0- (1,700,000)
Decrease (increase) in other assets............... 5,106,829 (2,416,008) (2,092,723)
Increase (decrease) in other liabilities.......... (1,785,973) 1,863,535 (2,621,643)
Other, net........................................ 10,454 -0- 26,544
--------------- --------------- ---------------
Total adjustments............................... (17,538,556) 10,164,863 (9,853,270)
Net cash provided by (used for) operating
activities..................................... (5,045,101) 12,420,360 3,139,978
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash portion of acquisitions, net of cash acquired
(Note 1)............................................. (14,799,803) -0- -0-
Proceeds from sales of securities held for
investment........................................... -0- -0- 4,995,492
Purchases of securities held for investment........... -0- -0- (5,012,500)
Proceeds from sales of securities available or held
for sale............................................. 3,096,014,082 1,624,941,668 1,477,244,532
Purchases of securities available or held for sale.... (3,088,494,087) (1,614,523,638) (1,471,962,078)
Proceeds from maturities and paydowns of securities... 26,915,053 20,660,202 26,975,158
Net decrease (increase) in interest-bearing
deposits............................................. 12,458,356 (1,489,694) 1,173,812
Net loan principal (advanced) collected............... 9,797,528 (626,379) (7,732,727)
Premises and equipment, net........................... (1,709,330) (610,100) (467,506)
--------------- --------------- ---------------
Net cash provided by investing activities....... 40,181,799 28,352,059 25,214,183
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits............. (18,043,671) (33,733,520) (26,597,380)
Net increase (decrease) in short-term borrowings...... (4,800,000) (8,800,000) 12,900,000
Proceeds from notes payable........................... 31,800,000 11,200,000 4,700,000
Principal reductions of notes payable................. (16,600,000) (5,800,000) (19,209,000)
Issuance of common stock.............................. 454,315 200,776 191,264
Purchase and retirement of common stock............... (1,731,122) (2,727,214) (1,333,879)
Dividends paid........................................ (5,108,673) (4,797,510) (4,315,840)
--------------- --------------- ---------------
Net cash used for financing activities.......... (14,029,151) (44,457,468) (33,664,835)
Net increase (decrease) in cash and cash equivalents.... 21,107,547 (3,685,049) (5,310,674)
Cash and cash equivalents at beginning of year.......... 20,265,069 23,950,118 29,260,792
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 41,372,616 $ 20,265,069 $ 23,950,118
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash paid during year for:
Interest.............................................. $ 25,690,952 $ 16,644,628 $ 18,619,252
Income taxes.......................................... 2,207,000 1,526,000 4,802,016
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-9
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES:
The consolidated financial statements of the Pinnacle Banc Group, Inc. (the
"Corporation") and Subsidiaries have been prepared in conformity with generally
accepted accounting principles and reporting practices prescribed for the
banking industry. The Corporation is a multi-bank holding company registered
under the Bank Holding Company Act and is engaged in the business of banking
through the ownership of subsidiary banks. A description of the significant
accounting policies follows:
(a) CONSOLIDATION --
The consolidated financial statements of the Corporation and Subsidiaries
include the accounts of the Corporation and its subsidiaries, Pinnacle Bank
("PB"), Pinnacle Bank of the Quad-Cities ("PBQC"), and Batavia Savings Bank
("BSB"). Significant intercompany accounts and transactions have been eliminated
in the preparation of these statements.
PB was formed through the merger of First National Bank of Cicero ("FNBC"),
Berwyn National Bank ("BNB"), and First National Bank in Harvey ("FNBH") with
and into Bank of LaGrange Park ("BLGP") on July 9, 1993. Each of these Banks
were subsidiaries of the Corporation. As part of the merger, the name of BLGP
was changed to Pinnacle Bank. The transaction was accounted for in a manner
similar to a pooling of interests.
PBQC was formed through the merger of The Henry County Bank ("HCB") with
Bank of Silvis ("BOS") on December 7, 1992. HCB and BOS were each subsidiaries
of the Corporation. The transaction was accounted for in a manner similar to a
pooling of interests.
(b) 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. Generally, Federal
funds are sold for one-day periods.
i.) In the consolidated statements of cash flows, acquisitions by the
Corporation are recorded as net cash from investing activities and, accordingly,
cash flows are net of the impact of the acquisitions discussed below. In 1995,
Acorn Financial Corp ("AFC") and its subsidiary bank, Suburban Trust & Savings
Bank ("STSB") was purchased by the Corporation and cash of $23,413,897 was paid
for the acquisition. At the date of purchase, the balance sheet of AFC included
cash and cash equivalents of $8,614,094 resulting in a net cash position of
$14,799,803.
ii.) In the statements of cash flows for the Parent Company (Note 18),
acquisitions by the Corporation are recorded as net cash from investing
activities in the amount of the cash paid for the acquisitions net of cash
acquired. In 1995, this amount was $23,413,897 for the acquisition of AFC.
(c) SECURITIES --
Effective January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 addresses the
accounting and reporting of investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Securities
are to be classified in three categories: held-to-maturity securities, trading
securities and available-for-sale securities.
Upon adoption of SFAS No. 115, all securities held by Pinnacle were
classified as available-for-sale. As a result, securities are carried on the
balance sheet at fair value, with corresponding (after tax) valuation
adjustments included in stockholders' equity. The adoption of SFAS No. 115 had
the effect of increasing stockholders' equity by approximately $6,800,000, at
January 1, 1994.
F-10
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ACCOUNTING POLICIES: (CONTINUED)
Premium and discount on securities are included in interest income on
securities over the period from acquisition to maturity or earlier call date
using the level-yield method. The specific identification method is used to
record gains and losses on securities transactions.
(d) LOANS --
Loans are stated net of unearned income. The unearned income on installment
loans is recognized as interest income over the term of the loans using the
sum-of-the-months-digits method, which does not differ materially from the
effective interest method.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the related
loan's yield. The Corporation generally amortizes these amounts over the
contractual life of the related loans.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan". This standard was amended in October, 1994, by SFAS
No. 118, "Accounting for Creditors for Impairment of a Loan -- Income
Recognition and Disclosure". SFAS No. 114 addresses the accounting for loans
when it is probable that all principal and interest amounts due on a loan will
not be collected in accordance with its contractual terms (i.e. "impaired
loans"). Pursuant to SFAS No. 114, to the extent the recorded investment of an
impaired loan exceeds the present value of the loan's expected future cash flows
or other measures of value, a valuation allowance is established for the
difference. The corresponding allocation or charge will be to either the
allowance for loan losses or to the provision for loan losses, respectively,
depending on the adequacy of the overall allowance for loan losses. The
Corporation adopted SFAS No. 114 and SFAS No. 118 effective as of January 1,
1995. There was no effect on the financial position and results of operation of
the Corporation upon adopting these standards.
No changes were required to Pinnacle's accounting policies to loans,
charge-offs, and interest income as a result of adopting these Statements.
(e) ALLOWANCE FOR LOAN LOSSES --
The allowance for loan losses is determined by management based on factors
such as past loan loss experience, evaluation of known and inherent losses in
the loan portfolio, prevailing economic conditions, and other factors and
estimates which are subject to change over time. Management adjusts the
allowance for loan losses by recording a provision for loan losses in an amount
sufficient to maintain the allowance at a level commensurate with the risks in
the loan portfolio. Loans are charged-off when deemed to be uncollectible by
management.
(f) PREMISES AND EQUIPMENT --
Premises and equipment are stated at cost less accumulated depreciation. For
financial reporting purposes, depreciation is computed using a combination of
the straight-line and accelerated methods over the estimated useful lives of the
assets.
(g) OTHER REAL ESTATE --
Other real estate, included in other assets, includes property acquired
through foreclosure or deed in lieu of foreclosure. Other real estate is carried
at the lower of cost or fair value. Losses arising at the time of acquisition of
property in full or partial satisfaction of loans are recorded as loan losses.
Subsequent losses or expenses on the property are charged to other expenses.
Income received on the property is recorded as an offset to expenses.
F-11
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ACCOUNTING POLICIES: (CONTINUED)
(h) INCOME TAXES --
The consolidated Federal income tax return of the Corporation includes the
accounts of each subsidiary bank. Under the terms of a tax-sharing agreement
with the Corporation, each subsidiary bank is required to pay to the Corporation
the Federal income tax liability computed as if the subsidiary bank were to file
a separate income tax return. In the event of a separate bank net operating
loss, the Corporation shall remit to each subsidiary bank the appropriate amount
of each refund. The tax-sharing agreement also includes a provision that the
Corporation will indemnify each subsidiary bank against all tax liabilities for
any taxable year in which the subsidiary bank joins with the Corporation in
filing a consolidated return.
Pinnacle adopted SFAS No. 109, "Accounting for Income Taxes", which modified
the provisions of SFAS No. 96, with an effective date of January 1, 1993. SFAS
No. 109 requires an asset and liability approach for accounting for income
taxes. Its objective is to recognize the amount of taxes payable or refundable
for the current year, and deferred tax assets and liabilities for the future tax
consequences for items that have been recognized in the Corporation's financial
statements or tax returns. The measurement of tax assets and liabilities is
based on enacted tax laws. Deferred tax assets are reduced, if necessary, by the
amount of such benefits that are not expected to be realized based on available
evidence.
The cumulative effect of the adoption of SFAS No. 109 on periods prior to
January 1, 1993 amounted to a benefit of $1,700,000, net of a valuation
allowance, which was recorded as a deferred tax asset.
(i) LONG-LIVED ASSETS --
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to
be Disposed of ("SFAS 121"). The Corporation is required to adopt the provisions
of SFAS 121 in 1996. Based on information currently available, the Corporation
does not expect the impact of adoption SFAS 121 to have a material effect on its
consolidated financial condition or results of operations.
(j) ESTIMATES --
In preparing the consolidated financial statements, management made
estimates and assumptions that affect the amounts reported therein and the
disclosures provided. These estimates and assumptions may change and future
results could differ from those estimates and assumptions.
(2) ACQUISITIONS:
On January 6, 1995, the Corporation completed the acquisition of AFC and its
subsidiary STSB. The purchase price was $23,413,897 in cash for all the issued
and outstanding shares of AFC. Funds to pay for the purchase were borrowed from
an unaffiliated bank. At the date of purchase, AFC was liquidated and concurrent
with the liquidations, STSB was merged into PB. As of the date of purchase, AFC
had total assets of approximately $144,000,000. Goodwill of approximately
$13,000,000 created in the acquisition is being amortized on a straight line
basis over fifteen years.
This transaction was accounted for using the purchase method of accounting
and the excess of the aggregate purchase price paid over the fair value of the
net assets acquired consisted of goodwill. The results of operations of STSB
have been included in the consolidated financial statements since date of
acquisition. No pro forma financial information is presented for 1995 since the
acquisition closely
F-12
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS: (CONTINUED)
coincides with the beginning of the year and would not differ significantly from
the results reported. The following unaudited condensed results of operations
reflect the acquisition of AFC as if the acquisition had occurred at the
beginning of 1994 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994
---------
<S> <C>
Net interest income...................................................... $ 29,872
Net income............................................................... 1,564
Net income per share -- fully diluted.................................... 0.35
</TABLE>
At December 31, 1995 and 1994, the Corporation had goodwill of $17,046,795
and $5,493,782, respectively. Goodwill is stated net of accumulated amortization
of $17,465,633 and $15,921,398 at December 31, 1995 and 1994, respectively.
Goodwill represents the excess of the aggregate purchase price paid over the
fair value of the net assets received in the purchases of FNBC and BLGP in 1980,
FNBH in 1982, FNBC's purchase of Cicero State Bank ("CSB") in 1982, BOS in 1989,
BNB and HCB in 1991, BSB in 1992, and AFC in 1995. Goodwill is being amortized
on straight line and accelerated methods over periods of 10 years to 20 years.
Amortization of goodwill amounted to $1,544,235 in 1995, $1,340,021 in 1994, and
$1,340,019 in 1993.
Other intangibles consist of a deposit base intangible totalling $2,130,625
and $2,471,525 as of December 31, 1995 and 1994, respectively, which was
allocated to values associated with the acquired deposits of the Berwyn branch
of Olympic Federal Savings Association. Other intangibles are stated net of
accumulated amortization of $1,278,375 and $937,475 at December 31, 1995 and
1994, respectively. Amortization of the deposit base intangible, which is being
amortized over an estimated 10-year life, amounted to $340,900 in 1995, 1994,
and 1993.
(3) SECURITIES:
As discussed in Note 1, the Corporation adopted SFAS No. 115, effective
January 1, 1994. The amortized cost and the estimated fair value of the
Corporation's securities as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S. Government agencies.... $ 370,084,058 $ 460,886 $ -0- $ 370,544,944
Mortgage-backed securities.................... 3,001,298 16,934 23,186 2,995,046
Floating rate collateralized mortgage
obligations.................................. 7,335,163 5,754 29,552 7,311,365
State and municipal........................... 22,917,762 2,925,251 3,570 25,839,443
Other debt securities......................... 1,461,232 21,000 -0- 1,482,232
---------------- ------------- ------------- ----------------
Total debt securities....................... 404,799,513 3,429,825 56,308 408,173,030
Corporate and other equity securities......... 13,837,560 4,918,222 -0- 18,755,782
---------------- ------------- ------------- ----------------
Total securities............................ $ 418,637,073 $ 8,348,047 $ 56,308 $ 426,928,812
---------------- ------------- ------------- ----------------
---------------- ------------- ------------- ----------------
</TABLE>
F-13
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SECURITIES: (CONTINUED)
<TABLE>
<CAPTION>
1994
--------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
---------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S. Government agencies...... $ 316,256,236 $ -0- $ 56,000 $ 316,200,236
Mortgage-backed securities...................... 3,723,130 35,554 25,534 3,723,130
Floating rate collateralized mortgage
obligations.................................... 11,180,414 -0- 149,000 11,031,414
State and municipal............................. 32,874,309 2,311,781 15,178 35,170,912
Other debt securities........................... 10,000 -0- -0- 10,000
---------------- ------------- ----------- ----------------
Total debt securities......................... 364,044,089 2,311,781 245,712 366,145,692
Corporate and other equity securities........... 18,573,900 2,170,305 389,627 20,354,578
---------------- ------------- ----------- ----------------
Total securities.............................. $ 382,617,989 $ 4,517,620 $ 635,339 $ 386,500,270
---------------- ------------- ----------- ----------------
---------------- ------------- ----------- ----------------
</TABLE>
The amortized cost and estimated fair value or carrying value of debt
securities at December 31, 1995 and 1994, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
1995 1994
---------------------------------- ----------------------------------
ESTIMATED FAIR ESTIMATED FAIR
AMORTIZED COST VALUE AMORTIZED COST VALUE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less................... $ 367,916,146 $ 368,502,612 $ 321,520,921 $ 321,571,140
Due after one year through five years..... 14,264,861 15,006,919 5,741,300 5,829,073
Due after five years through ten years.... 9,363,839 11,288,949 11,893,423 13,425,583
Due after ten years....................... 2,918,206 3,068,139 9,984,901 10,555,352
---------------- ---------------- ---------------- ----------------
394,463,052 397,866,619 349,140,545 351,381,148
Mortgage-backed securities................ 3,001,298 2,905,046 3,723,130 3,733,130
Floating rate collateralized mortgage
obligations.............................. 7,335,163 7,311,365 11,180,414 11,031,414
---------------- ---------------- ---------------- ----------------
Total debt securities................. $ 404,799,513 $ 408,173,030 $ 364,044,089 $ 366,145,692
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
Proceeds from sales of debt securities during 1995 were $3,091,833,533.
Gross gains of $4,279,315 and gross losses of $272,550 were realized on those
sales. Proceeds from sales of debt securities during 1994 were $1,621,779,610.
Gross gains of $807,111 and gross losses of $12,292,899 were realized on those
sales.
At December 31, 1995 and 1994, securities carried at approximately
$29,477,162 and $26,131,828, respectively, were pledged to secure public and
trust deposits, securities sold under agreement to repurchase, and for other
purposes as required or permitted by law.
The mortgage-backed securities are direct obligations of U. S. Government
agencies and the floating rate collateralized mortgage obligations are primarily
secured by obligations of U. S. Government agencies. In the opinion of
management, there were no material securities held at either December 31, 1995
or 1994, which constituted an unusual credit risk for the Corporation.
F-14
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS:
The composition of loans included in the accompanying consolidated balance
sheets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Commercial and other............................ $ 83,939,538 $ 68,788,323
Real estate --
Residential................................... 135,085,525 119,520,349
Commercial and construction................... 42,072,760 22,220,220
Consumer........................................ 49,464,246 38,981,697
---------------- ----------------
Gross loans................................. 310,562,069 249,510,589
Less -- Unearned income......................... 962,209 1,106,295
---------------- ----------------
Loans, net of unearned income............... $ 309,599,860 $ 248,404,294
---------------- ----------------
---------------- ----------------
</TABLE>
The balance of impaired loans at December 31, 1995, was $5,739,714, while
the average balance for the year was $5,992,000. No portion of the allowance for
loan losses was allocated to the impaired loans at December 31, 1995. Interest
income recognized on impaired loans was approximately $267,000. Interest income
recognized on a cash basis only was approximately $119,000.
Loan concentrations are defined as amounts loaned to a multiple number of
borrowers engaged in similar activities, which would cause them to be similarly
impacted by economic or other conditions. Although the Corporation has a
diversified loan portfolio, a substantial natural geographic concentration of
credit risk exists within the Corporation's defined customer market areas. These
geographic market areas include the Chicago metropolitan area and the
Quad-Cities metropolitan area of Illinois and Iowa.
(5) ALLOWANCE FOR LOAN LOSSES:
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance..................... $ 4,228,608 $ 3,547,183 $ 3,001,313
Balances acquired (Note 2)............ 1,945,941 -0- -0-
Loans charged off..................... (372,289) (305,820) (1,428,318)
Recoveries on loans................... 220,751 87,245 274,188
Provision for loan losses............. -0- 900,000 1,700,000
------------- ------------- --------------
Ending balance...................... $ 6,023,011 $ 4,228,608 $ 3,547,183
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-15
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PREMISES AND EQUIPMENT:
A summary of premises and equipment is detailed below:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Land............................................... $ 2,453,865 $ 1,713,498
Buildings & improvements........................... 13,091,656 8,345,840
Leasehold improvements............................. 351,530 329,250
Furniture and equipment............................ 5,587,592 3,968,667
-------------- --------------
Total............................................ $ 21,484,643 $ 14,357,255
Accumulated depreciation........................... (5,919,241) (4,642,996)
-------------- --------------
Premises and equipment............................. $ 15,565,402 $ 9,714,259
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense for the year ended December 31, 1995, 1994, and 1993
was $1,272,478, $651,397, and $717,628, respectively.
The Corporation leases office space for its corporate headquarters under an
agreement expiring in the year 1997, leases its banking premises in LaGrange
Park under an agreement expiring in the year 2003, and leases its banking
facility in North Riverside under an agreement expiring in the year 2007. Future
minimum lease payments on these operating leases at December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR LEASE PAYMENTS
- ------------------------------------------------------------------- ---------------
<S> <C>
1996............................................................... $ 181,904
1997............................................................... 170,376
1998............................................................... 144,280
1999............................................................... 144,280
2000............................................................... 144,280
Later years........................................................ 644,319
---------------
Total minimum payments required.................................... $ 1,429,439
---------------
---------------
</TABLE>
Rental expenses for leases, included in the consolidated statements of
income as occupancy expenses, amounted to $156,079 in 1995, $181,485 in 1994,
and $174,983 in 1993. The North Riverside and LaGrange Park leases are subject
to periodic adjustment based on changes in the U.S. Department of Labor Consumer
Price Index and deposit growth, respectively.
The Corporation's aggregate future minimum net rentals to be received under
non-cancelable leases from third party tenants for its locations in Oak Park and
Westmont are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
NET LEASE
YEAR RENTALS
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 173,577
1997.............................................................. 122,899
1998.............................................................. 104,334
1999.............................................................. 28,756
2000 and after.................................................... -0-
----------------
Total minimum net rentals......................................... $ 429,566
----------------
----------------
</TABLE>
F-16
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PREMISES AND EQUIPMENT: (CONTINUED)
The Corporation also receives reimbursement from its tenants for certain
occupancy expenses including, taxes, insurance, and operating expenses, as
defined in the lease agreement. Rental income, included as an offset to
occupancy expenses, amounted to $178,620 in 1995.
(7) INCOME TAXES:
The provision for income taxes in the consolidated statements of income is
composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
------------- -------------- -------------
<S> <C> <C> <C>
Federal
Current............................. $ 2,315,000 $ (1,157,000) $ 2,696,000
Deferred............................ 824,000 (401,000) 1,417,000
State................................. -0- (761,000) (108,000)
------------- -------------- -------------
Provision (benefit) for income
taxes.............................. $ 3,139,000 $ (2,319,000) $ 4,005,000
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
Not included in the above table, but credited directly to stockholders'
equity in 1995 and 1993 were taxes in the amount of $13,507 and $26,542,
respectively, related to the disposition of stock option shares by participants
of the Incentive Stock Option Plan before the expiration of defined holding
periods for tax purposes.
The following table reconciles the provision for income taxes with the
amounts computed at the applicable statutory Federal income tax rate of 34% for
each period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Tax provision at Federal statutory rate................. $ 5,314,495 $ (22,287) $ 5,211,307
Tax-exempt income....................................... (1,027,916) (1,859,472) (1,591,860)
Amortization of purchase accounting assets and goodwill
and other intangibles.................................. 691,717 605,927 628,665
Dividend received deduction............................. (900,821) (170,711) (143,522)
Securities writedown.................................... (239,850) -0- (142,869)
State income taxes, net of Federal income tax benefit... -0- (474,431) (59,428)
Other, net.............................................. (698,625) (398,026) 102,707
-------------- -------------- --------------
Provision (benefit) for income taxes.................. $ 3,139,000 $ (2,319,000) $ 4,005,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-17
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES: (CONTINUED)
The components of and changes in the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................. $ 1,366,224 $ 1,112,925
Installment note sale................................................. -0- 747,000
Deferred compensation................................................. 656,524 612,946
Other reserves........................................................ 190,480 663,132
State tax operating loss carryforward................................. 1,690,807 -0-
Federal regular tax operating loss carryforward....................... 1,237,815 1,237,815
Alternative minimum tax credit carryforward........................... 1,284,000 198,000
Other, net............................................................ 243,181 452,871
-------------- --------------
Gross deferred tax assets........................................... 6,669,031 5,024,689
Valuation allowance............................................... (1,783,914) (1,704,280)
-------------- --------------
Gross deferred tax assets, net of valuation allowance............... 4,885,117 3,320,409
-------------- --------------
Deferred tax liabilities:
Bond accretion........................................................ -0- 504,727
Depreciation.......................................................... 292,479 168,178
Purchase accounting adjustments....................................... 873,608 883,955
Other................................................................. 757,030 332,549
Unrealized gain on securities......................................... 1,240,000 834,000
-------------- --------------
Gross deferred tax liabilities...................................... 3,163,117 2,723,409
-------------- --------------
Net deferred tax asset.................................................. $ 1,722,000 $ 597,000
-------------- --------------
-------------- --------------
</TABLE>
A valuation allowance is provided when the realization potential of a
portion of the deferred tax asset cannot be determined to be more likely than
not. The Corporation has established a valuation allowance for a portion of its
Federal and State tax net operating loss carryforward. In 1995, a deferred tax
asset relating to an installment note sale, for which a valuation allowance had
been established, was recognized. This, together with establishment of the
valuation allowance for the state tax net operating loss carryforward resulted
in the change in the valuation allowance. Also included in the net deferred tax
asset is the tax effect of the unrealized gain on securities which is not
recorded through the provision for taxes, but directly to Stockholders' Equity.
The net operating loss carryforward for Federal purposes relates to the
parent company and is subject to significant limitation on its usage. At
December 31, 1995, the Federal net operating loss carryforward amounted to
approximately $3,641,000 which expires, if unused, in the years 1999 to 2001.
The State net operating loss carryforward amounted to $23,549,000 which expires,
if unused, in the years 2010 and 2011.
At December 31, 1995, the Corporation had an alternative minimum tax credit
carryforward of approximately $1,284,000, which is not subject to expiration.
F-18
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE:
The Corporation has financed acquisitions, purchases of equity securities
and short-term cash requirements of the parent company with an unaffiliated
bank. At December 31, 1995, the borrowings are composed of a $23,000,000 demand
loan used for the acquisition of AFC and a $7,000,000 revolving line of credit.
Total outstandings were $20,600,000 at December 31, 1995 of which $20,000,000
related to the AFC note. During 1994, the borrowings of the Corporation were
composed of a non-revolving note and a $10,000,000 revolving line of credit
which was replaced by the aforementioned line of credit. Total outstandings were
$5,400,000 at December 31, 1994.
These borrowings bear interest at a floating rate tied to the prime rate or
LIBOR, are due on demand and are secured by the common stock owned by the
Corporation of each subsidiary bank.
(9) PROFIT-SHARING AND INCENTIVE PLANS:
The Corporation maintains a trusteed, profit-sharing plan covering
substantially all employees who have met age and service requirements. Annual
contributions are made in accordance with a resolution passed by the Boards of
Directors of the Corporation and each subsidiary bank and amounted to $414,144
for 1995, $337,072 for 1994, and $339,259 for 1993.
The Corporation and each subsidiary bank maintain profit incentive plans
which are available to certain key executives. Distributions are based on the
performance levels of the Corporation and each subsidiary bank, and are subject
to the Board of Directors' approval.
(10) STOCK OPTION PLAN:
In April, 1990, the shareholders approved the 1990 Incentive Stock Option
Plan ("1990 Plan"). The 1990 Plan covers key employees of the Corporation and
requires that all options be issued at an option price at least equal to the
fair market value per share of the Corporation's common stock on the date
granted. No options may be granted to any individual who owns more than 10% of
the Corporation's common stock unless the grant is at a purchase price of 110%
of the option's fair market value on the date of grant. Under the 1990 Plan, the
aggregate number of shares which could be issued under options are 246,666
shares.
The Corporation previously had an incentive stock option plan originally
adopted in 1981 ("Prior Plan") which terminated on December 31, 1990 in regards
to the issuance of new options. The Prior Plan was amended in 1988 and the
options previously granted by companies merged into the Corporation were
converted into options to purchase shares of the Corporation. The substantive
terms of the Prior Plan were the same as the 1990 Plan. Under the Prior Plan,
the aggregate number of shares which could be issued under options were 366,667
shares. Upon adoption of the 1990 Plan, no additional option shares could be
issued under the Prior Plan.
F-19
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option transactions for 1995, 1994, and
1993 giving effect to stock splits. At December 31, 1995, 47,166 option shares
under the 1990 Plan and no option shares under the Prior Plan were outstanding.
All options outstanding may be exercised at any time during the five year period
from the date of grant.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
----------- -------------
<S> <C> <C>
Outstanding at December 31, 1992....................................... 93,065 $ 18.13
Options granted...................................................... -0- -0-
Options exercised.................................................... (13,271 ) 14.41
----------- -------------
Outstanding at December 31, 1993....................................... 79,794 18.75
Options granted...................................................... -0- -0-
Options exercised.................................................... (11,951 ) 16.80
----------- -------------
Outstanding at December 31, 1994....................................... 67,843 19.09
Options granted...................................................... 5,000 28.63
Options exercised.................................................... (25,677 ) 17.69
----------- -------------
Outstanding at December 31, 1995....................................... 47,166 $ 20.86
----------- -------------
----------- -------------
</TABLE>
In 1995 and 1993, the Corporation derived tax deductions from the
disposition of stock option shares by participants of the Prior Plan before the
expiration of defined holding periods for tax purposes. These tax deductions are
measured by the excess of the market value over the option price at the date of
sale by the participant. The related tax benefit is credited to additional
paid-in capital. The Corporation makes no charges against capital with respect
to options granted.
During 1993, individuals exercised stock appreciation rights relating to
13,333 shares with an average grant value of $10.42 per share. Upon exercise of
these stock appreciation rights, the Corporation paid compensation, the majority
of which was previously accrued, to the individuals holding the stock
appreciation rights in the amount of the difference between the market price of
the Corporation's common stock on the date of exercise and the grant price. At
December 31, 1995 and 1994, no stock appreciation rights were outstanding.
(11) CAPITAL STOCK:
The weighted average number of common and common equivalent shares
outstanding for the year ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Primary.................................................................. 4,417,701 4,456,437 4,526,161
Fully diluted............................................................ 4,419,006 4,459,599 4,528,298
</TABLE>
(12) RELATED-PARTY TRANSACTIONS:
Analysis of loans made to directors and executive officers of the
Corporation and subsidiaries is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1994........................................... $3,651,594
Additions............................................................ 1,694,049
Collections.......................................................... 2,290,628
----------
Balance, December 31, 1995......................................... $3,055,015
----------
----------
</TABLE>
Directors of the Corporation and subsidiaries were customers of and had
transactions with the subsidiaries in the ordinary course of business during the
period presented above and additional
F-20
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transactions may be expected in the future. In management's opinion, all
outstanding loans, commitments and deposit relationships included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
others, and did not involve more than a normal risk of collectibility or other
unfavorable features.
One director of the Corporation is a partner in a law firm that provides
various legal services to the Corporation and its subsidiary banks. Fees for
these services were $250,128 in 1995, $262,040 in 1994, and $104,150 in 1993.
(13) LITIGATION:
During the first quarter of 1994, a judgment in the amount of $2,300,000 was
entered in the U. S. Bankruptcy Court against PB. The judgment is the result of
a suit filed against PB by a trustee of a debtor in bankruptcy. The trustee
claimed that PB honored overdrafts in the debtor's bank account without
obtaining prior court approval. The amount of the judgment represents the
cumulative amount of all payments received by PB from the debtor to cover
overdrafts. While PB appealed the decision in 1994, management, upon the advice
of legal counsel, settled the case for $1,275,000 in December, 1995. The
settlement amount had been previously accrued.
The Corporation and the subsidiary banks are subject to other pending and
threatened legal actions which arise in the normal course of business. In the
opinion of management, based upon consultation of legal counsel, the disposition
of all outstanding matters will not have a materially adverse effect on the
consolidated financial position and results of operations.
(14) DISCLOSURES ABOUT ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires the disclosure of the fair value of financial instruments for which it
is practicable to estimate that value, and the disclosure of the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
(a) CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND INTEREST BEARING
DEPOSITS --
For these short-term instruments, the carrying value approximates fair value
because these instruments are short-term in nature and do not present
unanticipated credit concerns.
(b) SECURITIES --
For debt securities and equity securities available for sale, fair values
are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
instruments or carried at cost.
(c) LOANS --
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Corporation's and the industry's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions.
Fair value for significant impaired loans is based on estimated cash flows
which 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.
F-21
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) DEPOSIT LIABILITIES --
The fair value of deposits with no stated maturity, such as non-interest
bearing deposits, savings, and NOW accounts, and money market and checking
accounts, is equal to the amount payable on demand as of December 31, 1995. The
fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
(e) SHORT TERM BORROWINGS AND NOTES PAYABLE
Rates currently available to the Corporation and Subsidiaries for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
(f) UNRECOGNIZED FINANCIAL INSTRUMENTS
The fair value of unrecognized financial instruments including commitments
to extend credit, standby letters of credit and financial guarantees are
insignificant and, therefore, not presented.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------
CARRYING ESTIMATED FAIR
VALUE VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks, Federal funds sold and interest-bearing
deposits............................................................ $ 44,098,000 $ 44,098,000
Securities........................................................... 426,929,000 426,929,000
Loans, net........................................................... 303,577,000 306,361,000
Financial liabilities:
Deposits............................................................. (712,805,000) (713,888,000)
Short term borrowings................................................ -0- -0-
Notes payable........................................................ (20,600,000) (20,600,000)
<CAPTION>
1994
----------------------------------
CARRYING ESTIMATED FAIR
VALUE VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks, Federal funds sold and interest-bearing
deposits............................................................ $ 23,080,000 $ 23,080,000
Securities........................................................... 386,500,000 386,500,000
Loans, net........................................................... 244,176,000 236,457,000
Financial liabilities:
Deposits............................................................. (599,879,000) (600,840,000)
Short term borrowings................................................ (4,800,000) (4,800,000)
Notes payable........................................................ (5,400,000) (5,400,000)
</TABLE>
(g) 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 Corporation's entire holdings of a particular financial
instrument. Because no actively traded market exists for a significant portion
of the Corporation's financial instruments, fair value estimates are based on
judgments regarding future
F-22
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 judgments and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments. The disclosures do not address the value of the
Corporation's other types of recognized and unrecognized assets and liabilities
or the value of anticipated future business. 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.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Corporation has, through its subsidiary banks, financial instruments
with off-balance-sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated financial
statements. The contract amounts of those instruments reflect the extent of
involvement the subsidiary banks have in particular classes of financial
instruments. The Corporation is not using any derivative products for hedging or
other purposes.
The subsidiary banks' exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented by
the contractual amount of those instruments. Each subsidiary bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. At December 31, 1995 and 1994, the subsidiary
banks had the following financial instruments with off-balance-sheet risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Commitments to extend credit............................................... $ 70,651,000 $ 59,326,000
Standby letters of credit and financial guarantees written................. 2,982,000 3,412,000
</TABLE>
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. Each subsidiary bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by each subsidiary bank upon extension of credit
is based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the subsidiary banks to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private financing arrangements for a period of less than two years.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Each subsidiary bank
holds collateral supporting those commitments for which collateral is deemed
necessary.
F-23
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) REGULATORY REQUIREMENTS:
The subsidiary banks are subject to Federal and state laws which restrict
the payment of dividends to the Corporation. Based on these restrictions, at
January 1, 1996, the subsidiary banks could have declared approximately
$2,715,000 in dividends without requesting approval of the applicable Federal or
state regulatory agency.
Based on the types and amounts of deposits received, banks are required to
maintain non-interest bearing cash balances in accordance with Federal Reserve
Bank reserve requirements. At December 31, 1995 and 1994, the non-interest
bearing cash balances maintained to meet reserve requirements were $10,527,000
and $7,199,000, respectively.
(17) OTHER INCOME AND OTHER EXPENSE:
The following is the detail of the "Other income" and "Other expense" lines
on the Consolidated Statements of Income for the year ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Other income:
Banking services......................................... $ 3,139,142 $ 2,378,781 $ 2,632,216
Trust services........................................... 2,307,358 1,758,212 1,713,043
Other income............................................. 1,779,343 1,324,877 1,270,450
------------- ------------- -------------
Total.................................................. $ 7,225,843 $ 5,461,870 $ 5,615,709
------------- ------------- -------------
------------- ------------- -------------
Other expense:
Equipment expense........................................ $ 1,316,296 $ 828,877 $ 829,185
FDIC insurance premium................................... 983,962 1,398,995 1,416,314
Data processing.......................................... 1,206,129 890,275 985,719
Litigation expense....................................... -0- 750,000 -0-
Other expense............................................ 3,302,259 4,204,341 4,057,083
------------- ------------- -------------
Total.................................................. $ 6,808,646 $ 8,072,488 $ 7,288,301
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(18) PARENT COMPANY STATEMENTS:
Presented on the following pages are the balance sheets, statements of
income and statements of cash flows for the Parent Company.
F-24
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) PARENT COMPANY STATEMENTS: (CONTINUED)
BALANCE SHEETS
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1995 1994
---------------- --------------
<S> <C> <C>
Assets:
Cash in subsidiary banks................................................ $ 9,329 $ 160,643
Investment in subsidiary banks.......................................... 79,065,813 52,052,420
Goodwill and purchase accounting adjustments............................ 3,018,123 3,576,249
Securities.............................................................. 18,184,182 19,791,578
(amortized cost: 1995--$13,265,960
1994--$18,359,297)
Other assets............................................................ 898,965 440,633
---------------- --------------
Total................................................................. $ 101,176,412 $ 76,021,523
---------------- --------------
---------------- --------------
Liabilities and stockholders' equity:
Notes payable........................................................... $ 20,600,000 $ 5,400,000
Accrued income taxes.................................................... 948,322 1,018,501
Other liabilities....................................................... 667,275 767,345
Stockholders' equity.................................................... 78,960,815 68,835,677
---------------- --------------
Total................................................................. $ 101,176,412 $ 76,021,523
---------------- --------------
---------------- --------------
</TABLE>
F-25
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) PARENT COMPANY STATEMENTS: (CONTINUED)
STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks................................ $ 10,013,068 $ 4,273,958 $ 22,132,942
Management fees from subsidiary banks.......................... -0- -0- 1,320,955
Dividend and interest income................................... 1,157,391 1,489,839 1,340,871
Net securities gains........................................... 694,875 1,772,013 1,478,474
Other income................................................... 44,098 30,029 9,025
-------------- -------------- --------------
Total........................................................ 11,909,432 7,565,839 26,282,267
Expenses:
Interest on notes payable...................................... 1,963,897 282,937 423,947
Employee compensation and benefits............................. 639,554 530,600 1,565,276
Amortization of goodwill and purchase accounting adjustments... 637,038 1,311,443 1,294,872
Other expenses................................................. 351,575 641,897 511,068
-------------- -------------- --------------
Total........................................................ 3,592,064 2,766,877 3,795,163
Income before income taxes and undistributed earnings of
subsidiary banks............................................... 8,317,368 4,798,962 22,487,104
Provision (benefit) for income taxes........................... (1,383,000) (398,000) 1,361,000
Equity in undistributed earnings of subsidiary banks........... 2,793,087 (2,941,465) (7,247,856)
-------------- -------------- --------------
Income before cumulative effect of change in accounting for
income taxes................................................... 12,493,455 2,255,497 13,878,248
Cumulative effect of change in accounting for income taxes..... -0- -0- (885,000)
-------------- -------------- --------------
Net income....................................................... $ 12,493,455 $ 2,255,497 $ 12,993,248
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-26
<PAGE>
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) PARENT COMPANY STATEMENTS: (CONTINUED)
STATEMENTS OF CASH FLOWS
PINNACLE BANC GROUP, INC. (Parent Only)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 12,493,455 $ 2,255,497 $ 12,993,248
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess of equity in undistributed earnings of subsidiaries
(over) under dividends received......................... (2,793,087) 2,941,465 7,247,856
Amortization of goodwill and purchase accounting
adjustments.............................................. 637,038 1,311,443 1,294,872
Gain on sales of securities............................... (694,875) (1,772,013) (1,478,474)
Increase (decrease) in interest payable................... (66,662) 179,341 (41,190)
(Increase) decrease in other assets....................... (458,332) (279,808) 2,347,337
Decrease in other liabilities and accrued income taxes.... (103,587) (117,541) (585)
Other, net................................................ (344,008) (780,504) (710,372)
--------------- --------------- ---------------
Total adjustments....................................... (3,823,513) 1,482,383 8,659,444
Net cash provided by operating activities............... 8,669,942 3,737,880 21,652,692
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note
1)......................................................... (23,413,897) -0- -0-
Purchase of minority shares................................. -0- -0- (156,319)
Purchases of securities..................................... (107,500) (4,923,065) (4,670,000)
Proceeds from sales of securities........................... 3,056,625 2,870,722 2,081,280
Proceeds from maturities and paydowns of securities......... 2,828,996 -0- 1,012,900
--------------- --------------- ---------------
Net cash used for investing activities.................. (17,635,776) (2,052,343) (1,732,139)
Cash flows from financing activities:
Proceeds from notes payable................................. 31,800,000 11,200,000 4,700,000
Principal reductions of notes payable....................... (16,600,000) (5,800,000) (19,209,000)
Issuance of common stock.................................... 454,315 200,776 191,264
Purchase and retirement of common stock..................... (1,731,122) (2,727,214) (1,333,879)
Dividends paid.............................................. (5,108,673) (4,797,510) (4,315,840)
--------------- --------------- ---------------
Net cash provided by (used for) financing activities.... 8,814,520 (1,923,948) (19,967,455)
Net increase (decrease) in cash and cash equivalents.......... (151,314) (238,411) (46,902)
Cash and cash equivalents at beginning of year................ 160,643 399,054 445,956
--------------- --------------- ---------------
Cash and cash equivalents at end of year...................... $ 9,329 $ 160,643 $ 399,054
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash paid during year for:
Interest.................................................... $ 2,030,559 $ 103,597 $ 465,138
Income taxes................................................ 2,207,000 1,526,000 4,802,016
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
of Pinnacle Banc Group, Inc.
We have audited the accompanying consolidated balance sheets of Pinnacle
Banc Group, Inc. (an Illinois Corporation) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the December
31, 1993 financial statements of Batavia Savings Bank, which statements reflect
assets of 10 percent of the consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to the amounts included for that entity, is based solely on the
report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pinnacle Banc Group, Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 19, 1996
F-28
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
---------------- -----------------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................................... $ 793,845 $ 1,143,375
Interest earning deposits.................................................. 9,507,854 6,267,332
Federal funds sold......................................................... --0-- 745,696
---------------- -----------------
Total cash and cash equivalents.......................................... 10,301,699 8,156,403
Securities held-to-maturity................................................ 1,152,106 1,341,470
Securities available-for-sale.............................................. 55,348,869 54,134,691
Loans receivable -- net of allowance for loan losses of $2,341,662 at March
31, 1996 and $2,284,662 at December 31, 1995.............................. 186,639,039 190,495,513
Loans held for sale -- (net)............................................... 1,580,340 3,483,448
Foreclosed real estate -- (net)............................................ 1,190,996 1,321,009
Limited partnership investment in purchased mortgage servicing rights...... 9,032,941 8,615,863
Accrued interest receivable................................................ 2,018,335 2,370,350
Federal home loan bank stock............................................... 2,075,000 2,187,500
Premises and equipment..................................................... 3,086,073 3,151,491
Real estate held for development........................................... 416,400 466,400
Prepaid expenses and other assets.......................................... 1,123,328 1,333,061
---------------- -----------------
Total assets............................................................. $ 273,965,126 $ 277,057,199
---------------- -----------------
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits................................................................... $ 188,776,784 $ 193,845,087
Borrowed funds............................................................. 41,500,000 39,344,703
Advance payment by borrowers for taxes and insurance....................... 272,150 1,152,685
Accrued interest payable and other liabilities............................. 4,044,353 3,946,861
---------------- -----------------
Total liabilities........................................................ 234,593,287 238,289,336
---------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value. authorized 1,000,000 shares; none issued
or outstanding............................................................ --0-- --0--
Common stock, $.01 par value. authorized 3,000,000; issued 1,769,420;
outstanding 1,523,338..................................................... 17,694 17,419
Additional paid in capital................................................. 16,729,847 16,386,274
Treasury stock (246,082 shares at March 31, 1996 and December 31, 1995.)... (3,826,060) (3,826,060)
Retained earnings (substantially restricted)............................... 27,535,901 26,987,884
Employee stock ownership plan loan......................................... (600,000) (644,703)
Recognition and retention plan stock awards................................ (292,093) (326,400)
Unrealized gain or (loss) on securities available for sale (net of income
taxes).................................................................... (193,450) 173,449
---------------- -----------------
Total stockholders' equity............................................... 39,371,839 38,767,863
---------------- -----------------
Total liabilities and stockholders' equity............................... $ 273,965,126 $ 277,057,199
---------------- -----------------
---------------- -----------------
</TABLE>
F-29
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Interest income:
Loans receivable............................................................... $ 4,007,646 $ 4,193,965
Securities..................................................................... 751,120 466,773
Mortgage-backed securities..................................................... 234,704 255,274
Interest earning deposits and federal funds sold............................... 52,579 47,354
Dividends on FHLB stock........................................................ 35,094 32,507
-------------- --------------
Total interest income............................................................ 5,081,143 4,995,873
-------------- --------------
-------------- --------------
Interest expense:
Deposits....................................................................... 2,342,584 2,351,963
Borrowed funds................................................................. 640,269 585,938
-------------- --------------
Total interest expense........................................................... 2,982,853 2,937,901
-------------- --------------
Net interest income before provision for loan losses............................. 2,098,290 2,057,972
Provision for loan losses........................................................ 75,000 100,000
-------------- --------------
Net interest income after provision for loan losses.............................. 2,023,290 1,957,972
Non interest income:
Gain on sale of:
Loans........................................................................ 61,205 --0--
Securities available-for-sale................................................ --0-- 25,000
Foreclosed real estate loans................................................. 121,333 54,100
Insurance commissions.......................................................... 16,612 20,455
Equity in earnings of limited partnership investments in purchased mortgage
servicing rights.............................................................. 228,078 184,985
Other income................................................................... 57,051 32,547
-------------- --------------
Total non interest income........................................................ 484,279 317,087
Non interest expense:
Compensation and benefits...................................................... 831,779 757,399
Office occupancy and equipment................................................. 150,594 157,387
Federal deposit insurance premiums............................................. 114,975 109,978
Data processing................................................................ 80,350 87,516
Legal fees..................................................................... 7,198 30,960
Advertising and promotion...................................................... 20,354 74,614
Loss from foreclosed real estate operations (net).............................. 106,790 97,326
Provision for loss on securities............................................... 137,592 127,387
Provision for real estate held-for-development................................. 50,000 --0--
Other.......................................................................... 271,920 274,914
-------------- --------------
Total non interest expense....................................................... 1,771,552 1,717,481
-------------- --------------
Income before income taxes....................................................... 736,017 557,578
Income tax expense............................................................... 188,000 54,000
-------------- --------------
Net income....................................................................... $ 548,017 $ 503,578
-------------- --------------
-------------- --------------
Net earnings per share:
Primary........................................................................ $ 0.35 $ 0.31
-------------- --------------
-------------- --------------
Fully diluted.................................................................. $ 0.35 $ 0.31
-------------- --------------
-------------- --------------
</TABLE>
F-30
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Cash Flows from operating activities:
Net Income....................................................................... $ 548,017 $ 503,578
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation................................................................... 73,521 86,536
Deferred income tax expense (benefit).......................................... --0-- (101,121)
Amortization of premiums, discounts and deferred loan fees..................... (92,589) 26,273
Amortization of ESOP and RRP................................................... 79,010 71,855
Provisions for Losses:
Loans receivable............................................................. 75,000 100,000
Foreclosed real estate and real estate held-for-development.................. 50,000 --0--
Securities................................................................... 137,592 127,387
Gain on Sale of:
Securities available for sale................................................ --0-- (25,000)
Foreclosed real estate....................................................... (121,333) (54,100)
Loans........................................................................ (61,205) --0--
Purchase of loans held for sale................................................ --0-- (1,514,000)
Proceeds from sale of loans held for sale...................................... 1,699,000 1,442,000
Equity in earnings of limited partnership investment in purchased mortgage
servicing rights.............................................................. (228,078) (184,985)
Decrease in accrued interest receivable, prepaid expenses and other assets..... 1,071,800 952,769
Increase in accrued interest payable and other liabilities..................... 97,492 977,664
-------------- --------------
Net Cash provided by operating activities........................................ 3,328,227 2,408,856
-------------- --------------
Cash Flows from investing activities:
Net change in loans receivable and held for sale............................... 3,642,730 (774,068)
Principal repayments on:
Mortgage backed securities................................................... 970,000 440,000
Proceeds from maturities and calls of securities............................... 8,500,000 --0--
Increase in mutual funds, net.................................................. --0-- (70,932)
Proceeds from sales of Securities available-for-sale........................... --0-- 4,006,000
Foreclosed real estate......................................................... 549,635 670,000
Purchase of:
Securities available-for-sale................................................ (11,500,000) (8,528,000)
Premises and equipment....................................................... (8,103) (39,523)
Federal Home Loan Bank stock (purchase) redemption........................... 112,500 (37,500)
Limited partnership investment purchased mortgage servicing rights........... --0-- (370,000)
-------------- --------------
Net Cash provided by (used in) investing activities.............................. 2,266,762 (4,704,023)
-------------- --------------
Cash Flows from financing activities
Net increase (decrease) in deposits............................................ (5,068,303) 17,445,115
Proceeds from borrowed funds................................................... 12,900,000 2,100,000
Repayment of borrowed funds.................................................... (10,744,703) (13,042,982)
Purchase of treasury stock..................................................... --0-- (1,391,031)
Proceeds from exercise of stock options........................................ 343,848 27,500
Cash dividends paid............................................................ --0-- (1,569,128)
Net decrease in advance payments by borrowers for taxes and insurance.......... (880,535) (2,208,526)
-------------- --------------
Net Cash provided by (used in) financing activities.............................. (3,449,693) 1,360,948
-------------- --------------
Net increase (decrease) in cash and cash equivalents............................. 2,145,296 (934,219)
Cash and cash equivalents at beginning of year................................... 8,156,403 6,036,418
-------------- --------------
Cash and Cash Equivalents at End of Period....................................... $ 10,301,699 $ 5,102,199
-------------- --------------
-------------- --------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the quarter for:
Interest..................................................................... $ 2,952,748 $ 2,937,901
Income taxes................................................................. --0-- --0--
Non-Cash Activities:
Transfer of loans to foreclosed real estate.................................. $ 298,289 $ 777,140
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
NOTE 1
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to form 10-QSB and
Article 10 of regulation S-X. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles and with general practices within the thrift
industry requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The actual results could
differ from these estimates. Areas involving the use of management's estimates
and assumptions, and which are more susceptible to change in the near term,
include the allowance for loan losses, the realization of deferred tax assets,
fair value of certain securities, including FHA Title I securities and
collateralized mortgage obligations, the determination and carrying value of
impaired loans, the carrying value of loans held for sale, the carrying value of
other real estate, the fair value of mortgage servicing rights as they relate to
the limited partnership, and the determination of other-than-temporary
reductions in the fair value of securities.
The results of operations and other data for the three months ended March
31, 1996 are not necessarily indicative of results that may be expected for the
entire fiscal year ending December 31, 1996.
The unaudited consolidated financial statements include the accounts of
Financial Security Corp. (the "Company") and its wholly owned subsidiary,
Security Federal Savings and Loan Association of Chicago (the "Association"),
and subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2
OTHER EVENTS. On April 22, 1996, the Company entered into an Agreement and
Plan of Merger (the "Agreement") with Pinnacle Banc Group, Inc. ("Pinnacle")
pursuant to which Pinnacle will acquire the Company with the Company merging
into Pinnacle. The Company's wholly-owned subsidiary, Security Federal Savings
and Loan Association of Chicago will be held as a separate subsidiary of
Pinnacle.
Under the terms of the Agreement, holders of the Company's common stock will
receive $28.50, subject to adjustment, in cash, Pinnacle common stock or a
combination thereof for each share.
The Agreement is subject to approval by the shareholders of the Company and
Pinnacle and the approval of the appropriate regulatory authorities.
NOTE 3
Earnings per share of common stock for the quarter ended March 31, 1996 have
been determined by dividing net income by 1,571,791 primary shares and 1,579,198
fully diluted shares respectively, the weighted average number of shares of
common stock and common stock equivalents outstanding. Stock options are
regarded as common stock equivalents and are therefore considered in the
earnings per share calculations. Common stock equivalents are computed using the
treasury stock method. (See Exhibit 11.0).
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1996
NOTE 4 RECAPITALIZATION OF SAIF AND OTHER LEGISLATIVE INITIATIVES
Legislative initiatives regarding the recapitalization of the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"), deposit insurance premiums, FICO bond interest payments, the merger of
SAIF and Bank Insurance Fund ("BIF"), financial industry regulatory structure,
bad debt recapture and revision of thrift and bank charters are still pending
before Congress. Management cannot predict the ultimate impact any final
legislation or regulatory actions may have on the operations of Financial
Security. Without passage of legislation addressing the FDIC insurance premium
disparity, Security Federal, like other thrifts, will continue to pay deposit
insurance premiums significantly higher than banks. As long as such premium
differential continues, it may have adverse consequences on Financial Security's
earnings and Financial Security may be placed at a substantial competitive
disadvantage to commercial banking organizations insured by the BIF.
NOTE 5 SFAS NO. 122
On January 1, 1996, Financial Security adopted a Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights ("MSRs")
(an amendment to Statement 65)." SFAS 122 provides for the capitalization of
MSRs when mortgage loans are either originated or purchased and the underlying
loan is sold or securities with the MSR retained. The statement applies to
servicing rights resulting from mortgage loans only and is effective for fiscal
years starting after December 15, 1995. Security Federal is currently not
originating mortgage loans for sale and therefore the adoption of SFAS 122 did
not have a material impact on Financial Security.
NOTE 6 SFAS NO. 123
During 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" which provides new accounting guidelines over the treatment of
employee stock options. The Statement gives entities a choice of either adopting
a new fair value method of accounting for employee stock options and expensing
any related compensation costs in the income statement, or continuing to apply
Accounting Principles Board Opinion No. 25 and provide pro forma disclosure of
the effect of the fair value method within the financial statements. The
Statement is effective for financial statements beginning after December 15,
1995. Financial Security currently intends to adopt the disclosure method of the
Statement.
F-33
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks....................................................... $ 1,143,375 $ 1,570,409
Interest-earning deposits..................................................... 6,267,332 3,616,009
Federal funds sold............................................................ 745,696 850,000
---------------- ----------------
Cash and cash equivalents..................................................... 8,156,403 6,036,418
Securities held-to-maturity (fair value: 1995 - $1,341,470; 1994 -
$27,628,278) (Note 2)........................................................ 1,341,470 29,733,074
Securities available-for-sale (Note 3)........................................ 54,134,691 10,184,357
Loans receivable, net of allowance for loan losses of $2,284,662 in 1995 and
$3,294,221 in 1994 (Note 4).................................................. 190,495,513 198,201,151
Loans held for sale........................................................... 3,483,448 7,411,193
Foreclosed real estate, net of allowance of $24,710 in 1995 and $149,335 in
1994......................................................................... 1,321,009 3,799,486
Limited partnership investments in purchased mortgage servicing rights (Note
5)........................................................................... 8,615,863 7,766,456
Accrued interest receivable (Note 6).......................................... 2,370,350 1,855,506
Federal Home Loan Bank stock.................................................. 2,187,500 2,105,000
Premises and equipment (Note 7)............................................... 3,151,491 3,406,983
Real estate held for development, net of allowance of $315,590 in 1995 and
$251,991 in 1994............................................................. 466,400 530,000
Prepaid expenses and other assets............................................. 1,333,061 1,332,118
---------------- ----------------
$ 277,057,199 $ 272,361,742
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 8)........................................................... $ 193,845,087 $ 186,554,605
Borrowed funds (Note 9)..................................................... 39,344,703 42,416,629
Advance payments by borrowers for taxes and insurance....................... 1,152,685 2,383,287
Accrued interest payable and other liabilities.............................. 3,946,861 2,317,638
---------------- ----------------
238,289,336 233,672,159
Commitments and contingencies (Notes 14 and 15)
Stockholders' equity (Notes 11, 12 and 13)
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued or
outstanding................................................................ -- --
Common stock, $.01 par value. Authorized 3,000,000 shares; issued: 1,741,912
shares in 1995 and 1,734,004 shares in 1994; outstanding: 1,495,830 shares
in 1995 and 1,566,378 shares in 1994....................................... 17,419 17,340
Additional paid-in capital.................................................. 16,386,274 16,196,269
Treasury stock, at cost, 246,082 shares in 1995 and 167,626 shares in
1994....................................................................... (3,826,060) (2,435,029)
Retained earnings, substantially restricted................................. 26,987,884 26,444,759
Employee Stock Ownership Plan loan.......................................... (644,703) (816,629)
Unearned Recognition and Retention Plan stock awards........................ (326,400) (401,720)
Unrealized gain (loss) on securities available-for-sale, net of income taxes
(Note 2)................................................................... 173,449 (315,407)
---------------- ----------------
38,767,863 38,689,583
---------------- ----------------
$ 277,057,199 $ 272,361,742
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable....................................................... $17,406,230 $16,577,377 $16,073,839
Securities............................................................. 2,530,936 1,635,682 2,194,447
Mortgage-backed securities............................................. 1,048,477 1,121,905 1,187,919
Interest-earning deposits and federal funds sold....................... 106,785 192,914 124,151
Dividends on FHLB stock................................................ 142,555 116,155 108,128
----------- ----------- -----------
21,234,983 19,644,033 19,688,484
INTEREST EXPENSE
Deposits (Note 8)...................................................... 10,124,360 8,280,287 8,615,122
Borrowed funds (Note 9)................................................ 2,532,852 1,343,091 101,089
----------- ----------- -----------
12,657,212 9,623,378 8,716,211
----------- ----------- -----------
Net interest income before provision for loan losses..................... 8,577,771 10,020,655 10,972,273
Provision for loan losses (Note 4)....................................... 100,000 200,000 572,178
----------- ----------- -----------
Net interest income after provision for loan losses.................... 8,477,771 9,820,655 10,400,095
NON INTEREST INCOME
Equity in earnings of limited partnership investments in purchased
mortgage servicing rights............................................. 668,407 136,456 --
Gain (loss) on sale of
Mutual funds......................................................... -- (10,137) (39,198)
Securities held-to-maturity.......................................... -- (33,488) --
Securities available-for-sale........................................ 152,449 (88,685) 359,519
Loans................................................................ 76,224 -- --
Insurance commissions.................................................. 68,621 76,150 93,838
Other.................................................................. 175,555 160,202 273,406
----------- ----------- -----------
1,141,256 240,498 687,565
NON INTEREST EXPENSE
Compensation and benefits.............................................. 2,884,641 2,751,812 2,788,621
Office occupancy and equipment......................................... 715,940 686,209 634,071
Federal deposit insurance premiums..................................... 456,740 492,620 455,157
Advertising and promotion.............................................. 288,670 232,868 232,351
Data processing........................................................ 315,195 269,467 262,464
Legal fees............................................................. 90,692 223,714 158,472
Loss from foreclosed real estate operations, net....................... 258,677 243,062 286,449
Provision for loss on foreclosed real estate........................... 79,294 579,083 429,521
Provision for loss on securities....................................... 893,159 410,148 1,004,962
Other.................................................................. 1,055,715 1,294,560 1,029,152
----------- ----------- -----------
7,038,723 7,183,543 7,281,220
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................................................... 2,580,304 2,877,610 3,806,440
Income tax expense (Note 11)............................................. 468,051 970,224 1,400,000
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........ 2,112,253 1,907,386 2,406,440
Cumulative effect of change in accounting for income taxes (Note 11)..... -- -- 1,508,177
----------- ----------- -----------
Net income............................................................. $ 2,112,253 $ 1,907,386 $ 3,914,617
----------- ----------- -----------
----------- ----------- -----------
Primary earnings per share
Income before change in accounting principle........................... $1.35 $1.17 $1.40
Cumulative effect of change in accounting for income taxes............. -- -- .88
----------- ----------- -----------
Net income........................................................... $1.35 $1.17 $2.28
----------- ----------- -----------
----------- ----------- -----------
Fully diluted earnings per share
Income before change in accounting principle........................... $1.33 $1.17 $1.40
Cumulative effect of change in accounting for income taxes............. -- -- .87
----------- ----------- -----------
Net income........................................................... $1.33 $1.17 $2.27
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
ADDITIONAL UNEARNED SECURITIES
PREFERRED COMMON PAID-IN TREASURY RETAINED RRP STOCK AVAILABLE-
STOCK STOCK CAPITAL STOCK EARNINGS ESOP LOAN AWARDS FOR-SALE
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1993...................... $ -- $ 17,193 $15,999,423 $ -- $20,622,756 $(1,160,480) $(687,720) $ --
Net income................. -- -- -- -- 3,914,617 -- -- --
Purchase of treasury stock
-- 85,962 shares.......... -- -- -- (1,190,640) -- - -- --
Tax benefit from employee
stock plans............... -- -- 25,930 -- -- -- -- --
Payment on ESOP loan....... -- -- -- -- -- 171,926 -- --
Stock award earned......... -- -- -- -- -- -- 137,544 --
Unrealized loss on
securities held for sale
and mutual funds.......... -- -- -- -- -- -- -- (5,020)
Additional conversion
expenses.................. -- -- (10,537) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31,
1993...................... -- 17,193 16,014,816 (1,190,640) 24,537,373 (988,554) (550,176) (5,020)
Cumulative effect of change
in accounting for
investments, net of tax of
$32,000................... -- -- -- -- -- -- -- 50,944
Net income................. -- -- -- -- 1,907,386 -- -- --
Exercise of common stock
options................... -- 147 147,391 -- -- -- -- --
Purchase of treasury stock
-- 81,664 shares.......... -- -- -- (1,244,389) -- -- -- --
Tax benefit from employee
stock plans............... -- -- 34,062 -- -- -- -- --
Payment on ESOP loan....... -- -- -- -- -- 171,925 -- --
Stock award earned......... -- -- -- -- -- -- 148,456 --
Change in unrealized loss
on securities
available-for-sale, net of
tax of $212,000........... -- -- -- -- -- -- -- (361,331)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31,
1994...................... -- 17,340 16,196,269 (2,435,029) 26,444,759 (816,629) (401,720) (315,407)
Net income................. -- -- -- -- 2,112,253 -- -- --
Cash dividend declared ($1
per share)................ -- -- -- -- (1,569,128) -- -- --
Purchase of stock award
shares.................... -- -- -- -- -- -- (74,280) --
Exercise of common stock
options................... -- 79 79,001 -- -- -- -- --
Purchase of treasury stock
-- 78,456 shares.......... -- -- -- (1,391,031) -- -- -- --
Tax benefit from employee
stock plans............... -- -- 111,004 -- -- -- -- --
Payment on ESOP loan....... -- -- -- -- -- 171,926 -- --
Stock award earned......... -- -- -- -- -- -- 149,600 --
Unrealized gain on
securities available-for-
sale, net of tax of
$313,000.................. -- -- -- -- -- -- -- 488,856
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31,
1995...................... $ -- $ 17,419 $16,386,274 $(3,826,060) $26,987,884 $ (644,703) $(326,400) $ 173,449
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE AT JANUARY 1,
1993...................... $34,791,172
Net income................. 3,914,617
Purchase of treasury stock
-- 85,962 shares.......... (1,190,640)
Tax benefit from employee
stock plans............... 25,930
Payment on ESOP loan....... 171,926
Stock award earned......... 137,544
Unrealized loss on
securities held for sale
and mutual funds.......... (5,020)
Additional conversion
expenses.................. (10,537)
-----------
BALANCE AT DECEMBER 31,
1993...................... 37,834,992
Cumulative effect of change
in accounting for
investments, net of tax of
$32,000................... 50,944
Net income................. 1,907,386
Exercise of common stock
options................... 147,538
Purchase of treasury stock
-- 81,664 shares.......... (1,244,389)
Tax benefit from employee
stock plans............... 34,062
Payment on ESOP loan....... 171,925
Stock award earned......... 148,456
Change in unrealized loss
on securities
available-for-sale, net of
tax of $212,000........... (361,331)
-----------
BALANCE AT DECEMBER 31,
1994...................... 38,689,583
Net income................. 2,112,253
Cash dividend declared ($1
per share)................ (1,569,128)
Purchase of stock award
shares.................... (74,280)
Exercise of common stock
options................... 79,080
Purchase of treasury stock
-- 78,456 shares.......... (1,391,031)
Tax benefit from employee
stock plans............... 111,004
Payment on ESOP loan....... 171,926
Stock award earned......... 149,600
Unrealized gain on
securities available-for-
sale, net of tax of
$313,000.................. 488,856
-----------
BALANCE AT DECEMBER 31,
1995...................... $38,767,863
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 2,112,253 $ 1,907,386 $ 3,914,617
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation............................................ 352,145 315,310 320,679
Deferred income tax expense (benefit)................... 66,464 617,532 179,000
Amortization of premiums, discounts and deferred loan
fees, net.............................................. (772,025) (433,969) (971,671)
Amortization of ESOP.................................... 171,926 171,925 171,926
Stock award earned...................................... 149,600 148,456 137,544
Federal Home Loan Bank stock dividend................... (32,500) -- --
Provision for losses
Loans receivable...................................... 100,000 200,000 572,178
Foreclosed real estate and real estate held-
for-development...................................... 79,294 579,083 429,521
Securities............................................ 893,159 410,148 1,004,962
Loss (gain) on sale of
Mutual funds.......................................... -- 10,137 39,198
Securities held-to-maturity........................... -- 33,488 --
Securities available-for-sale......................... (152,449) 88,685 (359,519)
Foreclosed real estate................................ 78,962 50,957 122,875
Loans................................................. (76,224) -- --
Purchase of loans held for sale......................... (1,514,438) (9,060,541) --
Proceeds from sales of loans held for sale.............. 4,475,854 1,649,348 --
Equity in earnings of limited partnership investment in
purchased mortgage servicing rights.................... (668,407) (136,456) --
Decrease (increase) in accrued interest receivable,
prepaid expenses, and other assets..................... (515,787) 875,546 (1,694,674)
Increase (decrease) in accrued interest payable and
other liabilities...................................... 1,395,345 (553,521) (1,320,655)
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........... 6,143,172 (3,126,486) 2,545,981
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable and held for sale............ 8,692,810 12,816,596 7,010,364
Principal repayments on mortgage-backed securities.......... 2,793,669 3,453,347 4,509,076
Proceeds from maturities and calls of securities............ 8,594,000 401,823 17,762,003
Decrease in mutual funds, net............................... -- 2,622,123 157,269
Proceeds from sales of
Securities available-for-sale............................. 10,415,384 6,609,914 13,425,234
Foreclosed real estate.................................... 3,269,501 3,053,569 2,640,272
Securities held-to-maturity............................... -- 993,534 --
Purchase of
Loans..................................................... -- (14,666,979) (44,443,000)
Securities held-to-maturity............................... -- (12,295,829) (11,828,398)
Securities available-for-sale............................. (37,304,493) (6,524,820) (6,959,164)
</TABLE>
F-37
<PAGE>
FINANCIAL SECURITY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (CONTINUED)
Premises and equipment.................................... (96,653) (290,621) (189,045)
Federal Home Loan Bank stock.............................. (50,000) (265,300) --
Limited partnership investment in purchased mortgage
servicing rights......................................... (370,000) (7,630,000) --
Addition to real estate held for development................ -- (50,140) --
--------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES......................... (4,055,782) (11,772,783) (17,915,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits......................... 7,290,482 (13,057,787) 2,199,274
Proceeds from borrowed funds................................ 41,142,981 86,505,000 46,823,714
Repayment of borrowed funds................................. (44,214,907) (63,876,925) (28,195,640)
Purchase of treasury stock.................................. (1,391,031) (1,244,389) (1,190,640)
Proceeds from exercise of stock options..................... 79,080 147,538 --
Purchase of stock award shares.............................. (74,280) -- --
Cash dividends paid......................................... (1,569,128) -- --
Net increase (decrease) in advance payments by borrowers for
taxes and insurance........................................ (1,230,602) 223,114 427,256
--------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 32,595 8,696,551 20,063,964
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents.......... 2,119,985 (6,202,718) 4,694,556
Cash and cash equivalents at beginning of year................ 6,036,418 12,239,136 7,544,580
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 8,156,403 $ 6,036,418 $ 12,239,136
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental disclosures of cash flow information Cash paid
during the period for
Interest.................................................. $ 12,774,931 $ 8,290,446 $ 8,623,345
Income taxes.............................................. 166,266 689,000 1,712,500
Noncash activities
Transfer of loans to foreclosed real estate............... 1,939,944 3,273,911 814,123
Transfer of securities held-to-maturity to securities
available-for-sale....................................... 24,581,478 -- --
Transfer of investment securities held for investment and
mortgage-backed securities held for investment to
securities held for sale................................. -- -- 19,767,777
Transfers from foreclosed real estate to real estate held
for development.......................................... -- -- 731,851
Transfer of securities held for sale to securities
available-for-sale....................................... -- 10,903,536 --
Transfer of securities held for sale to mortgage-backed
securities held-to-maturity.............................. -- 1,830,565 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Financial Security Corp. (the "Company") is a thrift
holding company organized under the laws of the state of Delaware. Through its
wholly owned subsidiary, Security Federal Savings and Loan Association (the
"Association"), the Company provides financial services to customers located
primarily in Chicago and Cook County, Illinois, and, as discussed in Note 4, the
Association has also acquired loans outside of the Chicago area.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
for the years ended December 31, 1995, 1994 and 1993 include the accounts of
Financial Security Corp., the Association and the Association's wholly-owned
subsidiary, Security Federal Service Corporation. All significant intercompany
transactions and balances are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles and with general practices within the thrift
industry requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The actual results could
differ from these estimates.
Areas involving the use of management's estimates and assumptions, and which
are more susceptible to change in the near term, include the allowance for loan
losses, the realization of deferred tax assets, fair value of certain
securities, including FHA Title I securities and collateralized mortgage
obligations, the determination and carrying value of impaired loans, the
carrying value of loans held for sale, the carrying value of other real estate,
the fair value of mortgage servicing rights as they relate to the limited
partnership, and the determination of other-than-temporary reductions in the
fair value of securities.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents is defined to include cash on hand, demand balances, and
interest-bearing deposits with financial institutions with original maturities
of three months or less. The Company reports net cash flows for customer loan
transactions and deposit transactions. Federal funds sold are restricted from
withdrawal because they are pledged against borrowings.
SECURITIES: Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 requires corporations
to classify debt and equity securities as either held-to-maturity, trading or
available-for-sale. The cumulative effect on stockholders' equity at January 1,
1994 of adopting SFAS No. 115 was included as a separate component in the
statement of stockholders' equity and represented primarily the effect of
adjusting securities available-for-sale to fair value, net of income taxes of
$35,000. Securities are classified as held-to-maturity when management has the
positive intent and the Company has the ability to hold those securities to
maturity. Accordingly, they are stated at cost, adjusted for amortization of
premiums and accretion of discounts. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments and for other reasons. These securities are carried
at fair value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
stockholders' equity. Realized gains and losses on disposition are based on the
net proceeds and the adjusted carrying amounts of the securities sold, using the
specific identification method.
RECOGNITION OF INCOME ON LOANS: Interest on real estate and certain
consumer loans is accrued over the term of the loans based upon the principal
balance outstanding. Unearned interest on automobile and other consumer loans is
recognized over the loan term using the interest method.
F-39
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Where serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. In addition, allowances are established for
uncollected interest on mortgage loans with payments past due.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and the amount of loss on any loan is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Statement of Financial Accounting Standards (SFAS) No. 114 and SFAS No. 118,
"Accounting by Creditors For Impairment of a Loan" were adopted at January 1,
1995. Under these standards, loans considered to be impaired, as defined in SFAS
No. 114 are reduced to the present value of expected future cash flows or to the
fair value of related collateral, by allocating a portion of the allowance to
such loans. If these allocations cause the allowance for loan losses to require
an increase, such increase is reported as a provision for possible loan losses
charged to income. The adoption of SFAS No. 114 did not have a material effect
on the Company's financial position, results of operations or capital.
LOAN ORIGINATION FEES, COMMITMENT FEES, AND RELATED COSTS: The Company
defers loan fees, net of certain direct loan origination costs. The net amount
deferred is reported in the statement of financial condition as part of loans
and is recognized as interest income over the term of the loan using the level
yield method.
LOANS HELD FOR SALE: Loans held for sale are carried at the lower of cost,
less applicable deferred loan fees, or estimated fair value in the aggregate.
Loans held for sale are net of unearned discounts of $392,000 and $463,000 at
December 31, 1995 and 1994, respectively.
FORECLOSED REAL ESTATE: Real estate acquired through foreclosure and deed
in lieu of foreclosure is transferred at the lower of estimated fair value less
estimated costs to dispose of the property or the related loan balance at the
date of foreclosure. At the time of transfer to foreclosed real estate, a
charge-off is recorded to the loan valuation allowance if the estimated fair
value is less than its cost. Subsequent valuations are periodically performed by
management, and additional provisions for loss are established by a charge to
non interest expense if the carrying value of a property exceeds its estimated
fair value less costs to dispose.
LIMITED PARTNERSHIP INVESTMENTS IN PURCHASED MORTGAGE SERVICING
RIGHT: Investments in limited partnerships to acquire mortgage servicing rights
(PMSR) are recorded on the equity method. Adjustments to the investment in PMSRs
are made on a quarterly bases to reflect equity in any income or loss. The PMSRs
acquired by the limited partnership are evaluated for impairment using
discounted cash flows on a quarterly basis.
In May 1995, the Financial Accounting Standards Board released SFAS No. 122,
"Accounting for Mortgage Servicing Rights". SFAS No. 122 requires mortgage
banking enterprises to recognize the
F-40
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rights to service mortgage loans for others as a separate asset, regardless of
the manner in which such rights are acquired. SFAS No. 122 applies to fiscal
years beginning after December 15, 1995. The limited partnership has not yet
determined the impact of adopting SFAS No. 122.
Cumulative undistributed earnings from these limited partnership investments
totaled $804,863 and $136,456 at December 31, 1995 and 1994.
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost,
less accumulated depreciation and amortization. Provisions for depreciation and
amortization are computed on the straight-line method over the estimated useful
lives of the assets. The cost of maintenance and repairs is charged to income as
incurred; significant repairs are capitalized.
REAL ESTATE HELD FOR DEVELOPMENT: Real estate held for development is
carried at the lower of cost, including capitalized holding costs or net
realizable value. Real estate held for development is presented net of a
$316,000 and $252,000 valuation allowance at December 31, 1995 and 1994,
respectively.
INCOME TAXES: The provision for income taxes is based on an asset and
liability approach in accordance with SFAS No. 109. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
EARNINGS PER SHARE: Primary earnings per share for the years ended December
31, 1995, 1994, and 1993 were determined by dividing net income for the year by
1,568,412, 1,632,453 and 1,715,555, respectively, the weighted average number of
shares outstanding for each year. Fully-diluted earnings per share were
determined by dividing net income by 1,586,938, 1,632,453 and 1,721,511 shares,
respectively. Stock options are regarded as common stock equivalents and are
considered in calculating both primary and fully-diluted earnings per share
calculations. Common stock equivalents are computed using the treasury stock
method.
RECLASSIFICATIONS: Certain 1994 and 1993 items have been reclassified to
conform to the 1995 presentation.
F-41
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 2 -- SECURITIES HELD-TO-MATURITY
Securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Certificates of deposit................... $ 297,811 $ -- $ -- $ 297,811
FHA Title I mortgage-backed securities.... 890,750 -- -- 890,750
Community Investment Corporation mortgage
pools.................................... 152,909 -- -- 152,909
-------------- ----------- -------------- --------------
$ 1,341,470 $ -- $ -- $ 1,341,470
-------------- ----------- -------------- --------------
-------------- ----------- -------------- --------------
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. government obligations.............. $ 30,000 $ -- $ (5,325) $ 24,675
Federal Home Loan Mortgage Corporation
notes.................................... 2,000,000 -- (63,864) 1,936,136
Investment in subordinated notes.......... 1,900,000 -- (80,180) 1,819,820
Certificates of deposit................... 987,043 -- -- 987,043
Structured notes
Federal Home Loan Bank of Chicago
notes.................................. 7,000,000 -- (1,015,066) 5,984,934
Mortgage-backed securities
Government National Mortgage
Association............................ 5,388,388 -- (336,891) 5,051,497
Federal Home Loan Mortgage
Corporation............................ 4,961,195 -- (212,932) 4,748,263
Federal National Mortgage Association... 6,113,161 -- (390,538) 5,722,623
FHA Title 1 mortgage-backed
securities............................. 1,253,724 -- -- 1,253,724
Community Investment Corporation
mortgage pools......................... 99,563 -- -- 99,563
-------------- ----------- -------------- --------------
$ 29,733,074 $ -- $ (2,104,796) $ 27,628,278
-------------- ----------- -------------- --------------
-------------- ----------- -------------- --------------
</TABLE>
In December of 1995 the Company reclassified $24,600,000 of its
held-to-maturity securities to available-for-sale in accordance with "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities". The unrealized loss on the securities transferred was
$34,472.
The Company's investment in FHA Title 1 mortgage-backed securities is net of
a specific loss allowance of $57,000 and $315,000 at December 31, 1995 and 1994,
respectively. The allowance has been established by management to cover
estimated losses, which includes all loans greater than 90 days delinquent less
available insurance allowance. During 1995, underlying collateral of $480,000
F-42
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 2 -- SECURITIES HELD-TO-MATURITY (CONTINUED)
was charged off through the allowance. Currently, the Company is receiving
partial principal and interest payments. This investment has no liquid market
and the value is impaired due to high delinquency and loss rates. The investment
is currently accounted for on a cash basis and fair value has been determined by
management based on estimates of future cash flows.
The amortized cost and fair value of securities held-to-maturity by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less................................................... $ 297,811 $ 297,811
Mortgage backed securities................................................ 1,043,659 1,043,659
------------- -------------
$ 1,341,470 $ 1,341,470
------------- -------------
------------- -------------
</TABLE>
No securities held-to-maturity were sold during 1995. During 1994, a
security with an amortized cost of $1,001,817 was sold due to management's
belief that a significant deterioration in the issuer's creditworthiness had
occurred. Proceeds from the sale were $993,534, including accrued interest of
$25,206, and a gross loss of $33,488 was realized.
F-43
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 -- SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at December 31, 1995 and 1994 are summarized
as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U. S. Government obligations................ $ 1,067,704 $ 3,498 $ (2,593) $ 1,068,609
Federal Home Loan Bank of Chicago notes..... 23,244,424 163,565 (6,040) 23,401,949
Federal Farm Credit Bank.................... 301,113 405 -- 301,518
Federal National Mortgage Association
notes...................................... 3,998,924 20,510 -- 4,019,434
Stock in the Federal Home Loan Mortgage
Corporation................................ 1,020,000 15,000 -- 1,035,000
Stock in St. Paul Bancorp................... 241,250 13,750 -- 255,000
Investment in corporate notes............... 2,300,000 94,810 (2,000) 2,392,810
Collateralized mortgage obligations......... 270,386 -- (80,999) 189,387
Structured notes
Federal Home Loan Bank.................... 6,000,000 17,500 (169,140) 5,848,360
Federal National Mortgage Association..... 996,185 82,994 -- 1,079,179
Mortgage-backed securities
Government National Mortgage
Association.............................. 4,824,268 30,617 (5,120) 4,849,765
Federal Home Loan Mortgage Corporation.... 4,230,217 125,021 (7,323) 4,347,915
Federal National Mortgage Association..... 5,366,119 28,837 (49,191) 5,345,765
-------------- ----------- ------------ --------------
$ 53,860,590 $ 596,507 $ (322,406) $ 54,134,691
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
</TABLE>
F-44
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 -- SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U. S. government obligations................ $ 2,050,123 $ -- $ (73,254) $ 1,976,869
Federal Home Loan Bank of Chicago notes..... 2,998,741 -- (98,062) 2,900,679
Federal National Mortgage Association
notes...................................... 1,997,972 -- (184,462) 1,813,510
Stock in the Federal Home Loan Mortgage
Corporation................................ 1,020,000 -- (40,000) 980,000
Stock in Fidelity Bancorp................... 120,000 -- (17,500) 102,500
Investment in corporate notes............... 400,000 -- (18,040) 381,960
Collateralized mortgage obligations......... 943,535 -- -- 943,535
Structured notes
Federal National Mortgage Association..... 993,974 -- (74,094) 919,880
Mutual funds................................ 165,424 -- -- 165,424
-------------- ----------- ------------ --------------
$ 10,689,769 $ -- $ (505,412) $ 10,184,357
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
</TABLE>
The Company's investment in collateralized mortgage obligations (CMO) is
reported at amortized cost, net of a loss allowance of $1,643,000 and $969,330
at December 31, 1995 and 1994, respectively. The Company's investment consists
of Tranche 'B' which is subordinate to Tranche 'A'. The allowance has been
established by management to cover estimated losses. Currently, the Company is
not receiving any payments. This investment has no liquid market and the
investment is impaired due to high delinquency and loss rates.
Proceeds from the sale of securities available-for-sale during 1995, 1994
and 1993 were $10,415,384, $6,609,914 and $13,425,234, respectively. In 1995,
1994 and 1993, gross gains of $152,449, $3,956 and $365,071 and gross losses of
$0, $92,641 and $5,552 were realized on those sales, respectively.
At December 31, 1995 and 1994, securities with an amortized cost of
$1,306,000 and $1,356,000, respectively, were pledged to secure short-term
borrowings.
F-45
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 -- SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The amortized cost and fair value of securities available-for-sale by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
AMORTIZED COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less................................................ $ 1,519,996 $ 1,514,357
Due after one year through five years.................................. 7,315,005 7,408,238
Due after five years through ten years................................. 22,160,475 22,202,757
Due after ten years.................................................... 6,912,874 6,986,507
-------------- --------------
37,908,350 38,111,859
Mortgage backed securities and collateralized mortgage obligations..... 14,690,990 14,732,832
Stock in Federal Home Loan Mortgage Corporation........................ 1,020,000 1,035,000
Marketable equity securities........................................... 241,250 255,000
-------------- --------------
$ 53,860,590 $ 54,134,691
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4 -- LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Mortgage loans
One-to-four family residential.................................... $ 129,809,657 $ 126,314,364
Multifamily and rehabilitation.................................... 40,913,989 48,408,501
Commercial, construction and land................................. 13,975,395 17,396,454
---------------- ----------------
Total mortgage loans............................................ 184,699,041 192,119,319
Other loans and leases
Direct finance leases............................................. $ 4,124,334 $ 7,078,392
Home improvement (net of unearned interest of $306,659 in 1995 and
$505,547 in 1994)................................................ 1,176,414 1,767,779
Home equity lines................................................. 2,900,770 1,435,313
Loans secured by savings accounts................................. 434,952 443,718
Other............................................................. -- 823
---------------- ----------------
Total other loans and leases.................................... 8,636,470 10,726,025
---------------- ----------------
Total loans receivable........................................ 193,335,511 202,845,344
---------------- ----------------
Less
Loans in process.................................................. -- 25,611
Deferred income................................................... 279,989 594,838
Allowance for loan losses......................................... 2,284,662 3,294,221
Reserve for uncollected capitalized interest...................... 275,347 729,523
---------------- ----------------
Loans receivable, net........................................... $ 190,495,513 $ 198,201,151
---------------- ----------------
---------------- ----------------
</TABLE>
During 1995, the Company entered into an agreement with Dovenmuehle
Mortgage, Inc. (Dovenmuehle), whereby Dovenmuehle services mortgage loans for
Security Federal Savings and Loan Association. The servicing fee expensed in
1995 was $134,000.
F-46
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 4 -- LOANS RECEIVABLE (CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.............................. $ 3,294,221 $ 3,795,632 $ 3,814,519
Transfer.................................................. 359,943 -- --
Provision for loan losses................................. 100,000 200,000 572,178
Charge-offs............................................... (1,575,882) (722,411) (677,888)
Recoveries................................................ 106,380 21,000 86,823
-------------- ------------- -------------
Balance at end of year.................................. $ 2,284,662 $ 3,294,221 $ 3,795,632
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The balances in the allowance for loan losses at December 31, 1995, 1994 and
1993 include specific allowances for losses of $889,000, $1,627,000 and
$472,000, respectively.
Loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
YEAR LOANS AMOUNT TOTAL LOANS
- ------------------------------------------------------------------ ----------- ------------- -------------
<S> <C> <C> <C>
December 31, 1995................................................. 54 $ 3,950,000 2.01%
December 31, 1994................................................. 56 6,590,000 3.13
December 31, 1993................................................. 115 7,708,000 3.86
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan", and Statement of Financial Accounting Standard No. 118
(SFAS No. 118), "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure". Under these standards, loans considered to be
impaired, as defined in SFAS No. 114, are reduced to the present value of
expected future cash flows or to the fair value of the related collateral, by
allocating a portion of the allowance for loan losses to such loans. There was
no material effect on 1995 earnings as a result of adopting SFAS No. 114. During
1995, concurrent with the adoption of SFAS 114, all loans previously classified
as in-substance foreclosures were transferred back to loans. The corresponding
valuation allowances were transferred to the allowance for loan losses. At
December 31, 1995, the Company's gross carrying amount of impaired loans was
$715,696 and the allowance for loan losses allocated to impaired loans was $0.
During 1995, the average balance of impaired loans was $801,000.
Securities held-to-maturity at December 31, 1995 and loans receivable and
securities held-to-maturity at December 31, 1994 and 1993 accounted for as
troubled debt restructurings are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Aggregate principal balance...................................... $ 171,840 $ 750,831 $ 293,948
Interest income which would have been recorded................... 21,867 31,528 2,542
Interest income recognized....................................... 13,283 20,510 1,316
----------- ----------- -----------
Interest income foregone....................................... $ 8,584 $ 11,018 $ 1,226
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Loans on which the accrual of interest has been discontinued total
approximately $4,414,000 and $7,937,000 at December 31, 1995 and 1994,
respectively.
F-47
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 4 -- LOANS RECEIVABLE (CONTINUED)
The majority of the Company's originated mortgage loans are secured by
residential and commercial real estate in the Chicago metropolitan area.
Commercial mortgage loans are primarily secured by office properties, shopping
centers, retail stores and apartment buildings.
The Company's mortgage loans at December 31, 1995 include $68,785,916 of
purchased and participation loans secured by apartment buildings, single family
homes, and commercial buildings in the following areas of the United States:
0.77% in the Chicago metropolitan area, 22.03% in the Midwest (excluding
Chicago), 32.76% in California, 4.07% in the West (excluding California), 31.97%
in the South, and 8.40% in the East.
Real estate mortgage loans, aggregating approximately $77,163,000 and
$65,418,000 at December 31, 1995 and 1994, respectively, have interest rates
which adjust based upon the movement of various indices.
The Association has lending transactions with directors and executive
officers of the Company and their associates which total approximately $204,000
and $238,000 at December 31, 1995 and 1994, respectively.
NOTE 5 -- LIMITED PARTNERSHIP INVESTMENTS IN PURCHASED
MORTGAGE SERVICING RIGHTS
During 1995 and 1994, the Company invested in two limited partnerships, each
with several equity investors, whose business activity is to acquire purchased
mortgage servicing rights (PMSRs). The purchase of the servicing rights is
leveraged on a 1:1 ratio. At the end of five years, or at such time as the
investors agree, the servicing rights will be sold and the proceeds divided pro
rata among the investors. All purchases of servicing rights must be approved by
all equity investors and meet certain agreed-upon guidelines. The administration
and servicing of the purchased portfolios in each partnership are performed by
Dovenmuehle Mortgage, Inc., the general partner of each limited partnership. As
of December 31, 1995 and 1994, the Company has an investment of $8.6 million and
$7.8 million, respectively, in two limited partnerships which have purchased
PMSRs. The Company's investment represents an equity interest of approximately
44% and 11% in each limited partnership. The aggregate loans serviced for others
by the two limited partnerships total $5.7 billion and $3.9 billion at December
31, 1995 and 1994, respectively.
NOTE 6 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Securities................................................................ $ 823,156 $ 581,844
Loans receivable.......................................................... 1,547,194 1,273,662
------------- -------------
$ 2,370,350 $ 1,855,506
------------- -------------
------------- -------------
</TABLE>
F-48
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Land...................................................................... $ 273,619 $ 273,619
Office building and improvements.......................................... 3,279,928 3,289,586
Furniture, fixtures and equipment......................................... 1,949,558 1,875,350
Parking lot and improvements.............................................. 508,121 508,121
------------- -------------
6,011,226 5,946,676
Less accumulated depreciation and amortization............................ 2,859,735 2,539,693
------------- -------------
$ 3,151,491 $ 3,406,983
------------- -------------
------------- -------------
</TABLE>
NOTE 8 -- DEPOSITS
Deposits are summarized as follows as of December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------------------- -------------------------------------
STATED OR STATED OR
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts.............................. $ 50,682 26.2% 2.90% $ 52,760 28.3% 2.90%
NOW accounts................................... 3,051 1.6 2.25 2,670 1.4 2.25
Demand NOW accounts............................ 853 0.4 -- 563 .3 --
----------- ----- --- ----------- ----- ---
54,586 28.2 2.82 55,993 30.0 2.84
Money market demand accounts................... 2,212 1.1 2.95 3,395 1.8 2.95
Contractual maturity of certificates
Under 12 months.............................. 89,796 46.3 5.85 66,366 35.6 4.81
12 to 36 months.............................. 30,459 15.7 6.62 34,839 18.7 6.22
Over 36 months............................... 16,792 8.7 6.86 25,962 13.9 6.53
----------- ----- --- ----------- ----- ---
137,047 70.7 6.14 127,167 68.2 5.55
----------- ----- --- ----------- ----- ---
$ 193,845 100.0% 5.17% $ 186,555 100.0% 4.69%
----------- ----- --- ----------- ----- ---
----------- ----- --- ----------- ----- ---
</TABLE>
The aggregate amount of certificates of deposit with a balance of $100,000
or greater was approximately $32,191,000 and $29,598,000 at December 31, 1995
and 1994, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Passbook accounts........................................ $ 1,476,002 $ 1,553,511 $ 1,552,701
NOW accounts............................................. 65,436 57,781 51,012
Money market accounts.................................... 77,038 125,869 151,368
Certificate accounts..................................... 8,505,884 6,543,126 6,860,041
-------------- ------------- -------------
$ 10,124,360 $ 8,280,287 $ 8,615,122
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
F-49
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995, 1994 and 1993
NOTE 9 -- BORROWED FUNDS
Borrowed funds are summarized as follows as of December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED INTEREST RATE
AMOUNT OUTSTANDING
---------------------- --------------------
1995 1994 1995 1994
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Advances from Federal Home Loan Bank of Chicago
Fixed rate due in
1996................................................. 6.89% 6.89% $ 8,200 $ 8,200
1997................................................. 6.33 6.95 7,500 2,500
1998................................................. 7.27 7.27 2,500 2,500
1999................................................. 7.44 7.44 2,500 2,500
Variable rate
Due in 1996.......................................... 6.96 7.40 11,000 15,000
Due in 1997.......................................... 6.33 5,000 --
Open line............................................ 5.31 6.35 2,000 10,900
--- --- --------- ---------
Total advances from FHLB................................. 6.66 6.99 38,700 41,600
Debt of Employee Stock Ownership Plan.................... 8.56 8.03 645 817
--- --- --------- ---------
6.69% 7.01% $ 39,345 $ 42,417
--- --- --------- ---------
--- --- --------- ---------
</TABLE>
The Association adopted a collateral pledge agreement and agreed to keep on
hand, free of all other pledges, liens, and encumbrances, first mortgages with
unpaid principal balances aggregating no less than 167.67% of the outstanding
secured advances from the Federal Home Loan Bank of Chicago. All stock in the
Federal Home Loan Bank of Chicago is also pledged as additional collateral for
advances.
In 1992, the Association established a leveraged Employee Stock Ownership
Plan (ESOP). This plan was funded by the proceeds from a $1,203,480 loan from a
third-party lender at a rate of 5.70% as of December 31, 1992 (federal funds
rate plus 2.70%), with principal and interest payable in 28 quarterly
installments maturing in December 1999. The loan is secured by the unallocated
common stock the Company purchased with the loan and federal funds sold to the
third party in the amount of $746,000. The Association has committed to make
contributions to the ESOP sufficient to allow the ESOP to fund its debt service
requirements on the loan.
F-50
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The methods and assumptions used to determine fair
values for each class of financial instruments are presented as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks..................... $ 1,143 $ 1,143 $ 1,570 $ 1,570
Interest-earning deposits................... 6,267 6,267 3,616 3,616
Federal funds sold.......................... 746 746 850 850
Securities held-to-maturity................. 1,341 1,341 29,733 27,628
Securities available-for-sale............... 54,135 54,135 10,184 10,184
Loans receivable............................ 190,496 192,598 198,201 194,450
Loans held for sale......................... 3,483 3,689 7,411 7,693
Accrued interest receivable................. 2,370 2,370 1,856 1,856
Financial liabilities
Deposits with no stated maturities.......... (56,798) (56,798) (59,388) (59,388)
Deposits with stated maturities............. (137,047) (138,680) (127,167) (127,264)
Borrowed funds.............................. (39,345) (39,719) (42,417) (42,040)
Accrued interest payable.................... (227) (227) (345) (345)
</TABLE>
The following methods and assumptions are used by the Company in estimating
the fair value for its financial instruments.
CASH AND DUE FROM BANKS, INTEREST-EARNING DEPOSITS, AND FEDERAL FUNDS
SOLD: The carrying value of cash and due from banks, interest-earning deposits,
and federal funds sold approximates fair value due to the short period of time
between origination of the instruments and their expected realization.
SECURITIES HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE: The fair
value of these financial instruments was estimated using quoted market prices,
where applicable. No quoted market prices were available on the investments in
collateralized mortgage obligations and FHA Title 1 mortgage-backed securities
due to no liquidity in the market for these securities. The fair value of
financial instruments with no quoted market prices was estimated by management
based on their opinion of the ultimate realization of principal and interest.
Special write-downs have been taken on these financial instruments to reflect
management's estimate of fair value.
LOANS RECEIVABLE: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
one-to-four family, commercial, multi-family mortgage, and other consumer. Each
loan category is further segmented into fixed and adjustable rate interest terms
and by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the Company's
historical experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending
conditions. For performing residential
F-51
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
mortgage loans, fair value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary market
sources adjusted to reflect differences in remaining maturities and servicing
and credit costs.
Fair value estimates for significant non-performing loans are based on
estimated cash flows, which 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
information and specific borrower information.
LOANS HELD FOR SALE: Fair values of loans held for sale are estimated based
on quoted prices.
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying value of accrued
interest receivable and payable approximates fair value due to the fairly short
period of time between accrual and expected realization.
DEPOSITS: The estimated fair value of deposits with no stated maturity,
such as passbook, NOW, and money market accounts, is equal to the amount payable
on demand. The fair value of deposits with stated maturities is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
BORROWED FUNDS: The fair value of variable rate borrowings approximates
carrying value due to the relatively short period of time until their expected
repricing date. The fair value of fixed rate borrowings is the present value of
the contractual cash flows, discounted by the current rate offered for similar
remaining maturities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Fair values for the Company's
off-balance-sheet financial instruments are based on current settlement values
or fees currently charged to enter into similar agreements, taking into account
the remaining term of agreements and the counterparties' credit standing. The
fair value of these financial instruments is not material.
NOTE 11 -- INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -------------
<S> <C> <C> <C>
Current
Federal..................................................... $ 500,241 $ 337,312 $ 1,062,000
State....................................................... (98,654) 15,380 159,000
------------ ----------- -------------
401,587 352,692 1,221,000
Deferred
Federal..................................................... 454,418 500,030 155,300
State....................................................... 105,046 117,502 23,700
------------ ----------- -------------
559,464 617,532 179,000
Change in valuation allowance................................. (493,000) -- --
------------ ----------- -------------
$ 468,051 $ 970,224 $ 1,400,000
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
F-52
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 11 -- INCOME TAXES (CONTINUED)
The deferred tax asset, included in other assets in the accompanying
statement of financial condition, consisted of the following at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -------------
<S> <C> <C> <C>
Federal income tax at the 34% rate............................ $ 877,303 $ 978,387 $ 1,294,190
Change in valuation allowance................................. (493,000) -- --
Dividend received deduction................................... (18,922) (19,226) (19,087)
State income tax, net......................................... 44,130 87,702 120,600
Other, net.................................................... 58,540 (76,639) 4,297
------------ ----------- -------------
$ 468,051 $ 970,224 $ 1,400,000
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109 prospectively. The cumulative effect of the change in the method of
accounting for income taxes increased earnings by $1,508,177 for the year ended
December 31, 1993, and is reported separately in the consolidated statement of
earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Deferred tax assets
Pension expense........................................................ $ 95,000 $ 101,000
Allowance for loan losses.............................................. 876,000 686,000
Book deferred interest................................................. 134,000 211,000
Capital loss carryforward.............................................. 12,000 45,000
State net operating loss carryforward.................................. -- 4,000
Unrealized loss on securities available-for-sale....................... -- 180,000
Depreciation........................................................... 7,000 --
Other.................................................................. -- 49,000
-------------- -------------
1,124,000 1,276,000
Less valuation allowance............................................... (12,000) (505,000)
-------------- -------------
1,112,000 771,000
Deferred tax liabilities
Deferred loan origination costs........................................ $ (149,000) $ (126,000)
Excess of tax bad debt reserve over base year amount................... (64,000) (71,000)
Basis in FHLB stock.................................................... (107,000) (100,000)
Depreciation........................................................... -- (27,000)
Unrealized gain on securities available-for-sale....................... (101,000) --
Partnership investments................................................ (291,000) (1,000)
Other.................................................................. (365,000) (64,000)
-------------- -------------
(1,077,000) (389,000)
-------------- -------------
Net deferred tax asset............................................... $ 35,000 $ 382,000
-------------- -------------
-------------- -------------
</TABLE>
The Company has provided a valuation allowance for those amounts that may
not be realized. The Company believes that it is more likely than not that the
remaining net deferred tax assets will be
F-53
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 11 -- INCOME TAXES (CONTINUED)
realized based on historical taxable income levels and anticipated future
earnings and taxable income levels. The valuation allowance as of January 1,
1995 was $505,000 and such allowance decreased by $493,000 for the year ended
December 31, 1995.
Retained earnings at December 31, 1995 includes approximately $5,513,000 for
which no provision for federal or state income tax has been made. This amount
represents allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
will create income for tax purposes only, which will be subject to the then
current federal and state corporate income tax rates. The unrecorded deferred
tax liability on the above amount at December 31, 1995 was approximately
$2,136,000.
NOTE 12 -- STOCKHOLDERS' EQUITY
Federal regulations require institutions to have minimum regulatory tangible
capital equal to 1.5% of total assets, a core capital ratio of 3% of adjusted
assets, and a risk-based capital ratio equal to 8.0% of risk-adjusted assets as
defined by regulation.
The following is a reconciliation of the Association's capital under
generally accepted accounting principles (GAAP) to regulatory capital at
December 31, 1995:
<TABLE>
<CAPTION>
% OF
% OF % OF RISK RISK
TANGIBLE TANGIBLE CORE ADJUSTED BASED WEIGHTED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
--------- --------- --------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital................................... $ 30,067 11.19% $ 30,067 11.22% $ 30,067 20.70%
Regulatory general valuation allowances........ -- -- -- -- 1,395 .96
Unrealized gains on securities
available-for-sale............................ (101) (.04) (101) (.04) (101) (.10)
Purchase mortgage servicing rights............. -- -- (881) (.33) (881) (.61)
--------- --------- --------- ----- --------- -----
Regulatory capital computed.................... 29,966 11.15 29,085 10.85 30,480 20.95
Minimum capital requirement.................... 4,032 1.50 8,036 3.00 11,641 8.00
--------- --------- --------- ----- --------- -----
Regulatory capital -- excess................. $ 25,934 9.65% $ 21,049 7.85% $ 18,839 12.95%
--------- --------- --------- ----- --------- -----
--------- --------- --------- ----- --------- -----
</TABLE>
On December 29, 1992, the Association converted from a federal mutual
savings association to a federal stock savings association and concurrently
became a wholly-owned subsidiary of the Company.
As part of the conversion, the Association established a liquidation account
for the benefit of eligible depositors as of December 31, 1990, the eligibility
record date, who continued to maintain deposits in the Association following the
conversion. The initial balance of the liquidation account was equal to the
retained earnings of the Association as of December 29, 1992. The balance in
this account decreases each year in which deposit balances of eligible account
holders decline. In the unlikely event of a complete liquidation of the
Association, each eligible depositor who has continued to maintain deposits in
the Association following the conversion will be entitled to receive a
liquidation distribution from the liquidation account, based on their
proportionate share of the then total remaining qualifying deposits, prior to
any distribution to the Company as the sole shareholder of the Association.
Dividends cannot be paid from retained earnings allocated to the liquidation
account.
The Office of Thrift Supervision (OTS) imposes limitations upon all capital
distributions by savings institutions, including cash dividends. An institution
that exceeds fully phased-in capital
F-54
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it is in need of more than normal supervision could,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year up to the higher of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year, or (ii)
75% of its net income over the most recent four quarter period. Any additional
capital distributions would require prior regulatory approval. At December 31,
1995, approximately $5,139,000 was available for payment of dividends by the
Association to the Company.
NOTE 13 -- EMPLOYEE BENEFIT PLANS
PENSION PLANS: The Association maintains a qualified noncontributory
defined benefit pension plan (Regular Plan) covering substantially all of its
full-time employees employed more than six months and over 20-1/2 years of age,
including part-time employees working over 1,000 hours per year. The Association
also established a Supplemental Retirement Agreement (Supplemental Plan) in 1992
with one officer of the Association to provide supplemental retirement, death
and disability benefits. The Supplemental Plan is designed to provide benefits
for the difference between the maximum benefits available under the pension plan
and the actual benefits earned. The Association's policy is to fund the minimum
contribution required by the Employee Retirement Income Security Act of 1974
using the entry-age normal aggregate cost method.
The pension plans' financial data are summarized as follows for plan years
ending December 31, 1995 and 1994:
<TABLE>
<CAPTION>
REGULAR PLAN SUPPLEMENTAL PLAN
------------------------------ --------------------------
1995 1994 1995 1994
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations, including vested benefits of $2,170,128
in 1995 and $1,258,288 in 1994 for the Regular
Plan................................................. $ 2,236,854 $ 1,321,800 $ 155,324 $ 72,294
-------------- -------------- ------------ ------------
Plan assets at fair value (insurance contracts)....... $ 1,825,956 $ 1,669,839 $ -- $ --
Projected benefit obligation for services rendered to
date................................................. (3,068,522) (1,743,318) (223,812) (128,546)
-------------- -------------- ------------ ------------
Projected benefit obligation in excess of plan
assets............................................... (1,242,566) (73,479) (223,812) (128,546)
Cumulative experience loss (gain)..................... 664,484 (61,117) -- (10,220)
Prior service costs................................... 322,751 -- 174,393 49,400
Unamortized asset..................................... (99,149) (113,783) (127,050) --
-------------- -------------- ------------ ------------
Accrued pension cost before additional liability...... (354,480) (248,379) (176,469) (89,366)
Additional liability.................................. (56,418) -- -- --
-------------- -------------- ------------ ------------
Accrued pension cost before additional liability.... $ (410,898) $ (248,379) $ (176,469) $ (89,366)
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
</TABLE>
Effective January 1, 1995, the definition of the plan compensation changed
to a W-2 amount from a basic pay amount. This resulted in a prior service cost
being recorded which will be amortized over
F-55
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
30 years. During 1994, a settlement occurred in the Regular Plan due to lump-sum
distributions exceeding service and interest costs. The effect of the settlement
resulted in a curtailment gain of $106,267, which was recognized as a decrease
in accrued pension cost.
Net periodic pension cost for the Regular Plan includes the following
components for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
Service cost benefits earned during the year.............. $ 138,403 $ 167,033 $ 155,742
Interest cost on projected benefit obligation............. 183,533 185,040 179,709
Actual return on plan assets.............................. (129,027) (197,228) (200,486)
Net amortization and deferral............................. 2,892 (41,961) (19,738)
-------------- -------------- ------------
$ 195,801 $ 112,884 $ 115,227
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
Net periodic pension cost for the Supplemental Plan includes the following
components for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the year......................... $ 37,516 $ 18,690 $ 16,966
Interest cost on projected benefit obligation........................ 23,747 8,945 6,974
Actual return on plan assets......................................... -- -- --
Net amortization and deferral........................................ 25,840 6,175 6,175
--------- --------- ---------
$ 87,103 $ 33,810 $ 30,115
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in the actuarial valuations for both plans are summarized
as follows, except the Supplemental Plan does not assume a long-term rate of
return, for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Weighted average discount rate......................................... 7.00% 8.50% 7.25%
Rate of increase in future compensation levels......................... 6.00 6.00 6.00
Expected long-term rates of return on assets........................... 8.00 9.00 9.00
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN: In conjunction with the Association's
conversion, the Association formed an Employee Stock Ownership Plan (ESOP). The
ESOP covers substantially all employees with more than six months of employment
who have attained age 20-1/2. Benefits become 20% vested after the third year of
credited service, with an additional 20% vesting each year thereafter until 100%
vesting after seven years.
In 1992, the ESOP borrowed $1,203,480 from an unrelated third-party lender
to purchase 120,348 shares of the common stock issued in the conversion. Shares
purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is paid. In November of 1993, Statement of Position
93-6 (SOP 93-6), "Employer's Accounting for Employee Stock Ownership Plans", was
issued. SOP 93-6 is applicable for fiscal years beginning after December 15,
1993. The Company is not required to adopt the provisions of SOP 93-6, since all
shares were acquired before December 31, 1992. The Company will make scheduled
contributions to the ESOP sufficient to service the amounts borrowed in 28
quarterly installments. The unpaid balance of the ESOP has been included in
borrowed funds on the consolidated statements of financial condition, and
stockholders' equity has been reduced by a similar amount. The Company makes
annual contributions to the ESOP
F-56
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
debt equal to the ESOP's debt service less dividends received by the ESOP. All
dividends received by the ESOP on unallocated shares are used to pay debt
service. The ESOP shares are pledged as collateral for its debt, along with
federal funds sold in the amount of $746,000. Compensation expense is recognized
as the ESOP debt is paid. Contributions of $179,362 and $224,598 were made to
the ESOP to fund principal and interest payments for the years ended December
31, 1995 and 1994, respectively.
The ESOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Allocated shares....................................................... 36,318 20,979
Committed to be released............................................... 17,193 17,193
Suspense shares........................................................ 64,470 81,663
--------- ---------
117,981 119,835
--------- ---------
--------- ---------
</TABLE>
SUPPLEMENTAL RETIREMENT PLAN: In conjunction with the Association's
conversion, the Association formed a Supplemental Employee Stock Retirement Plan
to provide certain key employees with stock benefits in the event that these
employees retire prior to the expiration of the ESOP's term loan. The purpose of
this Supplemental Employee Stock Retirement Plan is to compensate these key
employees by providing them with benefits they would have received under the
ESOP had they remained with the Association until all shares held in the ESOP
suspense account for their benefit were fully allocated. Supplemental ESOP plan
expense was $90,000 for the year ended December 31, 1994. As of December 31,
1994, the entire liability had been accrued and no additional expense has been
recognized.
RECOGNITION AND RETENTION PLANS: In conjunction with the Association's
conversion, the Association formed four Recognition and Retention Plans (RRPs)
for the benefit of directors and officers of the Company as a method of
providing such persons a proprietary interest in the Company and to encourage
such persons to remain with the Company. The Company awarded 68,772 shares of
the common stock issued in the conversion. Awards of common shares become vested
at a rate of 20% per year after the first year from the date of the award. Upon
conversion, 63,270 shares of common stock were awarded.
During 1995 a new RRP for the benefit of Directors and officers of the
Company was approved. This plan allows the Company to award up to 62,655
additional shares. The Company contributed $74,280 to purchase 3,714 shares
awarded in 1995. These awards vest at a rate of 20% per year.
The aggregate purchase price of the common shares awarded will be amortized
to compensation expense as the Company's eligible participants become vested.
The unamortized cost of the RRPs is reflected as a reduction to stockholders'
equity. Shares vested at December 31, 1995 and 1994 were 14,218 and 15,951 ,
respectively. At December 31, 1995, 29,668 shares were unearned.
INCENTIVE STOCK OPTION PLAN: In 1992, the Company adopted an incentive
stock option plan (Incentive Plan) for the benefit of employees of the Company.
The number of options authorized under the Incentive Plan is 103,155 shares of
the common stock issued in the conversion. All of the authorized options were
granted in 1992. Options become exercisable at a rate of 20% per year after one
year from the date of grant. The option exercise price must be at least 100% of
the fair market
F-57
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
value of the common stock on the date of grant, and the option term cannot
exceed 10 years. Upon conversion, all Incentive Plan options for shares of
common stock were granted at an exercise price of $10 per share.
During 1995, a new option plan for the benefit of Directors and Officers of
the Company was approved. This plan allows an additional 93,983 options to be
awarded at 100% of fair value at the date of the grant and are exercisable at a
rate of 20% per year after one year from the date of the grant. The Company
awarded 9,284 options during 1995 at an exercise price of $16.75 per share of
common stock.
DIRECTORS STOCK OPTION PLAN: In 1992, the Company adopted a stock option
plan for the benefit of nonemployee directors (Directors Plan) of the Company.
The number of options authorized under the Directors Plan is 68,770 shares of
common stock issued in the conversion.
Options become immediately exercisable upon grant. The option exercise price
must be at least 100% of the fair market value of the common stock on the date
of grant, and the option term generally cannot exceed 10 years. Upon conversion,
55,016 options were granted at an exercisable price of $10 per share. During
1995, the remaining 13,754 options were granted at an exercise price of $15 per
share.
A summary of outstanding grants and stock option transactions for the
Incentive Plan and Directors Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE PER SHARE
---------------------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
--------- --------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992.............................................. 158,171 $ 0.00 $ 10.00
Granted................................................................. -- -- --
Exercised............................................................... -- -- --
Canceled................................................................ -- -- --
Balance at December 31, 1993.............................................. 158,171 10.00 10.00
Granted................................................................. -- -- --
Exercised............................................................... 14,754 10.00 10.00
Canceled................................................................ -- -- --
--------- --------------- -----------
Balance at December 31, 1994.............................................. 143,417 10.00 10.00
Granted................................................................. 23,038 15.00-16.75 15.71
Exercised............................................................... 7,908 10.00 10.00
Canceled................................................................ -- -- --
--------- --------------- -----------
Balance at December 31, 1995.............................................. 158,547 $ 10.00-16.75 $ 10.83
--------- --------------- -----------
--------- --------------- -----------
</TABLE>
NOTE 14 -- 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
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, and previously
approved unused lines of credit. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized in
the statement of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does for loans
recorded in the statement of financial condition.
F-58
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 14 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
At December 31, 1995 and 1994, these financial instruments are summarized as
follows:
<TABLE>
<CAPTION>
AMOUNT
--------------------------
1995 1994
----------- -------------
<S> <C> <C>
Off-balance-sheet financial instruments whose contract amounts represent credit risk
Commitments to extend credit
Fixed rate mortgage loans......................................................... $ 863,000 $ 2,151,000
Unused lines of credit............................................................ 870,000 731,000
</TABLE>
Fixed rate commitments have rates ranging from 7.00% to 9.00% and 7.25% to
11.50% at December 31, 1995 and 1994, respectively. The commitments are all due
to expire within 90 days of issuance. Since certain commitments to make loans
and fund lines of credit and loans in process expire without being used, the
above amounts do not necessarily represent future cash commitments. No losses
are anticipated as a result of these transactions.
The Company's loan portfolio has a substantial concentration of
out-of-market purchased and participation loans. See Note 4 regarding these
concentrations within the loan portfolio.
In 1991, the Association became a 12.5% participant in certain aspects of a
rehabilitation project for low income housing in the City of Chicago. In
addition, in 1991, the Association became a limited partner in a rehabilitation
project whereby it has made capital contributions approximating $751,298, which
represents a 13.96% interest in the rehabilitation project. The purpose of the
investment is to qualify for low income housing tax credits which are estimated
to be approximately $1,676,000 over 15 years ending in 2005.
The realization of these credits is contingent upon two factors. First,
should the rehabilitation project be foreclosed upon and the participants unable
or unwilling to provide additional funds to the project, the partners would then
be subject to recapture of a significant portion of the low income housing
credits and would not be able to claim any future tax credits. Second, if the
project does not meet certain set aside requirements and the project fails to
qualify as low income housing at any time during the 15-year compliance period
ending in the year 2005, the partners would then be subject to recapture rules.
The recapture rules could also apply if other recapture events occur such as a
change in ownership or if a limited partner sold its partnership interest.
Cumulative tax credits recognized by the Company total $395,000 through December
31, 1995.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
The Company and the Association are parties to litigation and claims arising
in the normal course of business. Management, after consultation with legal
counsel, believes that the liabilities, if any, arising from such litigation and
claims will not be material to the consolidated financial position.
During 1994, the Company entered into a pledge agreement with Community
Investment Corporation. The Company has agreed to fund up to $500,000 in
collateralized trust notes. The notes are secured by mortgages for low income
housing. Through December 31, 1995, the Company has funded $152,909 in notes.
As of January 1, 1995, the Association had $850,000 of federal funds pledged
as collateral for its ESOP loan with Nationar, the ESOP lender. Nationar was
seized by the New York State Banking Department on February 6, 1995. The loan
and federal funds were assumed by Northwest Savings Bank under the same terms
and collateral. In 1996, the loan was assumed by the Company.
F-59
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 15 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Association has sold two parcels of foreclosed real estate in
California, whereby the City of Los Angeles funds the sale through the issuance
of bonds, but the seller has full recourse liability until the bonds are repaid.
The Association currently has a contingent liability of $670,000 related to
sales under this program.
The Company entered into a lease agreement on December 1, 1994 for branch
office space. The lease term is 60 months. Future minimum lease payments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDED LEASE PAYMENTS
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 17,443
1997.............................................................. 17,961
1998.............................................................. 18,502
1999.............................................................. 17,424
--------
$ 71,330
--------
--------
</TABLE>
Rental expense for the year ended December 31, 1995 and 1994 was and $16,938
and $1,409.
The deposits of savings associations such as the Association are insured by
the Savings Association Insurance Fund (SAIF) which, along with the Bank
Insurance Fund (BIF), is administered by the Federal Deposit Insurance
Corporation (FDIC). It is anticipated that SAIF will not be adequately
capitalized without a substantial increase in premium rates or the imposition of
special assessments or other significant developments, such as a merger of SAIF
and BIF. A recapitalization plan under consideration by the Treasury Department,
the FDIC , the Office of Thrift Supervision (OTS) and Congress provides for a
special assessment of .85% to .90% to be imposed on all SAIF-insured deposits.
No assurance can be given, however, as to whether a recapitalization plan will
be adopted.
F-60
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995, 1994 and 1993
NOTE 16 -- PARENT COMPANY ONLY FINANCIAL INFORMATION
The statements of financial condition as of December 31, 1995 and 1994 and
the statement of earnings and cash flows for the years ended December 31, 1995
and 1994 for the parent company only is presented below and should be read in
conjunction with other notes to the consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Cash due from banks............................................................ $ 78,560 $ 129,530
Interest-earning deposits...................................................... 4,903,870 1,017,801
Federal funds sold............................................................. 745,696 --
-------------- --------------
Cash and cash equivalents.................................................... 5,728,126 1,147,331
Investment in mutual funds..................................................... -- 165,424
Securities held-to-maturity.................................................... -- 1,900,000
Securities available-for-sale.................................................. 2,249,810 102,500
Real estate held for development............................................... 466,400 530,000
Prepaid and other assets....................................................... 256,297 154,512
Dividend due from Association.................................................. -- 3,000,000
Investment in Association...................................................... 30,067,230 31,749,816
-------------- --------------
$ 38,767,863 $ 38,749,583
-------------- --------------
-------------- --------------
LIABILITIES
Accrued expenses............................................................... $ -- $ 60,000
STOCKHOLDERS' EQUITY
Common stock................................................................... 17,419 17,340
Additional paid-in capital..................................................... 16,386,274 16,196,269
Treasury stock................................................................. (3,826,060) (2,435,029)
Retained earnings.............................................................. 26,987,884 26,444,759
Employee Stock Ownership Plan loan............................................. (644,703) (816,629)
Recognition and Retention Plans................................................ (326,400) (401,720)
Unrealized gains (losses) on securities available-for-sale, net of income
taxes......................................................................... 173,449 (315,407)
-------------- --------------
Total stockholders' equity................................................... 38,767,863 38,689,583
-------------- --------------
Total liabilities and stockholders' equity................................. $ 38,767,863 $ 38,749,583
-------------- --------------
-------------- --------------
</TABLE>
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Interest income..................................................... $ 235,272 $ 165,786 $ 56,401
Dividend income from subsidiary..................................... 4,500,000 3,000,000 3,268,149
Dividends in excess of subsidiary net income........................ (2,404,114) (873,452) 671,267
Gain on sale of securities.......................................... 62,889 -- --
Non-interest expense................................................ (275,453) (499,725) (94,000)
-------------- ------------- -------------
Net income before taxes........................................... 2,118,594 1,792,609 3,901,817
Income tax (benefit) expense........................................ 6,341 (114,777) (12,800)
-------------- ------------- -------------
Net income........................................................ $ 2,112,253 $ 1,907,386 $ 3,914,617
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
F-61
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 16 -- PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income...................................................... $ 2,112,253 $ 1,907,386 $ 3,914,617
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Deferred tax benefit.......................................... -- (130,476) --
Provision for loss on real estate held-for-investment......... 63,600 251,991 --
Decrease in prepaid and other assets.......................... 159,820 47,977 (93,160)
Decrease (increase) in dividend due from Association.......... 3,000,000 (3,000,000) --
(Decrease) increase in accrued expenses....................... (60,000) 76,262 (671,267)
Dividends in excess of subsidiary net income.................. 2,404,114 873,452 --
Gain on sale of securities.................................... (62,889) -- --
Stock award earned............................................ 14,840 -- --
-------------- -------------- --------------
Net cash provided by operating activities................... 7,631,738 26,592 3,150,190
Cash flows from investing activities
Purchase of available-for-sale securities....................... (241,250) (196,262) (120,000)
Proceeds from sales of securities available for sale............ 145,625 -- --
Purchase of investment on mutual funds.......................... -- -- --
Proceeds from maturity of securities held-to-maturity........... -- -- 2,000,000
Purchase of securities held-to-maturity......................... -- (1,900,000) --
Additions to real estate held for development................... -- (50,140) --
-------------- -------------- --------------
Net cash used in investing activities....................... (95,625) (2,146,402) 1,880,000
Cash flows from financing activities
Purchase of treasury stock...................................... (1,391,031) (1,244,389) (1,190,640)
Proceeds from exercise of stock options......................... 79,081 147,538 --
Purchase of stock award shares.................................. (74,280) -- --
Cash dividend paid.............................................. (1,569,128) -- --
-------------- -------------- --------------
Net cash provided by financing activities................... (2,955,358) (1,096,851) (1,190,640)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.............. 4,580,755 (3,216,661) 3,839,550
Cash and cash equivalents at beginning of year.................... 1,147,371 4,363,992 524,442
-------------- -------------- --------------
Cash and cash equivalents at end of year.......................... $ 5,728,126 $ 1,147,331 $ 4,363,992
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-62
<PAGE>
FINANCIAL SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 17 -- QUARTERLY RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------------------------------------------------------ ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................................... $ 4,996 $ 5,613 $ 5,622 $ 5,004
Interest expense........................................................ 2,938 3,247 3,331 3,140
----------- --------- --------- ---------
Net interest income..................................................... 2,058 2,366 2,291 1,864
Provision for loan losses............................................... 100 -- -- --
Non-interest income..................................................... 317 371 183 270
Non-interest expense.................................................... 1,717 1,957 1,727 1,639
----------- --------- --------- ---------
Income before income taxes.............................................. 558 780 747 495
Income tax expense...................................................... 54 292 234 (112)
----------- --------- --------- ---------
Net income.............................................................. $ 504 $ 488 $ 513 $ 607
----------- --------- --------- ---------
----------- --------- --------- ---------
Earnings per common share
Primary............................................................... $ 0.31 $ 0.31 $ 0.33 $ 0.40
Fully diluted......................................................... 0.31 0.31 0.33 0.38
<CAPTION>
1994
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income......................................................... $ 4,876 $ 4,853 $ 4,877 $ 5,038
Interest expense........................................................ 2,138 2,252 2,467 2,766
----------- --------- --------- ---------
Net interest income..................................................... 2,738 2,601 2,410 2,272
Provision for loan losses............................................... -- -- -- 200
Non-interest income..................................................... 28 53 (68) 227
Non-interest expense.................................................... 1,622 1,748 1,820 1,994
----------- --------- --------- ---------
Income before income taxes.............................................. 1,144 906 522 305
Income tax expense...................................................... 439 260 193 78
----------- --------- --------- ---------
Net income.............................................................. $ 705 $ 646 $ 329 $ 227
----------- --------- --------- ---------
----------- --------- --------- ---------
Earnings per common share
Primary............................................................... $ 0.44 $ 0.42 $ 0.21 $ 0.10
Fully diluted......................................................... 0.44 0.42 0.21 0.10
</TABLE>
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
[CROWE CHIZEK LETTERHEAD]
The Board of Directors and Stockholders
Financial Security Corp.
Chicago, Illinois
We have audited the accompanying consolidated statement of financial condition
of Financial Security Corp. as of December 31, 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Financial Security Corp. as of December 31, 1994, and the consolidated
statements of earnings, stockholders' equity, and cash flows for the years ended
December 31, 1994 and 1993 were audited by other auditors whose report dated
February 27, 1995, included an explanatory paragraph which described the changes
in accounting for income taxes in 1993 and for securities at January 1, 1994, as
described in Notes 11 and 1, respectively, to the consolidated financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financial
Security Corp. at December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Oak Brook Illinois
February 10, 1996
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
[KPMG PEAT MARWICK LETTERHEAD]
The Board of Directors
Financial Security Corp.:
We have audited the accompanying consolidated statements of financial
condition of Financial Security Corp. and subsidiary as of December 31, 1994,
and the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1994. 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 and 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 Financial
Security Corp. and subsidiary as of December 31, 1994, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statements
of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, in 1994 and No. 109, ACCOUNTING FOR INCOME TAXES, in
1993.
/s/KPMG PEAT MARWICK
KPMG Peat Marwick
Chicago, Illinois
February 27, 1995
F-65
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
PINNACLE BANC GROUP, INC.
AND
FINANCIAL SECURITY CORP.
DATED AS OF THE 22ND DAY OF APRIL, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 1.01 STRUCTURE OF THE MERGER................................................................... I-1
Section 1.02 EFFECT ON OUTSTANDING SHARES.............................................................. I-1
Section 1.03 CONVERSION ELECTION PROCEDURES............................................................ I-2
Section 1.04 EXCHANGE PROCEDURES....................................................................... I-4
Section 1.05 DISSENTING SHARES......................................................................... I-6
Section 1.06 NO FRACTIONAL SHARES...................................................................... I-6
Section 1.07 CLOSING OF STOCK TRANSFER BOOKS........................................................... I-6
Section 1.08 ANTI-DILUTION ADJUSTMENTS................................................................. I-7
Section 1.09 MODIFICATION OF STRUCTURE................................................................. I-7
Section 1.10 TAKING OF NECESSARY ACTION................................................................ I-7
</TABLE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
<TABLE>
<S> <C> <C>
Section 2.01 REPRESENTATIONS AND WARRANTIES OF THE SELLER............................ I-7
Section 2.02 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER......................... I-17
</TABLE>
ARTICLE III
CONDUCT PENDING THE MERGER
<TABLE>
<S> <C> <C>
Section 3.01 CONDUCT OF THE SELLER'S BUSINESS PRIOR TO THE EFFECTIVE TIME............ I-25
Section 3.02 FORBEARANCE BY THE SELLER............................................... I-26
Section 3.03 CONDUCT OF THE PURCHASER'S BUSINESS PRIOR TO THE EFFECTIVE TIME......... I-27
</TABLE>
ARTICLE IV
COVENANTS
<TABLE>
<S> <C> <C>
Section 4.01 NO SOLICITATION......................................................... I-28
Section 4.02 EMPLOYEES, EMPLOYEE BENEFIT PLANS AND DIRECTORS......................... I-28
Section 4.03 EMPLOYEE STOCK OPTIONS.................................................. I-30
Section 4.04 ACCESS AND INFORMATION.................................................. I-31
Section 4.05 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS.............................. I-32
Section 4.06 ANTITAKEOVER PROVISIONS................................................. I-32
Section 4.07 ADDITIONAL AGREEMENTS................................................... I-32
Section 4.08 PUBLICITY............................................................... I-32
Section 4.09 NOTIFICATION OF CERTAIN MATTERS......................................... I-33
Section 4.10 INDEMNIFICATION......................................................... I-33
Section 4.11 SHAREHOLDERS' MEETINGS.................................................. I-34
Section 4.12 REGISTRATION STATEMENT.................................................. I-34
Section 4.13 AFFILIATE LETTERS....................................................... I-34
Section 4.14 TAX OPINION............................................................. I-35
Section 4.15 TAX-FREE REORGANIZATION TREATMENT....................................... I-35
Section 4.16 LISTING................................................................. I-35
Section 4.17 AFFILIATE PURCHASES..................................................... I-35
</TABLE>
ARTICLE V
CONDITIONS TO CONSUMMATION
<TABLE>
<S> <C> <C>
Section 5.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS.................................. I-35
</TABLE>
I-I
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C> <C>
Section 5.02 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER UNDER THIS AGREEMENT....................... I-36
Section 5.03 CONDITIONS TO THE OBLIGATIONS OF THE SELLER UNDER THIS AGREEMENT.......................... I-38
</TABLE>
ARTICLE VI
TERMINATION
<TABLE>
<S> <C> <C>
Section 6.01 TERMINATION............................................................. I-40
Section 6.02 EFFECT OF TERMINATION................................................... I-41
Section 6.03 THIRD PARTY TERMINATION................................................. I-41
Section 6.04 SPECIFIC ENFORCEABILITY................................................. I-42
</TABLE>
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME
<TABLE>
<S> <C> <C>
Section 7.01 EFFECTIVE DATE AND EFFECTIVE TIME....................................... I-42
Section 7.02 DELIVERIES AT THE CLOSING............................................... I-42
</TABLE>
ARTICLE VIII
OTHER MATTERS
<TABLE>
<S> <C> <C>
Section 8.01 CERTAIN DEFINITIONS; INTERPRETATION..................................... I-42
Section 8.02 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS... I-42
Section 8.03 AMENDMENT............................................................... I-43
Section 8.04 WAIVER.................................................................. I-43
Section 8.05 COUNTERPARTS............................................................ I-43
Section 8.06 GOVERNING LAW........................................................... I-43
Section 8.07 EXPENSES................................................................ I-43
Section 8.08 NOTICES................................................................. I-43
Section 8.09 ENTIRE AGREEMENT; ETC................................................... I-44
Section 8.10 ASSIGNMENT.............................................................. I-44
Section 8.11 SCHEDULES NOT ADMISSIONS................................................ I-44
</TABLE>
I-II
<PAGE>
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 22nd day of April,
1996 (this "Agreement"), by and between Pinnacle Banc Group, Inc., an Illinois
corporation (the "Purchaser"), and Financial Security Corp., a Delaware
corporation (the "Seller").
INTRODUCTORY STATEMENT
WHEREAS, the Boards of Directors of the Purchaser and the Seller have
approved, and deem it advisable and in the best interests of their respective
companies and their shareholders to merge with and into Purchaser, upon the
terms and conditions set forth herein;
WHEREAS, it is intended for Federal income tax purposes that the Merger (as
hereinafter defined) shall qualify as a reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Purchaser and the Seller desire to make certain
representations, warranties and agreements in connection with the business
combination transaction provided for herein and to prescribe various conditions
to such transaction.
NOW THEREFORE, in consideration of their mutual promises and obligations
hereunder, the parties hereto adopt and make this Agreement and prescribe the
terms and conditions hereof and the manner and basis of carrying it into effect,
which shall be as follows:
ARTICLE I
THE MERGER
SECTION 1.01 STRUCTURE OF THE MERGER. Upon the terms and subject to the
conditions of this Agreement, on the Effective Date (as defined in Section
7.01), Seller shall merge (the "Merger") with and into the Purchaser and such
Merger is intended to qualify as a tax-free reorganization under Section 368(a)
of the Code; the separate existence of Seller shall cease; Purchaser shall be
the surviving corporation in the Merger (the "Surviving Corporation"); and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions to shares, and all other choses in action, and all and
every other interest, of or belonging to or due to each of Purchaser and Seller,
shall be taken and deemed to be transferred to and vested in the Surviving
Corporation without further act or deed; and the title to any real estate, or
any interest therein, vested in any of such corporations shall not revert or be
in any way impaired by reason of the Merger; all in accordance with the
applicable laws of the State of Illinois or any other applicable laws. At the
Effective Time (as defined in Section 7.01), the Certificate of Incorporation
and Bylaws of the Purchaser shall become the Certificate of Incorporation and
Bylaws of the Surviving Corporation. At the Effective Time, the directors and
officers of the Purchaser shall become the directors and officers of the
Surviving Corporation.
SECTION 1.02 EFFECT ON OUTSTANDING SHARES.
(a) Each share of common stock, $4.69 par value of the Purchaser
("Purchaser Common Stock") that is issued and outstanding immediately prior to
the Effective Time shall continue to be an issued and outstanding share of
Purchaser Common Stock from and after the Effective Time; and
(b) Subject to Sections 1.03(f), 1.06, and 1.08 hereof at the Effective
Time, by virtue of the Merger, each share of common stock, $.01 par value of
Seller ("Seller Common Stock") issued and outstanding immediately prior to the
Effective Time shall cease to be outstanding, shall be deemed surrendered and
each such share shall be converted into and become the right to receive one of
the following:
(i) the right to receive an amount in cash (the "Cash Distribution(s)")
equal to $28.50; or
(ii)the right to receive 0.8803 shares of Purchaser Common Stock (the
"Exchange Ratio") (the "Stock Distribution(s)") subject to Section
1.02(c); or
<PAGE>
(iii)
the right to receive an amount in cash equal to 30% of the Cash
Distribution and shares of Purchaser Common Stock equal to 70% of the
Exchange Ratio, (the "Combined Distribution(s)") subject to Section
1.02(c);
as the holder thereof shall elect or be deemed to have elected pursuant to
Section 1.03 of this Agreement (the aggregate of the Cash Distributions, the
Stock Distributions and the Combined Distributions payable and/or issuable
pursuant to this Agreement at the Effective Time is sometimes hereinafter
collectively referred to as the "Merger Consideration").
Shares of Seller Common Stock held by Seller or any of it Subsidiaries as
defined in Section 2.01(a)(ii) of this Agreement, or by Purchaser or any of its
subsidiaries, in each case other than in a fiduciary capacity or as a result of
debts previously contracted, shall be cancelled after the Effective Time. In
addition, no Dissenting Shares (as defined in Section 1.05 of this Agreement)
shall be converted pursuant to this Section 1.02 but shall be treated in
accordance with the procedures set forth in Section 1.05 of this Agreement.
(c) Notwithstanding Section 1.02(b)(ii) and (iii) above,
(i) if the Purchaser Average Stock Price (as defined below) is greater
than $35.00 per share, then on the business day prior to the Closing
Date, the Exchange Ratio shall be adjusted such that the stock consideration
shall equal $31.00 divided by the Purchaser Average Stock Price, provided
that, if the Purchaser Average Stock Price exceeds $37.00 per share, the
Exchange Ratio shall be .8378 and Purchaser shall have the option of
terminating this Agreement pursuant to Section 6.01(f) hereof; PROVIDED,
HOWEVER, that Purchaser shall not have an option to terminate pursuant
hereto if not later than two business days prior to the Closing Date, Seller
has agreed to modify the Exchange Ratio to be the quotient of $31.00 divided
by the Purchaser Average Stock Price; or
(ii)if the Purchaser Average Stock Price is less than $30.00 per share,
then on the business day prior to the Closing Date, the Exchange
Ratio shall be adjusted such that the stock consideration shall equal $26.00
divided by the Purchaser Average Stock Price, provided that, if the
Purchaser Average Stock Price is less than $28.00 per share, the Exchange
Ratio shall be .9286 and Seller shall have the option of terminating this
Agreement pursuant to Section 6.01(g) hereof; PROVIDED, HOWEVER, that Seller
shall not have an option to terminate pursuant hereto if not later than two
business days prior to the Closing Date Purchaser has agreed to modify the
Exchange Ratio to be the quotient of $26.00 divided by the Purchaser Average
Stock Price.
(d) The "Purchaser Average Stock Price" means the average of the closing
prices per share of Purchaser Common Stock reported by the National Association
of Securities Dealers, Inc. ("NASD") on the ten (10) trading days on which one
or more trades actually occurs immediately prior to the second business day
preceding the Closing Date.
SECTION 1.03 CONVERSION ELECTION PROCEDURES.
(a) Concurrently with the mailing to the shareholders of Seller of the
"Proxy Statement" (as defined in Section 2.01(bb) of this Agreement), including
the prospectus contained in the "Registration Statement" (also as defined in
Section 2.01(bb) of this Agreement) and at least thirty-five days prior to an
anticipated Effective Date or on such date as mutually agreed upon by Purchaser
and Seller, Purchaser shall cause the "Exchange Agent" (as defined in this
Section 1.03(a) below) to mail to each holder of record of Seller Common Stock a
form of election in such form as Purchaser and Seller shall mutually agree (an
"Election Form") on which such holder shall make the election as provided for in
Section 1.03(b) of this Agreement. Purchaser shall cause an Election Form and
other appropriate and customary materials for the purpose of making the election
provided for in Section 1.03(b) of this Agreement to be sent to each holder of
Seller Common Stock who Seller advises Purchaser has become a holder of Seller
Common Stock after the record date of the special meeting of shareholders called
to vote upon this Agreement and the Merger. Seller shall have the right to
review both the Election Form and other election materials and provide
reasonable comments thereon.
I-2
<PAGE>
"Exchange Agent" shall mean Harris Trust and Savings Bank, or such other bank or
trust company or affiliate thereof selected by Purchaser and reasonably
acceptable to Seller to effect the exchange of certificates formerly
representing shares of Seller Common Stock (each a "Certificate," collectively
"Certificates") for the Merger Consideration.
(b) Each Election Form shall specify the type(s) and amounts of each such
type of Merger Consideration receivable by the holder of Seller Common Stock in
the Cash Distribution, the Stock Distribution and the Combined Distribution and
shall permit each such holder to elect to receive, as provided in Section 1.02
of this Agreement, (i) the Cash Distribution (in which case, such holder's
shares of Seller Common Stock shall be deemed to be and shall be referred to
herein as "Cash Election Shares"), (ii) the Stock Distribution (in which case,
such holder's shares of Seller Common Stock shall be deemed to be and shall be
referred to herein as "Stock Election Shares"), or (iii) the Combined
Distribution (in which case, such holder's shares of Seller Common Stock shall
be deemed to be and shall be referred to herein as "Combined Election Shares").
(c) Any shares of Seller Common Stock with respect to which the holder
thereof shall not, as of the "Election Deadline" (as defined in this Section
1.03(c) below), have made an election to receive either the Cash Distribution,
the Stock Distribution or the Combined Distribution (such holder's shares being
deemed to be and shall be referred to herein as "No Election Shares") by
submission to the Exchange Agent of an effective, properly completed Election
Form shall be deemed to be Stock Election Shares. "Election Deadline" shall mean
5:00 p.m., local time, on the day prior to the date of the special meeting of
shareholders of Seller called to vote upon this Agreement and the Merger or such
other date mutually agreed to by the Seller and Purchaser.
(d) For purposes of Section 1.03(f) of this Agreement, any Dissenting
Shares shall be deemed to be Cash Election Shares; PROVIDED, HOWEVER, that such
Dissenting Shares shall in all cases be payable in cash and shall not be subject
to pro rata reduction, if required, of the Cash Distribution payable in
conversion of the other Cash Election Shares as set forth in Section 1.03(f) of
this Agreement. In addition, for purposes of Section 1.03(f) of this Agreement,
the number of shares ("Seller Stock Options") of Seller Common Stock that are
issuable upon the exercise of any stock options granted by Seller and disclosed
to Purchaser in writing shall be exchanged pursuant to Section 4.03 and shall
not be subject to any pro rata reduction under Section 1.03(f); PROVIDED,
HOWEVER, that such Seller Stock Options shall in all cases be payable, upon
exercise in accordance with the terms of the plan and/or agreement under which
they were issued and/or evidenced, in shares of Purchaser Common Stock.
(e) Any election for purposes of Section 1.03(b) of this Agreement shall be
effective only if the Exchange Agent shall have received the properly completed
Election Form by the Election Deadline. Any Election Form may be revoked or
changed by the person submitting such Election Form or any other person to whom
the shares that are the subject of the Election Form are subsequently
transferred. Such revocation or change shall be effected by written notice by
such person to the Exchange Agent PROVIDED such notice is received by the
Exchange Agent at or prior to the Election Deadline. All Election Forms shall be
deemed to be revoked if the Exchange Agent is notified in writing by either
Purchaser or Seller that this Agreement has been terminated in accordance with
its terms (with a copy of such writing to be provided to Purchaser or Seller, as
appropriate). The Exchange Agent shall have reasonable discretion to determine
when any election, modification or revocation is received or whether any such
election, modification or revocation is effective, consistent with the duty of
the Exchange Agent to give effect to such elections, modifications or
revocations to the maximum extent possible.
(f) As soon as practicable after the Election Deadline, Purchaser shall
cause the Exchange Agent to allocate among the holders of Seller Common Stock
the right to receive the Cash Distribution, as follows:
If the total number of shares of Purchaser Common Stock issuable to all
holders of Stock Election Shares and Combined Election Shares is
insufficient in the reasonable judgment of Muldoon Murphy & Faucette ("MMF")
to allow it to render the opinion required by Section 4.14
I-3
<PAGE>
of this Agreement, then, MMF shall notify the Exchange Agent as to the
number of additional shares of Purchaser Common Stock that will be required
to be issued in the Merger in order to allow MMF to render such opinion in
its reasonable judgment (the "Minimum Share Notice"); PROVIDED, HOWEVER, the
aggregate Merger Consideration (calculated using the Exchange Ratio and the
Purchaser Average Stock Price) so determined consists of at a minimum 55%
stock consideration (or such higher percentage of stock consideration that
MMF considers necessary to qualify the Merger as a tax free reorganization
within the meaning of Section 368(a) of the Code).
Upon receipt of the Minimum Share Notice, the Exchange Agent shall
reallocate the Merger Consideration payable to each holder of Cash Election
Shares pro rata (based upon the number of Cash Election Shares owned by such
holder as compared with the total number of Cash Election Shares owned by
all holders) such that the holders of Cash Election Shares will receive the
number of shares of Purchaser Common Stock which in the aggregate will equal
the number of shares of Purchaser Common Stock set forth in the Minimum
Share Notice to the Exchange Agent and such holders will receive the balance
of the Merger Consideration, if any, to which each such holder is entitled
to receive pursuant to the Merger (determined by (x) computing the value of
the Merger Consideration to which each such holder is entitled to receive
pursuant to the Merger by multiplying the number of shares of Seller Common
Stock owned at the Effective Time by the per share value of the Merger
Consideration and (y) subtracting from the amount determined in (x) above
the value of the shares of Purchaser Common Stock issued pursuant to this
Section 1.03(f)) in cash.
(g) The computation of the pro rata computations utilized in the
reallocations and the reallocated payments of the Merger Consideration
contemplated by Section 1.03(f) of this Agreement shall be made by the Exchange
Agent in the reasonable exercise of its discretion.
(h) Each separate entry on the Seller's Shareholder List (as provided
pursuant to Section 1.07 hereof) shall be presumed to represent a separate and
distinct holder of record of Seller Common Stock. Shares held of record by a
bank, trust company, broker, dealer or other recognized nominee shall be deemed
to be held by a single holder unless the nominee advises the Exchange Agent
otherwise in writing. In such case, each of the beneficial owners shall be
treated as a separate holder and either directly or through such nominee may
submit a separate Election Form for shares of Seller Common Stock that are
beneficially owned.
(i) Any provisions of the preceding paragraphs of this Section 1.03 to the
contrary notwithstanding, if a holder of Seller Common Stock in two or more
different names so certifies in writing on or before the Election Deadline, such
shareholder may submit a single Election Form for all such shares subject to the
certification and shall be treated for purposes of this Section 1.03 as a single
holder.
SECTION 1.04 EXCHANGE PROCEDURES.
(a) At the Effective Time, Purchaser shall have granted the Exchange Agent
the requisite power and authority to effect for Purchaser the issuance of the
number of shares of Purchaser Common Stock to be issued in the Merger and the
payment of the amount of cash to be paid in the Merger. Promptly after
consummation of the Merger, Purchaser shall deposit, or shall cause to be
deposited, with the Exchange Agent, for the benefit of the holders of shares of
Seller Common Stock for exchange in accordance with this Article I, through the
Exchange Agent, (i) certificates evidencing such number of shares of Purchaser
Common Stock equal to the number of shares to be issued pursuant to Section 1.02
and (ii) cash in the amount equal to the aggregate amount of cash to be paid to
shareholders pursuant to Section 1.02 (such certificates for shares of Purchaser
Common Stock, together with any dividends or distributions with respect thereto
and cash, being hereinafter referred to as the "Exchange Fund"). The Exchange
Agent shall, pursuant to irrevocable instructions, deliver the Purchaser Common
Stock and cash contemplated to be issued pursuant to Section 1.02 out of the
Exchange Fund. Except as contemplated by Section 1.06 hereof, the Exchange Fund
shall not be used for any other purpose.
I-4
<PAGE>
(b) As soon as practicable following the Effective Time, but in no event
later than ten (10) days thereafter, the Exchange Agent shall mail to the
holders of record of a Certificate or Certificates of Seller Common Stock, as
identified on the Seller Shareholder List provided pursuant to Section 1.07
hereof, (1) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificate shall pass, only upon
proper delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Purchaser and Seller shall mutually agree
upon) and (2) instructions for use in effecting the surrender of the
Certificates in exchange for Certificates evidencing shares of Purchaser Common
Stock or cash. Seller shall have the right to review both the letter of
transmittal and any other transmittal materials prior to the Effective Time and
provide reasonable comments thereon. Upon surrender of a Certificate to the
Exchange Agent together with such letter of transmittal, duly executed, and such
other customary documents in proper form as may be required pursuant to such
instructions, the holder of such Certificates shall be entitled to receive in
exchange therefor (A) certificates evidencing that number of whole shares of
Purchaser Common Stock which such holder has the right to receive in respect of
the shares of Seller Common Stock formerly evidenced by such Certificate, in
accordance with Section 1.02, (B) cash to which such holder is entitled to
receive in accordance with Section 1.02, (C) cash in lieu of fractional shares
of Purchaser Common Stock to which such holder is entitled pursuant to Section
1.06 and (D) any dividends or other distributions to which such holder is
entitled pursuant to Section 1.04, and the Certificate so surrendered shall be
cancelled.
(c) Subject to Section 1.07 hereof, after the Effective Time, each holder
of a Certificate that surrenders such Certificate or in lieu thereof, any
reasonable documentation required by the Purchaser for a lost, stolen, or
mutilated Certificate (the "Required Documentation") to the Exchange Agent, with
a properly completed and executed letter of transmittal with respect to such
Certificate, will be entitled to a certificate or certificates representing the
stock component of the Merger Consideration and/or a payment representing the
cash component of the Merger Consideration.
(d) Each outstanding Certificate, until duly surrendered to the Exchange
Agent, shall be deemed to evidence ownership of the Merger Consideration into
which the stock previously represented by such Certificate shall have been
converted pursuant to this Agreement.
(e) After the Effective Time, holders of Certificates shall cease to have
rights with respect to the stock previously represented by such Certificates,
and their sole rights shall be to exchange such Certificates for the Merger
Consideration issuable or payable in the Merger. After the closing of the
transfer books as described in Section 1.07 hereof, there shall be no further
transfer on the records of Seller of Certificates, and if such Certificates are
presented to Seller for transfer, they shall be cancelled against delivery of
the Merger Consideration. Neither Purchaser nor the Exchange Agent shall be
obligated to deliver the Merger Consideration to which any former holder of
Seller Common Stock is entitled as a result of the Merger until such holder
surrenders the Certificates or the Required Documentation as provided herein. No
interest will be accrued or paid on the cash component of the Merger
Consideration. No dividends or distributions declared after the Effective Time
on the Purchaser Common Stock representing the stock component of the Merger
Consideration will be remitted to any person entitled to receive such stock
component of the Merger Consideration under this Agreement until such person
surrenders the Certificate representing the right to receive such Purchaser
Common Stock or furnishes the Required Documentation, at which time such
dividends or declarations shall be remitted to such person, without interest and
less any taxes that may have been imposed thereon. Neither the Exchange Agent
nor any party to this Agreement nor any affiliate thereof shall be liable to any
holder of stock represented by any Certificate for any Merger Consideration
issuable or payable in the Merger that is paid to a public official pursuant to
applicable abandoned property, escheat or similar laws without interest on the
cash component, but with accrued but unpaid dividends on the Purchaser Common
Stock.
(f) Any portion of the Exchange Fund which remains undistributed to holders
of Seller Common Stock for eighteen (18) months after the Effective Time shall
be delivered to Purchaser, upon demand and any holders of Seller Common Stock
who have not theretofore complied with this Article I shall
I-5
<PAGE>
thereafter look only to Purchaser for the Merger Consideration to which they are
entitled without interest on the cash component, but with accrued and unpaid
dividends on the Purchaser Common Stock.
SECTION 1.05 DISSENTING SHARES.
(a) Notwithstanding any other provision of this Agreement to the contrary,
any holder of Seller Common Stock otherwise entitled to receive Merger
Consideration for each of his or her shares shall be entitled to demand payment
of the fair cash value of such shares as specified in Section 262 of the
Delaware General Corporation Law ("DGCL") if the holder follows the procedure
specified therein. These shares shall hereafter be specified as "Dissenting
Shares." Any holders of Dissenting Shares shall be entitled to payment for such
shares only to the extent permitted by and in accordance with the provisions of
such law, and Purchaser shall cause the surviving corporation to pay such
consideration with funds provided by the Purchaser. Any Dissenting Share shall
not, after the Effective Time, be entitled to vote for any purpose or receive
any dividends or other distributions and shall not be converted into the Merger
Consideration as provided in Section 1.02 hereof; PROVIDED, HOWEVER, that shares
of Seller Common Stock held by a dissenting stockholder who subsequently
withdraws a demand for payment, fails to comply fully with the requirements of
the DGCL, or otherwise fails to establish the right to such stockholder to be
paid for fair cash value of such stockholder's shares under the DGCL shall be
deemed to be converted into the right to receive the Merger Consideration in
cash pursuant to the terms and conditions specified herein.
(b) Each party hereto shall give the other prompt notice of any written
demands for the payment of the fair value of any shares, withdrawals of such
demands, and any other instruments, served pursuant to the DGCL received by such
party, and Seller shall give Purchaser the opportunity to participate in all
negotiations and proceedings with respect to such demands. Seller shall not
voluntarily make any payment with respect to any demands for payment of fair
value and shall not, except with the prior written consent of Purchaser, which
consent shall not be unreasonably withheld, settle or offer to settle any such
demands.
SECTION 1.06 NO FRACTIONAL SHARES. Notwithstanding any other provision of
this Agreement, neither certificates nor scrip for fractional shares of
Purchaser Common Stock shall be issued in the Merger. Each holder who otherwise
would have been entitled to a fraction of a share of Purchaser Common Stock
shall receive in lieu thereof cash (without interest) in an amount determined by
multiplying the fractional share interest to which such holder would otherwise
be entitled by the Purchaser Average Stock Price. No such holder shall be
entitled to dividends, voting rights or any other rights in respect of any
fractional share.
SECTION 1.07 CLOSING OF STOCK TRANSFER BOOKS.
(a) The stock transfer books of Seller shall be closed at the end of
business on the business day immediately preceding the Closing Date. In the
event of a transfer of ownership of Seller Common Stock which is not registered
in the transfer records prior to the closing of such record books, the Merger
Consideration issuable or payable with respect to such stock may be delivered to
the transferee, if the Certificate or Certificates representing such stock is
presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and all applicable stock transfer taxes are
paid.
(b) At the Effective Time, Seller shall provide Purchaser with a complete
and verified list of registered holders of Seller Common Stock based upon its
stock transfer books as of the closing of said transfer books, including the
names, addresses, certificate numbers and taxpayer identification numbers of
such holders (the "Seller Shareholder List"). Purchaser and the Exchange Agent
shall be entitled to rely upon the Seller Shareholder List to establish the
identity of those persons entitled to the Merger Consideration specified in this
Agreement, which list shall be conclusive with respect thereto.
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SECTION 1.08 ANTI-DILUTION ADJUSTMENTS. If between the date of this
Agreement and the Effective Time a share of Purchaser Common Stock shall be
changed into a different number of shares of Purchaser Common Stock or a
different class of shares by reason of reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or if a stock
dividend thereon shall be declared with a record date within such period, then
appropriate and proportionate adjustment or adjustments will be made to the
stock component of the Merger Consideration to reflect such split, combination,
dividend or other distribution.
SECTION 1.09 MODIFICATION OF STRUCTURE. Notwithstanding any provision of
this Agreement to the contrary, Purchaser may elect to modify the structure of
the transactions contemplated hereby so long as (i) there are no material
adverse federal or state income tax consequences to the Seller and its
stockholders or to holders of options to purchase Seller Common Stock as a
result of such modification; (ii) the consideration to be paid to holders of
Seller Common Stock or Seller Stock Options under this Agreement is not thereby
changed in kind or reduced in amount because of such modification; (iii) such
modification will not be likely to delay materially or jeopardize receipt of any
required regulatory approvals; and (iv) opinions as to these conditions being
met are supplied to Seller by a public accountant and law firm, in a form
acceptable to Seller but at the sole expense of Purchaser.
SECTION 1.10 TAKING OF NECESSARY ACTION. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Purchaser with full title to all
properties, assets, rights, approvals, immunities and franchises of Seller and
its Subsidiaries, the officers and directors of Purchaser shall take all such
necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.01 REPRESENTATIONS AND WARRANTIES OF THE SELLER.
The Seller represents and warrants to the Purchaser that, except as
specifically disclosed in the schedules of the Seller delivered to the Purchaser
prior to the execution hereof (and making specific reference to the Section or
Sections of this Agreement for which an exception is taken) (such schedules, as
amended from time to time in the manner provided for in Section 4.09 hereof,
shall hereafter be referred to as the "Disclosure Schedules"):
(a) ORGANIZATION.
(i) The Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Except for the
Seller Bank as defined in this Section 2.01(a), Seller has no direct
subsidiaries. The Seller is duly qualified to do business and is in good
standing in Illinois and in each other jurisdiction in which the nature of
the business conducted or the properties or assets owned or leased by it
makes such qualification necessary, except for such failure to qualify or be
in such good standing which, when taken together with all such failures,
would not have a Material Adverse Effect as hereinafter defined in Section
2.01(h) on the Seller. The Seller is a registered savings and loan holding
company under the Home Owners' Loan Act, as amended ("HOLA"). The Seller has
the corporate power and authority (including all federal, state, local and
foreign government authority) to carry on its business as it is now
conducted and to own, lease and operate its properties.
(ii)Security Federal Savings and Loan Association of Chicago (the "Seller
Bank") is a federally chartered stock savings and loan association
duly organized, validly existing and in good standing under the laws of the
United States. Security Federal Service Corp. is a wholly owned subsidiary
of Seller Bank and is a corporation duly organized, validly existing and in
good standing under the laws of the State of Illinois. (Seller Bank and
Security Federal Service Corp. are sometimes referred to herein each as a
"Subsidiary" and together as the "Subsidiaries"). Each of the Subsidiaries
has the corporate power and authority to carry on its business as it is now
conducted and to own, lease and operate its properties, and is duly
qualified to do business
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and is in good standing in each jurisdiction in which the nature of the
business conducted or the properties or assets owned or leased by it makes
such qualification necessary, except where the absence thereof, would not,
individually or in the aggregate, have a Material Adverse Effect as
hereinafter defined in Section 2.01(h) on the Seller. Each subsidiary of
Seller Bank, as defined in Section 2.01(a)(ii), is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which the subsidiary is incorporated. Seller Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent
permitted by law.
(iii)
The Disclosure Schedule 2.01(a) sets forth all of the Subsidiaries of
the Seller and all entities (whether corporations, partnerships, or
similar organizations), including the corresponding percentage ownership, in
which the Seller owns, directly or indirectly, 10% or more of the debt,
equity or other proprietary interests as of the date of this Agreement and
indicates for each such entity, as of such date, its jurisdiction of
organization. The Seller owns, either directly or indirectly, all of the
outstanding capital stock of each of the Subsidiaries free and clear of any
claim, lien or encumbrance. Except for Seller Bank, no Subsidiary of the
Seller is an "insured depository institution" as defined in the Federal
Deposit Insurance Act, as amended, and applicable regulations thereunder.
All of the shares of capital stock of each of the Subsidiaries held by the
Seller or by another Subsidiary of the Seller are fully paid, nonassessable
and not subject to any preemptive rights and, except as set forth in the
Disclosure Schedule 2.01(a), are owned by the Seller or a Subsidiary of the
Seller free and clear of any claims, liens, encumbrances or restrictions
(other than those imposed by applicable federal and state securities laws)
and there are no agreements or understandings with respect to the voting or
disposition of any such shares so held.
(b) CAPITAL STRUCTURE.
(i) The authorized capital stock of the Seller consists of three-million
(3,000,000) shares of Seller Common Stock, par value $.01 per share
(the "Seller Common Stock") and one million (1,000,000) shares of preferred
stock, par value $.01 per share (the "Seller Preferred Stock"). As of the
date hereof: (A) 1,550,846 shares of Seller Common Stock were issued and
outstanding (which includes outstanding share awards under the Security
Federal Savings and Loan Association Recognition and Retention Plans
("ARP"), and the Financial Security Corp. 1995 Long Term Incentive Plan)
(the "Incentive Plan"), and no shares of Seller Preferred Stock were issued
or outstanding; (B) 103,531 shares of Seller Common Stock were subject to
outstanding stock option awards; (C) no shares of Seller Preferred Stock
were reserved for issuance; (D) 246,082 shares of Seller Common Stock were
held by the Seller in its treasury (which are not included in aforesaid
shares which are issued and outstanding), and (E) 58,941 share awards and
84,699 options in the Incentive Plan were authorized but have not been
granted. All outstanding shares of Seller Common Stock are validly issued,
fully paid and nonassessable and not subject to any preemptive rights. The
Disclosure Schedule 2.01(b) sets forth a complete and accurate list of all
options, warrants, calls, or commitments or other agreements to purchase
Seller Common Stock outstanding, including the dates of grant, exercise
prices, dates of vesting, dates of termination and shares subject to option
for each grant.
(ii)As of the date of this Agreement, except for this Agreement and as
set forth in the Disclosure Schedule 2.01(b), neither the Seller nor
any of its Subsidiaries is a party to or is bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating the Seller or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, any additional shares of capital stock of the Seller or any of its
Subsidiaries or obligating the Seller or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, convertible
security, commitment or agreement. As of the date hereof, there are no
outstanding contractual obligations of the Seller or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of
the Seller or any of its Subsidiaries.
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(c) AUTHORITY. The Seller has all requisite corporate power and authority
to enter into this Agreement and, subject to approval of this Agreement by the
requisite vote of the shareholders of the Seller and approval of regulators, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement, and, subject to the approval of this Agreement by the requisite
vote of the shareholders of the Seller and approval of regulators, the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Seller. This Agreement has
been duly executed and delivered by the Seller and, assuming due execution and
delivery by the Purchaser constitutes a valid and binding obligation of the
Seller, enforceable in accordance with its terms subject to applicable
conservatorship, receivership, bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity (including without limitation specific
performance), whether applied in a court of law or a court of equity.
(d) SHAREHOLDER APPROVALS. The Board of Directors of the Seller has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Seller's shareholders for approval at a meeting of such
shareholders and, except for adoption of this Agreement by the requisite vote of
the Seller's shareholders, no other shareholder action is necessary to approve
this Agreement and to consummate the transactions contemplated hereby. The Board
of Directors will recommend that the shareholders approve the transaction
subject to their fiduciary duties and will exempt the transaction from Section
203 of DGCL. The approval of the majority of the outstanding shares of Seller
Common Stock entitled to vote is required for approval of this Agreement and to
consummate the transactions contemplated hereby. The Board of Directors of the
Seller has received the opinion of Hovde Financial, Inc. to the effect that the
Merger Consideration to be received by the shareholders of the Seller is fair,
from a financial point of view, to such shareholders.
(e) NO VIOLATIONS. Subject to approval of this Agreement by the Seller's
shareholders and the regulatory agencies referred to in Section 2.01(g)(ii), the
execution, delivery and performance of this Agreement by the Seller do not, and
the consummation of the transactions contemplated hereby by the Seller will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of the Seller or any Subsidiary of the Seller
or to which the Seller or any of its Subsidiaries (or any of their respective
properties) is subject, which breach, violation or default would, individually
or in the aggregate, have a Material Adverse Effect as hereinafter defined in
Section 2.01(h) on Seller or on Seller's ability to consummate the transactions
contemplated hereby, (ii) a breach or violation of, or a default under, the
certificate or articles of incorporation or Bylaws of the Seller or any
Subsidiary of the Seller or (iii) a breach or violation of, or a default under
(or an event which with due notice or lapse of time or both would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the properties or assets of the Seller
or any Subsidiary of the Seller under, any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which the Seller or any Subsidiary of the
Seller is a party, or to which any of their respective properties or assets may
be bound or affected, except for any of the foregoing that, individually or in
the aggregate, would not have a Material Adverse Effect on the Seller.
(f) CONSENTS. Except as referred to herein or in connection, or in
compliance, with the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the HOLA,
the Bank Merger Act, as amended (the "BMA"), the rules and regulations of the
Federal Reserve Board, the rules and regulations of the Office of Thrift
Supervision ("OTS"), and the environmental, corporation, securities or blue sky
laws or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by the Seller of the Merger or the other transactions
contemplated by this Agreement, other than filings, registrations,
authorizations, consents or approvals the failure to make or obtain would not
have a Material Adverse Effect on the Seller.
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(g) REPORTS.
(i) As of their respective dates, neither the Seller's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995, nor any
other document filed subsequent to December 31, 1995 under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, each in the form (including any
documents specifically incorporated by reference therein) filed with the
Securities and Exchange Commission ("SEC") (collectively, the "Seller's
Reports"), contained or will contain any untrue statement of a material fact
or omitted or will omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading, PROVIDED, HOWEVER,
that no representation is made herein with respect to any Exhibits to the
Seller's Reports that are not specifically incorporated by reference therein
and that Seller's amendment of any Seller's Report, in and of itself, in
response to SEC comments will not be violative of this section. Each of the
balance sheets of the Seller or its Subsidiaries contained or specifically
incorporated by reference in the Seller's Reports (including in each case
any related notes and schedules) fairly presented the financial position of
the entity or entities to which it relates as of its date and each of the
statements of income and of changes in shareholders' equity and of cash
flows of the Seller or its Subsidiaries, contained or specifically
incorporated by reference in the Seller's Reports (including in each case
any related notes and schedules) (collectively the "Financial Statements"),
fairly presented the results of operations, shareholders' equity and cash
flows, as the case may be, of the entity or entities to which it relates for
the periods set forth therein (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments), in each case in
accordance with generally accepted accounting principles ("GAAP")
consistently applied during the periods involved, except as may be noted
therein.
(ii)The Seller and each of its Subsidiaries have each filed all material
reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file
since December 31, 1995 with (A) the SEC, (B) the OTS, (C) the FDIC, (D) any
state banking commission or other banking regulatory authority
(collectively, the "Regulatory Agencies") and (E) the National Association
of Securities Dealers, Inc. and any other self-regulatory organization
("SRO"), and have paid all fees and assessments due and payable in
connection therewith, except for those fees and assessments that would not
be material.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Seller's Reports filed prior to the date of this Agreement, (i) from December
31, 1995 to the date hereof, the Seller and its Subsidiaries have not, except as
set forth in the Disclosure Schedule 2.01(h), incurred any material liability,
other than in the ordinary course of their business consistent with past
practice, and (ii) since December 31, 1995, there has not been any condition,
event, change or occurrence that, individually or in the aggregate, has had, or
is reasonably likely to have, a Material Adverse Effect on the Seller or a
Subsidiary. Material Adverse Effect, with respect to a person, means a material
adverse effect upon (A) the business, properties, assets, financial condition or
results of operations, in each case, of the Seller or its Subsidiaries or
Purchaser or its subsidiaries, as appropriate either individually or taken as a
whole, or (B) the ability of such person to consummate the transactions
contemplated by this Agreement; it being understood that a Material Adverse
Effect shall not include: (i) a change with respect to, or effect on, the Seller
and its Subsidiaries resulting from a change in law, rule, regulation, generally
accepted accounting principles or regulatory accounting principles, including
any change in the treatment of bad debt reserves as such would apply to the
financial statements of the Seller on a consolidated basis; (ii) a change with
respect to, or effect on, the Seller and its Subsidiaries resulting from
expenses (such as legal, accounting and investment bankers' fees) incurred in
connection with this Agreement or the transactions contemplated hereby; (iii) a
change with respect to, or effect on, the Seller or its Subsidiaries resulting
from any other matter affecting depository institutions generally including,
without limitation, changes in general economic conditions and changes in
prevailing interest and deposit rates; or (iv) any one-time special insurance
premium assessed by the FDIC on deposits insured by the SAIF.
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(i) TAXES. All federal, state, and local tax returns required to be filed
by or on behalf of the Seller or any of its Subsidiaries have been timely filed
or requests for extensions have been timely filed (and any such extension shall
have been granted and not have expired). All taxes, owed by Seller or any of its
Subsidiaries (whether or not shown on the returns) and all taxes required to be
shown on returns for which extensions have been granted, have been paid in full
or adequate provision has been made for any such taxes on the Seller's balance
sheet as of December 31, 1995 (in accordance with GAAP). Since December 31,
1995, there has been no audit examination of the Seller by the Internal Revenue
Service ("IRS) and the latest audit examination of the Seller by the applicable
taxing authority of the State of Illinois was October 26, 1995 for the tax years
ended 1990, 1991, 1992 and 1993. Except as set forth in Disclosure Schedule
2.01(i), as of the date of this Agreement, there is no audit examination,
deficiency, claim, or refund litigation with respect to any taxes of the Seller
or any of its Subsidiaries, and no claim or assessment has been made by any
authority in a jurisdiction where the Seller or any of its Subsidiaries do not
file tax returns and the Seller or any such Subsidiary is subject to taxation.
All taxes, interest, additions, and penalties due with respect to completed and
settled examinations or concluded litigation relating to the Seller or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on the Seller's balance sheet as of December 31, 1995 (in
accordance with GAAP). Except as set forth in Disclosure Schedule 2.01(i), the
Seller and its Subsidiaries have not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect. Except as set forth in Disclosure Schedule 2.01(i),
the Seller and each of its Subsidiaries have withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, shareholder or other third
party, and the Seller and each of its Subsidiaries have timely complied with all
applicable information reporting requirements under Part III, Subchapter A of
Chapter 61 of the Code and similar applicable state and local information
reporting requirements, except in each case for such failure to withhold, pay or
comply that would not, individually or in the aggregate, result in a Material
Adverse Effect on the Seller.
(j) ABSENCE OF CLAIMS. Except as set forth in Disclosure Schedule 2.01(j),
neither Seller, nor any of its Subsidiaries, nor any of their respective
directors and officers is a party to any pending litigation, legal,
administrative, arbitration or other proceeding, before any court or
governmental agency ("Claim"), and Seller is not aware of any threatened Claim
against Seller, or any of its Subsidiaries, which are reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the
Seller or its Subsidiaries or to materially hinder or delay consummation of the
transactions contemplated hereby. Except as set forth in Disclosure Schedule
2.01(j), there are no orders of any regulatory or governmental authorities or
any judgments against the Seller or any of its Subsidiaries, directors or
officers which are reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on Seller or its Subsidiaries or to materially hinder
or delay consummation of the transaction contemplated hereby.
(k) ABSENCE OF REGULATORY ACTIONS. Except as set forth in Disclosure
Schedule 2.01(k), and excluding reports of examination by Regulatory Agencies,
neither the Seller nor any of its Subsidiaries is a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or similar written undertaking to, or is subject to any
order or directive by, or is a recipient of any extraordinary supervisory letter
from, federal or state governmental authorities charged with the supervision or
regulation of depository institutions or depository institution holding
companies or engaged in the insurance of bank and/or savings and loan deposits
("Regulatory Agency") nor has it been advised by any Regulatory Agency that it
is contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, directive, written agreement, memorandum
of understanding, extraordinary supervisory letter, commitment letter or similar
written undertaking.
(l) AGREEMENTS.
(i)
Except for this Agreement and except as disclosed in Disclosure
Schedule 2.01(l), neither the Seller nor any of its Subsidiaries is a
party to a written or, to the Seller's knowledge, oral
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(A) agreement (other than data processing, software programming and
licensing contracts entered into in the ordinary course of business and
customary real estate brokerage commissions in connection with the sale of
REO) not terminable on thirty (30) days' or less notice, and providing for
payments in excess of $50,000 per annum, (B) agreement with any executive
officer or other key employee of the Seller or any of its Subsidiaries the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving the Seller or any of
its Subsidiaries of the nature contemplated by this Agreement, (C) agreement
with respect to any executive officer or employee of the Seller or any of
its Subsidiaries providing for other than at-will employment, (D) agreement
or plan, including any stock option plan, stock appreciation rights plan,
restricted stock plan, stock purchase plan, or any other non-qualified
compensation 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, or (E) agreement containing
covenants that limit the ability of the Seller or any of its Subsidiaries to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which or method by which, the Seller
(including any successor thereof) or any of its Subsidiaries may carry on
its business (other than as may be required by law or any regulatory
agency).
(ii)
Neither the Seller nor any of its Subsidiaries is in default under or
in violation of any provision, and is not aware of any fact or
circumstance that has been or could be alleged to constitute a default or
violation, of its Certificate of Incorporation or Bylaws or any note, bond,
indenture, mortgage, deed of trust, loan agreement or other agreement to
which it is a party or by which it is bound or to which any of its
respective properties or assets is subject, other than such defaults or
violations as could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on Seller or Seller Bank and
has not waived and will not waive prior to the Effective Time, any material
right under any material contract or commitment.
(m) LABOR MATTERS. Neither the Seller nor any of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract, or
other agreement or understanding with a labor union or labor organization with
respect to its employees. Neither the Seller nor any of its Subsidiaries is the
subject of any proceeding asserting that it has committed an unfair labor
practice or seeking to compel it or any such Subsidiary to bargain with any
labor organization as to wages and conditions of employment, nor is the
management of the Seller aware of any strike, other labor dispute or
organizational effort involving the Seller or any of its Subsidiaries that is
pending or threatened that individually or in the aggregate would result in a
Material Adverse Effect on the Seller.
(n) EMPLOYEE BENEFIT PLANS.
(i)
Disclosure Schedule 2.01(n) contains a complete list of all employee,
retiree or director pension, retirement, stock option, stock
purchase, restricted stock, stock ownership, savings, stock appreciation
right, profit sharing, deferred compensation, supplemental income,
supplemental retirement, consulting, bonus, group insurance, key executive
officer insurance, severance and any other benefit plans, employment
contracts (providing termination, change in control, or severance payments),
agreements, arrangements, or policies including, but not limited to,
employee benefit plans, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), incentive and
welfare policies, contracts, plans and arrangements and all trust agreements
related thereto, maintained or which have been maintained or to which Seller
or any of its Subsidiaries is or has been a party or subject with respect to
any present or former directors, officers, or other employees of the Seller
or any of its Subsidiaries (hereinafter referred to collectively as the
"Employee Plans"), except for any such plans, contracts, agreements or
arrangements involving liabilities or expenses not exceeding $10,000
individually or in the aggregate. All of the Employee Plans comply in all
material respects with all applicable requirements of ERISA, the Code and
other applicable laws, orders, rules and regulations; neither the Seller nor
any of its Subsidiaries has engaged in a "prohibited transaction" (as
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defined in Section 406 of ERISA or Section 4975 of the Code) with respect to
any Employee Plan. Seller and its Subsidiaries have complied with the health
care continuation coverage requirements of Section 4980B of the Code and
Sections 601 through 608 of ERISA. No liability to the Pension Benefit
Guaranty Corporation has been incurred and, except as described on
Disclosure Schedule 2.01(n), there exists no fact or circumstance which
would cause the Seller to incur any such liability with respect to any
Employee Plan which is subject to Title IV of ERISA ("Pension Plan"), or
with respect to any "single-employer plan" (as defined in Section
4001(a)(15) of ERISA) currently or formerly maintained by the Seller or any
entity which is considered one employer with the Seller under Section 4001
of ERISA or Section 414 of the Code (an "ERISA Affiliate"). Except as
described on Disclosure Schedule 2.01(n), no Pension Plan had an
"accumulated funding deficiency" (as defined in Section 302 of ERISA
(whether or not waived) as of the last day of the end of the most recent
plan year ending prior to the date hereof; the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under each Pension
Plan as of the date hereof, calculated on the basis of the actuarial
assumptions used in the most recent actuarial valuation for such Pension
Plan as of the date hereof does not exceed the fair market value of the
assets of such Pension Plan, and no notice of a "reportable event" (as
defined in Section 4043 of ERISA) for which the 30-day reporting requirement
has not been waived has been required to be filed for any Pension Plan
within the 12-month period ending on the date hereof. Neither the Seller nor
any Subsidiary of the Seller has provided, or is required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code. Neither the Seller,
its Subsidiaries, nor any ERISA Affiliate currently contributes or, since
December 31, 1988, has contributed to any multiemployer plan, as defined in
Section 3(37) of ERISA. Except as disclosed on Disclosure Schedule 2.01(n),
each Employee Plan of the Seller or of any of its Subsidiaries which is an
employee "pension benefit plan" (as defined in Section 3(2) of ERISA) and
which is intended to be qualified under Section 401(a) of the Code (a
"Qualified Plan") has received a favorable determination letter from the IRS
that the pension benefit plan meets the Tax Reform Act of 1986 and all
applicable legislative and regulatory requirements for tax qualification
that became effective at the time that the determination letter was issued
and the Seller and its Subsidiaries are not aware of any circumstances which
would result in revocation of any such favorable determination letter. Each
Qualified Plan which is an "employee stock ownership plan" (as defined in
Section 4975(e)(7) of the Code) has satisfied all of the applicable
requirements of Sections 409 and 4975(e)(7) of the Code and the regulations
thereunder in all material respects and any assets of any such Qualified
Plan that are not allocated to participants' individual accounts are pledged
as security for, and subject to the provisions of Section 4.02(e) of this
Agreement may be applied to satisfy, any securities acquisition
indebtedness.
(ii)
There is no pending or, to the Seller's knowledge, threatened
litigation, administrative action or proceeding relating to any
Employee Plan and the Seller has not received any notification from any
federal, state or local agency or department asserting that any Employee
Plan is not in compliance with any of the statutes, regulations or
ordinances that such governmental authority enforces. There has been no
announcement or commitment by the Seller or any Subsidiary of the Seller to
create an additional Employee Plan, or to amend an Employee Plan except for
amendments required by applicable law which do not materially increase the
cost of such Employee Plan and except for any plans or amendments expressly
described herein or on Disclosure Schedule 2.01(n); and, except as set forth
in Disclosure Schedule 2.01(n), the Seller and its Subsidiaries do not have
any obligations for post-retirement or post-employment benefits under any
Employee Plan (exclusive of any coverage mandated by the Consolidated
Omnibus Reconciliation Act of 1986 ("COBRA").
(iii)
With respect to each Employee Plan to the extent applicable, the
Seller has supplied to the Purchaser a true and complete copy of (A)
the most recent annual report on the applicable form of the Form 5500 series
filed with the IRS with all the attachments filed, (B) such Employee Plan,
including amendments thereto, (C) each trust agreement and insurance
contract relating to
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such Employee Plan, including amendments thereto, (D) the most recent
summary plan description for such Employee Plan, including amendments
thereto, if the Employee Plan is subject to Title I of ERISA, (E) the most
recent actuarial report or valuation if such Employee Plan is a Pension Plan
and (F) the most recent determination letter issued by the IRS if such
Employee Plan is a Pension Plan and Qualified Plan.
(o) TITLE TO ASSETS. Except as set forth in Disclosure Schedule 2.01(o),
the Seller and each of its Subsidiaries has insurable title (subject only to
standard title insurance policy exceptions as determined by customary practices
in the area in which such properties are located) to its owned real properties
(other than real estate owned as a result of foreclosure, transfer in lieu of
foreclosure or other transfer in satisfaction of a debtor's obligation
previously contracted), except for Liens, as defined below, or such other
defects arising by operation of law or which would not, individually or in the
aggregate, have a Material Adverse Effect on the Seller. Liens shall mean any
claim, encumbrance, or charge on property for payment of a debt, obligation or
duty. Each of the Seller and its Subsidiaries has good and valid title to its
owned personal property free and clear of all Liens, except for Liens, or other
defects arising by operation of law or which would not, individually or in the
aggregate, have a Material Adverse Effect on the Seller.
(p) FEES. Except as set forth in Disclosure Schedule 2.01(p) and other
than financial advisory services performed for the Seller by Hovde Financial,
Inc. ("Hovde"), the terms of which are set forth in Disclosure Schedule 2.01(p),
neither the Seller nor any of its Subsidiaries, nor to Seller's knowledge any of
their respective officers, directors, employees or agents, has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for the Seller or any Subsidiary of the Seller, in
connection with this Agreement or the transactions contemplated hereby. The
Seller shall pay all costs and expenses prior to the Closing Date for services
rendered by Hovde pursuant to the terms set forth in Disclosure Schedule
2.01(p). The Seller shall not be liable for any financial services advisory fees
incurred by the Purchaser.
(q) COMPLIANCE WITH LAWS. The Seller and the Subsidiaries hold all
licenses, certificates, permits, franchises and rights from all appropriate
federal, state or other public authorities necessary for the conduct of its and
their business as it is presently conducted except where the absence thereof
would not, individually or in the aggregate, have a Material Adverse Effect on
the Seller or materially delay the Merger. Each of the Seller and the
Subsidiaries has conducted its business so as to comply in all respects with all
applicable federal, state and local statutes, ordinances, regulations or rules,
except for possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Seller; and neither the Seller
nor any of the Subsidiaries is presently charged with, or, to the Seller's
knowledge, under governmental investigation with respect to, any actual or
alleged material violations of any statute, ordinance, regulation or rule, and
neither the Seller nor either of the Subsidiaries is the subject of any pending
or, to the Seller's knowledge, threatened material proceeding by any regulatory
authority having jurisdiction over its business, properties or operations.
Except as set forth in Disclosure Schedule 2.01(q), to the best of Seller's
knowledge no federal, state or local government, agency, commission or entity
has initiated any formal proceeding or inquiry into the business or operations
of Seller or Seller Bank within the past five years.
(r) ENVIRONMENTAL MATTERS.
(i)
For purposes of this Agreement, the following terms shall have the
following respective meanings:
(A) "ENVIRONMENTAL LAW(S)" means any law, regulation, rule, ordinance
or similar requirement which governs or protects the environment
enacted by the United States, any state, or any county, city or agency or
subdivision of the United States or any state.
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(B) "HAZARDOUS MATERIAL(S)" means any material or substance: (1)
which is a "hazardous substance," "pollutant," or "contaminant,"
pursuant to the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA") (42 U.S.C. 9601 ET SEQ.) as amended and
regulations promulgated thereunder; (2) containing gasoline, oil, diesel
fuel or other petroleum products; (3) which is "hazardous waste" pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA") (42 U.S.C.
Section 6901 ET SEQ.) as amended and regulations promulgated thereunder;
(4) containing polychlorinated biphenyls (PCBs); (5) containing asbestos;
(6) which is radioactive; (7) the presence of which requires
investigation or remediation under any Environmental Law (defined above);
or (8) which is defined or identified as a "hazardous waste," "hazardous
substance," "pollutant," "contaminant," or "biologically Hazardous
Material" under any Environmental Law.
(C) "PROPERTIES" means (1) the real estate owned or leased by the
Seller and the Subsidiaries or, with respect to the Purchaser, by
the Purchaser and its subsidiaries and used as a banking related
facility; (2) other real estate owned ("OREO") by the Seller or the
Subsidiaries as defined by any other federal or state financial
institution regulatory agency with regulatory authority for the Seller or
the Subsidiaries; (3) real estate that is in the process of pending
foreclosure or forfeiture proceedings conducted by the Seller or the
Subsidiaries; (4) real estate that is held in trust for others by the
Subsidiaries of the Seller; and (5) real estate owned or leased by a
partnership or joint venture in which the Seller or a Subsidiary has an
ownership interest.
(ii)
Except as disclosed in Schedule 2.01(r), to the best knowledge of the
Seller after due inquiry, there are no present conditions on the
Properties or to the best of Seller's knowledge properties with respect to
which Seller or its Subsidiaries has a mortgage interest, involving or
resulting from a past or present storage, spill, discharge, leak, emission,
injection, escape, dumping or release of any kind whatsoever of any
Hazardous Materials or from any generation, transportation, treatment,
storage, disposal, use or handling of any Hazardous Materials, that
may reasonably be expected to result in a Material Adverse Effect on the
Seller's consolidated business, financial condition or prospects.
(iii)
The Seller and the Subsidiaries are in substantial compliance with
all applicable Environmental Laws. Neither the Seller nor the
Subsidiaries have received notice of, nor to the best of their knowledge are
there outstanding or pending, any public or private claims, lawsuits,
citations, penalties, unsatisfied abatement obligations or notices or orders
of non-compliance relating to the environmental condition of the Properties,
which have or may have a Material Adverse Effect on the Seller's
consolidated business, financial condition or prospects.
(iv)
No Properties are currently undergoing remediation or clean-up of
Hazardous Materials or other environmental conditions, the actual or
estimated cost of which may have a Material Adverse Effect on the Seller's
consolidated business, financial condition or prospects.
(v)
To the best knowledge of the Seller after due inquiry, the Seller and
the Subsidiaries have all governmental permits, licenses,
certificates of inspection and other authorizations governing or protecting
the environment necessary to conduct its present business.
(s) LOANS AND INVESTMENTS.
(i)
Except as set forth in Disclosure Schedule 2.01(s), each outstanding
loan of Seller Bank as of the date hereof is evidenced by appropriate
and sufficient documentation and constitutes the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms except to the extent that the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles affecting the rights of creditors generally except
where the failure to be so documented or to constitute a legal, valid and
binding obligation will not have a Material Adverse Effect upon the
business, operations or financial condition of Seller Bank. To the best
knowledge of Seller and Seller Bank, no obligor
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named therein is seeking to avoid the enforceability of the terms of any
loan under any such laws or equitable principles and no loan is subject to
any defense, offset or counterclaim except where the actions of such obligor
will not have a Material Adverse Effect upon the business, operations or
financial condition of Seller or Seller Bank.
(ii)
To the best knowledge of Seller and Seller Bank, all guarantees of
indebtedness owed to Seller or Seller Bank, including but not limited
to those of state or federal agencies, are, valid and enforceable, except to
the extent enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles affecting the rights of creditors generally and except as would
not have a Material Adverse Effect on Seller and Seller Bank on a
consolidated basis.
(iii)
To the best knowledge of Seller and Seller Bank, in originating,
underwriting, servicing, and discharging loans, mortgages, land
contracts, and other contractual obligations, either for their own account
or for the account of others, Seller and Seller Bank have complied with all
applicable terms and conditions of such obligations and with all applicable
laws, regulations, rules, contractual requirements, and procedures with
respect to such servicing, except where the failure to comply would not have
a Materially Adverse Effect on Seller and Seller Bank on a consolidated
basis.
(t) ALLOWANCE FOR LOAN LOSSES. In the Seller's reasonable judgment, the
allowance for loan losses reflected in the Seller's audited statement of
condition at December 31, 1995 was, and the allowance for loan losses shown on
the balance sheets in Seller's Reports for periods ending after December 31,
1995 have been and will be, adequate in all material respects, as of the dates
thereof, under generally accepted accounting principles applicable to federal
savings and loan associations. The Seller has disclosed to the Purchaser in
writing prior to the date hereof the amounts of all loans, leases, advances,
credit enhancements, other extensions of credit, commitments and
interest-bearing assets of the Seller and its Subsidiaries that have been
classified as of December 31, 1995 as "Other Loans Specially Mentioned,"
"Special Mention," "Substandard," "Doubtful," "Loss," "Classified,"
"Criticized," "Credit Risk Assets," "Concerned Loans" (in the latter two cases,
to the extent available) or words of similar import. From and after the date
hereof, the Seller promptly will provide the Purchaser with a copy of each
monthly classified asset report it provides to its Board of Directors. The REO
included in any non-performing assets of the Seller or any of its Subsidiaries
is carried net of reserves at the lower of cost or fair value.
(u) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as set forth in
Disclosure Schedule 2.01(u), to Seller's knowledge, no officer or director of
the Seller has any material interest in any material contract or property (real
or personal), tangible or intangible, used in or pertaining to the business of
the Seller or any of its Subsidiaries that would be required to be disclosed
under the SEC's Regulation S-K.
(v) INSURANCE. The Seller and its Subsidiaries are presently insured, and
since December 31, 1995 have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business located in the State of Illinois would,
in accordance with good business practice, customarily be insured. All material
claims thereunder have been filed in due and timely fashion. Neither Seller nor
Seller Bank has any knowledge of any inaccuracy in any application for such
policies or binders, any failure to pay premiums when due or any similar state
of facts that might form the basis for termination of such insurance except
where such failure would not have a Material Adverse Effect on Seller and its
Subsidiaries on a consolidated basis.
(w) INVESTMENT SECURITIES. Except for investments in Federal Home Loan
Bank stock and Federal National Mortgage Association ("FNMA") stock, ownership
of Subsidiary shares and except as set forth in Disclosure Schedule 2.01(b),
none of the investments reflected in the consolidated balance sheet of the
Seller as of December 31, 1995, and none of such investments with face value in
excess of $100,000 made by it or any of its Subsidiaries since December 31, 1995
is subject to any
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restriction (contractual or statutory), other than applicable securities laws,
that would materially impair the ability of the entity holding such investment
freely to dispose of such investment at any time, except to the extent any such
investments are pledged in the ordinary course of business (including in
connection with hedging arrangements or programs or reverse repurchase
arrangements) consistent with prudent banking practice to secure obligations of
the Seller or any of its Subsidiaries. Seller and its Subsidiaries have no
outstanding repurchase agreements to which Seller or Seller Bank is a party.
(x) REGISTRATION OBLIGATIONS. Neither the Seller nor any of its
Subsidiaries is under any obligation, contingent or otherwise, to register any
of its securities under the Securities Act or the OTS Regulations.
(y) BOOKS AND RECORDS. The books and records of the Seller and its
Subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect in all material respects the
substance of material events and transactions that should be included therein.
(z) CORPORATE DOCUMENTS. The Seller has delivered to the Purchaser true
and complete copies of its Certificate of Incorporation and Bylaws and the
Charter and Bylaws of Seller Bank, as amended to date, which are currently in
full force and effect.
(aa) ABSENCE OF KNOWLEDGE. As of the date hereof, the Seller is not aware
of any reason why it would be unable to obtain all the necessary approvals
required in order to consummate the transactions contemplated by this Agreement.
(bb) SEC AND REGULATORY FILINGS. None of the information regarding Seller
supplied or to be supplied by Seller for inclusion or included in (a) the
registration statement on Form S-4 to be filed with the SEC by Purchaser for the
purpose of registering the shares of Purchaser Common Stock to be exchanged for
shares of Seller Common Stock pursuant to the provisions of this Agreement (the
"Registration Statement"), (b) the joint proxy statement/prospectus to be mailed
to shareholders of Seller and Purchaser (the "Proxy Statement") and (c) any
other documents to be filed with the SEC or any Regulatory Agencies in
connection with the transactions contemplated hereby will, at the respective
times such documents are filed with the SEC or any Regulatory Agencies and, in
the case of the Registration Statement, when it becomes effective and, with
respect to the Proxy Statement, when mailed, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements therein not misleading or, in the case of the Seller Proxy
Statement or any amendment thereof or supplement thereto, at the time of the
meeting of Seller stockholders referred to in Section 4.11, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for such meeting. All documents which Seller is
responsible for filing with the SEC or any other Regulatory Agencies in
connection with the Merger will comply as to form in all respects with the
provisions of applicable law.
(cc) TAX TREATMENT. To the best knowledge of the Seller, neither Seller
nor any Seller Subsidiary has engaged in any act that would preclude or
adversely affect the Merger from qualifying as a tax-free reorganization under
Section 368(a) of the Code.
(dd) INDEMNIFICATION. To the best knowledge of Seller, no action or
failure to take action by any director, officer, employee or agent of Seller or
Seller Bank has occurred which would give rise to a Claim by any such person for
indemnification from Seller or Seller Bank under the corporate indemnification
provisions of Seller or Seller Bank in effect on the date of this Agreement,
which are reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on the Seller or its Subsidiaries.
SECTION 2.02 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Seller that except as disclosed in
schedules of the Purchaser delivered to the Seller prior to
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execution hereof (and making specific reference to the Section or Sections of
this Agreement for which an exception is taken) (such schedules as amended from
time to time in the manner provided for in Section 4.09 hereof, the "Disclosure
Schedules"):
(a) CORPORATE ORGANIZATION AND QUALIFICATION.
The Purchaser is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Illinois and is a bank holding
company duly registered under the Bank Holding Company Act of 1956, as amended
and a savings and loan holding company under Section 10 of the HOLA. Each
subsidiary of the Purchaser is a corporation or partnership duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of the Purchaser and its subsidiaries is in
good standing as a foreign corporation in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by it requires such
qualification, except where the absence thereof, would not, individually or in
the aggregate, have a Material Adverse Effect on Purchaser. The Purchaser and
its subsidiaries each has the requisite corporate and other power and authority
(including all federal, state, local and foreign government authority) to carry
on its respective business as they are now being conducted and to own, lease and
operate their respective properties and assets. The deposits of the subsidiaries
of the Purchaser are insured by the Bank Insurance Fund ("BIF") or the SAIF of
the FDIC to the maximum extent permitted by law.
(b) CAPITAL STRUCTURE.
(i)
The authorized capital stock of the Purchaser consists of 20,000,000
shares of common stock, par value $4.69 per share ("Purchaser Common
Stock"), and 1,000 shares of preferred stock, no par value per share (the
"Purchaser Preferred Stock"). As of the date hereof, 4,354,138 shares of
Purchaser Common Stock and no shares of Purchaser Preferred Stock were
outstanding. All outstanding shares of capital stock of the Purchaser are,
and at the Effective Time will be, validly issued, fully paid and
nonassessable and not subject to any preemptive rights.
(ii)
Except as set forth in Disclosure Schedule 2.02(b) as of the date of
this Agreement, except for this Agreement, neither the Purchaser nor
any of its subsidiaries is a party to or is bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating the Purchaser or any
of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, any additional shares of capital stock of the Purchaser
or any of its subsidiaries or obligating the Purchaser or any of its
subsidiaries to grant, extend or enter into any such option, warrant, call,
right, convertible security, commitment or agreement. As of the date hereof,
there are no outstanding contractual obligations of the Purchaser or any of
its subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Purchaser or any of its subsidiaries.
(c) AUTHORITY. The Purchaser has all requisite corporate power and
authority to enter into 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 authorized
by all necessary corporate action on the part of the Purchaser. This Agreement
has been duly executed and delivered by the Purchaser, and assuming due
execution and delivery by the Seller, constitutes a valid and binding obligation
of the Purchaser, enforceable in accordance with its terms subject to applicable
conservatorship, receivership, bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity (including without limitation specific
performance), whether applied in a court of law or a court of equity.
(d) SHAREHOLDER APPROVALS. The Board of Directors of the Purchaser has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Purchaser's shareholders for approval at a meeting of such
shareholders and, except for adoption of this Agreement by the requisite vote of
the Purchaser's shareholders, no other shareholder action is necessary to
approve this Agreement and to consummate the transactions contemplated hereby.
The Board of Directors will
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recommend that the shareholders approve the transaction subject to their
fiduciary duties and will exempt the transaction from any applicable state
takeover statutes. The approval of the majority of the outstanding shares of
Purchaser Common Stock entitled to vote is required for approval of this
Agreement and to consummate the transactions contemplated hereby.
(e) NO VIOLATIONS. Subject to approval by the appropriate Regulatory
Agencies, the execution, delivery and performance of this Agreement by the
Purchaser do not, and the consummation of the transactions contemplated hereby
will not, constitute (i) a breach or violation of, or a default under, any law,
rule or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of the Purchaser or any
subsidiary or to which the Purchaser or any subsidiary (or any of their
respective properties) is subject, which breach, violation or default would
individually or in the aggregate, have a Material Adverse Effect on Purchaser or
on Purchaser's ability to consummate the transaction's contemplated hereby (ii)
a breach or violation of, or a default under, the certificate of incorporation,
charter or bylaws of the Purchaser or any subsidiary of the Purchaser or (iii) a
breach or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of the Purchaser under any of the terms,
conditions or provisions of any note, bond, indenture, deed of trust, loan
agreement or other agreement, instrument or obligation to which the Purchaser is
a party, or to which any of its respective properties or assets may be bound or
affected, except for any of the foregoing that, individually or in the
aggregate, would not have a Material Adverse Effect on the Purchaser.
(f) CONSENTS. Except as referred to herein or in connection, or in
compliance, with the Securities Act, the Exchange Act, the HOLA, the BMA, the
rules and regulations of the Federal Reserve Board, and the environmental,
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by the Purchaser of
the Merger or the other transactions contemplated by this Agreement, other than
filings, registrations, authorizations, consents or approvals, the failure to
make or obtain would not have a Material Adverse Effect on the Purchaser.
(g) REPORTS.
(i)
As of their respective dates, neither the Purchaser's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, nor any
other document filed subsequent to December 31, 1995 under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, each in the form (including any
documents specifically incorporated by reference therein) filed with the
SEC, (collectively, the "Purchaser's Reports"), contained or will contain
any untrue statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, PROVIDED, HOWEVER, that no representation is made
herein with respect to any Exhibits to the Purchaser Reports that are not
specifically incorporated by reference therein and that Purchaser's
amendment of any Purchaser's Report, in and of itself, in response to SEC
comments will not be violative of this section. Each of the balance sheets
of the Purchaser or its subsidiaries contained or specifically incorporated
by reference in the Purchaser's Reports (including in each case any related
notes and schedules) fairly presented the financial position of the entity
or entities to which it relates as of its date and each of the statements of
income and of changes in stockholders' equity and cash flows of the
Purchaser or its subsidiaries contained or specifically incorporated by
reference in the Purchaser's Reports (including in each case any related
notes and schedules), fairly presented the results of operations,
shareholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein (subject, in
the case of unaudited interim statement, to normal year-end audit
adjustments), in each case in accordance with GAAP consistently applied
during the periods involved, except as may be noted therein.
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(ii)
The Purchaser and its subsidiaries have filed all material reports,
registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file since
December 31, 1995, with the Regulatory Agencies, the National Association of
Securities Dealers, Inc. and any other SRO, and have paid all fees and
assessments due and payable in connection therewith, except for those fees
and assessments that would not be material.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
Purchaser's Reports from December 31, 1995 to the date hereof: (i) Purchaser and
its subsidiaries have not, except as set forth in Disclosure Schedule 2.02(h),
incurred any material liability, other than in the ordinary course of their
business consistent with past practice, and (ii) there has not been any
condition, event, change or occurrence that, individually or in the aggregate,
has had, or is reasonably likely to have, a Material Adverse Effect on the
Purchaser or its subsidiaries.
(i) TAXES. All federal, state, and local tax returns required to be filed
by or on behalf of the Purchaser or any of its subsidiaries have been timely
filed or requests for extensions have been timely filed (and any such extension
shall have been granted and not have expired). All taxes, owed by Purchaser or
any of its subsidiaries (whether or not shown on the returns) and all taxes
required to be shown on returns for which extensions have been granted, have
been paid in full or adequate provision has been made for any such taxes on the
Purchaser's balance sheet as of December 31, 1995 (in accordance with GAAP).
Since December 31, 1992, there has been no audit examination of the Purchaser by
the IRS and the latest audit examination of the Purchaser by the applicable
taxing authority of the State of Illinois was for the fiscal year ended December
31, 1992. Except as set forth in Disclosure Schedule 2.02(i), as of the date of
this Agreement, there is no audit examination, deficiency, claim, or refund
litigation with respect to any taxes of the Purchaser or any of its
subsidiaries, and no claim or assessment has been made by any authority in a
jurisdiction where the Purchaser or any of its subsidiaries do not file tax
returns and the Purchaser or any such subsidiary is subject to taxation. All
taxes, interest, additions, and penalties due with respect to completed and
settled examinations or concluded litigation relating to the Purchaser or any of
its subsidiaries have been paid in full or adequate provision has been made for
any such taxes on the Purchaser's balance sheet as of December 31, 1995 (in
accordance with GAAP). Except as set forth in Disclosure Schedule 2.02(i), the
Purchaser and its subsidiaries have not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect. Except as set forth in Disclosure Schedule 2.02(i),
the Purchaser and each of its subsidiaries have withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, shareholder or other third
party, and the Purchaser and each of its subsidiaries have timely complied with
all applicable information reporting requirements under Part III, Subchapter A
of Chapter 61 of the Code and similar applicable state and local information
reporting requirements, except in each case for such failure to withhold, pay or
comply that would not, individually or in the aggregate, result in a Material
Adverse Effect on the Purchaser.
(j) ABSENCE OF CLAIMS. Except as set forth in Disclosure Schedule 2.02(j),
neither Purchaser, nor any of its subsidiaries, nor any of their respective
directors or officers is a party to any Claim, and Purchaser is not aware of any
threatened Claim against Purchaser or any of its subsidiaries which are
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on the Purchaser or its subsidiaries or to materially hinder or delay
consummation of the transactions contemplated hereby, and to the Purchaser's
knowledge, no such Claim has been threatened. Except as set forth in Disclosure
Schedule 2.02(j), there are no orders of any regulatory or governmental
authorities or any judgments against the Purchaser or any of its subsidiaries,
directors or officers which are reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Purchaser or its subsidiaries or
to materially hinder or delay consummation of the transaction contemplated
hereby.
(k) ABSENCE OF REGULATORY ACTIONS. Excluding reports of examination by
Regulatory Agencies, neither the Purchaser nor any of its subsidiaries is a
party to any cease and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or similar
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written undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from any Regulatory Agency,
nor has it been advised by any Regulatory Agency that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter or similar
written undertaking.
(l) AGREEMENTS. Neither the Purchaser nor any of its subsidiaries is in
default under or in violation of any provision, and is not aware of any fact or
circumstance that has been or could be alleged to constitute a default or
violation of its Certificate of Incorporation or Bylaws or, of any note, bond,
indenture, mortgage, deed of trust, loan agreement or other agreement to which
it is a party or by which it is bound or to which any of its respective
properties or assets is subject, other than such defaults or violations as could
not reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect on Purchaser or its subsidiaries and has not waived and will not
waive, prior to the Effective Time, any material right under any material
contract or commitment.
(m) EMPLOYEE BENEFIT PLANS.
(i)
The Purchaser and its subsidiaries maintain various plans for the
benefit of employees, except for any such plans, contracts,
agreements or arrangements involving liabilities or expenses not exceeding
$10,000 individually or in the aggregate which are herein after referred to
collectively as "Purchaser Employee Plans." All of the Purchaser Employee
Plans comply in all material respects with all applicable requirements of
ERISA, the Code and other applicable laws, orders, rules and regulations;
neither the Purchaser nor any of its subsidiaries has engaged in a
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975
of the Code) with respect to any Purchaser Employee Plan. Purchaser and its
subsidiaries have complied with the health care continuation coverage
requirements of Section 4980B of the Code and Sections 601 through 608 of
ERISA. No liability to the Pension Benefit Guaranty Corporation has been
incurred and, except as described on Disclosure Schedule 2.02(m), there
exists no fact or circumstance which would cause the Purchaser to incur any
such liability with respect to any Purchaser Employee Plan which is subject
to Title IV of ERISA ("Pension Plan"), or with respect to any
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA)
currently or formerly maintained by the Purchaser or any entity which is
considered one employer with the Purchaser under Section 4001 of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Except as described on
Disclosure Schedule 2.02(m), no Pension Plan had an "accumulated funding
deficiency" (as defined in Section 302 of ERISA (whether or not waived)) as
of the last day of the end of the most recent plan year ending prior to the
date hereof; the present value of the "benefit liabilities" (as defined in
Section 4001(a)(16) of ERISA) under each Pension Plan as of the date hereof,
calculated on the basis of the actuarial assumptions used in the most recent
actuarial valuation for such Pension Plan as of the date hereof does not
exceed the fair market value of the assets of such Pension Plan, and no
notice of a "reportable event" (as defined in Section 4043 of ERISA) for
which the 30-day reporting requirement has not been waived has been required
to be filed for any Pension Plan within the 12-month period ending on the
date hereof. Neither the Purchaser nor any Subsidiary of the Purchaser has
provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of
the Code. Neither the Purchaser, its subsidiaries, nor any ERISA Affiliate
currently contributes or, since December 31, 1988, has contributed to any
multiemployer plan, as defined in Section 3(37) of ERISA. Each Purchaser
Employee Plan of the Purchaser or of any of its subsidiaries which is an
employee "pension benefit plan" (as defined in Section 3(2) of ERISA) and
which is intended to be qualified under Section 401(a) of the Code (a
"Qualified Plan") has received a favorable determination letter from the IRS
that the pension benefit plan meets the Tax Reform Act of 1986 and all
applicable legislative and regulatory requirements for tax qualification
that became effective at the time that the determination letter was issued
and the Purchaser and its subsidiaries are not aware of any circumstances
which would result in revocation of any such favorable determination letter.
Each Qualified Plan which is an "employee stock ownership plan" (as
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defined in Section 4975(e)(7) of the Code) has satisfied all of the
applicable requirements of Sections 409 and 4975(e)(7) of the Code and the
regulations thereunder in all material respects and any assets of any such
Qualified Plan that are not allocated to participants' individual accounts
are pledged as security for, and may be applied to satisfy, any securities
acquisition indebtedness.
(ii)
There is no pending or, to the Purchaser's knowledge, threatened
litigation, administrative action or proceeding relating to any
Purchaser Employee Plan and the Purchaser has not received any notification
from any federal, state or local agency or department asserting that any
Purchaser Employee Plan is not in compliance with any of the statutes,
regulations or ordinances that such governmental authority enforces. There
has been no announcement or commitment by the Purchaser or any Subsidiary of
the Purchaser to create an additional Purchaser Employee Plan, or to amend
an Purchaser Employee Plan except for amendments required by applicable law
which do not materially increase the cost of such Purchaser Employee Plan
and except for any plans or amendments expressly described herein or on
Disclosure Schedule 2.02(m); and, except as set forth in Disclosure Schedule
2.02(m), the Purchaser and its subsidiaries do not have any obligations for
post-retirement or post-employment benefits under any Employee Plan
(exclusive of any coverage mandated by the COBRA.
(iii)
With respect to each Purchaser Employee Plan to the extent
applicable, the Purchaser has supplied to the Purchaser a true and
complete copy of (A) such Purchaser Employee Plan, including amendments
thereto, (B) each trust agreement and insurance contract relating to such
Purchaser Employee Plan, including amendments thereto, (C) the most recent
summary plan description for such Purchaser Employee Plan, including
amendments thereto, if the Employee Plan is subject to Title I of ERISA, and
(D) the most recent determination letter issued by the IRS if such Purchaser
Employee Plan is a Pension Plan and Qualified Plan.
(n) TITLE TO ASSETS. Except as set forth in Disclosure Schedule 2.02(n),
the Purchaser and each of its subsidiaries has insurable title (subject only to
standard title insurance policy exceptions as determined by customary practices
in the area in which such properties are located) to its owned real properties
(other than real estate owned as a result of foreclosure, transfer in lieu of
foreclosure or other transfer in satisfaction of a debtor's obligation
previously contracted), except for Liens or such other defects arising by
operation of law or which would not, individually or in the aggregate, have a
Material Adverse Effect on the Purchaser. Each of the Purchaser and its
subsidiaries has good and valid title to its owned personal property free and
clear of all Liens, except for Liens, or other defects arising by operation of
law or which would not, individually or in the aggregate, have a Material
Adverse Effect on the Purchaser.
(o) FEES. Neither the Purchaser nor any of its subsidiaries, nor to
Purchaser's knowledge any of their respective officers, directors, employees or
agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions, or finder's fees, and no
broker or finder has acted directly or indirectly for the Purchaser or any
subsidiary of the Purchaser, in connection with this Agreement or the
transactions contemplated hereby.
(p) COMPLIANCE WITH LAWS. The Purchaser and its subsidiaries hold all
licenses, certificates, permits, franchises and rights from all appropriate
federal, state or other public authorities necessary for the conduct of its and
their business as it is presently conducted except where the absence thereof
would not, individually or in the aggregate, have a Material Adverse Effect on
the Purchaser or materially delay the Merger. Each of the Purchaser and its
subsidiaries has conducted its business so as to comply in all respects with all
applicable federal, state and local statutes, ordinances, regulations or rules,
except for possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Purchaser; and neither the
Purchaser nor any of its subsidiaries is presently charged with, or, to the
Purchaser's knowledge, under governmental investigation with respect to, any
actual or alleged material violations of any statute, ordinance, regulation or
rule, and
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neither the Purchaser nor its subsidiaries is the subject of any pending or, to
the Purchaser's knowledge, threatened material proceeding by any regulatory
authority having jurisdiction over its business, properties or operations.
Except as set forth in Disclosure Schedule 2.01(p), to the best of Purchaser's
knowledge, no federal state or local government agency, commission or entity has
initiated any formal proceeding or inquiry into the business operations of
Purchaser or its subsidiaries within the past five years.
(q) ENVIRONMENTAL MATTERS.
(i)
Except as disclosed in Schedule 2.02(q), to the best knowledge of the
Purchaser after due inquiry, there are no present conditions on the
Properties or to the best of Purchaser's knowledge properties with respect
to which Purchaser or its subsidiaries has a mortgage interest, involving or
resulting from a past or present storage, spill, discharge, leak, emission,
injection, escape, dumping or release of any kind whatsoever of any
Hazardous Materials or from any generation, transportation, treatment,
storage, disposal, use or handling of any Hazardous Materials, that may
reasonably be expected to result in a Material Adverse Effect on the
Purchaser's consolidated business, financial condition or prospects.
(ii)
The Purchaser and its subsidiaries are in substantial compliance with
all applicable Environmental Laws. Neither the Purchaser nor its
subsidiaries have received notice of, nor to the best of their knowledge are
there outstanding or pending, any public or private claims, lawsuits,
citations, penalties, unsatisfied abatement obligations or notices or orders
of non-compliance relating to the environmental condition of the Properties,
which have or may have a Material Adverse Effect on the Purchaser's
consolidated business, financial condition or prospects.
(iii)
No Properties are currently undergoing remediation or clean-up of
Hazardous Materials or other environmental conditions, the actual or
estimated cost of which may have a Material Adverse Effect on the
Purchaser's consolidated business, financial condition or prospects. (iv)To
the best knowledge of the Purchaser after due inquiry, the Purchaser and its
subsidiaries have all governmental permits, licenses, certificates of
inspection and other authorizations governing or protecting the environment
necessary to conduct the subsidiaries' present business.
(r) LOANS AND INVESTMENTS.
(i)
Except as set forth in Disclosure Schedule 2.02(r), each outstanding
loan of Purchaser or any of its subsidiaries as of the date hereof is
evidenced by appropriate and sufficient documentation and constitutes the
legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms except to the extent that the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting
the rights of creditors generally except where the failure to be so
documented or to constitute a legal, valid and binding obligation will not
have a Material Adverse Effect upon the business, operations or financial
condition of Purchaser or its subsidiaries. To the best knowledge of
Purchaser and its subsidiaries, no obligor named therein is seeking to avoid
the enforceability of the terms of any loan under any such laws or equitable
principles and no loan is subject to any defense, offset or counterclaim
except where the actions of such obligor will not have a Material Adverse
Effect upon the business, operations or financial condition of Purchaser or
its subsidiaries.
(ii)
To the best knowledge of Purchaser and its subsidiaries, all
guarantees of indebtedness owed to Purchaser or its subsidiaries,
including but not limited to those of state or federal agencies, are, valid
and enforceable, except to the extent enforceability thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws or equitable principles affecting the rights of creditors generally and
except as would not have a Material Adverse Effect on Purchaser and its
subsidiaries on a consolidated basis.
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(iii)
To the best knowledge of Purchaser and its subsidiaries, in
originating, underwriting, servicing, and discharging loans,
mortgages, land contracts, and other contractual obligations, either for
their own account or for the account of others, Purchaser and its
subsidiaries have complied with all applicable terms and conditions of such
obligations and with all applicable laws, regulations, rules, contractual
requirements, and procedures with respect to such servicing, except where
the failure to comply would not have a Materially Adverse Effect on
Purchaser and its subsidiaries on a consolidated basis.
(s) ALLOWANCE FOR LOAN LOSSES. In the Purchaser's reasonable judgment, the
allowance for loan losses reflected in the Purchaser's audited statement of
condition at December 31, 1995 was, and the allowance for loan losses shown on
the balance sheets in the Purchaser's Reports for periods ending after December
31, 1995 have been and will be, adequate in all material respects, as of the
dates thereof, under generally accepted accounting principles applicable to
state banks and federal savings banks as the case may be. The Purchaser has
disclosed to the Seller the amounts of all loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of the Purchaser and its subsidiaries that have been classified as of
December 31, 1995 as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk
Assets," "Concerned Loans" (in the latter two cases, to the extent available) or
words of similar import. The REO included in any non-performing assets of the
Purchaser or any of its subsidiaries is carried net of reserves at the lower of
cost or fair value.
(t) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as set forth in
Disclosure Schedule 2.02(t), to Purchaser's knowledge, no officer or director of
the Purchaser has any material interest in any material contract or property
(real or personal), tangible or intangible, used in or pertaining to the
business of the Purchaser or any of its subsidiaries that would be required to
be disclosed under the SEC's Regulation S-K.
(u) INSURANCE. The Purchaser and its subsidiaries are presently insured,
and since December 31, 1995 have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business located in the State of Illinois would,
in accordance with good business practice, customarily be insured. All material
claims thereunder have been filed in due and timely fashion. Neither Purchaser
nor its subsidiaries has any knowledge of any inaccuracy in any application for
such policies or binders, any failure to pay premiums when due or any similar
state of facts that might form the basis for termination of such insurance
except where such failure would not have a Material Adverse Effect on Purchaser
and its subsidiaries on a consolidated basis.
(v) REGISTRATION OBLIGATIONS. Neither the Purchaser nor any of its
subsidiaries is under any obligation, contingent or otherwise, to register any
of its securities under the Securities Act or the OTS Regulations.
(w) BOOKS AND RECORDS. The books and records of the Purchaser and its
subsidiaries have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect in all material respects the
substance of material events and transactions that should be included therein.
(x) CORPORATE DOCUMENTS. The Purchaser has delivered to the Seller true
and complete copies of the Purchaser's and each of its subsidiaries' certificate
of incorporation, charter and bylaws as amended to date and currently in full
force and effect.
(y) ABSENCE OF KNOWLEDGE. As of the date hereof, the Purchaser is not
aware of any reason why it would be unable to obtain all of the necessary
regulatory approvals required in order to consummate the transactions
contemplated by this Agreement. As of the date of this Agreement, the Purchaser
believes that, in light of its financial condition, it shall be able to obtain
all such approvals, without the imposition of any burdensome term or condition.
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(z) BENEFICIAL OWNERSHIP OF SELLER COMMON STOCK. As of the date hereof,
neither the Purchaser nor any subsidiary or affiliate thereof beneficially owns
any shares of Seller Common Stock or, other than contemplated by this Agreement,
have any option, warrant or right of any kind to acquire the beneficial
ownership of any shares of Seller Common Stock other than as set forth in
Disclosure Schedule 2.02(z).
(aa) SEC & REGULATORY FILINGS. None of the information regarding Purchaser
and its subsidiaries supplied or to be supplied by Purchaser for inclusion or
included in (i) the Registration Statement, (ii) the Proxy Statement, or (iii)
any other documents to be filed with the SEC or any Regulatory Agencies in
connection with the transactions contemplated hereby will, at the respective
times such documents are filed with the SEC or any Regulatory Agencies and, in
the case of the Registration Statement, when it becomes effective and, with
respect to the Proxy Statement, when mailed, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements therein not misleading or, in the case of the Proxy
Statements or any amendment thereof or supplement thereto, at the time of the
meeting of the stockholders referred to in Section 4.11, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for such meeting. All documents which Purchaser and
its subsidiaries are responsible for filing with the SEC and any Regulatory
Agencies in connection with the Merger will comply as to form in all material
respects with the provisions of applicable law.
(bb) TAX TREATMENT. To the best of the knowledge of Purchaser, neither
Purchaser nor any Subsidiary has engaged in any act that would preclude or
adversely affect the Merger from qualifying as a tax-free reorganization under
Section 368(a) of the Code.
(cc) AFFILIATE PURCHASES. Affiliates of the Purchaser or its subsidiaries
including, but not limited to, officers, employees, directors, and greater than
10% beneficial owners have not purchased any Purchaser Common Stock during the
ten (10) trading days on which one or more trades actually occurred immediately
prior to the execution of this Agreement.
(dd) INDEMNIFICATION. To the best knowledge of Purchaser, no action or
failure to take action by any director, officer, employee or agent of Purchaser
or its subsidiaries has occurred which would give rise to a Claim by any such
person for indemnification from Purchaser or its subsidiaries under the
corporate indemnification provisions of Purchaser or its subsidiaries in effect
on the date of this Agreement, which are reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect on the Purchaser or its
subsidiaries.
ARTICLE III
CONDUCT PENDING THE MERGER
SECTION 3.01 CONDUCT OF THE SELLER'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided in this Agreement and except to the extent
required by law or regulation, or by regulatory authorities, during the period
from the date of this Agreement to the Effective Time the Seller shall, and
shall cause its Subsidiaries to, (i) conduct its business in the usual, regular
and ordinary course consistent with past practice and prudent banking practice,
(ii) use its reasonable efforts to maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the appropriate services of its officers and key
employees, (iii) take any action that would cause the representations in Section
2.01 to fail to be true and accurate or that would materially affect the ability
of the Seller or any of its Subsidiaries to perform its covenants and agreements
under this Agreement or to consummate the transaction contemplated hereby, and
(iv) not knowingly take any action (other than action consistent with clause (i)
above or taken pursuant to clause (ii) above) which would materially adversely
affect or delay the ability of the Seller, or the Purchaser to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated hereby.
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SECTION 3.02 FORBEARANCE BY THE SELLER. Without limiting the covenants set
forth in Section 3.01 hereof, except as otherwise specifically provided in this
Agreement and except to the extent required by law or regulation or by
regulatory authorities, and except in each case as specifically permitted by
other subsections of this Section 3.02 or any Schedules attached hereto, from
and after the execution and delivery of this Agreement and until the Effective
Time, the Seller and its Subsidiaries will not, without the prior written
consent of the Purchaser which written consent will not be unreasonably
withheld:
(a) amend its or their Certificate of Incorporation, Charter, or Bylaws
or other corporate governance documents;
(b) except for the issuance of shares of Seller Common Stock upon
exercise of options under the Seller's Employee Plans or pursuant to
this Agreement, issue any shares of its or their capital stock, issue or
grant any stock options, warrants, rights, calls or commitments of any
character calling for or permitting the issuance of its or their capital
stock (or securities convertible into or exchangeable, with or without
additional consideration, for shares of such capital stock or amend any of
the terms of the outstanding stock options);
(c) increase or reduce the number of shares of its or their capital stock
by split-up, reverse split, reclassification, distribution of stock
dividends, change of par or stated value or otherwise modify, change or
amend the voting rights or preferences attributable to any such capital
stock;
(d) (i) except to the extent required by law, as required by business
necessity or as set forth in Disclosure Schedule 3.02(d), adopt,
amend or otherwise modify any of Seller's or its Subsidiaries Employee
Plans, any bonus, pension, profit sharing, retirement or other compensation
plan qualified or non-qualified; (ii) except as set forth in Disclosure
Schedule 3.02(d), enter into or amend any contract of employment with any
officer which is not terminable at will without cost or other liability;
(iii) except as set forth in Disclosure Schedule 3.02(d), make or grant any
general or individual wage or salary increase or increase in any manner the
compensation or fringe benefits of any of its employees, officers or
directors, other than general increases in compensation for employees in the
ordinary course of business consistent with past practices; or (iv) become a
party to or commit itself to fund or otherwise establish any trust or
account related to any Employee Plan with or for the benefit of any
employee, officer or director;
(e) sell, transfer or lease any of its or their assets or property (other
than the Seller's portfolio of securities, classified assets or REO
having a book value of less than $1,000,000) having a book value in excess
of $200,000 to any individual, corporation, or other entity other than a
direct or indirect wholly owned subsidiary of the Seller, except in the
ordinary course of business; make any acquisition of all or any substantial
portion of the business or assets of any other person, firm, association,
corporation or business organization in each case which are material,
individually or in the aggregate, to the Seller or any of its Subsidiaries,
other than in connection with the collection of any loan or credit
arrangement between Seller or any of its Subsidiaries and any other person;
permit the revocation or surrender by Seller or any of its Subsidiaries of
its certificate of authority to do business or its certificate of authority
to maintain, or file an application for the relocation of any existing
branch office, or file an application for a certificate of authority to
establish a new branch office;
(f) waive, release, transfer or grant any rights, or modify or change in
any material respect, any material leases, licenses or agreements,
other than in the ordinary course of business;
(g) subject any asset or property of Seller or any of its Subsidiaries to
a lien, mortgage, pledge, security interest or other encumbrance
(other than in connection with deposits, Federal Home Loan Bank ("FHLB")
advances, repurchase agreements, bankers acceptances, and accounts
established in the ordinary course of business, transactions in "federal
funds" and any
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lien, mortgage, pledge, security interest or other encumbrance incurred in
the ordinary course of business consistent with past practice which does not
have or could not reasonably be expected to have a Material Adverse Effect
on Seller or any of its Subsidiaries);
(h) enter into any leases, licenses or agreements pursuant to which
Seller or any of its Subsidiaries is obligated to pay an unaffiliated
party in excess of $25,000 per annum;
(i) declare, set aside, pay or make any dividend or other distribution or
payment (whether in cash, stock or property) with respect to or
purchase or redeem any shares of the Seller's Common Stock, except for the
payment of a quarterly cash dividends not to exceed after tax earnings for
the quarter prior to such dividend as the Board of Directors may declare
beginning six months after the date hereof;
(j) incur any indebtedness for borrowed money (or guarantee any
indebtedness for borrowed money), except for deposit liabilities and
except for indebtedness incurred in the ordinary course of business or
consistent with past practices including short term FHLB advances;
(k) cancel or compromise any debt or claim which has not previously been
charged off, other than in the ordinary course of business and in an
aggregate amount which would not have a Material Adverse Effect on the
Seller or any of its Subsidiaries;
(l) change its method of accounting as in effect as of December 31, 1995,
except as required by changes in GAAP or by Regulatory Agencies;
(m) settle any claim, action or proceeding involving any liability of the
Seller or Seller Bank for money, damages or other payment in excess
of $50,000 or which would place material restrictions upon the operations of
the Seller or the Seller Bank;
(n) fail to notify Purchaser promptly of its receipt of any letter,
notice or other communication, whether written or oral, from any
Regulatory Authority advising that it is contemplating issuing, requiring,
or requesting any agreement, memoranda of understanding, understanding or
similar undertaking, or order, directive, or extraordinary supervisory
letter;
(o) fail to remain in compliance with any capital requirement of any
Regulatory Authority to which it is subject;
(p) fail to maintain and keep its properties in as good repair and
condition as at present, except for ordinary wear and tear;
(q) except in the ordinary course of business and consistent with
applicable laws and regulations, make any loan or loan commitment to
any of its officers, directors or 5% or more stockholders (or any person or
entity controlled by or affiliated with such officer, director or 5% or more
stockholder);
(r) make, commit to make, acquire or commit to acquire, renew, or commit
to renew any loan or purchase or commit to purchase any securities
(other than overnight money market funds) for an amount in excess of $1
million; and
(s) agree or make any commitment to take any action to do any of the
foregoing.
SECTION 3.03 CONDUCT OF THE PURCHASER'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided for or contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, the
Purchaser and its subsidiaries shall carry on their respective business in the,
usual, regular, ordinary course consistent with past practice and prudent
banking practices. Without limiting the generality of the foregoing and except
as consented to in writing by Seller, the Purchaser or any of its subsidiaries
shall not, (i) take any action that would cause the representations in Section
2.02 to fail to be true and accurate or that would materially affect the ability
of the Purchaser or any of its subsidiaries to perform its covenants and
agreements under this Agreement or to consummate the transactions contemplated
hereby, (ii) take any action which would materially affect or delay the
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ability of the Seller or the Purchaser to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby, (iii) consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an entirety
to any person unless such person shall expressly assume the obligations of
Purchaser hereunder, (iv) declare or pay any dividend on, or make any other
distributions in respect of, the Purchaser Common Stock except for regular
dividends and dividends or distributions in Purchaser Common Stock, (iv) amend
its Certificate of Incorporation or Bylaws or other corporate governance
documents, or (v) authorize or enter into any agreement or commitment to do any
of the foregoing. Except as expressly provided in the preceding sentence,
nothing contained herein shall limit Purchaser nor any of its subsidiaries from
entering into agreements to acquire (i) the stock or assets of any other entity
except that the Purchaser shall not enter into an agreement which would
materially affect or delay the ability of Purchaser to obtain any necessary
regulatory approvals or consummate the transactions contemplated hereby or (ii)
outstanding shares of Purchaser Common Stock consistent with past practices, so
long as such purchases of Purchaser Common Stock are consummated prior to the
time period contemplated by Section 1.02(d).
ARTICLE IV
COVENANTS
SECTION 4.01 NO SOLICITATION. From and after the date hereof until the
termination of this Agreement, neither the Seller or Seller Bank, nor any of
their respective officers, directors, employees, representatives, agents or
affiliates (including, without limitation, any investment banker, attorney or
accountant retained by the Seller or any of its Subsidiaries) will, directly or
indirectly, initiate, solicit or knowingly encourage any inquiries or the making
of any proposal or offer (including, without limitation, any proposal or offer
to shareholders of the Seller) with respect to a merger, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of assets or any equity securities of, the Seller or any of its Subsidiaries
(any such proposal or other being herein referred to as an "Acquisition
Proposal"). The Seller shall notify Purchaser promptly of the relevant details
relating to all inquiries and proposals which it may receive relating to any of
such matters; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the Seller
(or such persons) may engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
related to an Acquisition Proposal, or otherwise facilitate any effort to
attempt to make or implement an Acquisition Proposal, if the Board of Directors
of the Seller, after consultation with its outside counsel, determines in the
exercise of its fiduciary responsibilities that such discussions or negotiations
should be commenced or such information should be furnished or such facilitation
undertaken. Subject to the foregoing, (i) the Seller will immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing or which
are otherwise in contemplation of an acquisition transaction and (ii) the Seller
will take the necessary steps to inform the appropriate individuals or entities
referred to in the first sentence hereof of the obligations undertaken in this
Section 4.01. The Seller will notify the Purchaser promptly if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with the Seller after the date hereof in respect of any such Acquisition
Proposal, together with details as to the identity of the persons making such
inquiry or proposal, requesting information or seeking such negotiations or
discussions and the terms and conditions thereof.
SECTION 4.02 EMPLOYEES, EMPLOYEE BENEFIT PLANS AND DIRECTORS.
(a)(i) All persons who are employees of the Seller or the Seller Bank
immediately prior to the Effective Time (the "Seller's Employees") shall,
at the Effective Time, become employees of Purchaser or any of its subsidiaries,
respectively; PROVIDED, HOWEVER, that in no event shall any of the Seller's
Employees be officers of the Purchaser, or have or exercise any power or duty
conferred upon such an officer, unless and until duly elected or appointed to
such position in accordance with the bylaws of the Purchaser. The Purchaser
agrees to use its best efforts to reasonably identify, within 30
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days after the Effective Date, the Seller's Employees who Purchaser intends to
offer employment; PROVIDED, HOWEVER, that subject to the provisions of Section
4.02(c) herein, the Purchaser shall not have any duty or obligation to continue
to employ any of Seller's or Seller Bank's Employees beyond the Effective Date.
All of Seller's Employees who remain following the Effective Date shall be
employed at the will of the Purchaser. No employee of Seller will become a
contractual employee of Purchaser unless such contract is in writing and
executed by the President or Chief Executive Officer of the Purchaser.
(ii)
With the exception of employees listed in Section 4.02(c)(iv) and (v),
employees of Seller or its Subsidiaries who are terminated for other than
cause within the meaning of 12 C.F.R. Section563.39(b)(1) within one year
following the Effective Time will be eligible for the following benefits: a
Seller Employee shall receive any benefits provided to similarly situated
employees of Pinnacle upon termination including four (4) weeks of salary plus
one (1) additional week for every year of credited service; provided however,
the maximum severance payment shall be no greater than sixteen weeks. For
purposes of the foregoing and purposes of calculating benefits available, Seller
Employees will receive credit for service with Seller or its subsidiaries to the
same extent and in the manner as if such employees had been employed by
Purchaser.
(iii)
Employees of Seller or its Subsidiaries shall be eligible to participate
in the pension and welfare plans maintained by Purchaser after the
Effective Time. For purpose of determining eligibility and vesting of
participants in such plans, employees of Seller and its Subsidiaries shall be
credited with years of service with Seller to the extent credited under the
respective predecessor plans. Service of employees of Seller and its
Subsidiaries will be recognized for vacation and disability benefits. Purchaser
shall provide generally to officers and employees of Seller and its Subsidiaries
who become employees of Purchaser employee benefits under employee benefit plans
on terms and conditions which when taken as a whole are substantially the same
as those provided by Purchaser or its subsidiaries to their similarly situated
officers and employees.
(b)(i) At the Effective Time, no Employee Plans shall have any unfunded
liabilities on any basis including a termination basis or any Pension
Benefit Guaranty Corporation ("PBGC") liability except as described on
Disclosure Schedule 2.01(n) or 4.02(b).
(ii)
Seller shall make a sufficient contribution to the Security Federal
Savings and Loan Association Retirement Plan ("Pension Plan") to fully
fund the Pension Plan on a termination basis as calculated at the Effective
Time.
(iii)
On or prior to the Effective Time, Pension Plan shall be terminated in
the manner of a standard termination under the rules of the PBGC. Seller
shall take all legal and administrative steps necessary to terminate the Pension
Plan and in the event the Pension Plan is not terminated as of the Effective
Time, Purchaser shall use their best efforts to obtain a standard termination.
As soon as practicable after receipt of a letter from the IRS as to the tax
qualified status of the Pension Plan upon its termination ("Final Determination
Letter") distributions of the assets of the Pension Plan shall be made to
Pension Plan participants and beneficiaries. From and after the Effective Date
of this Agreement, Purchaser shall use their best efforts to secure a Final
Determination Letter for the Pension Plan.
(c)(i) Purchaser will assume and honor in accordance with their terms all
existing written employment, severance, change in control, and other
compensation agreements, including the Supplemental Employee Stock Retirement
Plan ("SERP") and Supplemental Retirement Agreement ("SRA"), between the Seller
and any of its Subsidiaries and any officer, director or employee of the Seller
or any of its Subsidiaries listed on Disclosure Schedule 4.02(c) and all
provisions for vested benefits or other vested amounts earned or accrued through
the Effective Time under any other plan referred to in Section 2.01(n);
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(ii)
Purchaser acknowledges that for purposes of any agreement listed on
Schedule 4.02(c) conferring rights on an employee as a result of a
"change in control", the Merger shall constitute a change in control;
(iii)
In addition, Purchaser acknowledges that there will be full vesting at
the Effective Time for participants under the Security Federal Savings
and Loan Association 1992 Recognition and Retention Plans ("ARP"), the Financial
Security Corp. 1995 Long Term Incentive Plan, the Financial Security Corp. 1992
Incentive Stock Option Plan, the Financial Security Corp. 1992 Stock Option Plan
for Outside Directors (the "Option Plans"). With respect to the ARP and the Long
Term Incentive Plan, share awards will be exchanged for the Merger Consideration
set forth in Section 1.02;
(iv)
At the Effective Time, single cash payments will be made to Ivan F.
Kovac, Daniel K. Augustine, Patrick Hunt and Frank Swiderski by the
Seller in accordance with the change in control provisions of their employment
agreements, unless otherwise mutually agreed to by the Purchaser and the
individual officer. The method of calculating the cash payments owed under the
employment agreements is set forth on Disclosure Schedule 4.02(c), PROVIDED,
HOWEVER, that benefits which are dependent on 1996 performance will be
recalculated according to the identical formula immediately prior to the
Effective Time and disclosed on Schedule 4.02(c). Medical, dental and disability
benefits, etc., will be continued pursuant to the terms of the employment
agreements.
(v)
At the Effective Time, a cash payment will be made to Daniel R. Yamtich,
William C. Preissner and Edward L. Sylvestrak in accordance with such
agreement, unless otherwise mutually agreed to by the Purchaser and individual
officer. The method of calculating the cash payment owed under the change in
control agreements will be set forth on Disclosure Schedule 4.02(c) under the
same terms discussed above in Section 4.02(c)(v). Medical, dental and disability
benefits, etc. will be continued pursuant to the terms of change in control
agreements.
(vi)
Purchaser and Seller agree that single sum cash payments will be made at
the Effective Time by the Seller for benefits payable under the SRA.
(d)On or prior to the Effective Time, the Security Federal Savings and Loan
Association Employee Stock Ownership Plan ("ESOP") shall be terminated
and the ESOP loan shall be repaid. As soon as practicable after the receipt of a
letter from the IRS as to the tax qualified status of the ESOP upon its
termination under Sections 401(a) and 4975(e) of the Code (the "Final
Determination Letter") distributions of the benefits under the ESOP shall be
made to ESOP Participants and Beneficiaries. From and after the Effective Date
of this Agreement to the Effective Time, in anticipation of such termination and
distribution, Purchaser, Seller and their respective representatives, after the
Effective Time, shall use their best efforts to apply for an obtain a favorable
Final Determination Letter from the IRS.
(e)At least 60 days prior to the Effective Time Purchaser will provide to
Seller descriptions of all of its Qualified Plans and those non-qualified
plans available to non-executive employees of Purchaser which includes
information regarding eligibility, vesting and benefits. Materials generally
provided to newly hired Purchaser Employees will be acceptable.
SECTION 4.03 EMPLOYEE STOCK OPTIONS.
(a) CONSIDERATION FOR SELLER STOCK OPTION. Disclosure Schedule 4.03 sets
forth a list of each option outstanding on the date of this Agreement, whether
or not fully exercisable, under the Option Plans, (collectively, the "Seller
Stock Options") to purchase Seller Common Stock heretofore granted by the
Seller. Disclosure Schedule 4.03 also sets forth with respect to each Seller
Stock Option the option exercise price, the number of shares subject to the
option, the date of grant, vesting, exercisability and expiration of the option
and whether the option is an incentive stock option or a non-qualified stock
option. All rights under the Seller Stock Options shall be treated as provided
in Section 4.03(b).
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(b) CONVERSION OF SELLER STOCK OPTIONS INTO PURCHASER COMMON STOCK. Each
Seller Stock Option shall be converted at the Effective Time into such number of
shares of Purchaser Common Stock as are equal in value (determined by valuing
each share of Purchaser Common Stock at the Purchaser Average Share Price) to
(i) the product of the number of shares of Seller Common Stock subject to Seller
Stock Options, the Exchange Ratio and the Purchaser Average Stock Price less
(ii) the aggregate exercise price for the number of shares of Seller Common
Stock subject to Seller Stock Options. No fractional shares shall be issued and
the number of shares of Purchaser Common Stock to which the holder of Seller
Stock Options would be entitled pursuant to this Section 4.03(b) shall be as
determined pursuant to the provision of this Section 4.03(b) rounded to the
nearest whole share.
SECTION 4.04 ACCESS AND INFORMATION.
(a)From the date of this Agreement through the Effective Time, Seller and
its Subsidiaries shall afford to each of Purchaser and its authorized
agents and representatives, reasonable access to their respective properties,
assets, books and records and personnel, except for materials that are legally
privileged or which the Seller and its Subsidiaries are prohibited by law from
disclosing, during normal business hours and after reasonable notice; and
Purchaser shall be provided with such financial and operating data and other
information with respect to the businesses, properties, assets, books and
records and personnel of Seller and its Subsidiaries as it shall from time to
time reasonably request, except for materials that are legally privileged or
which the Seller and its Subsidiaries are prohibited by law from disclosing.
Purchaser agrees to conduct any such requests and discussions hereunder in a
manner so as not to interfere with normal operations and consumer and employee
relationships of Seller and its Subsidiaries. In the event the Purchaser learns
of any information or matters during such investigation that the Purchaser
believes may constitute or reveal a material breach of the Seller's or its
Subsidiaries representations, warranties, covenants or agreements contained
herein, the Purchaser shall provide the Seller with a written notice within 15
business days, specifying the information or matters learned and the basis upon
which they may constitute or reveal a material breach of the Seller's
representations, warranties, covenants or agreements and the Seller shall have
the right to cure such material breach within 30 calendar days from the date of
such notice or such longer period as extended by the parties in writing. No
breach of a representation, warranty, covenant or agreement that is learned
pursuant to Purchaser's investigation contemplated by this Section 4.04 shall
constitute a material breach of a representation, warranty, covenant or
agreement by Seller or its Subsidiaries under any provision of or for any
purpose under this Agreement and the information or matters underlying such
breach shall be deemed to have been fully disclosed in Seller's disclosure
pursuant to this Agreement, unless Purchaser provides Seller with a written
notice relating thereto delivered and the Seller has not cured such breach
within the time period provided in the immediately preceding sentence and
Purchaser exercises its right to terminate this Agreement on the basis thereof
in accordance with Section 6.01(e).
(b)Each party hereto shall treat as strictly confidential all information
received from the other party and shall not divulge to any other person,
natural or corporate (other than essential employees and agents of each party)
any financial statements, schedules, contracts, agreements, instruments, papers,
documents and other information relating to the other party which it may come to
know or which may come into its possession and, if the transactions contemplated
hereby are not consummated for any reason, shall promptly return to the other
party all material furnished by the other party.
(c)Each party hereto shall will not, and will cause its respective
representatives not to, use any information obtained from any other such
party as a result of this Agreement (including this Section 4.04) or in
connection with the transactions contemplated hereby (whether so obtained before
or after the execution hereof, including work papers and other materials derived
therefrom (collectively, the "Confidential Information")) for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, regulation and applicable
Regulatory Agencies, each party hereto will keep confidential, and will cause
its respective representatives to keep confidential, all Confidential
Information relating to or furnished by any other
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such party unless such information (i) was already or becomes known to the
general public, other than from a prohibited disclosure by a party to this
Agreement or its representatives, (ii) becomes available to such party or an
affiliate of such party from sources (other than another party to this Agreement
or its representatives) not bound by a confidentiality obligation or agreement,
(iii) is disclosed with the prior written approval of the party which furnished
such Confidential Information or (iv) is or becomes readily ascertainable from
published information. In the event that this Agreement is terminated or the
transactions contemplated by this Agreement shall otherwise fail to be
consummated, each party hereto and its respective representatives shall promptly
cause all Confidential Information in the possession of itself and its
representatives, including all copies or extracts thereof, to be returned to the
party which furnished the same.
SECTION 4.05 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. The Purchaser and
the Seller shall, (a) make as soon as practicable (or cause to be made) from the
date of the Agreement, (or cause to be made) any filings and applications
required to be filed in order to obtain all approvals, consents and waivers of
governmental authorities necessary or appropriate for the consummation of the
transactions contemplated hereby, (b) cooperate with one another (i) in promptly
determining what filings are required to be made or approvals, consents or
waivers are required to be obtained under any relevant federal, state or foreign
law or regulation and (ii) in promptly making any such filings, furnishing
information required in connection therewith and seeking timely to obtain any
such approvals, consents or waivers, (c) use reasonable efforts to obtain all
such approvals, consents or waivers, to respond to all inquiries and requests
for information from regulatory authorities, (d) apprise each other of the
content of all communications with regulatory authorities with respect to all
filings and applications, and (e) deliver to the other copies of all such
filings and applications (except for materials that are legally privileged or
which it is prohibited by law from disclosing) promptly after they are filed.
SECTION 4.06 ANTITAKEOVER PROVISIONS. Subject to the continued accuracy of
the Purchaser's representation in Section 2.02(p) and to the exercise of the
fiduciary duties of the Seller's Board of Directors as contemplated by Section
4.01, the Seller and its Subsidiaries shall use reasonable best efforts (i) to
continue to exempt the Purchaser, the Agreement and the Merger from any
provisions of an antitakeover nature in the Seller's or its Subsidiaries'
charters and bylaws and the provisions of any federal or state antitakeover
laws, and (ii) upon the reasonable request of the Purchaser, to assist in any
challenge by the Purchaser to the applicability to the Agreement or the Merger
of any state antitakeover law.
SECTION 4.07 ADDITIONAL AGREEMENTS. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all reasonable efforts
to take promptly, or cause to be taken promptly, all actions and to do promptly,
or cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as practicable,
including using reasonable efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
governmental entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
SECTION 4.08 PUBLICITY. The initial press release announcing this
Agreement shall be a joint press release and thereafter the Seller and the
Purchaser shall consult with each other in issuing any press releases or similar
public disclosure with respect to the other or the transactions contemplated
hereby and in making any filings with any governmental entity or with any
national securities exchange with respect thereto; PROVIDED, HOWEVER, that
nothing contained in this Section 4.08 shall prohibit any party from responding
to questions from the business press or, following notification to the other
parties to this Agreement, from making any disclosure which, after consultation
with its counsel, it deems necessary to comply with the requirements of
applicable law or regulation.
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SECTION 4.09 NOTIFICATION OF CERTAIN MATTERS. The Purchaser, on the one
hand, and the Seller and the Seller Bank, on the other hand, shall give prompt
notice to the other of (a) the occurrence or its knowledge of any event or
condition that would cause any of its representations or warranties set forth in
this Agreement not to be true and correct in all material respects as of the
date of this Agreement or as of the Effective Time (except as to any
representation or warranty which specifically relates to an earlier date), or
any of its obligations set forth in this Agreement required to be performed at
or prior to the Effective Time not to be performed in all material respects at
or prior to the Effective Time (any such notice, a "Supplemental Disclosure
Schedule"), including without limitation, any event, condition, change or
occurrence which individually or in the aggregate has, or which, so far as
reasonably can be foreseen at the time of its occurrence, is reasonably likely
to result in a Material Adverse Effect on it; and (b) any action of a third
party of which it receives notice that might reasonably be expected to prevent
or materially delay the consummation of the transactions contemplated hereby,
including, without limitation, any notice or other communication from any third
party alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement. Any
Supplemental Disclosure Schedule given by one party to the other party shall be
deemed to amend the Disclosure Schedule and, unless the party receiving such
amended Disclosure Schedule, by written notice to the other party given within
fifteen (15) business days of its receipt of such Supplemental Disclosure
Schedule, exercises any right of termination it may then have under Section
6.01(b), and subject to the cure period set forth in 6.01(b), that party shall
thereafter be deemed to have permanently and irrevocably waived (on behalf of
itself and its subsidiaries) (i) any right of termination (or any other rights
or remedies) arising out of or with respect to the events or conditions
described in such Supplemental Disclosure Schedule; and (ii) any contribution of
such events or conditions towards the occurrence of a Material Adverse Effect.
SECTION 4.10 INDEMNIFICATION.
(a)From and after the Effective Time through the sixth anniversary of the
Effective Date, the Purchaser agrees to indemnify and hold harmless each
present and former director and officer of the Seller or its Subsidiaries (each,
an "Indemnified Party"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, the "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, and whether or not the Indemnified Party is a party thereto,
arising out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent then
permitted under Delaware law or, if greater, that the Seller would have been
permitted under its certificate of incorporation, charter or bylaws in effect on
the date hereof, and to advance any such costs to each Indemnified Party as they
are from time to time incurred (subject to receipt of an undertaking to repay
such advances if it is ultimately judicially determined that such Indemnified
Party is not entitled to indemnification); provided that if a court of competent
jurisdiction finds that the Indemnified Party is not permitted indemnification,
then the Purchaser will not be liable for the expenses of such Indemnified
Party.
(b)Any Indemnified Party wishing to claim indemnification under Section
4.10(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Purchaser thereof, but the failure to
so notify shall not relieve the Purchaser of any liability it may have hereunder
to such Indemnified Party if such failure does not materially and substantially
prejudice the indemnifying party. In the event of any such claim, action, suit,
proceeding or investigation, (i) the Purchaser shall have the right to assume
the defense thereof with counsel reasonably acceptable to the Indemnified Party
and the Purchaser shall not be liable to such Indemnified Party for any legal
expenses of other counsel subsequently incurred by such Indemnified Party in
connection with the defense thereof, except that if the Purchaser elects to
assume such defense within a reasonable time or counsel for the Indemnified
Party at any time advises that there are issues which raise conflicts of
interest between the Purchaser and the Indemnified Party, the Indemnified Party
may retain counsel satisfactory to such Indemnified Party, and the Purchaser
shall remain responsible for the reasonable
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fees and expenses of such counsel as set forth above, promptly as statements
therefor are received; PROVIDED, HOWEVER, that the Purchaser shall be obligated
pursuant to this paragraph (b) to pay for only one firm of counsel for all
Indemnified Parties in any one jurisdiction with respect to any given claim,
action, suit, proceeding or investigation unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest; (ii)
the Indemnified Party will reasonably cooperate in the defense of any such
matter and (iii) the Purchaser shall not be liable for any settlement effected
by an Indemnified Party without its prior written consent, which consent may not
be withheld unless such settlement is unreasonable in light of such claims,
actions, suits, proceedings or investigations against, and defenses available
to, such Indemnified Party.
(c)Prior to the Closing the Seller shall obtain directors' and officers'
liability insurance, providing substantially the same coverage as the
existing directors' and officers' liability insurance of the Seller for all
persons who are directors and officers of the Seller and Seller Bank on the Date
hereof for a period to continue for six years following the Effective Date
provided, the aggregate cost of such insurance shall not exceed $50,000.
SECTION 4.11 SHAREHOLDERS' MEETINGS.
(a)The Seller shall take all action necessary, in accordance with applicable
law and its certificate of incorporation and bylaws, to convene a meeting
of the holders of Seller Common Stock (the "Shareholder Meeting") as promptly as
practicable for the purpose of considering and voting on the approval and
adoption of this Agreement. The Seller's Board of Directors, subject to its
fiduciary duties, (i) shall recommend at the Shareholder Meeting that the
holders of the Seller Common Stock vote in favor of and approve and adopt this
Agreement and (ii) shall use its reasonable best efforts to solicit such
approval.
(b)The Purchaser shall take all action necessary, in accordance with
applicable law and its certificate of incorporation and bylaws, to
convene a meeting of holders of Purchaser Common Stock ("Purchaser Shareholder
Meeting") as promptly as practicable for the purposes of considering and voting
on the approval and adoption of this Agreement. The Purchaser's Board of
Directors, subject to their fiduciary duties, (i) shall recommend at the
Purchaser's Shareholders Meeting that the holders of Purchaser Common Stock vote
in favor of and approve the above stated matters and (ii) shall use its
reasonable best efforts to solicit such approval.
SECTION 4.12 REGISTRATION STATEMENT. As soon as practicable after the date
hereof, the Purchaser shall prepare and file with the SEC a Registration
Statement on Form S-4 covering the Purchaser Common Stock to be issued to the
holders of Seller Common Stock in the Merger, which Registration Statement shall
include the Proxy Statement for use in soliciting proxies for the shareholders'
meeting to be held by the Purchaser and Seller for the purpose of considering
the Merger, and Purchaser and Seller shall use their best efforts to cause the
Registration Statement to become effective under the Securities Act. Purchaser
will take any action required to be taken under the applicable blue sky or
securities laws in connection with the issuance of the shares of Purchaser
Common Stock in the Merger. Seller shall promptly furnish all information
concerning it and the holders of its capital stock as Purchaser may reasonably
request in connection with such action, and Purchaser shall provide the Seller
with reasonable opportunity to review and comment upon the content of the
Registration Statement. The Purchaser represents and covenants that the
Registration Statement and any amendment or supplement thereto, at the date of
mailing to shareholders of the Purchaser and the Seller and the dates of the
Shareholder Meeting and the Purchaser Shareholder Meeting, will be in material
compliance with all relevant rules and regulations of the SEC and, with respect
to the Purchaser and the transactions contemplated herein, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
SECTION 4.13 AFFILIATE LETTERS. Seller shall disclose in the Disclosure
Schedule 4.13 each person whom it reasonably believes is an "affiliate" of the
Seller for purposes of Rule 145 under the Securities
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Act. Seller shall use its reasonable efforts to cause each person to deliver to
Purchaser not later than thirty (30) calendar days prior to the Effective Time,
a written agreement, substantially in the form of EXHIBIT A to this Agreement,
providing that such person will not sell, pledge, transfer, or otherwise dispose
of the shares of Purchaser Common Stock to be received by such person upon
consummation of the Merger except in compliance with applicable provisions of
the Securities Act and the rules and regulations thereunder.
SECTION 4.14 TAX OPINION. The Purchaser and Seller agree to use their
reasonable efforts to obtain a written opinion of Muldoon, Murphy & Faucette or
such other counsel reasonably acceptable to both parties, addressed to the
Purchaser and Seller, dated the Closing Date, subject to the customary
representations and assumptions referred to therein, and substantially to the
effect that (a) the Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code; (b) the exchange in the Merger of
Purchaser Common Stock will not give rise to gain or loss to the stockholders of
the Seller with respect to the exchange (except to the extent of any cash
received), and (iii) each of Purchaser and Seller will be a party to that
reorganization within the meaning of Section 368(a) of the Code. In rendering
the tax opinion, counsel shall be entitled to rely upon representations of
officers of Purchaser and Seller. Each of the parties undertakes and agrees to
use its best efforts to cause the Merger, and to take no action which would
cause the Merger not to qualify for treatment as a "reorganization" within the
meaning of Section 368(a) of the Code.
SECTION 4.15 TAX-FREE REORGANIZATION TREATMENT. Prior to Effective Time,
neither the Purchaser nor the Seller shall intentionally take, fail to take or
cause to be taken or not take any action which would disqualify the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code.
SECTION 4.16 LISTING. Purchaser shall cause Purchaser Common Stock to
become qualified for quotation on the Nasdaq National Market and file with the
Nasdaq Stock Market a notification for the listing on the Nasdaq Stock Market
relating to the proposed issuance of the shares of Purchaser Common Stock to be
issued to the holders of Seller Common Stock pursuant to the Merger.
SECTION 4.17 AFFILIATE PURCHASES. Affiliates of the Purchaser or its
subsidiaries including officers, employees, directors or greater than 10%
beneficial owners agree not to purchase any Purchaser Common Stock during the
thirty (30) business days prior to the Closing Date of the Merger.
ARTICLE V
CONDITIONS TO CONSUMMATION
SECTION 5.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions, none
of which may be waived:
(a) this Agreement shall have been approved by the requisite vote of the
holders of Seller Common Stock and Purchaser Common Stock at the
Shareholder Meeting and the Purchaser Shareholder Meeting, respectively in
accordance with applicable law;
(b) all necessary regulatory or governmental approvals, consents or
waivers 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;
(c) no party hereto shall be subject to any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger;
(d) the Registration Statement shall have been declared effective under
the Securities Act and no stop orders shall be in effect and no
proceedings for such purpose shall be pending or threatened by the SEC;
(e) Purchaser shall have received all state securities laws and "blue
sky" permits and other authorizations necessary to consummate the
transactions contemplated hereby;
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(f) the shares of Purchaser Common Stock and the shares issuable pursuant
to the Merger shall have been approved for listing on the Nasdaq
National Market; and
(g) each party shall have received the opinion of Muldoon, Murphy &
Faucette, dated the date of the Closing, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
SECTION 5.02 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER UNDER THIS
AGREEMENT. The obligations of the Purchaser to effect the Merger shall be
further subject to the satisfaction at or prior to the Effective Time of the
following conditions, any one or more of which may be waived by the Purchaser:
(a) each of the obligations, covenants and agreements of the Seller
required to be performed by it at or prior to the Effective Time
pursuant to the terms of this Agreement shall have been duly performed and
complied with in all respects, except as to the failure to perform an
obligation, covenant or agreement that would not, individually or in the
aggregate, result in a Material Adverse Effect on Seller or Seller Bank,
individually, and the Purchaser shall have received a certificate to the
foregoing effect dated the Effective Date and signed by the President and
Chief Financial Officer of the Seller;
(b) the representations and warranties of the Seller contained in this
Agreement (subject to Section 4.09) shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective
Time (as though made at and as of the Effective Time except as to any
representation or warranty which specifically relates to an earlier date)
and the Purchaser shall have received a certificate to the foregoing effect
dated the Closing Date signed by the President and the Chief Financial
Officer of the Seller;
(c) the Purchaser shall have received certified copies of the resolutions
or documents of like import evidencing the authorization of this
Agreement and the consummation of the transactions contemplated hereby by
the Seller's Board of Directors and the Seller's shareholders;
(d) the Purchaser shall have received a certificate of corporate
existence for the Seller (such certificate to be dated as of a day as
close as practicable to the date of the Closing);
(e) subject to the Purchaser's compliance with Sections 4.05 and 4.06,
none of the approvals or consents referred to in Section 5.01(b)
hereof shall contain any non-standard condition (whether such condition is
non-standard shall be determined based on the practices and procedures of
the applicable regulatory or governmental body as of the date of this
Agreement) which would, or would be reasonably likely to, have a Material
Adverse Effect on the Purchaser and its subsidiaries taken as a whole giving
effect to the completion of the transactions contemplated hereby;
(f) the Purchaser shall have received an opinion or opinions, dated the
date of the Closing, from Muldoon, Murphy & Faucette, special counsel
to the Seller, to the effect that:
(i)
Seller is a corporation duly authorized, validly existing and in
good standing under the laws of the State of Delaware and Seller
Bank is a Federally chartered stock savings and loan association duly
organized under the laws of the United States;
(ii)
the Seller has the power and authority to carry on its business
as described in the Proxy Statement and to consummate the
transactions contemplated by the Agreement and the Subsidiaries have the
corporate power and authority to carry on their business as described in
the Proxy Statement;
(iii)
the Agreement has been duly authorized and approved by the Seller
and the Agreement and the transactions contemplated thereby have
been approved by the requisite vote of the Seller's shareholders and duly
authorized, executed and delivered by the Seller and the Agreement
constitutes the valid and binding obligation of the Seller subject to
applicable laws affecting creditors' right generally and equitable
defenses;
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(iv)
to the best knowledge of such counsel, all acts, other
proceedings required to be taken by or on the part of the Seller,
including the adoption of the Agreement by the shareholders of the
Seller, and the necessary approvals, consents, authorizations or
notifications required to be taken to consummate the transactions
contemplated by the Agreement, have been properly taken or obtained;
neither the execution and delivery of the Agreement nor the consummation
of the transactions contemplated hereby and thereby, with or without the
giving of notice or the lapse of time, or both, will (i) violate any
provision of the Certificate, Charter or Bylaws of the Seller or the
Subsidiaries; or (ii) to the best knowledge of such counsel, violate,
conflict with, result in the material breach or termination of,
constitute a material default under, accelerate the performance required
by, or result in the creation of any material lien, charge or encumbrance
upon any of the properties or assets of the Seller or the Subsidiaries
pursuant to any indenture, mortgage, deed of trust, or other agreement or
instrument to which the Seller or the Subsidiaries are a party or by
which they or any of their properties or assets may be bound, or violate
any statute, rule or regulation applicable to the Seller or the
Subsidiaries, which would have a Material Adverse Effect on the financial
condition, assets, liabilities, or business of the Seller or the
Subsidiaries; to the best knowledge of such counsel, no consent,
approval, authorization, order, registration or qualification of or with
any court, regulatory authority or other governmental body, other than as
specifically contemplated by this Agreement is required for the
consummation by the Seller or the Subsidiaries of the transactions
contemplated by the Agreement;
(v)
to the best knowledge of such counsel, there are no actions,
suits, proceedings or investigations of any nature pending or
threatened that challenge the validity or legality of the transactions
contemplated by the Agreement or which seek or threaten to restrain,
enjoin or prohibit (or obtain substantial damages in connection with) the
consummation of such transactions;
(vi)
to the best knowledge of such counsel, there is no litigation,
appraisal or other proceeding or governmental investigation
pending or threatened against or relating to the business or property of
the Seller or the Subsidiaries which would have a Materially Adverse
Effect on the consolidated financial condition of the Seller or the
Subsidiaries;
(vii)
the Proxy Statement, and any supplement or amendment thereto, on
the date of the mailing thereof and on the date of the special
meeting of stockholders of Seller, complied as to form in all material
respects with the applicable provisions of law with respect to
information provided for inclusion therein by Seller; and
(g) the Purchaser shall have received a letter, dated the date of the
Closing, from Muldoon, Murphy & Faucette, special counsel to the
Seller, to the effect that no facts have come to the attention of such
counsel, with respect to information provided by Seller for inclusion in the
Proxy Statement, which would lead such counsel to believe that the Proxy
Statement, and any supplement or amendment thereto, on the date of the
mailing thereof and on the date of the meeting of stockholders of Seller,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion with respect to the fairness opinion, financial statements and notes
thereto and other financial, statistical and accounting information included
in the Proxy Statement); PROVIDED, HOWEVER, that such counsel may state that
they have not independently verified the accuracy, completeness or fairness
of the statements contained in the Proxy Statement, and the limitations
inherent in their participation in the preparation of the Proxy Statement
and that the knowledge available to them is such that they are unable to
assume, and do not assume, responsibility for the accuracy, completeness or
fairness of the statements contained in the Proxy Statement.
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<PAGE>
(h) the Seller shall have furnished the Purchaser with such certificates
of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Section 5.02 as the
Purchaser may reasonably request.
SECTION 5.03 CONDITIONS TO THE OBLIGATIONS OF THE SELLER UNDER THIS
AGREEMENT. The obligations of the Seller to effect the Merger shall be further
subject to the satisfaction at or prior to the Effective Time of the following
conditions, any one or more of which may be waived by the Seller:
(a) each of the obligations of the Purchaser, respectively, required to
be performed by it at or prior to the Effective Date pursuant to the
terms of this Agreement shall have been duly performed and complied with in
all material respects, and the Seller shall have received a certificate to
the foregoing effect dated the Closing Date and signed by the President and
Chief Financial Officer of the Purchaser;
(b) the representations and warranties of the Purchaser and its
subsidiaries contained in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the
Effective Time (as though made at and as of the Effective Time except as to
any representation or warranty which specifically relates to an earlier
date) and the Seller shall have received a certificate to the foregoing
effect dated the Closing Date signed by the President and the Chief
Financial Officer of the Purchaser.
(c) the Seller shall have received an opinion at the time of execution of
this Agreement and a written opinion dated not more than five (5)
days prior to the date of the Proxy Statement from Hovde Financial, Inc. or
another financial advisor selected by Seller, to the effect that in the
opinion of such firm, the consideration to be received in the Merger by the
stockholders of Seller is fair to the stockholders of Seller from a
financial point of view and such opinion shall not have been withdrawn or
materially modified prior to the vote of the stockholders.
(d) the Seller shall have received an opinion, dated as of the Effective
Date, from Burke, Warren & MacKay, P.C. counsel for the Purchaser to
the effect that:
(i)
Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of the State of Illinois.
(ii)
all of the issued and outstanding shares of Purchaser Common
Stock are duly authorized, validly issued, fully paid and
nonassessable;
(iii)
Purchaser has the power and authority to carry on its business as
described in the Proxy Statement and to consummate the
transactions contemplated by this Agreement and the subsidiaries have the
corporate power and authority to carry on their business as described in
the Proxy Statement;
(iv)
the Agreement has been duly authorized and approved by Purchaser
and the Agreement and transactions contemplated thereby have been
approved by the requisite vote of the Purchaser's shareholders and duly
authorized, executed and delivered by Purchaser and the Agreement
constitutes the valid and binding obligation of Purchaser subject to
applicable laws affecting creditors' rights generally and equitable
defenses;
(v)
all corporate acts and other proceedings required to be taken by
or on the part of Purchaser including the adoption of the
Agreement by shareholders of Purchaser and the necessary approvals,
consents authorizations or notifications required to be taken to
consummate the transactions contemplated by the Agreement have been
properly taken or obtained; neither the execution and delivery of the
Agreement, nor the consummation of the transactions contemplated hereby
and thereby, with and without the giving of notice or the lapse of time,
or both, will (i) violate any provision of the Articles of Incorporation
or Bylaws of Purchaser or its subsidiaries or (ii) to the actual
knowledge of such counsel without inquiry or investigation, violate,
conflict with, result in the material breach or termination of,
constitute a material default under, accelerate the performance required
by, or result in the
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<PAGE>
creation of any material lien, charge or encumbrance upon any of the
properties or assets of the Purchaser or the subsidiaries pursuant to any
indenture, mortgage, deed of trust, or other agreement or instrument to
which the Purchaser or the subsidiaries are a party or by which it or any
of their properties or assets may be bound, or violate any statute, rule
or regulation applicable to the Purchaser or the subsidiaries, which
would have a Material Adverse Effect on the financial condition, assets,
liabilities, or business of the Purchaser or the subsidiaries; to the
actual knowledge of such counsel without inquiry or investigation, no
consent, approval, authorization, order, registration or qualification of
or with any court, regulatory authority or other governmental body, other
than as specifically contemplated by this Agreement is required for the
consummation by the Purchaser or the subsidiaries of the transactions
contemplated by this Agreement and Plan of Merger;
(vi)
to the actual knowledge of such counsel without inquiry or
investigation there are no actions, suits, proceedings or
investigations (public or private) of any nature pending or threatened
that challenge the validity or legality of the transactions contemplated
by the Agreement or which seek or threaten to restrain, enjoin or
prohibit (or to obtain substantial damages in connection with) the
consummation of such transactions;
(vii)
all regulatory and governmental approvals and consents which are
necessary to be obtained by Purchaser and its subsidiaries to
permit the execution, delivery and performance of the Agreement have been
obtained;
(viii)
the Registration Statement, in so far as it contains information
relating to the Purchaser and any of its subsidiaries, complies
in all material respects as to form with the requirements of the
Securities Act as in effect on the date of effectiveness of the
Registration Statement. The Prospectus included therein, including any
supplements or amendments thereto, at the time of the mailing thereof or
at the time of the stockholders' meeting of the Purchaser, complied as to
form in all material respects with the applicable provisions of law with
respect to information provided for inclusion therein by Purchaser;
(ix)
the shares of the $4.69 par value common stock of Purchaser to be
issued to the stockholders of Seller as contemplated by the
Agreement have been duly and validly authorized for issuance, have been
registered under the Securities Act of 1933, as amended, and when the
certificates therefor are duly countersigned by Purchaser (or Purchaser's
transfer agent) and delivered to the stockholders of Seller pursuant to
the Agreement following consummation of the Merger will be duly and
validly issued, fully paid and nonassessable, and no holder of any
presently outstanding shares of Purchaser Common Stock has any preemptive
or similar rights to subscribe for or purchase any such shares.
(e) the Purchaser shall have received a letter, dated the date of
Closing, from Burke, Warren & MacKay, P.C. counsel to Purchaser, to
the effect that no facts have come to the attention of such counsel that the
information provided by the Purchaser for inclusion in the Proxy Statement,
and the information in the Registration Statement, and any supplements or
amendments thereto, on the date of the mailing of the Proxy Statement, and
on the date of the meeting of stockholders of Seller, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to made the statements contained therein,
in light of the circumstances under which they were made, not misleading
PROVIDED, HOWEVER, that such counsel may state that they have not
independently verified the accuracy, completeness or fairness of the
statements contained in the Proxy Statement and the Registration Statement,
and the limitations inherent in their participation in the preparation of
the Proxy Statement and the Registration Statement and that the knowledge
available to them is such that they are unable to assume, and do not assume,
responsibility for the accuracy, completeness or fairness of the statements
contained in the Proxy Statement and the Registration Statement.
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<PAGE>
(f) the Purchaser shall have furnished to the Seller with such
certificates of its officers and others and such other documents to
evidence fulfillment of the conditions set forth in this Section 5.03 as the
Seller may reasonably request.
ARTICLE VI
TERMINATION
SECTION 6.01 TERMINATION. Notwithstanding any other provision of this
Agreement, this Agreement may be terminated, and the Merger abandoned, prior to
the Effective Time, either before or after its approval by the shareholders of
the Seller:
(a) by the mutual consent of the Purchaser and the Seller 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 the Purchaser or the Seller (provided that the party seeking
termination is not then in material breach of any representation,
warranty, covenant or other agreement contained herein), in the event of a
failure to perform or comply by the other party with any covenant or
agreement of such other party contained in this Agreement, which failure or
non-compliance is material in the context of the transactions contemplated
by this Agreement, or (ii) subject to Section 4.09, any inaccuracies,
omissions or breach in the representations, warranties, covenants or
agreements of the other party contained in this Agreement the circumstances
as to which either individually or in the aggregate have, or reasonably
could be expected to have, a Material Adverse Effect on such other party; in
either case which has not been or cannot be cured within 30 calendar days
after written notice thereof is given by the party seeking to terminate to
such other party.
(c) by the Purchaser or the Seller by written notice to the other party
if either (i) any approval, consent or waiver of a governmental
authority required to permit consummation of the transactions contemplated
hereby shall have been denied or (ii) any governmental authority of
competent jurisdiction shall have issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the transactions
contemplated by this Agreement, or (iii) the holders of Seller Common Stock
or the Purchaser Common Stock shall fail to approve and adopt this
Agreement, PROVIDED, HOWEVER, that no party shall have the right to
terminate this Agreement pursuant to this Section 6.01(c) if such denial or
request or recommendation for withdrawal 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 the Purchaser or the Seller, in the event that the Merger is not
consummated by March 31, 1997, unless the failure of such occurrence
is due to the failure to perform or comply with any covenant or agreement
contained in this Agreement by the party seeking to terminate;
(e) subject to Section 4.09, by the Purchaser by written notice to the
Seller in the event that there has occurred since the date of this
Agreement an event, condition, change or occurrence which, individually or
in the aggregate, has had or could reasonably be expected to result in a
Material Adverse Effect on the Seller or the Seller Bank; PROVIDED that the
Purchaser shall have given the Seller thirty (30) calendar days prior
written notice of such termination, and the Seller shall not have remedied
such event, condition, change or occurrence by the end of such thirty-day
period and PROVIDED, further that any exclusions from Material Adverse
Effect under Section 2.01(h) shall not be deemed an event that would permit
Purchaser to terminate this Agreement;
(f) by Purchaser in accordance with Section 1.02(c)(i) upon notice to
Seller;
(g) by Seller in accordance with Section 1.02(c)(ii) upon notice to
Purchaser; or
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(h) by the Purchaser by written notice to the Seller five (5) days prior
to the Closing Date in the event that there has been a reduction of
the value as of that date of the Bennett Portfolio, as described in
Disclosure Schedule 6.01(h), in excess of a threshold amount equal to
$375,000 before any tax savings (the "Threshold Amount") ("Bennett Material
Adverse Change"); PROVIDED, HOWEVER, that Purchaser shall not have an option
to terminate pursuant to this paragraph (h) if no later than two (2) days
prior to the Closing Date, the Seller agrees to reduce the Merger
Consideration by the amount of the Bennett Material Adverse Change in excess
of the Threshold Amount, reduced by tax savings of 34%, divided by the
number of outstanding shares of Seller Common Stock.
SECTION 6.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Purchaser or the Seller as provided in Section 6.01,
this Agreement shall forthwith become void and have no effect and there shall be
no liability on the part of any party hereto or to their respective officers or
directors except that (i) Sections 4.04(b), 4.04(c), 8.06 and 8.07, shall
survive any termination of this Agreement, and (ii) notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
SECTION 6.03 THIRD PARTY TERMINATION. In recognition of the efforts and
expenses of, and other opportunities foregone by, the Purchaser while
structuring the Merger, the parties agree that the Seller shall pay to the
Purchaser a termination fee of $600,000 in cash (the "Termination Fee") on
demand if, during a period of eighteen (18) months after the date hereof, the
Merger has not been completed and any of the foregoing occurs:
(a) Any person other than the Purchaser or an affiliate of the Purchaser
acquires beneficial ownership of 50% or more of the then outstanding
Seller Common Stock;
(b) The Seller, without having received the Purchaser's prior written
consent, enters into an agreement to engage in an Acquisition
Transaction (as defined below) 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 Exchange Act and the rules and regulations
thereunder) other than the Purchaser or any of its subsidiaries or the
Seller's Board of Directors recommends that the shareholders of the Seller
approve or accept any Acquisition Transaction with any person other than the
Purchaser or any of its subsidiaries. For purposes of this Agreement,
"Acquisition Transaction" shall mean (x) a merger or consolidation, or any
similar transaction, involving the Seller, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of the Seller or (z) a
purchase or other acquisition (including by way of merger, consolidation,
share exchange or otherwise) of securities representing 50% or more of the
voting power of the Seller; provided that the term "Acquisition Transaction"
does not include any internal merger or consolidation involving only the
Seller and/or its Subsidiaries; or
(c) If a BONA FIDE proposal is made by a third party to the Seller or its
shareholders to engage in an Acquisition Transaction and after such
proposal is made any of the following events occurs: the Seller breaches any
covenant or obligation contained in the Agreement which would materially
impair Seller's ability to consummate the Merger and such breach entitles
the Purchaser to terminate this Agreement; the Shareholder Meeting is not
held or is canceled prior to termination of this Agreement for reasons other
than the fault of the Purchaser; or the Seller's Board of Directors
withdraws or modifies in a manner adverse to the Purchaser the
recommendation of the Seller's Board of Directors with respect to this
Agreement.
Notwithstanding the foregoing, the Seller shall not be obligated to pay to
the Purchaser the Termination Fee if the Seller validly terminates this
Agreement pursuant to Section 6.01(b) or, prior to the Termination Fee becoming
payable, the Seller terminates this Agreement pursuant to Section 6.01(c), (d)
or (f).
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SECTION 6.04 SPECIFIC ENFORCEABILITY. The parties recognize and hereby
acknowledge that it is impossible to measure in money the damages that would
result to a party by reason of the failure of the other party to perform any of
the obligations imposed on it by this Agreement and that in any event damages
would be an inadequate remedy in this instance. Accordingly, if a party should
institute an action or proceeding seeking specific enforcement of the provisions
hereof, the other party hereby waives the claim or defense that the party making
the claim has an adequate remedy at law and hereby agrees not to assert in any
such action or proceeding the claim or defense that such a remedy at law exists
and shall waive or not assert any requirement to post bond in connection with
seeking specific performance.
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.01 EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the provisions
of Article V and VI, the closing of the transactions contemplated hereby shall
take place at the offices of the Purchaser on such date (the "Closing Date") or
such other place as mutually agreed to by the Purchaser and Seller and at such
time as the Purchaser and the Seller mutually agree to within thirty (30)
business days after the expiration of all applicable waiting periods in
connection with approvals of governmental authorities and all conditions to the
consummation of this Agreement are satisfied or waived, or on such other date as
may be agreed by the parties. Subject to the provisions of this Agreement, on
the Closing Date, the Certificate of Merger shall be signed, verified and
affirmed as required by Illinois Law or any other applicable laws and duly filed
with the Secretary of State of the State of Illinois or as required by any other
applicable laws. The date of such filing is herein called the "Effective Date."
The "Effective Time" of the Merger shall be the time on the Effective Date as
set forth in such articles of merger.
SECTION 7.02 DELIVERIES AT THE CLOSING. Subject to the provisions of
Articles V and VI, on the Closing Date there shall be delivered to the Purchaser
and the Seller the documents and instruments required to be delivered under
Article V.
ARTICLE VIII
OTHER MATTERS
SECTION 8.01 CERTAIN DEFINITIONS; INTERPRETATION. As used in this
Agreement, the following terms shall have the meanings indicated, unless the
context otherwise requires:
"material" means material to the Purchaser or the Seller (as the
case may be) and its respective subsidiaries, taken as a whole.
"person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
When a reference is made in this Agreement to Sections or Exhibits, such
reference shall be to a Section of, or Exhibit to, this Agreement unless
otherwise indicated. The headings contained in this Agreement are for ease of
reference only and shall not affect the meaning or interpretation of this
Agreement. Whenever the words "include," "includes," or "including" are used in
this Agreement, they shall be deemed followed by the words "without limitation."
Any singular term in this Agreement shall be deemed to include the plural, and
any plural term the singular. Any reference to gender in this Agreement shall be
deemed to include any other gender.
SECTION 8.02 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. All representations, warranties, covenants and agreements contained
in this Agreement (or in any instrument delivered pursuant to this Agreement)
shall not survive beyond the Effective Time, except for the agreements contained
in this Section 8.02 and in Article I and Sections 4.02, 4.10, 6.03, 6.04 and
8.06 hereof.
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SECTION 8.03 AMENDMENT. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective boards of directors,
at any time before or after approval hereof by the shareholders of the Seller
but, after such approval, no amendment shall be made which reduces the amount or
changes the form of the Merger Consideration as provided in Section 1.02 or
which in any way materially adversely affects the rights of such shareholders,
without the further approval of such shareholders. This Agreement may not be
amended except by an instrument in writing specifically referring to this
Section 8.03 and signed on behalf of each of the parties hereto.
SECTION 8.04 WAIVER. At any time prior to the Effective Date, the
Purchaser, on the one hand, and the Seller, on the other hand, may (i) extend
the time for the performance of any of the obligations or other acts of the
other, (ii) waive any inaccuracies in the representations and warranties of the
other contained herein or in any documents delivered pursuant hereto and (iii)
waive compliance by the other with any of the agreements or conditions contained
herein which may legally be waived. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing specifically referring to this Section 8.04 and signed on
behalf of such party.
SECTION 8.05 COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
SECTION 8.06 GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Illinois or any other
applicable laws except to the extent that the federal laws of the United States
apply.
SECTION 8.07 EXPENSES. Except as provided elsewhere herein, each party
hereto will bear all expenses incurred by it in connection with this Agreement
and the transactions contemplated hereby, including fees and expenses of its own
financial or other consultants, investment bankers, accountants, and counsel,
except that Purchaser, on the one hand, and Seller, on the other hand, shall
bear and pay one-half of the costs incurred in connection with the printing and
mailing of the Registration Statement and the Proxy Statement. In the event one
of the parties hereto files suit to enforce this Section or a suit seeking to
recover costs and expenses or damages for breach of this Agreement, the costs,
fees, charges and expenses (including attorneys' fees and expenses) of the
prevailing party in such litigation (and related litigation) shall be borne by
the losing party.
SECTION 8.08 NOTICES. All notices, requests, acknowledgements and other
communications hereunder to a party shall be in writing and shall be delivered
by hand, overnight courier or by facsimile transmission (confirmed in writing)
to such party at its address or facsimile number set forth below or such other
address or facsimile number as such party may specify by notice hereunder, and
shall be deemed to have been delivered as of the date so delivered.
<TABLE>
<S> <C>
If to the Seller, to: Financial Security Corp.
1209 North Milwaukee Avenue
Chicago, Illinois 60622
Facsimile: (312) 227-6689
Attention: Daniel K. Augustine
President Chief Executive Officer and
and Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: (202) 966-9409
Attention: Mary M. Sjoquist
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
If to the Purchaser, to: Pinnacle Banc Group, Inc.
2215 York Road, Suite 208
Oak Brook, Illinois 60521
Facsimile: (708) 571-3012
Attention: John J. Gleason, Jr.
Vice Chairman
With copies to: Burke, Warren & MacKay, P.C.
225 West Washington Street
24th Floor
Chicago, Illinois 60606
Facsimile: (312) 357-0707
Attention: Richard W. Burke
</TABLE>
SECTION 8.09 ENTIRE AGREEMENT; ETC. This Agreement, together with the
Disclosure Schedules (including any Supplemental Disclosure Schedules), the
Exhibits and the Plan of Merger, represents the entire understanding of the
parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. All
terms and provisions of the Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns
and intended beneficiaries. Except as to Section 4.10, nothing in this Agreement
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
SECTION 8.10 ASSIGNMENT. This Agreement may not be assigned by any party
hereto without the written consent of the other parties.
SECTION 8.11 SCHEDULES NOT ADMISSIONS. Inclusion in any Exhibit hereto or
in the Disclosure Schedules (including in any Supplemental Disclosure Schedule)
of any statement or information by the Seller shall not constitute an admission
that such information is required (by reason of materiality or otherwise) to be
furnished as part of such Disclosure Schedules, (including any Supplemental
Disclosure Schedule) or otherwise under this Agreement or an admission against
interest with respect to any person not a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
PINNACLE BANC GROUP, INC.
By: /s/ JOHN J. GLEASON, JR.
-----------------------------------
John J. Gleason, Jr.
VICE CHAIRMAN
FINANCIAL SECURITY CORP.
By: /s/ DANIEL K. AUGUSTINE
-----------------------------------
Daniel K. Augustine
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
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<PAGE>
APPENDIX II
[HOVDE FINANCIAL, INC. LETTERHEAD]
July 26, 1996
Board of Directors
Financial Security Corp.
1209 N. Milwaukee Avenue
Chicago, IL 60622-2294
Members of the Board:
Financial Security Corp. ("Financial Security"), a Delaware corporation, and
Pinnacle Banc Group, Inc. ("Pinnacle"), an Illinois corporation, have entered
into an Agreement and Plan of Merger (the "Agreement") dated April 22, 1996,
pursuant to which Financial Security will merge with and into Pinnacle
(the"Merger"). As is set forth in the Agreement at the effective time of the
Merger, each of the outstanding shares of Financial Security Corp. common stock
("Financial Security Common Stock") will be converted into and have the right to
receive, as determined pursuant to Section 1.02, and subject to Section 1.03(f),
of the Agreement (the "Merger Consideration"), one of the following: (i) an
amount in cash equal to $28.50 (the "Cash Distribution"); or (ii) 0.8803 shares
of Pinnacle common stock ("Pinnacle Common Stock") (the "Exchange Ratio"); or
(iii) an amount in cash equal to 30% of the Cash Distribution and 70% of the
Exchange Ratio (the "Combined Distribution"). In connection therewith, you have
requested our opinion as to the fairness, from a financial point of view, of the
Merger Consideration to the shareholders of Financial Security.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
We are familiar with Financial Security, having acted as its financial advisor
in connection with, and having participated in the negotiations leading to, the
Agreement.
We were retained by Financial Security to act as its exclusive financial
advisor with respect to a review of Financial Security's strategic alternatives
and the possible sale, merger, consolidation, or other business combination, in
one or a series of transactions, involving all or a substantial amount of the
business, securities or assets of Financial Security. We have received and will
receive compensation from Financial Security in connection with our services, a
significant portion of which is contingent upon the consummation of the Merger.
At your direction, we solicited the interest of third parties regarding a
possible business combination with Financial Security. The Agreement is the
result of this solicitation.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Financial Security and
Pinnacle and material prepared in connection with the proposed transaction,
including the following: the Agreement; certain publicly available information
concerning Financial Security and Pinacle, including Financial Security's annual
report to shareholders and Form 10-K for the year ended December 31, 1995 and
quarterly financial information through March 31, 1996, and Pinnacle's annual
report to shareholders and Form 10-K for the year ended December 31, 1995 and
quarterly financial information through March 31, 1996; the terms of recent
merger and acquisition transactions involving thrifts and thrift holding
companies that we considered relevant; historical market prices and trading
volumes for Financial Security Common Stock and Pinnacle Common Stock; and
financial and other information provided to us by the managements of Financial
Security and Pinnacle.
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<PAGE>
In addition, we have conducted meetings with members of the senior
management of Financial Security and Pinnacle for the purpose of reviewing the
future prospects of Financial Security and Pinnacle. We also evaluated the pro
forma ownership of Pinnacle Common Stock by Financial Security's shareholders
relative to the pro forma contribution of Financial Security's assets,
liabilities, equity and earnings to the pro forma company, and conducted such
other studies, analyses and examinations as we deemed appropriate. We also took
into account our assessment of general economic, market and financial conditions
and our experience in other transactions, as well as our knowledge of the bank
and thrift industries and our general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
Financial Security and Pinnacle and in the discussions with Financial Security
and Pinnacle management. We did not independently verify and have relied on and
assumed that the aggregate allowances for loan losses set forth in the balance
sheets of each of Financial Security and Pinnacle at March 31, 1996 were
adequate to cover such losses and complied fully with applicable law, regulatory
policy and sound banking practices as of the date of such financial statements.
We were not retained to and did not conduct a physical inspection of any of the
properties or facilities of Financial Security or Pinnacle, nor did we make any
independent evaluation or appraisal of the assets, liabilities or prospects of
Financial Security or Pinnacle, nor were we furnished with any such evaluation
or appraisal, and we were not retained to and did not review any individual
credit files.
We have assumed that the Merger is, and will be, in compliance with all laws
and regulations that are applicable to Financial Security and Pinnacle. In
rendering this opinion, we have been advised by Financial Security and Pinnacle
and we have assumed that there are no factors that would impede any necessary
regulatory or governmental approval for the Merger and we have further assumed
that in the course of obtaining the necessary regulatory and governmental
approvals, no restriction will be imposed on Pinnacle or the surviving
corporation that would have a material adverse effect on Pinnacle or the
contemplated benefits of the Merger. We have also assumed that there would not
occur any change in the applicable law or regulation that would cause a material
adverse change in the prospects or operations of Pinnacle or the surviving
corporation after the Merger.
Our opinion is based solely upon the information available to us and the
economic, market and other circumstances as they exist as of the date hereof.
Events occurring and information that becomes available after the date hereof
could materially affect the assumptions and analyses used in preparing this
opinion. We have not undertaken to reaffirm or revise this opinion or otherwise
comment upon any events occurring or information that becomes available after
the date hereof.
We are not expressing any opinion herein as to the prices at which shares of
Pinnacle Common Stock issued in the Merger may trade if and when they are issued
or at any future time, nor does our opinion constitute a recommendation to any
holder of Financial Security Common Stock as to how such holder should vote with
respect to the Agreements at any meeting of holders of Financial Security Common
Stock.
This letter is solely for the information of the Board of Directors of
Financial Security and is not to be used, circulated, quoted or otherwise
referred to for any other purpose, nor is it to be filed with, included in or
referred to in whole or in part in any registration statement, proxy statement
or any other document, except in each case in accordance with our prior written
consent which shall not be unreasonably withheld; provided, however, that we
hereby consent to the inclusion and reference to this letter in any registration
statement, proxy statement, information statement or tender offer document to be
delivered to the holders of Financial Security Common Stock in connection with
the Merger if and only if this letter is quoted in full or attached as an
exhibit to such document and this letter has not been withdrawn prior to the
date of such document.
II-2
<PAGE>
Subject to the foregoing and based on our experience as investment bankers,
our activities and assumptions as described above, and other factors we have
deemed relevant, we are of the opinion as of the date hereof that the Merger
Consideration is fair, from a financial point of view, to the shareholders of
Financial Security.
Sincerely,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
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<PAGE>
APPENDIX III
SECTION 262 OF DELAWARE GENERAL CORPORATION LAW
SECTION262 APPRAISAL RIGHTS. -- (a) Any stockholders of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholders" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in (1)subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to SectionSection251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 stockholders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fraction shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) and (c) hereof that appraisal rights are available for any or
all of the shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
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<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to
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<PAGE>
the effective date of the merger or consolidation); provided, however, that if
no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of his demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease,
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 299, L.
'95, 2-1-96.)
III-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.75 of the Illinois Business Corporation Act of 1983, as amended,
grants to each corporation the power to indemnify its directors, officers,
employees and agents against expenses incurred in certain proceedings provided
they acted in good faith and in a manner they reasonably believed to be in, or
not opposed to the best interests of the corporation and provided that they are
not adjudged to be liable for negligence or misconduct in the performance of
their duty to the corporation. This statute provides, however, that this
indemnification should not be deemed exclusive of any other indemnification
rights provided by the by-laws, agreement, vote of stockholders or disinterested
directors or otherwise. Article VII of the By-laws of Pinnacle Banc Group, Inc.
("Pinnacle") sets forth provisions which define the indemnification available to
Directors and Officers of Pinnacle. Article VII provides as follows:
INDEMNIFICATION
SECTION 1. To the extent permitted by Illinois law from time to time in
effect and subject to the provisions of Section 2 of this Article, the Board of
Directors of the corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigate
(whether or not by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the agent of the corporation
as a director, officer, employee or agent of the corporation or is or was
serving at the request of the agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with any
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, of upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. Any indemnification under Section 1 of this Article (unless
ordered by a court) shall be made by the Board of Directors only upon a
determination in the specific case that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in said Section 1. Such determination
shall be made (a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (b) if such quorum is not obtainable, or, even if obtainable and a quorum of
disinterested directors so directs, by independent legal counsel (compensated by
the corporation) in a written opinion, or (c) by the stockholders.
SECTION 3. OTHER. The right of indemnification hereinabove provided for
shall not be exclusive of any rights to which any director or officer of the
corporation may otherwise be entitled by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
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The following exhibits are filed herewith unless noted otherwise.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated April 22, 1996, between Pinnacle Banc Group, Inc. ("Pinnacle") and
Financial Security Corp. (Included as Appendix I to the Prospectus).
3.1 Articles of Incorporation of Pinnacle, as amended. (Incorporated by reference to Form SE filed by
Pinnacle on March 18, 1996.)
3.2 By-laws of Pinnacle, as amended. (Incorporated by reference to Form SE filed by Pinnacle on March 18,
1996.)
4.1 The portions of the Articles of Incorporation and By-Laws of Pinnacle defining the rights of holders of
Pinnacle's common stock are included as part of the exhibit filed on Form SE by Pinnacle on March 18,
1996 and is hereby incorporated by reference.
5.1 Opinion of Burke, Warren & MacKay, P.C.
8.1 Opinion of Muldoon, Murphy & Faucette.
10.1 Form of Letter of Understanding between Executives and Pinnacle.
10.2 The Pinnacle Incentive Stock Option Plan originally adopted in 1981 (the "Prior Plan") and Form of
Deferred Compensation Agreement entered into with Pinnacle directors and officers and related Trust
Agreement. These items were filed as Exhibit 10 to Pinnacle's Form S-1 Registration Statement, No.
33-19608 which became effective March 18, 1988 and are hereby incorporated by reference. The 1990
Pinnacle Incentive Stock Option Plan (the "1990 Plan") adopted by Pinnacle's shareholders on April 24,
1990 was included as Exhibit 3 to Pinnacle's Form 10-K for the fiscal year ended December 31, 1990 and
is hereby incorporated by reference.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Crowe, Chizek & Company LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Burke, Warren & MacKay, P.C. (Contained in the opinion filed as Exhibit 5.1 hereto).
23.5 Consent of Muldoon, Murphy & Faucette (Contained in the opinion filed as Exhibit 8.1 hereto).
23.6 Consent of Hovde Financial, Inc.
24.1 Powers of Attorney.
99.1 Pinnacle Form of Proxy.
99.2 Financial Security Corp. Form of Proxy.
99.3 Election Form For Use by Stockholders of Financial Security Corp.
</TABLE>
(b) Financial Statement Schedules.
Not Applicable
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
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<PAGE>
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by person
who may be deemed underwriters, in addition to the information called for by the
other items for the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Oak Brook, State of
Illinois, on July 26, 1996.
PINNACLE BANC GROUP, INC.
By /s/ JOHN J. GLEASON, JR.
-----------------------------------
John J. Gleason, Jr.
VICE CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 26, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<S> <C>
/s/ RICHARD W. BURKE*
------------------------------------------- Director and Secretary
Richard W. Burke
/s/ MARK P. BURNS*
------------------------------------------- Director
Mark P. Burns
/s/ WILLIAM J. FINN, JR.*
------------------------------------------- Director
William J. Finn, Jr.
/s/ SAMUEL M. GILMAN*
------------------------------------------- Director
Samuel M. Gilman
/s/ ALBERT GIUSFREDI*
------------------------------------------- Director
Albert Giusfredi
/s/ JOHN J. GLEASON*
------------------------------------------- Director, Chairman of the Board
John J. Gleason
/s/ JOHN J. GLEASON, JR.
------------------------------------------- Director, Vice Chairman and Chief Executive Officer
John J. Gleason, Jr. (Principal Executive Officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<S> <C>
/s/ WILLIAM P. GLEASON*
------------------------------------------- President
William P. Gleason
/s/ JAMES L. GREENE*
------------------------------------------- Director
James L. Greene
/s/ DONALD G. KING*
------------------------------------------- Director
Donald G. King
/s/ JAMES A. MADDOCK*
------------------------------------------- Director
James A. Maddock
/s/ JAMES J. MCDONOUGH*
------------------------------------------- Director
James J. McDonough
/s/ SARA J. MIKUTA*
------------------------------------------- Chief Financial Officer and Chief Accounting Officer
Sara J. Mikuta
/s/ WILLIAM C. NICKELS*
------------------------------------------- Director
William C. Nickels
/s/ JOHN E. O'NEILL*
------------------------------------------- Director
John E. O'Neill
/s/ JAMES R. PHILLIP, JR.*
------------------------------------------- Director
James R. Phillip, Jr.
/s/ KENNETH C. WHITENER, JR.*
------------------------------------------- Director and Executive Vice President
Kenneth C. Whitener, Jr.
/s/ RICHARD W. BURKE, JR.
-------------------------------------------
Richard W. Burke, Jr.
ATTORNEY-IN-FACT*
</TABLE>
II-5
<PAGE>
EXHIBIT 5.1
[BURKE, WARREN & MACKAY P.C. LETTERHEAD]
July 26, 1996
Pinnacle Banc Group, Inc.
2215 York Road, Suite 208
Oak Brook, Illinois 60521
Re: Pinnacle Banc Group, Inc.
Registration Statement on Form S-4
-------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Pinnacle Banc Group, Inc., an Illinois
corporation (the "Company"), in connection with the preparation of the
above-referenced Registration Statement on Form S-4 (the "Registration
Statement"), to be filed by the Company with the Securities and Exchange
Commission (the "Commission") on the date hereof. The Registration Statement
relates to the registration under the Securities Act of 1933, as amended (the
"1933 Act"), of 1,456,362 shares of the Company's Common Stock, $4.69 par value
per share (the "Shares"), which may be exchanged and issued by the Company
pursuant to the terms and conditions of that certain Agreement and Plan of
Merger, dated as of April 22, 1996, by and between the Company and Financial
Security Corp. (the "Merger Agreement").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Articles of Incorporation and the By-Laws of the Company, (ii) certain
resolutions of the Board of Directors of the Company relating to the offering of
the Shares, (iii) the Registration Statement and (iv) such other documents as we
have deemed necessary or appropriate as bases for the opinions set forth below.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to any facts material to this opinion
which we did not independently establish or verify, we have relied upon
statements and representations of officers and other representatives of the
Company and others.
Members of our firm are admitted to the practice of law in the State of
Illinois, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly and validly authorized and, when issued and delivered
pursuant to the terms and conditions of the Merger Agreement, will be duly and
validly issued, fully paid and nonassessable.
This opinion is furnished to you solely for your benefit in connection with
the filing of the Registration Statement and is not to be used, circulated,
quoted or otherwise referred to for any other purpose without our prior written
consent. Notwithstanding the foregoing, we hereby consent to the filing of this
opinion with the Commission as Exhibit 5.1 to the Registration Statement. We
also consent to the reference to our firm under the caption "Legal Matters" in
the Registration Statement. In giving this consent, we do not thereby admit that
we are included in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission.
Very truly yours,
/s/ BURKE, WARREN & MacKAY, P.C.
/kam
<PAGE>
EXHIBIT 8.1
[Muldoon, Murphy & Faucette Letterhead]
July 26, 1996
Board of Directors
Financial Security Corp.
1209 North Milwaukee Avenue
Chicago, Illinois 60622
Board of Directors
Pinnacle Banc Group, Inc.
2215 York Road
Suite 208
Oak Brook, Illinois 60521
Re: Federal Tax Consequences of the Merger of Financial Security Corp.
with and into Pinnacle Banc Group, Inc.
To the Members of the Board:
You have requested an opinion with respect to the Federal income tax
consequences of the proposed merger of Financial Security Corp., a Delaware
corporation ("Financial Security"), with and into Pinnacle Banc Group, Inc., an
Illinois corporation ("Pinnacle") (the "Merger"), pursuant to the Agreement and
Plan of Reorganization dated as of April 22, 1996 which provides for a statutory
merger under Illinois and Delaware law between Financial Security and Pinnacle
(the "Plan of Reorganization"). Upon consummation of the Merger, the separate
existence of Financial Security shall cease and Pinnacle will be the continuing
and surviving corporation.
The proposed transaction and the parties are described in the Plan of
Reorganization. We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of
Pinnacle and Financial Security concerning Pinnacle and Financial Security as
well as the transaction ("Representations"). These Representations are required
to be furnished prior to the execution of this letter and again prior to the
closing of the Merger. We will rely upon the accuracy of the Representations of
Pinnacle and Financial Security and the statements of fact contained in the
examined documents, particularly the Plan of Reorganization. We have also
assumed the authenticity of all signatures, the legal capacity of all natural
persons and the conformity to the originals of all documents submitted to us as
copies. Each capitalized term used herein, unless otherwise defined, has the
meaning set forth in the Plan of Reorganization. We have assumed that the
transaction will be consummated strictly in accordance with the terms of the
Plan of Reorganization.
The Plan of Reorganization (including exhibits), contains detailed
descriptions of the parties to the Merger and the Merger itself. These documents
as well as the Representations to be provided by Pinnacle and Financial Security
are incorporated in this letter as part of the statement of the facts.
In order to effect the Merger, each share of the common stock, par value
$0.01 per share, of Financial Security ("Financial Security Common Stock")
issued and outstanding immediately prior to the Effective Time (other than any
shares of Financial Security Common Stock held by Financial Security or any of
its wholly-owned subsidiaries, or by Pinnacle or any of its wholly-owned
subsidiaries, all of which shares will be cancelled) other than Dissenting
Shares, shall be converted into the right to receive a combination of cash
and/or shares of Pinnacle Common Stock. The combined value of this right is
referred to as the "Merger Consideration."
<PAGE>
Board of Directors
July 26, 1996
Page 2
Pursuant to the terms of the Plan of Reorganization, the Merger
Consideration shall be calculated such that the aggregate Merger Consideration
so determined consists of not more than 45% cash consideration and not less than
55% stock consideration or such higher percentage of stock consideration
necessary to qualify the Merger as a tax-free reorganization within the meaning
of section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code")). The stock portion of the Merger Consideration may be greater than 55%
and the cash portion may be less than 45% of the aggregate Merger Consideration.
Thus, under the Plan of Reorganization, the aggregate amount of cash that may be
received by Financial Security shareholders in the merger may not exceed 45% of
the value of all the formerly outstanding shares of Financial Security Common
Stock issued and outstanding at the Effective Time of the Merger. For purposes
of this limitation, shares of Financial Security Common stock exchanged for cash
or other property, surrendered by dissenters, or exchanged for cash in lieu of
fractional shares, will be treated as outstanding stock on the date of the
transaction.
OPINION
Based upon the facts set forth above and in the Plan of Reorganization, the
Representations discussed above, and assuming the the Merger is effected in
accordance with the terms of the Plan of Reorganization between Pinnacle and
Financial Security as well as in conformity with applicable law, rules and
regulations, and assuming that Financial Security is solvent, and taking into
consideration the limitations discussed in this opinion, it is our opinion that
under current federal income tax law:
(1) The proposed Merger of Financial Security and Pinnacle will be a
reorganization within the meaning of section 368(a) of the Code. Pinnacle
and Financial Security will each be a "party to a reorganization" within
the meaning of section 368(b) of the Code.
(2) No gain or loss will be recognized by Pinnacle or Financial Security
upon the exchange in the Merger, pursuant to the terms of the Plan of
Reorganization, of Pinnacle Common Stock and cash for all the Financial
Security Common Stock as provided for in the Plan of Reorganization.
(3) No gain or loss will be recognized by the shareholders of Financial
Security who receive shares of Pinnacle Common Stock in exchange for all
of their shares of Financial Security Common Stock, except to the extent
of any cash received, including cash received in lieu of a fractional
share of Pinnacle Common Stock. Gain, if any, will be recognized by
holders of the shares of Financial Security Common Stock who receive both
Pinnacle Common Stock (including a fractional share interest) and cash in
exchange for their Financial Security Common Stock, but not in excess of
the amount of cash received. If the exchange has the effect of the
distribution of a dividend (determined with the application of section
318(a) of the Code), then the amount of the gain recognized that is not
in excess of shareholder's ratable share of undistributed earnings and
profits will be treated as a dividend. The determination of whether the
exchange has the effect of a dividend will be made in accordance with the
principles set forth in COMMISSIONER V. CLARK, 489 U.S. 726 (1989). No
loss will be recognized on the exchange of Financial Security Common
Stock for Pinnacle Common Stock (including a fractional share interest,
if any), and cash, as described in paragraph (2) above (section 354(a)(1)
of the Code).
(4) A Financial Security stockholder who receives cash in the Merger in lieu
of a fractional share of Pinnacle Common Stock will be treated as if the
fractional share had been received in the Merger and then redeemed by
Pinnacle in return for the cash. The receipt of such cash will cause the
recipient to recognize capital gain or loss equal to the difference
between the amount of cash received and the portion of such holder's
adjusted tax basis in the shares of Pinnacle Common Stock allocable to
the fractional share.
<PAGE>
Board of Directors
July 26, 1996
Page 3
(5) The basis of the Pinnacle Common Stock received by shareholders of
Financial Security in the Merger will be the same as the basis of the
Financial Security Common Stock surrendered in exchange therefor,
decreased by the amount of any cash received, and increased by the amount
of any gain recognized in the exchange.
(6) The holding period of the Pinnacle Common Stock received by the
Financial Security shareholders will include the holding period of the
Financial Security Common Stock surrendered therefor, provided that the
Financial Security Common Stock was, in each instance, held as a capital
asset in the hands of the shareholder of Financial Security at the
Effective Time.
(7) The basis of the assets of Financial Security to be received by Pinnacle
will be the same as the basis of those assets in the hands of Financial
Security immediately prior to the Merger.
(8) The holding period of the assets of Financial Security to be received by
Pinnacle will include the holding period of those assets in the hands of
Financial Security immediately prior to the Merger.
LIMITATIONS OF OPINION
Our opinion expressed herein is based solely upon current provisions of the
Code including applicable regulations thereunder and current judicial and
administrative authority. Any future amendment to the Code or applicable
regulations, or new judicial decisions or administrative interpretations, any of
which could be retroactive in effect, could cause us to modify our opinion. No
opinion is expressed herein with regard to the federal or state tax consequences
of the Merger under any section of the Code (or under state or local tax law)
except if any only to the extent specifically addressed.
* * *
We consent to the inclusion of this opinion as an exhibit to the Form S-4
Registration Statement of Pinnacle and the Application on Form H-(e)2 of the
Office of Thrift Supervision and the references to and summary of this opinion
in such documents.
Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 10.1
FORM OF LETTER OF UNDERSTANDING BETWEEN EXECUTIVES AND PINNACLE*
April 22, 1996
Daniel K. Augustine
Financial Security Corp.
1209 North Milwaukee Avenue
Chicago, Illinois 60622
Re: Letter of Understanding
Dear Mr. Augustine:
As you know, Pinnacle Banc Group, Inc. ("Pinnacle") has entered into an
Agreement and Plan of Merger dated April 22, 1996 (the "Merger Agreement") with
Financial Security Corp. (the "Company") with respect to the proposed
transaction whereby the Company will merge with and into Pinnacle (the
"Merger"). Pursuant to Section 4.02(c) of the Merger Agreement, the employment
agreement between the Company and you will be honored, unless you and Pinnacle
otherwise mutually agree to another arrangement. Pinnacle believes that your
continued service as a consultant will assist in fully preserving the ongoing
business operations of the Company following the Merger. Capitalized terms in
this Letter of Understanding (the "Letter") will have the same meaning as in the
Merger Agreement and the Employment Agreement.
By signing this Letter you will confirm your understanding of the terms of
this Letter and agree to:
(1) execute prior to the Closing Date, an amendment to the Employment
Agreement to provide that, in lieu of the payment to be made under Section 6
of the Employment Agreement, you will receive a payment of an amount equal
to One Dollar ($1.00) less than the least amount that would cause the
benefits payable to you in connection with the Merger to constitute a
parachute payment as defined in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "New Change in Control Payment"). The New
Change in Control Payment shall not exceed $484,557. If the Merger is not
consummated prior to December 31, 1996, the New Change in Control Payment
shall be subject to adjustment; and
(2) execute prior to the Closing Date a Consulting Agreement between
Pinnacle and you which will provide for the performance of certain
consulting services in consideration for an amount ("Consulting Amount")
mutually agreed to by both parties to be effective in the event you do not
become employed by Pinnacle in connection with the Merger.
The Company will obtain a written opinion of a public accountant that the
New Change in Control Payment taken together with the Consulting Amount and any
other payments made to you by Pinnacle or the Company will not constitute a
parachute payment under Section 280G(b)(2) of the Code. The accounting firm
shall be a nationally recognized firm and mutually agreed to by the Company,
Pinnacle and you. Pinnacle shall bear the cost of acquiring such opinion. Such
opinion will be addressed to the Company, Pinnacle and you.
- ------------------------
* Similar agreements, albeit with different change in control payments, were
executed between Pinnacle Banc Group, Inc. and Messrs. Ivan F. Kovac, Frank
M. Swiderski and Patrick Hunt.
<PAGE>
Daniel K. Augustine
April 22, 1996
Page 2
The Company will obtain a written appraisal opinion from a professional
valuation firm that the Consulting Amount is reasonable consideration for your
services under the Consulting Agreement. The valuation firm shall be mutually
agreed to by the Company, Pinnacle and you. Pinnacle shall bear the cost of
acquiring such opinion. Such opinion will be addressed to the Company, Pinnacle
and you.
Neither Pinnacle nor any of its affiliates will bear any responsibility to
you in the event that excise taxes are assessed in connection with the New
Change in Control Payment, the Consulting Amount or any other payments made to
you by Pinnacle or the Company.
If the Merger is not effectuated, this Letter will terminate upon the
termination of the Merger Agreement.
Please acknowledge your acceptance of this Letter and its terms, and your
agreement to amend the Employment Agreement and enter into a consulting
agreement by signing in the place provided below and returning one copy of this
Letter to Pinnacle.
Very truly yours,
Pinnacle Banc Group, Inc.
By: /s/ John J. Gleason, Jr.
Its: Vice Chairman and Chief Executive
Officer
Acknowledged and agreed
to this 22nd day
of April, 1996
/s/ Daniel K. Augustine
<PAGE>
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
COMPUTATION REQUIRED BY REGULATION S-K
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------- ---------------------------------------------
PRIMARY EARNINGS PER SHARE 1996 1995 1994 1993
- --------------------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income......................................... $ 1,556,709 $ 12,493,455 $ 2,255,497 $ 12,993,248
Weighted average number of common and common
quivalent shares outstanding:
Common shares.................................... 4,367,108 4,402,590 4,431,501 4,491,248
Dilutive effect of stock option shares (Note
1).............................................. 14,832 15,111 24,936 34,913
------------- -------------- ------------- --------------
Total common and common equivalent shares...... 4,381,940 4,417,701 4,456,437 4,526,161
Earnings per share -- primary...................... $ 0.36 $ 2.83 $ 0.51 $ 2.87
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
Note 1: The dilutive effect of common share equivalents was determined by the
treasury stock method.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------- ---------------------------------------------
FULLY DILUTED EARNINGS PER SHARE 1996 1995 1994 1993
- --------------------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income......................................... $ 1,556,709 $ 12,493,455 $ 2,255,497 $ 12,993,248
Weighted average number of common and common
equivalent shares outstanding:
Common shares.................................... 4,367,108 4,402,590 4,431,501 4,491,248
Dilutive effect of stock option shares (Note
1).............................................. 15,050 16,416 28,098 37,050
------------- -------------- ------------- --------------
Total common and common equivalent shares...... 4,382,158 4,419,006 4,459,599 4,528,298
Earnings per share -- fully diluted................ $ 0.36 $ 2.83 $ 0.51 $ 2.87
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
Note 1: The dilutive effect of common share equivalents was determined by the
treasury stock method.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Pinnacle Bank
Pinnacle Bank of the Quad-Cities
Pinnacle Bank, F.S.B.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation herein
by reference in this registration statement of our report dated January 19, 1996
incorporated by reference in Pinnacle Banc Group, Inc.'s Form 10-K for the year
ended December 31, 1995 and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN L.L.P.
Chicago, Illinois
July 25, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Financial Security Corp.
We consent to the incorporation by reference in this Registration Statement
of Pinnacle Banc Group, Inc. on Form S-4 related to the acquisition of Financial
Security Corp. by Pinnacle Banc Group, Inc., filed with the Securities and
Exchange Commission of our report dated February 10, 1996 on the 1995
consolidated financial statements of Financial Security Corp. We also consent to
the reference to us under "Experts" in this Registration Statement of Pinnacle
Banc Group, Inc. on Form S-4.
/s/ Crowe, Chizek and Company LLP
Oak Brook, Illinois
July 26, 1996
<PAGE>
EXHIBIT 23.3
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Financial Security Corp.:
We consent to the inclusion of our report dated February 27, 1995, with
respect to the consolidated statement of financial condition of Financial
Security Corp. and subsidiary as of December 31, 1994, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1994,
which report appears in the Form S-4 of Pinnacle Banc Group, Inc. dated July 29,
1996.
/s/ KPMG PEAT MARWICK
Chicago, Illinois
July 26, 1996
<PAGE>
EXHIBIT 23.6
[HOVDE FINANCIAL, INC. LETTERHEAD]
July 26, 1996
Pinnacle Banc Group, Inc.
2215 York Road
Oak Brook, IL 60521
Gentlemen:
This letter will constitute our consent to the inclusion of our opinion
regarding the acquisition of Financial Security Corp. ("Financial Security") by
Pinnacle Banc Group, Inc. ("Pinnacle"), in Pinnacle's registration statement on
Form S-4 (the "Registration Statement") and to the inclusion of the summary of
such opinion and the use of our name in the Registration Statement. In giving
the foregoing consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended (the "Securities Act"), or the rules and regulations of the
Securities and Exchange Commission (the "Commission") with respect to any part
of such Registration Statement within the meaning of the term "experts" as used
in the Securities Act and the rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
HOVDE FINANCIAL, INC.
/s/ STEVEN D. HOVDE
Executive Vice President
SDH:ee
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
WHEREAS, each of the undersigned Directors and Officers of Pinnacle Banc
Group, Inc., an Illinois corporation, hereby constitutes and appoints each of
Mr. John J. Gleason, Jr. and Mr. Richard W. Burke, Jr. his or her true and
lawful attorney and agent, with full power of substitution and resubstitution,
in the name and on behalf of the undersigned, to do any and all acts and things
and execute any and all instruments which the said attorney and agent may deem
necessary or advisable to enable Pinnacle Banc Group, Inc. ("Pinnacle") to
comply with the Securities Act of 1933, as amended, and any rules and
regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the registration under the Securities Act of
1933 of common stock issued by Pinnacle in connection with the Agreement and
Plan of Merger, dated as of April 22, 1996, by and between Pinnacle and
Financial Security Corp., including specifically, but without limiting the
generality of the foregoing, the power and authority to sign the name of the
undersigned in his or her capacity as a Director or Officer of Pinnacle to one
or more Registration Statements on Form S-4 to be filed with the Securities and
Exchange Commission with respect thereto, to any and all amendments, including
post-effective amendments, to the said Registration Statements and to any and
all instruments and documents filed as a part of or in connection with the said
Registration Statements or amendments thereto; hereby ratifying and confirming
all that the said attorneys and agents, or any of them, has done, shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunder set his or her hand this
16th day of July 1996.
<TABLE>
<S> <C>
/s/ RICHARD W. BURKE /s/ DONALD G. KING
- ------------------------------------------- -------------------------------------------
Richard W. Burke Donald G. King
/s/ MARK P. BURNS /s/ JAMES A. MADDOCK
- ------------------------------------------- -------------------------------------------
Mark P. Burns James A. Maddock
/s/ WILLIAM J. FINN, JR. /s/ JAMES J. MCDONOUGH
- ------------------------------------------- -------------------------------------------
William J. Finn, Jr. James J. McDonough
/s/ SAMUEL M. GILMAN /s/ WILLIAM C. NICKELS
- ------------------------------------------- -------------------------------------------
Samuel M. Gilman William C. Nickels
/s/ ALBERT GIUSFREDI /s/ JOHN E. O'NEILL
- ------------------------------------------- -------------------------------------------
Albert Giusfredi John E. O'Neill
/s/ JOHN J. GLEASON /s/ JAMES R. PHILLIP, JR.
- ------------------------------------------- -------------------------------------------
John J. Gleason James R. Phillip, Jr.
/s/ JOHN J. GLEASON, JR. /s/ KENNETH C. WHITENER, JR.
- ------------------------------------------- -------------------------------------------
John G. Gleason, Jr. Kenneth C. Whitener, Jr.
/s/ WILLIAM P. GLEASON /s/ RICHARD W. BURKE, JR.
- ------------------------------------------- -------------------------------------------
William P. Gleason Richard W. Burke, Jr., Attorney-in-Fact
/s/ JAMES L. GREENE /s/ SARA J. MIKUTA
- ------------------------------------------- -------------------------------------------
James L. Greene Sara J. Mikuta, Chief Financial Officer and
Chief Accounting Officer
</TABLE>
<PAGE>
EXHIBIT 99.1
PROXY PROXY
PINNACLE BANC GROUP, INC.
SPECIAL MEETING OF STOCKHOLDERS
SEPTEMBER 11, 1996, 10:00 A.M.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of Pinnacle Banc Group, Inc. ("Pinnacle"), hereby
appoints James L. Greene and William J. Finn, Jr., and each of them, each with
several powers of substitution, to vote all shares of Common Stock of Pinnacle
which the undersigned is entitled to vote at the Special Meeting of Stockholders
(the "Special Meeting") to be held on September 11, 1996 at 10:00: a.m. at
2215 York Road, Oak Brook, Illinois, and at any and all adjournments thereof
with all the powers the undersigned would possess if personally present, as
indicated on the reverse side:
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE FOLLOWING PROPOSAL.
1. Approval and Adoption of the Agreement and Plan of Merger, between Pinnacle
and Financial Security Corp. ("Financial Security"), dated as of April 22,
1996, providing for the merger of Financial Security with and into
Pinnacle.
For Against Abstain
/ / / / / /
This proxy is revocable and will be voted as directed, but if no
instructions are specified, this proxy will be voted FOR the proposal listed. If
any other business is presented at the Special Meeting, this proxy will be voted
by James L. Greene and William J. Finn, Jr., or either of them in their best
judgment, including a motion to adjourn or postpone the Special Meeting to
another time and/or place for the purpose of soliciting additional proxies. At
the present time, the Board of Directors knows of no other business to be
presented at the Special Meeting.
The undersigned acknowledges receipt from Pinnacle prior to the execution
of this proxy of a Notice of Special Meeting of Shareholders and of a Joint
Proxy Statement/Prospectus dated July 31, 1996.
Dated:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SIGNATURE OF SHAREHOLDER
--------------------------------------------------------------------------
SIGNATURE OF SHAREHOLDER
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your
full title. If shares are held jointly, each holder may sign but only one
signature is required. Please complete, date sign and mail this proxy
promptly in the enclosed white postage paid envelope.
<PAGE>
EXHIBIT 99.2
PROXY PROXY
FINANCIAL SECURITY CORP.
SPECIAL MEETING OF STOCKHOLDERS
SEPTEMBER 11, 1996, 3:00 P.M.
The undersigned hereby appoints the official proxy committee (the
"Committee") of the Board of Directors of Financial Security Corp. (the
"Company"), each with full power of substitution, to act as attorneys and
proxies for the undersigned, and to vote all shares of Common Stock of the
Company which the undersigned is entitled to vote only at the Special Meeting
of Stockholders ("Special Meeting") to be held on September 11, 1996 at
3:00 p.m. at 1209 North Milwaukee Avenue, Chicago, Illinois, and at any and
all adjournments thereof, as indicated on the reverse side.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL LISTED.
If any other business is presented at the Special Meeting, this proxy will be
voted by the Committee in its best judgment, including a motion to adjourn or
postpone the Special Meeting to another time and/or place for the purpose of
soliciting additional proxies. At the present time, the Board of Directors
knows of no other business to be presented at the Special Meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED POSTAGE PAID WHITE ENVELOPE
<PAGE>
FINANCIAL SECURITY CORP.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
[ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
FOLLOWING PROPOSAL
1. Approval and Adoption of the Agreement and Plan of Merger between Pinnacle
Banc Group Inc. ("Pinnacle") and the Company, dated as of April 22, 1996,
providing for the merger of the Company with and into Pinnacle.
For Against Abstain
/ / / / / /
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY
The undersigned acknowledges receipt from the
Company prior to the execution of this proxy
of a Notice of Special Meeting of Stockholders
and of a Joint Proxy Statement/Prospectus
dated July 31, 1996.
Dated:
--------------------------------------------
- ---------------------------------------------------
SIGNATURE OF SHAREHOLDER
- ---------------------------------------------------
SIGNATURE OF SHAREHOLDER
Please sign exactly as your name appears on this card.
When signing as an attorney, executor, administrator,
trustee or guardian, please give your full title. If
shares are held jointly, each holder may sign but only
one signature is required.
<PAGE>
EXHIBIT 99.3
ELECTION FORM FOR USE BY STOCKHOLDERS OF
FINANCIAL SECURITY CORP.
Harris Trust and Savings Bank
311 West Monroe Street
14th Floor West
Chicago, Illinois 60606
Dear Financial Security Corp. Stockholder:
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of April 22, 1996, between Pinnacle Bank Group, Inc.
("Pinnacle"), and Financial Security Corp. ("Financial Security"), the
undersigned stockholder(s) of Financial Security elects to receive the following
category of consideration in conversion of his or her shares of common stock of
Financial Security, par value $.01 per share ("Financial Security Common Stock")
upon consummation of the merger:
/ / STOCK ELECTION -- .8803 shares (the "Exchange Ratio") of Pinnacle Common
Stock, subject to adjustment dependent upon the Pinnacle Average Stock
Price as provided in the Merger Agreement (the "Stock Distribution");
/ / CASH ELECTION -- a cash payment in an amount equal to $28.50 per share of
Financial Security Common Stock (the "Cash Distribution"); or
/ / COMBINED ELECTION -- an amount in cash equal to 30% of the Cash
Distribution and shares of Pinnacle Common Stock equal to 70% of the Stock
Distribution.
THE UNDERSIGNED ACKNOWLEDGES THAT THE DEADLINE FOR FILING THIS ELECTION FORM
WITH HARRIS TRUST AND SAVINGS BANK ("HARRIS") IS BY 5:00 P.M., CENTRAL TIME, ON
SEPTEMBER 10, 1996, THE DAY PRIOR TO THE DATE OF THE SPECIAL MEETING OF
STOCKHOLDERS OF FINANCIAL SECURITY CALLED TO CONSIDER AND VOTE UPON THE MERGER
AGREEMENT.
PURSUANT TO THE MERGER AGREEMENT, ANY STOCKHOLDER WHO FAILS TO DELIVER THE
ELECTION FORM TO HARRIS PROPERLY COMPLETED AND EXECUTED BY THE DEADLINE WILL
RECEIVE THE STOCK DISTRIBUTION.
The undersigned acknowledges that the consideration received in connection
with the Stock Distribution and the Combined Distribution is subject to possible
adjustment depending on the Pinnacle Average Stock Price (as defined in the
Merger Agreement) prior to the Effective Time, and as discussed in greater
detail in the Joint Proxy Statement/ Prospectus.
The undersigned further acknowledges that the Cash Election is subject to
the limitations on the issuance of not less than the number of shares of
Pinnacle Common Stock such that the aggregate consideration received in the
Merger consists of at a minimum 55% stock consideration or such higher
percentage necessary for Muldoon, Murphy & Faucette, counsel to Financial
Security, to render an opinion that the merger qualifies as a tax-deferred
reorganization for those stockholders who receive shares of Pinnacle Common
Stock in exchange for their shares of Financial Security Common Stock. See the
accompanying Joint Proxy Statement/Prospectus -- "THE MERGER -- Election
Procedures" for a description of the situations in which the Exchange Agent may
be required to reallocate the consideration to be paid to stockholders making
the Cash Election.
Prior to 5:00 p.m., Central Time, on September 10, 1996, the undersigned
may, at any time or from time to time, change his or her election by filing a
new Election Form with Harris.
FOR INFORMATION CONCERNING THE SUBMISSION OF THE ELECTION FORM, PLEASE
CONTACT HARRIS AT (312) 461-6001. STOCKHOLDERS WHO HAVE QUESTIONS REGARDING THE
ELECTION PROCESS, AND/OR THE TAX CONSEQUENCES ASSOCIATED WITH SUCH ELECTION
PROCESS, SHOULD CONSULT, AT THEIR OWN EXPENSE, THEIR OWN TAX, LEGAL AND
INVESTMENT ADVISORS.
<TABLE>
<S> <C>
DATED: ------------------------------------------------------
SIGNATURE OF STOCKHOLDER
------------------------------------------------------
SIGNATURE OF STOCKHOLDER
(TO BE SIGNED BY THE HOLDER(S) OF RECORD EXACTLY AS THE
NAME(S) OF SUCH HOLDER(S) APPEARS ON THE STOCK
CERTIFICATE. WHEN SIGNING AS AN ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE. ALL JOINT OWNERS MUST SIGN.)
</TABLE>
PLEASE RETURN TO HARRIS TRUST AND SAVINGS BANK
USING THE ENCLOSED, PRE-PAID, PRE-ADDRESSED BLUE ENVELOPE
