<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended DECEMBER 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commission file Number 0-18283
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PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3190818
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2215 York Road, Suite 208, Oak Brook, Illinois 60521
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 574-3550
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $4.69 Par Value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 19, 1996, was approximately $66,914,000.
As of March 19, 1996, the registrant had 4,354,138 shares outstanding of common
stock, $4.69 par value.
Parts of the 1995 Annual Report to Stockholders have been incorporated by
reference into Part II of the Form 10-K. Parts of the Proxy Statement to
Stockholders for the Annual Meeting to be held on April 16, 1996 have been
incorporated by reference into Part III of the Form 10-K.
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FORM 10-K TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 5-6
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 6
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters . . . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . 6
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 7
Item 9. Disagreements on Accounting and Financial Disclosures . . . . . 7
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . 7
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 7
Item 12. Security Ownership of Certain Beneficial Owners and Management. 7
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 7
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PART I
ITEM 1. BUSINESS
Pinnacle Banc Group, Inc. (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. At December 31, 1995 the
Corporation had total consolidated assets of $818,697,000, total loans of
$309,600,000, total deposits of $712,805,000, and total stockholders' equity of
$78,961,000. The Corporation's principal office is 2215 York Road, Suite 208,
Oak Brook, Illinois 60521. The Corporation has twelve banking locations in the
metropolitan areas of Chicago and Quad-Cities, Illinois and Iowa.
The Corporation, 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, the Corporation merged (the "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 Merger, the name of the
Corporation was changed to Pinnacle Banc Group, Inc.
Since the date of the merger, SBH Corp., parent company of Bank of Silvis (the
"Silvis Bank"), was merged into the Corporation 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 Batavia Savings Bank, F.S.B. ("Batavia Savings"),
was merged into Pinnacle on December 31, 1992.
On December 7, 1992, the Silvis Bank merged with the Henry County Bank with the
resultant 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 the 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 the
Corporation and concurrent with the liquidation, STSB was merged into Pinnacle
Bank.
The Corporation owns 100% of the common stock of Pinnacle Bank, Quad-Cities Bank
and Batavia Savings.
The Corporation is a legal entity separate and distinct from its subsidiary
banks. The major source of the Corporation's revenues is dividends from its
subsidiary banks.
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 the customers. Pinnacle Bank
provides nondeposit-based products, including mutual funds and annuities through
affiliation with an independent broker.
Batavia 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, Batavia Savings makes commercial, consumer and
installment loans. The bank offers a full range of deposit services including
demand, savings and time deposits.
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The 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 December 31, 1995, the Bank had total assets of $624 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. The Bank's 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 and Iowa. As of December 31, 1995, the Bank had
total assets of $106 million.
Batavia Savings was originally organized as an Illinois state chartered savings
and loan association in 1909. The Bank converted to a federal mutual charter in
1983. The Bank 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. The Bank's
main office is located in Batavia, Illinois with a full service branch located
in Elburn. Currently, Batavia Savings is leasing its previously owned branch in
Elburn. A new Elburn branch, presently under construction, will open in the
second or third quarter of 1996. As of December 31, 1995, the Bank had total
assets of $67 million.
COMPETITION
Intense competition exists in all aspects of business in which the Corporation
and its 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 a banking
subsidiary, including banks in the primary marketing areas of each subsidiary
bank which have recently become affiliated through parent holding companies
owning significantly larger banking institutions. Each 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.
EMPLOYEES
At December 31, 1995, the Corporation and its subsidiary banks employed 337
persons on a full-time equivalent basis.
SUPERVISION AND REGULATION
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 the Corporation and any banks which are
now or hereafter become affiliated with the Corporation. Future bills could
also be introduced which could significantly affect the banking industry. It
cannot be
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predicted whether any such legislation will be adopted or how such
adoption would affect the business of the Corporation or any banks so
affiliated.
The following references to applicable statutes and regulations are brief
summaries thereof which do not purport to be complete and which are qualified in
their entirety by reference to such statutes and regulations.
BANK HOLDING COMPANY. As a bank holding company, the Corporation is
subject to the supervision of the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). Bank holding
companies are required to file with the Federal Reserve Board an annual
report and such additional information as the Federal Reserve Board may
require. The Federal Reserve Board also makes periodic examinations of bank
holding companies and their subsidiaries. As a result of the Corporation's
acquisition of Batavia Savings, the Corporation is also considered a
diversified savings and loan holding company subject to regulatory oversight
by the Office of Thrift Supervision ("OTS"). As such, the Corporation is
subject to regulation and examination by the OTS. The Corporation is
required to obtain the prior approval of the Federal Reserve Board 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 subsidiary
bank of the Corporation, if, after such acquisition, it would own or control
more than 5% of the voting shares of such bank. The BHC Act does not permit
the Federal Reserve Board to approve the acquisition by the Holding Company
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 Board 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.
Subsidiary banks of a bank holding company (such as the bank subsidiaries of the
Corporation) 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 Board, 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 Federal
Deposit Insurance Corporation ("FDIC"). The operations of Batavia 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.
Batavia Savings is a member of the Federal Home Loan Bank of Chicago.
The Federal Reserve System, the FDIC, the OTS and the State of Illinois
Commissioner of Banks and Trust Companies regularly examine, where applicable,
such areas as reserves, loans, investments, management practices and other
aspects of the banks' operations. These examinations are designed for the
protection of the banks' depositors and not for its stockholders. In addition
to these regular examinations, the banks must furnish periodic reports to the
regulatory authorities containing a full and accurate statement of its affairs.
As members of the FDIC, the banks' deposits are insured as provided by law.
Effective January 1, 1993, a risk-based deposit insurance assessment program was
placed into effect by the FDIC. Insurance premiums are to be determined based
on the level of a bank's capital and supervisory evaluation. As of the current
date, each of the Corporation's subsidiary banks were in the lowest premium
assessment category.
3
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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 subsidiary banks are subject
to certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the Corporation or any of its other subsidiaries, on investments in
the stock or other securities of the Corporation or any of its subsidiaries, and
on taking such stock or securities as collateral for loans. Federal statutes
and Federal Reserve Board 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 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.
In 1991, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
was enacted into law. FDICIA provides for, among other things, the
recapitalization of the FDIC Insurance Fund; enhanced federal supervision of
depository institutions, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions; the adoption of
safety and soundness standards by the Federal banking regulators, on matters
such as loan underwriting and documentation, interest rate risk exposure and
compensation and other employee benefits; the establishment of risk-based
deposit insurance premiums; liberalization of the qualified thrift lender test;
greater restrictions on transactions with affiliates; mandated consumer
protection disclosures with respect to deposit accounts; and expanded audit
requirements including statements by management regarding internal controls and
regulatory compliance.
GOVERNMENT MONETARY POLICIES
The earnings of banks and bank holding companies are affected by the policies of
regulatory authorities including the Federal Reserve Board which regulates the
money supply. Among the methods employed by the Federal Reserve Board 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 Board 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.
FINANCIAL INFORMATION
For financial information regarding the Corporation, see ITEM 8, FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA, and ITEM 14, EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
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ITEM 2. PROPERTIES
The corporate offices of the Corporation are located at 2215 York Road, Suite
208, Oak Brook, Illinois 60521. These offices, consisting of approximately
2,000 square feet, have been leased by the Corporation since January 1, 1989.
Approximately two years remain on the term of the lease.
Pinnacle Bank owns its main banking office located at 6000 West Cermak Road,
Cicero, Illinois 60650. The main office consists of approximately 41,500
square feet and was extensively remodeled in 1989.
Pinnacle Bank has five other full service banking offices. The Harvey
Banking Center is located at 174 East 154th Street, Harvey, Illinois 60426
with an adjacent drive-in facility and parking lot. The main building
consists of approximately 33,000 square feet. The Berwyn Banking Center is
located at 7112 West Cermak Road, Berwyn, Illinois 60402. The building
consists of approximately 15,000 square feet and was extensively remodeled in
1991. The Oak Park Banking Center, containing approximately 21,000 square
feet, is located at 840 South Oak Park Avenue, Oak Park, Illinois 60304. The
Westmont Banking Center contains approximately 23,000 square feet and is
located at 640 Pasquinelli Drive, Westmont, Illinois 60559. All
aforementioned buildings are owned by Pinnacle Bank. The LaGrange Park
Banking Center is located in a leased office at Oak and Sherwood Streets,
LaGrange Park, Illinois 60525. Eight years remain on the term of the lease.
The office consists of approximately 11,500 square feet.
Pinnacle Bank has two limited service banking facilities. An owned facility
containing approximately 2,500 square feet is located at 2500 South Cicero
Avenue, Cicero, Illinois 60650. This facility, with certain expanded
services, was constructed in 1995. A leased facility containing
approximately 2,000 square feet is located at 7373 West 25th Street, North
Riverside, Illinois 60546. Twelve years remain on the term of the lease.
The Quad-Cities Bank owns its main banking office located at Eleventh Street
and First Avenue, Silvis, Illinois 61282. The banking office consists of
approximately 10,600 square feet. The Quad-Cities Bank owns a branch banking
office located at 107 First Street, Green Rock, Illinois 61241. The banking
office consists of approximately 4,000 square feet.
Batavia Savings owns its main banking office located at 165 West Wilson
Street, Batavia, Illinois 60510. The banking office consists of 8,640 square
feet. Batavia Savings currently leases a formerly owned branch banking office
at 100 South Main Street, Elburn, Illinois 60119. This banking office
consists of 2,300 square feet. A new banking office of approximately 2,400
square feet is presently being built in Elburn.
Each of the subsidiary banks has sufficient space for current banking needs
as well as any foreseeable expansion.
ITEM 3. LEGAL PROCEEDINGS
On February 17, 1994, a judgment in the amount of $2.3 million was entered in
the U.S. Bankruptcy Court against Pinnacle Bank, a wholly owned subsidiary of
the Corporation. The judgment is the result of a suit filed against the Bank
by a trustee of a debtor in bankruptcy. The trustee claimed that the Bank
honored overdrafts in the debtor's bank account without obtaining prior court
approval. The Bank denied any liability on the basis that no court
authorization is required for debtors who obtain unsecured credit in the
ordinary course of business. The amount of the judgment represents the
cumulative amount of all payments received by the Bank from the debtor to
cover overdrafts. The largest outstanding overdraft as of the close of
business on any day was $260,000. The judgment provides that the Bank will
have an allowed claim in the bankruptcy proceeding upon its payment of the
judgment. While the Bank appealed the decision in 1994, management, upon
advice of legal counsel, settled the case for $1,275,000 on December 8, 1995.
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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 the consultation of legal counsel, the
disposition of all outstanding matters will not have a material adverse effect
on the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Corporation is traded in the over-the-counter market
and is quoted on the National Association of Securities Dealers Automated
Quotation System (NASDAQ) under the Small-Cap issues with the ticker symbol
"PINN".
The following table sets forth the high and low sales prices of the
Corporation's common stock by quarter as reported by NASDAQ.
<TABLE>
<CAPTION>
1995 1994
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CASH CASH
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
--------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $31.50 $26.75 $0.29 $36.50 $30.50 $0.27
2nd 33.25 29.00 0.29 33.00 30.50 0.27
3rd 32.00 28.00 0.29 33.00 26.50 0.27
4th 34.00 29.00 0.29 30.50 26.75 0.27
</TABLE>
In 1995, the Corporation purchased 45,755 shares of its common stock at
market prices in privately negotiated and market transactions as part of its
announced stock repurchase program. In 1994, the Corporation purchased
88,838 shares of its common stock at market prices in privately negotiated
and market transactions.
NUMBER OF SHAREHOLDERS
As of March 19, 1996, the Corporation had approximately 335 shareholders of
record. In addition, the Corporation believes that it has approximately 450
additional beneficial shareholders who hold shares in street name.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation is incorporated herein by
reference to the 1995 Annual Report to Stockholders included as Exhibit 2.
The information required is contained on page 22 of Exhibit 2, under the
title "Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations is incorporated herein by reference to the 1995 Annual Report
to Stockholders included as Exhibit 2. The information is contained on pages
23 through 36 of Exhibit 2.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the 1995 Annual Report to Stockholders included as Exhibit 2.
The information is contained as follows:
<TABLE>
<CAPTION>
PAGE OF
EXHIBIT 2
<S> <C>
Consolidated Balance Sheets. . . . . . . . 4
Consolidated Statements of Income . . . . . 5
Consolidated Statements of Changes in
Stockholders' Equity . . . . . . . . . . 6
Consolidated Statements of Cash Flows . . . 7
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . 8 - 20
Report of Independent Public Accountants
Arthur Andersen LLP. . . . . . . . . . . . 21
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required pursuant to this item is contained on pages 1 through 3
of the Definitive Proxy Statement for the Annual Meeting to be held on April
16, 1996, under the title "Election of Directors", this portion which is
expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required pursuant to this item is contained on pages 5 through 7
of the Definitive Proxy Statement for the Annual Meeting to be held on April
16, 1996, under the title "Executive Compensation", this portion which is
expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required pursuant to this item is contained on pages 3 through 5
of the Definitive Proxy Statement for the Annual Meeting to be held on April
16, 1996, under the title "Security Ownership of Certain Beneficial Owners
and Management", this portion which is expressly incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required pursuant to this item is contained on pages 8 and 9 of the
Definitive Proxy Statement for the Annual Meeting to be held on April 16, 1996
under the title "Certain Relationships, Related Transactions and Other
Information Regarding Management", this portion which is expressly incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
DESIGNATION NO.
EXHIBIT UNDER ITEM 601 OF
NUMBER REGISTRATION S-K EXHIBIT DESCRIPTION
------- ----------------- ---------------------------------------------
<S> <C> <C>
-- (2) Plan of Acquisition, Reorganization,
Management, Liquidation or Succession. The
Agreement and Plan of Reorganization
between the Corporation and Acorn
Financial Corp for the acquisition of Acorn
Financial Corp and its subsidiary bank,
Suburban Trust & Savings Bank was filed as
an Exhibit to the Corporation's Report of
Form 8-K dated January 6, 1995 and filed
on January 20, 1995 and is incorporated
herein by reference.
-- (3) Articles of Incorporation and By-laws.
This Exhibit was filed on Form SE on
March 18, 1996 and is hereby incorporated
by reference.
-- (4) Instruments defining the rights of Security
Holders Including Debentures. The
portions of the Corporation's Articles of
Incorporation and By-laws defining the
rights of holders of the Corporation's
common stock are included as part of
Exhibit filed on Form SE on March 18,
1996 and is hereby incorporated by
reference.
-- (10) Material Contracts. The Pinnacle
Incentive Stock Option Plan originally
adopted in 1981 ("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
the Corporation'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
("1990 Plan") adopted by the Corporation's
shareholders on April 24, 1990 was
included as Exhibit 3 to the Corporation's
Form 10-K for the fiscal year ended
December 31, 1990 and is hereby
incorporated by reference.
1 (11) Statement Re Computation of Per Share
Earnings.
2 (13.1) Annual Report to Security Holders. The
Corporation is including, as an Exhibit,
its 1995 Annual Report to Stockholders.
Those parts of the Annual Report not
specifically incorporated by reference
elsewhere herein are not deemed to be
part of this filing.
3 (13.2) Independent Auditors' Report provided by
Crowe, Chizek and Company regarding the
1993 and 1992 financial statements of
Batavia Savings Bank, F.S.B., a subsidiary
of Pinnacle. Pursuant to Regulation S-X,
Rule 2-05, this report is being filed as
an Exhibit.
-- (21) Subsidiaries of the Registrant. The
information is included in ITEM 1,
BUSINESS on page 1.
4 (27) Financial Data Schedule.
</TABLE>
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FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules not included in ITEM 8, FINANCIAL DATA AND
SUPPLEMENTARY DATA are included on the following pages as part of this item
in accordance with Guide 3, Statistical Disclosure by Bank Holding Companies.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Corporation during the fourth
quarter of 1995.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
ANALYSIS OF NET INTEREST INCOME
Information required in this table, including the daily average balance
outstanding for the major categories of interest bearing assets and interest
bearing liabilities, and the average interest rate earned or paid thereon, is
incorporated herein by reference to the 1995 Annual Report to Stockholders
included as Exhibit 2. The information required is contained in Table 1,
"Analysis of Net Interest Income" on page 25 of Exhibit 2, within the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL
Information required in this table is incorporated herein by reference to the
1995 Annual Report to Stockholders included as Exhibit 2. The information
required is contained in Table 2, "Analysis of Volume/Rate Variance" on page
26 of Exhibit 2, within the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ANALYSIS OF INTEREST RATE SENSITIVITY
Information regarding the interest rate sensitivity position of Pinnacle is
incorporated herein by reference to the 1995 Annual Report to Stockholders
included as Exhibit 2. This information is contained in Table 6, "Interest
Rate Sensitivity Position" on page 35 and discussed on page 36 of Exhibit 2,
within the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
II. INVESTMENT PORTFOLIO
The following table presents the book value of securities in thousands at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
U. S. Treasury and Federal
agency securities. . . . . $370,545 $316,200 $337,771
State and municipal (1). . . 25,839 35,171 38,199
Mortgage-backed securities
and floating rate
collateralized mortgage
obligations (1). . . . . . 10,307 14,764 29,417
Corporate and other (1) . . 20,238 20,365 14,030
---------------------------------
Total securities . . . . . $426,929 $386,500 $419,417
---------------------------------
---------------------------------
</TABLE>
(1) Held for investment in 1993.
9
<PAGE>
The following table shows the maturities of securities in thousands at
December 31, 1995 and weighted average fully taxable equivalent yields:
<TABLE>
<CAPTION>
U. S. TREASURY AND FEDERAL
AGENCY SECURITIES STATE AND MUNICIPAL
--------------------------- ---------------------
<S> <C> <C> <C> <C>
One year or less . . . . . . $366,328 5.59% $ 2,213 10.86%
One year to five years. . . . 3,783 3.91 12,018 12.94
Five to ten years . . . . . . 434 4.97 10,120 12.68
Over ten years . . . . . . . -0- 0.00 1,488 15.15
No fixed maturity . . . . . . -0- 0.00 -0- 0.00
--------------------------- ---------------------
$370,545 5.47% $25,839 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 . . . . . . . $1,220 7.91% $-0- 0.00% $369,761 5.63%
One year to five years . . . . 262 8.35 -0- 0.00 16,063 10.74
Five years to ten years. . . . -0- 0.00 -0- 0.00 10,554 12.36
Over ten years . . . . . . . . -0- 0.00 -0- 0.00 1,488 15.15
No fixed maturity . . . . . . . 10,307 7.87 18,756 5.35 29,063 6.24
--------------------- ------------------- ---------------------
$11,789 7.88% $18,756 5.35% $426,929 6.06%
--------------------- ------------------- ---------------------
--------------------- ------------------- ---------------------
</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 December 31, 1995.
III. LOAN PORTFOLIO
The following table sets forth the outstanding loans, in thousands, at the
following dates:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and other. . $ 83,939 $ 68,788 $ 74,855 $ 82,118 $ 86,666
Consumer. . . . . . . . 49,464 38,982 38,442 43,806 45,728
Real estate:
Residential . . . . . 135,086 119,520 112,138 92,811 36,198
Commercial . . . . . . 42,073 22,220 24,170 25,185 30,219
------------------------------------------------
Total gross loans. . . 310,562 249,510 249,605 243,920 198,811
Unearned income . . . . 962 1,106 1,529 2,002 2,871
------------------------------------------------
Net loans. . . . . . . $309,600 $248,404 $248,076 $241,918 $195,940
------------------------------------------------
------------------------------------------------
</TABLE>
10
<PAGE>
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 TOTAL
OR LESS FIVE YEARS FIVE YEARS
-------------------------------------------------
-------------------------------------------------
<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.
COLLATERAL AND APPRAISAL GUIDELINES
Subsidiary banks of the Corporation 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 the Corporation 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 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:
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans. . . . . . . . . $4,791 $748 $5,283 $2,646 $3,294
Past due 90 days
or more and still accruing . . . 2,293 552 585 1,067 2,713
Restructured loans. . . . . . . . 931 -0- -0- -0- 1,629
-------------------------------------------
$8,015 $1,300 $5,868 $3,713 $7,636
-------------------------------------------
-------------------------------------------
Other real estate owned . . . . . $ 284 $2,416 $3,444 $1,803 $ 87
</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" under the subsection "Provision for Loan
Losses" on pages 26 through 28 of the Corporation's 1995 Annual Report to
Stockholders included as Exhibit 2.
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 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.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS "SFAS" NOS. 114
AND 118. Effective January 1, 1995, the Corporation 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 the Corporation as a result of adopting these statements.
No changes were required to the Corporation'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 the
Corporation's credit risk classification system. All of the Corporation's
impaired loans are included in the nonperforming category.
NONACCRUAL LOAN POLICY. The Corporation 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 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.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Information required in this table is incorporated herein by reference to the
1995 Annual Report to Stockholders included as Exhibit 2. The information
required is contained in Table 3, "Analysis of the Allowance for Loan Losses" on
page 27 of Exhibit 2, within the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The Corporation's subsidiary banks do not allocate the allowance for loan losses
by specific loan categories. However, bank disclosure guidelines issued by the
Securities and Exchange Commission 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
12
<PAGE>
allowance for loan losses represents 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 December 31 of each year, in thousands, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------
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 . . . . $1,366 27.1 % $1,051 27.7 % $1,710 30.2 %
Consumer . . . . . . . . . . 36 15.7 147 15.4 540 54.7
Real estate. . . . . . . . . 858 57.2 826 56.9 750 15.1
Unallocated. . . . . . . . . 3,763 - 2,205 - 547 -
------------------------------------------------------------------------
$6,023 100.0 % $4,229 100.0 % $3,547 100.0 %
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1992 1991
-----------------------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and other. . . . . . . $1,503 33.9 % $1,401 44.2 %
Consumer. . . . . . . . . . . . . 453 17.7 464 22.0
Real estate . . . . . . . . . . . 430 48.4 251 33.8
Unallocated . . . . . . . . . . . 615 - 401 -
-----------------------------------------------------
$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 the Corporation has not recorded a significant
loss that had not been previously identified as a watch list credit by the loan
review process.
V. 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 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 December 31, 1995 are shown below, in thousands.
13
<PAGE>
<TABLE>
<CAPTION>>
<S> <C>
Three months or less . . . . . . . . . . . . . . $11,915
Over three months through six months . . . . . . 10,564
Over six months through twelve months. . . . . . 7,377
Over twelve months . . . . . . . . . . . . . . . 2,748
--------
Total . . . . . . . . . . . . . . . . . . . . $32,604
--------
--------
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for 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>
DECEMBER 31
----------------------------
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Return on average assets. . . . . . . . . . . . . . 1.55 % 0.32 % 1.80 %
Return on average stockholders' equity. . . . . . . 18.09 3.35 18.88
Dividend payout ratio . . . . . . . . . . . . . . . 40.89 213.70 33.22
Average stockholders' equity to average assets. . . 8.55 9.61 9.52
</TABLE>
VII. SHORT-TERM BORROWINGS
The following table shows the distribution of short-term borrowings and the
weighted average interest rates thereon for 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>
YEARS ENDED DECEMBER 31
----------------------------
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Amount outstanding at end of period . . . . . . . . . . . . . . $ -0- 4,800 $13,600
Weighted average interest rate at end of period . . . . . . . . N/A 6.73% 3.40%
Average amount outstanding during the period. . . . . . . . . . $ 589 $10,989 $ 2,72
Weighted average interest rate during the period. . . . . . . . 6.62% 4.28% 3.23%
Maximum amount outstanding at any month's end . . . . . . . . . $2,500 $22,200 $14,000
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on March 19, 1996.
PINNACLE BANC GROUP, INC.
By: /s/ John J. Gleason By: /s/ William P. Gleason
------------------------- ---------------------------
John J. Gleason William P. Gleason
Chairman President
By: /s/ John J. Gleason, Jr. By: /s/ Sara J. Mikuta
------------------------- ---------------------------
John J. Gleason, Jr. Sara J. Mikuta
Vice Chairman and Principal Financial and
Chief Executive Officer Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following Directors on behalf of the registrant on
March 19, 1996.
/s/ James L. Green
______________________________ ______________________________
Richard W. Burke James L. Greene
/s/ Mark P. Burns /s/ Donald G. King
______________________________ ______________________________
Mark P. Burns Donald G. King
/s/ William J. Finn, Jr. /s/ James A. Maddock
______________________________ ______________________________
William J. Finn, Jr. James A. Maddock
/s/ James J. McDonough
______________________________ ______________________________
Samuel M. Gilman James J. McDonough
______________________________ ______________________________
Albert Giusfredi William C. Nickels
/s/ John J. Gleason /s/ John E. O'Neill
______________________________ ______________________________
John J. Gleason John E. O'Neill
/s/ John J. Gleason, Jr. /s/ James R. Phillip, Jr.
______________________________ ______________________________
John J. Gleason, Jr. James R. Phillip, Jr.
/s/ William P. Gleason /s/ Kenneth C. Whitener. Jr.
______________________________ ______________________________
William P. Gleason Kenneth C. Whitener, Jr.
15
<PAGE>
EXHIBIT 1 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For The Years Ended December 31
-------------------------------
Primary Earnings Per Share 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computation Required by Regulation S-K
and for Statement of Income (Note 1):
Net income.......................................... $12,493,455 $2,255,497 $12,993,248
Weighted average number of common and
common equivalent shares outstanding:
Common shares..................................... 4,402,590 4,431,501 4,491,248
Dilutive effect of stock option shares (Note 2)... 15,111 24,936 34,913
-------------------------------------------------
Total common and
common equivalent shares........................ 4,417,701 4,456,437 4,526,161
Earnings per share - primary........................ $ 2.83 $ 0.51 $ 2.87
-------------------------------------------------
-------------------------------------------------
<CAPTION>
For The Years Ended December 31
-------------------------------
Fully Diluted Earnings Per Share 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computation Required by Regulation S-K
and for Statement of Income (Note 1):
Net income.......................................... $12,493,455 $2,255,497 $12,993,248
Weighted average number of common and
common equivalent shares outstanding:
Common shares..................................... 4,402,590 4,431,501 4,491,248
Dilutive effect of stock option shares (Note 2)... 16,416 28,098 37,050
-------------------------------------------------
Total common and
common equivalent shares........................ 4,419,006 4,459,599 4,528,298
Earnings per share - fully diluted.................. $ 2.83 $ 0.51 $ 2.87
-------------------------------------------------
-------------------------------------------------
</TABLE>
Note 1: See the Consolidated Statements of Income for Earnings per share
computations on page 5 of the Corporation's 1995 Annual Report to
Stockholders contained herein as Exhibit 2.
Note 2: The dilutive effect of common share equivalents was determined by
the treasury stock method.
<PAGE>
ANNUAL REPORT
1995
<PAGE>
- --------------------------------------------------------------------------------
[PINNACLE BANC GROUP LOGO]
FINANCIAL HIGHLIGHTS
PINNACLE BANC GROUP, INC.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Percent
1995 1994 Change
--------------------------------------------------------------------
<S> <C> <C> <C>
For the Year:
Net income............... $ 12,493,455 $ 2,255,497 N/M
Return on average
equity.................. 18.1% 3.4%
Return on average
assets.................. 1.55 0.32
Per Share:
Net income............... $ 2.83 $ 0.51 N/M
Book value............... 18.05 15.62 16%
Dividends................ 1.16 1.08 7
At Year End:
Total assets............. $818,697,283 $684,892,118 20%
Loans.................... 309,599,860 248,404,294 25
Portfolio funds.......... 443,754,703 389,315,596 14
Deposits................. 712,804,697 599,879,284 19
Notes payable............ 20,600,000 5,400,000 N/M
Stockholders' equity..... 78,960,815 68,835,677 15
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................................................... 2
Consolidated Financial Statements................................................ 4
Report of Independent Public Accountants......................................... 21
Selected Financial Data.......................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 23
Board of Directors, Executive Officers, Bank and Banking Center Presidents, and
Department Heads............................................................... 37
Shareholder Information.......................................................... 38
Corporate Information............................................................ 39
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
Each year this letter serves as our forum to report to you on Pinnacle's
performance for the past year as well as an opportunity to communicate our
objectives for the future. As we look back on 1995, we see a successful twelve
months on a number of fronts. Net income exceeded our initial expectations,
total assets were up 20%, and stockholders' equity increased 15%. Pinnacle's
common stock price increased 12%. An acquisition added two new banking centers
to the group and a conversion to a new data processor has given us the
technology necessary to provide enhanced service and to market products beyond
Pinnacle's previous capabilities.
FINANCIAL PERFORMANCE
Net income for 1995 was $12,493,000, or $2.83 per share, compared to $2,255,000,
or $0.51 per share earned in 1994. The substantial increase was the result of
large net securities losses recorded in 1994. In addition, a 5% increase in net
interest income and a lower provision for loan losses in 1995 compared with 1994
contributed to the improvement in earnings. The return on average equity was
18.1% in 1995 and the return on average assets totalled 1.55%.
Total assets were $818,697,000 at December 31, 1995, up 20% from the previous
year end. The increase was the result of the acquisition of Acorn Financial Corp
and its subsidiary bank, Suburban Trust & Savings Bank, in January, 1995.
Likewise, loans and deposits increased. At year-end 1995, total loans were
$309,600,000, up 25%, and total deposits amounted to $712,805,000, an increase
of 19% from the prior year end.
Stockholders' equity was $78,961,000 at December 31, 1995 which represented a
15% increase over the amount at year-end 1994. Book value per share amounted to
$18.05. Dividends of $1.16 per share were paid in 1995, up 7% from 1994.
The components of Pinnacle's earnings were similar to previous years. Net
securities gains totalled $4,730,000 in 1995 with three-fourths of the gains
resulting from Pinnacle's term portfolio and the remaining one-fourth from the
equity portfolio. While net interest income was up 5%, an increase in the level
of earning assets was the contributor. Pinnacle's net interest margin fell from
4.28% in 1994 to 3.90% in 1995 as the relatively low level of interest rates
coupled with a high volume of U. S. Government securities held compressed the
spread between the yields earned and the rates paid.
No provision for loan losses was made in 1995 compared to $900,000 provided in
1994. Net charge-offs amounted to $151,000, or 0.05% of average loans in 1995.
The allowance for loan losses was $6,023,000, or 1.95% of total loans at
December 31, 1995 compared to 1.70% of loans at year-end 1994. Total
nonperforming loans were $8,015,000 and other real estate owned amounted to
$284,000 at year-end 1995. While the total nonperforming asset total of
$8,299,000 increased 2.2 times from the amount at year-end 1994, approximately
one-half of the increase was the result of the Acorn transaction which added
significant dollars to Pinnacle's reserve for loan losses. Notwithstanding this
increase, several long-standing problem assets were resolved in 1995.
Nonperforming assets at December 31, 1995 were 2.68% of total loans plus other
real estate owned, and amounted to 1.01% of total assets.
THE BANKING SIDE
One of Pinnacle's stated objectives has been to improve the core earnings of the
banking function. Too many times Pinnacle is viewed on the outside for its
non-bank successes -- the investment portfolio, tax planning strategies and
other innovative programs unrelated to traditional banking. While these items
can continue to play an important part for Pinnacle, today's environment
mandates the importance of the core banking function.
Many of Pinnacle's successes in 1995 were with this factor in mind. The
acquisition of Acorn in January of 1995 added two locations to the Pinnacle
franchise. Pinnacle now has twelve banking locations, including seven within a
seven-mile radius in the near western suburbs.
Early in 1995, Pinnacle completed the conversion to a new data processing
system. While the obvious factors of enhanced customer service and improved
technology should be evident in any conversion, the corollary benefits were
substantial. For example, extensive training touched each employee and new data
capabilities provided information to take marketing and sales to a new level.
In this regard, Pinnacle expanded its advertising to include both television and
radio for the first time. Direct marketing also became a dominant program. Gone
are the days where bankers only needed to wait at their desks for customers to
walk in the door. Our challenge is to meet the competition of other banking
organizations and the non-bank financial providers with a stronger marketing and
sales culture. Pinnacle added ten new banking products including free checking,
new loan options and expanded trust and non-
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
bank products in its markets during the past year. We must make sure that the
current customer base and our perspective clients know what we have to offer.
The investment in technology and people in 1995 was supplemented by an
investment in facilities during the year. A newly constructed facility in Cicero
replaced an existing, outdated building. The core of the Pinnacle trust
department moved to the recently purchased Westmont facility in order to enhance
Pinnacle's visibility in a highly fertile market. In Elburn, on the western
fringe of the Chicago area, a new banking facility is under construction in
order to replace a less visible location.
The lending function continues to be an area of opportunity for Pinnacle. The
loan growth in 1995 resulted from the Acorn acquisition. While internal growth
on a year end-to-year end comparative basis was minimal without the acquisition,
a significant number of new credits were booked. In order to compete in a highly
competitive lending environment, we intend to be a little more aggressive on
pricing while keeping our credit standards intact.
OUR OBJECTIVES
Our goals remain the same: to enhance shareholder value by effectively
leveraging Pinnacle's equity base and to achieve returns on equity and assets
significantly in excess of peer group performance. We can accomplish these
objectives through continued acquisitions; our goal is to exceed $1 billion in
assets within the next twelve months. We will continue to repurchase Pinnacle
shares and we have increased the dividend payout in January, 1996, for the
eighth consecutive year. On the banking side, we will continue our efforts to
improve the core earnings of the bank and ensure that responsive, quality
service will differentiate Pinnacle banks from our competitors.
In any successful corporation, the organizational structure is a key component
in achieving corporate objectives. During the past two years, Pinnacle has been
undergoing a process which culminated in changes in executive management
effective January 1, 1996. On that date, John J. Gleason, Jr. was designated as
Chief Executive Officer of Pinnacle, succeeding John J. Gleason, Sr. who
continues as Chairman of the Board. William P. Gleason was named President of
Pinnacle succeeding Mark P. Burns. Mark, who had previously indicated a desire
to reduce his on-site commitment to Pinnacle, will continue to be active
primarily through business development, officer calling programs and sales
training.
The recently completed year of 1995 was a successful one for Pinnacle. The year
currently underway will be much more challenging. The relatively low rate
environment coupled with the high volume of U. S. Government securities and a
flat yield curve will continue to put pressure on Pinnacle's net interest margin
and its earnings in the near term. We have cautioned many times against putting
too much emphasis on one good or bad year or quarter of results for Pinnacle.
Our objective is to manage with a wider perspective. Over the past five years,
Pinnacle's return on equity has averaged 16.3% and the return on assets has
amounted to 1.50%. Both continue to be well in excess of peer group performance
and management is confident in its ability to continue to post strong results
over future periods.
We thank you for your continued support and assure you that maximizing
shareholder value remains our number one priority.
Sincerely,
/s/ John. J. Gleason, Jr.
John J. Gleason, Jr.
Vice Chairman and
Chief Executive Officer
- --------------------------------------------------------------------------------
3
<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.
- --------------------------------------------------------------------------------
4
<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.
- --------------------------------------------------------------------------------
5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SECURITIES
ADDITIONAL AVAILABLE
COMMON PAID-IN RETAINED FOR SALE,
STOCK CAPITAL EARNINGS NET OF 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.
- --------------------------------------------------------------------------------
6
<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.
- --------------------------------------------------------------------------------
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
(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.
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.
- --------------------------------------------------------------------------------
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
(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
- --------------------------------------------------------------------------------
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
(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
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair 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
----------------------------------------------------
<CAPTION>
1994
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair 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 35,534 25,534 3,733,130
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 2,347,315 245,712 366,145,692
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
-------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair 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 2,995,046 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>
- --------------------------------------------------------------------------------
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
(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>
(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
- --------------------------------------------------------------------------------
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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>
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>
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
- --------------------------------------------------------------------------------
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
(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.
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
- --------------------------------------------------------------------------------
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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>
Number Weighted
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>
RELATED-PARTY TRANSACTIONS: (12)
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 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.
- --------------------------------------------------------------------------------
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
(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.
(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
----------------------------
Estimated
Carrying 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
----------------------------
Estimated
Carrying 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
- --------------------------------------------------------------------------------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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 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.
(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
- --------------------------------------------------------------------------------
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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>
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>
- --------------------------------------------------------------------------------
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
20
<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.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 19, 1996
- --------------------------------------------------------------------------------
21
<PAGE>
SELECTED FINANCIAL DATA
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands; except per
share data) For the year ended December 31
------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income............... $ 53,297 $ 42,920 $ 40,779 $ 42,054 $ 44,362
Interest expense.............. 25,739 16,640 17,670 20,233 23,708
------------------------------------------------
Net interest income........... 27,558 26,280 23,109 21,821 20,654
Provision for loan losses... --0-- 900 1,700 1,753 680
------------------------------------------------
Net interest income after
provision for loan
losses..................... 27,558 25,380 21,409 20,068 19,974
Other income.................. 7,225 5,461 5,616 5,413 4,934
Net securities gains
(losses).................... 4,731 (9,845) 8,740 10,950 4,741
Other expense................. 23,882 21,060 20,467 20,282 18,133
------------------------------------------------
Income (loss) before
taxes...................... 15,632 (64) 15,298 16,149 11,516
Income tax provision
(benefit)................... 3,139 (2,319) 4,005 3,235 978
------------------------------------------------
Income before cumulative
effect of change in
accounting
for income taxes........... 12,493 2,255 11,293 12,914 10,538
Cumulative effect of change
in accounting for income
taxes...................... --0-- --0-- 1,700 --0-- --0--
------------------------------------------------
Net income.................... $ 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 taxes............. $ 2.83 $ 0.51 $ 2.50 $ 2.81 $ 2.25
Net income................ 2.83 0.51 2.87 2.81 2.25
Book value.................. 18.05 15.62 15.81 14.03 12.33
Dividends paid.............. 1.16 1.08 0.96 0.88 0.80
Average common and common
equivalent shares
outstanding on a fully
diluted basis............... 4,419 4,460 4,528 4,597 4,685
At end of year:
Total assets................ $818,697 $684,892 $722,382 $746,195 $580,501
Loans....................... 309,600 248,404 248,076 241,918 195,940
Portfolio funds............. 443,755 389,316 420,742 453,007 336,744
Deposits.................... 712,805 599,879 633,613 660,756 509,474
Notes payable............... 20,600 5,400 --0-- 14,509 7,400
Stockholders' equity........ 78,961 68,836 70,856 63,295 56,919
Selected financial ratios:
Return on average assets.... 1.55% 0.32% 1.80% 1.94% 1.86%
Return on average equity.... 18.09 3.35 18.88 21.49 19.50
Net interest margin......... 3.90 4.28 3.70 3.87 4.36
Dividend payout............. 40.89 213.70 33.22 31.13 35.48
Average equity to average
assets..................... 8.55 9.61 9.52 9.05 9.53
Allowance for loan losses to
year-end loans............. 1.95 1.70 1.43 1.24 1.28
Net charge-offs to average
loans...................... 0.05 0.09 0.48 0.75 0.52
Nonperforming assets to
year-end assets............ 1.01 0.54 1.29 0.74 1.33
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME
1995 COMPARED TO 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
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 banks and Federal
funds sold. Supporting liabilities primarily consist of deposits, short-term
borrowings and notes payable. A portion of Pinnacle's interest income is earned
on tax exempt investments 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
tax-equivalent basis.
An analysis of net interest income is presented in Table 1. The variance
analysis of net interest income due to rate and volume changes is contained in
Table 2.
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.
The average cost of interest-bearing liabilities increased 100 basis points to
4.02% in 1995 from
- --------------------------------------------------------------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
TABLE 1. ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended Year ended Year ended
December 31, 1995 December 31, 1994 December 31, 1993
--------------------------- --------------------------- ---------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits at
banks and Federal funds
sold......................... $ 19,137 $ 1,063 5.55% $ 1,742 $ 75 4.31% $ 6,224 $ 182 2.92%
Taxable securities............. 379,223 23,347 6.16 367,372 19,438 5.29 389,304 17,756 4.56
Non-taxable securities......... 36,140 3,895 10.78 34,966 4,429 12.67 40,439 5,070 12.54
Loans.......................... 309,818 26,454 8.54 248,000 20,611 8.31 238,826 19,605 8.21
--------------------------- --------------------------- ---------------------------
Total interest-earning
assets...................... 744,318 54,759 7.36 652,080 44,553 6.83 674,793 42,613 6.31
Noninterest-earning assets:
Cash and due from banks........ 23,755 18,107 18,581
Allowance for loan losses...... (6,383) (4,068) (3,542)
Other assets................... 46,455 33,542 33,473
-------- -------- --------
Total assets................. $808,145 $699,661 $723,305
-------- -------- --------
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $ 86,573 $ 1,732 2.00% $ 74,565 $ 1,376 1.85% $ 75,235 $ 1,487 1.98%
Savings deposits............... 219,852 6,852 3.12 215,662 5,721 2.65 222,344 6,446 2.90
Money market deposits.......... 50,732 1,489 2.94 50,509 1,295 2.56 54,021 1,349 2.50
Other time deposits............ 258,569 13,664 5.28 195,657 7,496 3.83 209,899 7,877 3.75
Short term borrowings.......... 589 39 6.62 10,989 470 4.28 2,728 88 3.23
Notes payable.................. 24,684 1,964 7.96 3,857 283 7.34 7,183 424 5.90
--------------------------- --------------------------- ---------------------------
Total interest-bearing
liabilities................. 640,999 25,740 4.02 551,239 16,641 3.02 571,410 17,671 3.09
Noninterest-bearing liabilities:
Demand deposits................ 91,481 74,827 75,839
Other liabilities.............. 6,588 6,358 7,162
Minority interest.............. --0-- --0-- 68
Stockholders' equity........... 69,077 67,237 68,826
-------- -------- --------
Total liabilities and
stockholders'
equity...................... $808,145 $699,661 $723,305
-------- -------- --------
Net interest income and margin..... $ 29,019 3.90% $ 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 years ended December 31, 1995,
1994 and 1993 were, in thousands, $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.
- --------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
TABLE 2. ANALYSIS OF VOLUME / RATE VARIANCE
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 versus 1994 1994 versus 1993
------------------------- ------------------------
Change due to Change due to
---------------- Total --------------- Total
Volume Rate Change Volume Rate Change
------------------------- -------------------------
<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.
------------------------------
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 potential losses in the loan portfolio, and prevailing economic
conditions.
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 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
- --------------------------------------------------------------------------------
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
------------------------
TABLE 3. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding....................... $309,818 $248,000 $238,826 $185,797 $200,551
------------------------------------------------
Total loans at year end......................... $309,600 $248,404 $248,076 $241,918 $195,940
------------------------------------------------
Allowance for loan losses at beginning of
year.......................................... $ 4,229 $ 3,547 $ 3,001 $ 2,517 $ 2,542
Balance acquired................................ 1,945 --0-- --0-- 130 347
Loans charged off:
Commercial and other.......................... 257 186 769 692 877
Consumer...................................... 115 78 107 313 309
Real estate................................... --0-- 42 552 667 5
------------------------------------------------
Total....................................... 372 306 1,428 1,672 1,191
------------------------------------------------
Recoveries of loans previously charged off:
Commercial and other.......................... 168 14 126 198 72
Consumer...................................... 53 65 86 74 67
Real estate................................... --0-- 9 62 1 -0-
------------------------------------------------
Total....................................... 221 88 274 273 139
------------------------------------------------
Net loans charged off........................... 151 218 1,154 1,399 1,052
------------------------------------------------
Provision charged to expense.................... --0-- 900 1,700 1,753 680
------------------------------------------------
Allowance for loan losses at end of year........ $ 6,023 $ 4,229 $ 3,547 $ 3,001 $ 2,517
------------------------------------------------
Ratio of net charge-offs to average loans
outstanding................................... 0.05% 0.09% 0.48% 0.75% 0.52%
------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. Table 4 provides data regarding nonperforming assets.
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 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.
------------------------
TABLE 4. NON-PERFORMING ASSETS
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual.................. $4,791 $ 748 $5,283 $2,646 $3,294
Past due 90 days or more and
still accruing............ 2,293 552 585 1,067 2,713
Restructured................ 931 --0-- --0-- --0-- 1,629
--------------------------------------
Nonperforming loans....... $8,015 $1,300 $5,868 $3,713 $7,636
--------------------------------------
Other real estate owned..... $ 284 $2,416 $3,444 $1,803 $ 87
Ratios:
Nonperforming loans/total
loans.................... 2.59% 0.52% 2.37% 1.53% 3.90%
Nonperforming assets/total
assets................... 1.01 0.54 1.29 0.74 1.33
Net charge-offs/average
loans.................... 0.05 0.09 0.48 0.75 0.52
Allowance for loan
losses/total loans....... 1.95 1.70 1.43 1.24 1.28
Allowance for loan
losses/nonperforming
loans.................... 75.15 325.28 60.44 80.82 32.96
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. A detailed
analysis of income taxes and the components of the deferred tax assets is
contained in Note 7 to the Consolidated Financial Statements. At December 31,
1995, Pinnacle had a consolidated Federal net 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.
NET INCOME
1994 COMPARED TO 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
- --------------------------------------------------------------------------------
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. A detailed analysis of income taxes and the components of
the deferred tax assets is contained in Note 7 to the Consolidated Financial
Statements. 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.
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. A detailed
analysis of securities, including unrealized gains and losses as well as
maturity schedules is contained in Note 3 to the Consolidated Financial
Statements.
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.
- --------------------------------------------------------------------------------
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. Table 5 provides an analysis of deposits by category for the past
three years.
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-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. As indicated by the mix of deposits shown on Table 5, 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.
------------------------
TABLE 5. PERCENTAGE OF TOTAL DEPOSITS BY CATEGORY
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
Amount Pct. Amount Pct. Amount Pct.
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand:
Noninterest-bearing....... $ 96,715 13.6% $ 73,922 12.3% $ 81,625 12.9%
Interest-bearing.......... 89,230 12.5 74,699 12.5 77,745 12.3
Savings..................... 211,615 29.7 202,172 33.7 223,058 35.2
Money market................ 46,179 6.5 49,297 8.2 54,658 8.6
Other time less than
$100,000.................. 236,462 33.2 181,967 30.3 183,728 29.0
Other time greater than
$100,000.................. 32,604 4.5 17,822 3.0 12,799 2.0
---------------------------------------------------
TOTAL DEPOSITS.............. $712,805 100% $599,879 100% $633,613 100%
---------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
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
As is characteristic of the banking industry, Pinnacle's indicators of liquidity
are principally its deposit base, loan and securities 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, 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
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
- --------------------------------------------------------------------------------
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
Table 6 details the Corporation's interest rate sensitive position at December
31, 1995. The table is one method of monitoring the interest rate risk of the
Corporation. 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. The Corporation 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.
------------------------
TABLE 6. INTEREST RATE SENSITIVITY POSITION
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1-90 91-180 181-365 Over 1
Days Days Days Year Total
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Interest-bearing deposits... $ 15,642 $ 98 $ 591 $ 495 $ 16,826
Taxable securities.......... 375,550 4,169 212 2,402 382,333
Tax-exempt securities....... 1,154 --0-- 956 23,730 25,840
Loans, net.................. 67,978 17,253 25,963 193,075 304,269
------------------------------------------------
Total..................... 460,324 21,520 27,722 219,702 729,268
------------------------------------------------
Cumulative total.......... $460,324 $481,844 $509,566 $729,268
--------------------------------------
Rate Sensitive Liabilities:
Interest-bearing demand..... $ --0-- $ --0-- $ --0-- $ 89,230 $ 89,230
Savings deposits............ 257,794 --0-- --0-- --0-- 257,794
Time deposits............... 75,452 61,844 74,911 56,859 269,066
Purchased funds............. --0-- --0-- --0-- --0-- --0--
Notes payable............... 20,600 --0-- --0-- --0-- 20,600
------------------------------------------------
Total..................... 353,846 61,844 74,911 146,089 636,690
------------------------------------------------
Cumulative total.......... $353,846 $415,690 $490,601 $636,690
--------------------------------------
Cumulative gap............ $106,478 $ 66,154 $ 18,965 $ 92,578
--------------------------------------
Cumulative ratio of earning
assets to interest-bearing
liabilities.................. 1.30x 1.16x 1.04x 1.15x
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 4.79x for 1-90 days; 3.05x for 91-180 days; and 2.19x for
181-365 days.
- --------------------------------------------------------------------------------
36
<PAGE>
BOARD OF DIRECTORS, EXECUTIVE OFFICERS, BANK AND BANKING CENTER
PRESIDENTS, AND DEPARTMENT HEADS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Richard W. Burke, PARTNER, BURKE, WARREN & MACKAY, P.C.
Mark P. Burns, VICE CHAIRMAN OF SUBSIDIARY BANKS
William J. Finn, Jr., PRESIDENT, FINN INSURANCE AGENCY, INC.
Samuel M. Gilman, PARTNER, COYLE, GILMAN & STENGEL
Albert Giusfredi, PRESIDENT, HEADLY MANUFACTURING CO.
John J. Gleason, CHAIRMAN
John J. Gleason, Jr., VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
William P. Gleason, PRESIDENT AND TREASURER
James L. Greene, PRESIDENT, JIM GREENE ASSOCIATES, INC.
Donald G. King, FORMER CHAIRMAN, FIRST NATIONAL BANK IN HARVEY
James A. Maddock, PRESIDENT, MADDOCK INDUSTRIES
James J. McDonough, PRESIDENT, MCDONOUGH ASSOCIATES
William C. Nickels, CHAIRMAN, REPLOGLE GLOBES, INC.
John E. O'Neill, PRESIDENT, F.C. PILGRIM & COMPANY
James R. Phillip, Jr., PRESIDENT, PHILLIP'S FLOWERS AND GIFTS
Kenneth C. Whitener, Jr., EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
EXECUTIVE OFFICERS
John J. Gleason, CHAIRMAN
John J. Gleason, Jr., VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
William P. Gleason, PRESIDENT AND TREASURER
Kenneth C. Whitener, Jr., EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
Richard W. Burke, SECRETARY
BANK AND BANKING CENTER PRESIDENTS
Robert A. Becker, BATAVIA SAVINGS BANK, F.S.B.
Robert J. Boucek, LAGRANGE PARK AND WESTMONT BANKING CENTERS
Mark P. Burns, VICE CHAIRMAN
Larry R. Clark, PINNACLE BANK OF THE QUAD-CITIES
William P. Gleason, PINNACLE BANK AND BERWYN BANKING CENTER
Dennis J. Irvin, HARVEY BANKING CENTER
Richard G. Pogvara, OAK PARK BANKING CENTER
William A. Spoo, CICERO BANKING CENTER
DEPARTMENT HEADS
J. Frank Daly, TRUST DEPARTMENT
Robert F. Geringer, Jr., DIRECTOR OF AUDITING
Glenn M. Mazade, CHIEF CREDIT OFFICER
Denise Medema, DIRECTOR OF PERSONNEL
Sara J. Mikuta, CHIEF FINANCIAL OFFICER
Ronald J. Rous, CASHIER
David F. Spiewak, DIRECTOR OF OPERATIONS
Kenneth C. Whitener, Jr., CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
37
<PAGE>
SHAREHOLDER INFORMATION
- ----------------------------------------------------------------------
MARKET PRICE AND The Corporation's common stock is traded in the
DIVIDENDS over-the- counter market and is quoted on the
National Association of Securities Dealers Automated
Quotation System (NASDAQ) under the Small-Cap Issues.
The Corporation's ticker symbol is "PINN" and
newspaper listings use the abbreviations "PinBG" and
"PinclBcs". The following table sets forth the high
and low sales price by quarter as reported by NASDAQ.
<TABLE>
<CAPTION>
1995
----------------------------------
Cash
Quarter High Low Dividends
----------------------------------
<S> <C> <C> <C>
First $31.50 $26.75 $0.29
Second 33.25 29.00 0.29
Third 32.00 28.00 0.29
Fourth 34.00 29.00 0.29
<CAPTION>
1994
----------------------------------
Cash
Quarter High Low Dividends
----------------------------------
<S> <C> <C> <C>
First $36.50 $30.50 $0.27
Second 33.00 30.50 0.27
Third 33.00 26.50 0.27
Fourth 30.50 26.75 0.27
</TABLE>
MARKET MAKERS Principal market makers are The Chicago Corporation
and Howe Barnes Investments, Inc.
TRANSFER AGENT The Transfer Agent for the Corporation's common stock
is Harris Trust and Savings Bank, Corporate Agencies
Administration Division, P. O. Box 755, Chicago,
Illinois 60690.
FORM 10-K The Form 10-K Annual Report filed with the Securities
and Exchange Commission can be obtained by written
request to the Vice Chairman of the Corporation.
NOTICE OF MEETING A meeting of Shareholders of Pinnacle Banc Group,
Inc. will be held at the Drake Oak Brook Plaza Office
Building, Lower Level Conference Room, 2215 York
Road, Oak Brook, Illinois on Tuesday, April 16, 1996
at 3:00 p.m.
- --------------------------------------------------------------------------------
38
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
PINNACLE BANC GROUP, INC.
Corporate Headquarters
2215 York Road, Suite 208
Oak Brook, Illinois 60521
[PINNACLE BANC GROUP LOGO] 708/574-3550
SUBSIDIARY BANKS
PINNACLE BANK PINNACLE BANK OF THE QUAD-CITIES
CICERO BANKING CENTER SILVIS BANKING CENTER
6000 West Cermak Road Eleventh Street at First Avenue
Cicero, Illinois 60650 Silvis, Illinois 61282
and 309/752-1200
2500 South Cicero Avenue GREEN ROCK-COLONA BANKING CENTER
Cicero, Illinois 60650 107 First Street
708/780-5000 Green Rock, Illinois 61241
OAK PARK BANKING CENTER 309/792-3384
840 South Oak Park Avenue BATAVIA SAVINGS BANK, F.S.B.
Oak Park, Illinois 60304 BATAVIA BANKING CENTER
708/848-6700 165 West Wilson Street
HARVEY BANKING CENTER Batavia, Illinois 60510
174 East 154th Street 708/879-5300
Harvey, Illinois 60426 ELBURN BANKING CENTER
708/333-2010 100 South Main Street
BERWYN BANKING CENTER Elburn, Illinois 60119
7112 West Cermak Road 708/365-9292
Berwyn, Illinois 60402
and
7373 West 25th Street
North Riverside, Illinois 60546
708/788-4700
LAGRANGE PARK BANKING CENTER
Oak Avenue at Sherwood Road
LaGrange Park, Illinois 60525
708/579-2000
WESTMONT BANKING CENTER
640 Pasquinelli Drive
Westmont, Illinois 60559
708/654-2800
- --------------------------------------------------------------------------------
39
<PAGE>
EXHIBIT 13.2 - INDEPENDENT AUDITOR'S REPORT
Independent Auditors' Report provided by Crowe, Chizek
and Company regarding the 1993 and 1992 financial
statements of Batavia Savings Bank, F.S.B., a subsidiary
of the Corporation.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Batavia Savings Bank, F.S.B.
Batavia, Illinois
We have audited the accompanying statements of income, changes in stockholder's
equity and cash flows of Batavia Savings Bank, F.S.B. (the "Bank") for the year
ended December 31, 1993. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all material
respects, the results of operations and cash flows of Batavia Savings Bank,
F.S.B. for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Bank changed its method
of accounting for income taxes for the year ended December 31, 1993, in
accordance with Statement of Financial Accounting Standards No. 109.
Crowe, Chizek and Company
Oak Brook, Illinois
January 15, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT TO SECURITY HOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 27272616
<INT-BEARING-DEPOSITS> 2725891
<FED-FUNDS-SOLD> 14100000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426928812
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 309599860
<ALLOWANCE> (6023011)
<TOTAL-ASSETS> 818697283
<DEPOSITS> 712804697
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6331771
<LONG-TERM> 20600000
0
0
<COMMON> 20505323
<OTHER-SE> 58455492
<TOTAL-LIABILITIES-AND-EQUITY> 818697283
<INTEREST-LOAN> 26316430
<INTEREST-INVEST> 25918321
<INTEREST-OTHER> 1062640
<INTEREST-TOTAL> 53297391
<INTEREST-DEPOSIT> 23736816
<INTEREST-EXPENSE> 25739322
<INTEREST-INCOME-NET> 27558069
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 4730481
<EXPENSE-OTHER> 23881938
<INCOME-PRETAX> 15632455
<INCOME-PRE-EXTRAORDINARY> 12493455
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12493455
<EPS-PRIMARY> 2.83
<EPS-DILUTED> 2.83
<YIELD-ACTUAL> 3.90
<LOANS-NON> 4791000
<LOANS-PAST> 2293000
<LOANS-TROUBLED> 931000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4228608
<CHARGE-OFFS> (372289)
<RECOVERIES> 220751
<ALLOWANCE-CLOSE> 6023011
<ALLOWANCE-DOMESTIC> 2259859
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3763152
</TABLE>
