<PAGE>
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- -----------------
Commission File Number: 0-18283
PINNACLE BANC GROUP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3190818
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2215 York Road, Suite 208, Oak Brook, Illinois 60521
----------------------------------------------------
(Address of principal executive offices)
(708) 574-3550
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(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 6, 1996, the
registrant had 4,302,716 shares
outstanding of common stock,
$4.69 par value.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Presented on the following pages are the unaudited consolidated balance
sheets of Pinnacle Banc Group, Inc. and subsidiaries ("Pinnacle") for June 30,
1996 and December 31, 1995, the related consolidated statements of income for
the three and six month periods ended June 30, 1996 and 1995, and the related
consolidated statements of cash flows for the six month periods ended June 30,
1996 and 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for a complete
financial statement. In the opinion of management, all adjustments, such as
estimated provisions for profit sharing and bonus arrangements normally
determined at year end, considered necessary for a fair presentation have been
included.
Footnote disclosure has been made about an event subsequent to year end
where Pinnacle has entered into a definitive agreement to acquire Financial
Security Corp. ("Financial Security") and its wholly-owned subsidiary, Security
Federal Savings and Loan Association of Chicago, ("Security Federal") and the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The remaining footnote disclosure has been omitted since it
would substantially duplicate the disclosure contained in the latest audited
financial statements of Pinnacle contained in the 1995 Annual Report to
Shareholders.
2
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks . . . . . . . . . . . $24,901,989 $27,272,616
Federal funds sold. . . . . . . . . . . . . . 1,950,000 14,100,000
-------------- --------------
Total cash and cash equivalents . . . . . . 26,851,989 41,372,616
Interest-bearing deposits . . . . . . . . . . 3,439,380 2,725,891
Securities:
Available for sale. . . . . . . . . . . . . 426,207,187 426,928,812
(amortized cost: 6/30/96 - $418,911,000
12/31/95 - $418,637,000
Loans . . . . . . . . . . . . . . . . . . . . 330,977,732 309,599,860
Less: Allowance for loan losses. . . . . . . (6,061,167) (6,023,011)
-------------- --------------
Net loans . . . . . . . . . . . . . . . . . 324,916,565 303,576,849
Premises and equipment. . . . . . . . . . . . 16,786,137 15,565,402
Goodwill and other intangibles. . . . . . . . 18,233,757 19,177,420
Other assets. . . . . . . . . . . . . . . . . 14,264,825 9,350,293
-------------- --------------
Total . . . . . . . . . . . . . . . . . . . $830,699,840 $818,697,283
-------------- --------------
-------------- --------------
LIABILITIES:
Demand deposits:
Noninterest-bearing . . . . . . . . . . . . $ 93,740,575 $ 96,714,490
Interest-bearing. . . . . . . . . . . . . . 86,851,089 89,230,444
Savings deposits. . . . . . . . . . . . . . . 251,924,688 257,793,601
Other time deposits . . . . . . . . . . . . . 272,496,516 269,066,162
-------------- --------------
Total deposits. . . . . . . . . . . . . . . 705,012,868 712,804,697
Short-term borrowings . . . . . . . . . . . . 17,500,000 0
Notes payable . . . . . . . . . . . . . . . . 25,950,000 20,600,000
Other liabilities . . . . . . . . . . . . . . 5,848,366 6,331,771
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Total liabilities . . . . . . . . . . . . . 754,311,234 739,736,468
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock . . . . . . . . . . . . . . . 0 0
1,000 shares authorized, none issued
Common stock, $4.69 par . . . . . . . . . . . 20,168,981 20,505,323
20,000,000 shares authorized; shares
issued and outstanding: 6/30/96: 4,302,716
12/31/95: 4,374,469
Additional paid-in capital. . . . . . . . . . 18,001,282 17,897,900
Retained earnings . . . . . . . . . . . . . . 33,648,561 33,505,657
Unrealized gains in securities available
for sale, net of tax. . . . . . . . . . . . 4,569,782 7,051,935
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Total stockholders' equity. . . . . . . . . 76,388,606 78,960,815
-------------- --------------
Total . . . . . . . . . . . . . . . . . . . $830,699,840 $818,697,283
-------------- --------------
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</TABLE>
3
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . . . . . . . . . $ 6,898,703 $ 6,641,702 $13,357,598 $13,286,526
Securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . 5,729,645 6,009,625 11,031,387 12,043,657
Tax exempt . . . . . . . . . . . . . . . . . . . . 435,559 681,469 879,585 1,521,894
Interest-bearing deposits, Federal funds sold
and other. . . . . . . . . . . . . . . . . . . . . 52,004 261,279 153,110 535,276
------------- ------------- ------------- -------------
Interest income. . . . . . . . . . . . . . . . . . 13,115,911 13,594,075 25,421,680 27,387,353
------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand. . . . . . . . . . . . . . 456,045 443,328 905,041 847,197
Savings. . . . . . . . . . . . . . . . . . . . . . 1,919,196 2,110,901 3,837,524 4,205,879
Other time . . . . . . . . . . . . . . . . . . . . 3,671,501 3,341,811 7,360,060 6,412,055
Short-term borrowings. . . . . . . . . . . . . . . . 106,830 964 108,987 36,959
Notes payable. . . . . . . . . . . . . . . . . . . . 425,449 563,622 781,957 1,127,876
------------- ------------- ------------- -------------
Interest expense . . . . . . . . . . . . . . . . . 6,579,021 6,460,626 12,993,569 12,629,966
------------- ------------- ------------- -------------
Net Interest Income. . . . . . . . . . . . . . . . . . 6,536,890 7,133,449 12,428,111 14,757,387
Provision for loan losses. . . . . . . . . . . . . . 0 75,000 0 150,000
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses. . . . . . . . . . . . . . . . . 6,536,890 7,058,449 12,428,111 14,607,387
------------- ------------- ------------- -------------
OTHER INCOME:
Banking services and other . . . . . . . . . . . . . 1,175,590 1,101,151 2,389,360 2,550,347
Trust services . . . . . . . . . . . . . . . . . . . 571,361 553,755 1,118,060 1,024,391
Net securities gains (losses). . . . . . . . . . . . (130,573) 3,450,348 133,149 4,265,161
------------- ------------- ------------- -------------
Other income . . . . . . . . . . . . . . . . . . . 1,616,378 5,105,254 3,640,569 7,839,899
------------- ------------- ------------- -------------
OTHER EXPENSE:
Salaries, profit sharing and other
employee benefits. . . . . . . . . . . . . . . . . 3,020,669 2,936,280 6,031,989 5,903,671
Occupancy. . . . . . . . . . . . . . . . . . . . . . 670,392 1,055,419 1,348,833 1,642,594
Amortization of goodwill and other intangibles . . . 471,832 471,832 943,664 941,475
Other expenses . . . . . . . . . . . . . . . . . . . 1,760,762 2,156,739 3,263,872 4,187,939
------------- ------------- ------------- -------------
Other expense. . . . . . . . . . . . . . . . . . . 5,923,655 6,620,270 11,588,358 12,675,679
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . . . . . . . 2,229,613 5,543,433 4,480,322 9,771,607
Provision for income taxes . . . . . . . . . . . . . (8,000) 887,000 686,000 1,709,000
------------- ------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 2,237,613 $ 4,656,433 $ 3,794,322 $ 8,062,607
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING. . . . . . . . . 4,341,989 4,432,616 4,365,836 4,432,445
EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . $ 0.51 $ 1.05 $ 0.87$ 1.82
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,794,322 $ 8,062,607
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 703,905 613,396
Amortization of goodwill and other intangibles . . . . . . . . 943,664 941,475
Amortization of purchase accounting adjustments. . . . . . . . 138,574 18,132
Discount accretion . . . . . . . . . . . . . . . . . . . . . . (6,255,033) (11,645,524)
Premium amortization . . . . . . . . . . . . . . . . . . . . . 244,269 117,815
Provision for loan losses. . . . . . . . . . . . . . . . . . . 0 150,000
Gain on sale of securities . . . . . . . . . . . . . . . . . . (133,149) (4,265,899)
Decrease (increase) in interest receivable . . . . . . . . . . (5,063,458) 299,053
Increase in interest payable . . . . . . . . . . . . . . . . . 275,749 179,905
Decrease in other assets . . . . . . . . . . . . . . . . . . . 148,927 1,477,449
Decrease in other liabilities. . . . . . . . . . . . . . . . . (759,155) (272,856)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (123,161) (17,762)
--------------- ---------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . (9,878,868) (12,404,816)
Net cash used for operating activities . . . . . . . . . . (6,084,546) (4,342,209)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash portion of acquisition, net of cash acquired. . . . . . . . . 0 (14,799,803)
Proceeds from sale of securities . . . . . . . . . . . . . . . . . 1,098,133,712 1,664,347,216
Proceeds from maturities and paydowns of securities. . . . . . . . 4,441,370 18,450,558
Purchase of securities . . . . . . . . . . . . . . . . . . . . . . (1,096,953,320) (1,662,312,651)
Net decrease (increase) in interest-bearing deposits . . . . . . . (713,489) 8,822,025
Net loan principal (advanced) collected. . . . . . . . . . . . . . (21,268,903) 14,743,390
Premises and equipment expenditures. . . . . . . . . . . . . . . . (2,047,220) (730,754)
--------------- ---------------
Net cash provided by (used for) investing activities . . . (18,407,850) 28,519,981
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in total deposits . . . . . . . . . . . . . . . . . . (7,791,829) (27,807,913)
Net increase (decrease) in short-term borrowings . . . . . . . . . 17,500,000 (3,800,000)
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . 10,250,000 32,400,000
Principal reductions of notes payable. . . . . . . . . . . . . . . (4,900,000) (13,700,000)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . 132,285 417,215
Purchase and retirement of common stock. . . . . . . . . . . . . . (2,513,269) (855,165)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (2,705,418) (2,562,860)
--------------- ---------------
Net cash provided by (used for) financing activities . . . 9,971,769 (15,908,723)
Net increase (decrease) in cash and cash equivalents . . . . . . . (14,520,627) 8,269,049
Cash and cash equivalents at beginning of period . . . . . . . . . 41,372,616 20,265,069
--------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 26,851,989 $ 28,534,118
--------------- ---------------
--------------- ---------------
CASH PAID DURING PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,717,820 $ 12,450,061
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 816,000 835,000
</TABLE>
NOTE: On January 6, 1995, Acorn Financial Corp and its subsidiary,
Suburban Trust & Savings Bank, were purchased by Pinnacle for $23,413,897 in
cash. At the date of purchase, the balance sheet of Acorn included cash and
cash equivalents of $8,614,094 resulting in a net cash position of $14,799,803.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
SUBSEQUENT EVENT:
On April 22, 1996, Pinnacle entered into a definitive agreement to acquire
Financial Security and its wholly-owned subsidiary, Security Federal. Pursuant
to the agreement, Financial Security will merge into Pinnacle with Security
Federal initially becoming a separate subsidiary of Pinnacle. Under the terms
of the agreement, holders of Financial Security common stock will receive $28.50
per share, subject to adjustment, in cash, Pinnacle common stock, or a
combination thereof. The aggregate transaction value is estimated to be
$47,000,000. At December 31, 1995, Financial Security had total assets of
$277,000,000, loans of $194,000,000, deposits of $194,000,000, and stockholders'
equity of $39,000,000.
The acquisition agreement is subject to approval by the shareholders of
Financial Security and Pinnacle, approval of the appropriate regulatory
authorities, and satisfaction of certain other customary conditions. It is
anticipated that the transaction will be completed in the third quarter of 1996.
LONG-LIVED ASSETS:
On January 1, 1995, Pinnacle adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The standard requires evaluation
of impairment of long-lived assets to be reviewed when indicators of impairment
are present. Indicators of impairment include, but are not limited to, a
significant decrease in the market value of an asset; a significant change in
the manner an asset is used; or a significant adverse change in legal, business
or regulatory factors which affect the ability to use the asset. The fair value
of the long-lived assets is compared to the carrying value, and any impairment
is recorded in current earnings. Currently, there are no indicators present to
warrant any evaluation of the impairment of Pinnacle's long-lived assets and,
thus, there is no effect of the adoption of this standard on the financial
position and results of operations of Pinnacle.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INCOME - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Consolidated net income was $3,794,000, or $0.87 per share, on a fully
diluted basis for the six months ended June 30, 1996, compared to the
$8,063,000, or $1.82 per share, earned in the first six months of 1995. The
annualized return on average assets was 0.94% for the first six months of 1996
and 1.98% for the first six months of 1995. For each period, the return on
average equity was 10.7% and 23.8%, respectively. Return on average assets and
equity for the same periods, calculated using the effects of SFAS No. 115, would
not be materially different.
The primary factors for lower earnings were twofold. Net interest income
decreased 16% compared to the same period one year ago, with a corresponding
decrease in the net interest margin from 4.19% to 3.49% for the same periods.
Low interest rates, the relatively level yield curve and the high level of
Pinnacle's U. S. Government Securities have continued to put pressure on the net
interest margin. Securities gains were $133,000 compared with $4,265,000 of the
same period a year ago, also the product of a relatively flat yield curve.
Other income, excluding net securities gains, decreased 2% compared with
the same period of 1995. Other expenses decreased 9%, more than offsetting the
decrease in other income.
NET INTEREST INCOME
The primary component of Pinnacle's consolidated earnings is net interest
income, or the difference between interest income on earning assets and interest
paid on supporting liabilities. The net interest margin is net interest income
expressed as a percentage of average earning assets. Pinnacle's earning assets
consist of loans, securities, interest-bearing deposits at financial
institutions and Federal funds sold. Supporting liabilities primarily consist
of deposits, Federal funds purchased and Pinnacle's 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 taxable equivalent basis.
During the first six months of 1996, Pinnacle's average earning assets were
$741,451,000, a 1% decrease from the comparable period of the previous year.
The net interest margin for the first six months of 1996 was 3.49%, down from
4.19% of the same period a year ago. Net interest income on a fully taxable
equivalent basis was $12,940,000 for the first six months of 1996, or 17% lower
than the comparable period in 1995. Actual net interest income decreased 16% as
the result of the decrease in the net interest margin and the decrease in
average earning assets.
The yield earned on total earning assets was 7.00% for the first six months
of 1996 compared to 7.57% for the same period of 1995. The decrease resulted
from a lower level of yields earned on interest-bearing deposits and Federal
funds sold and taxable securities in the first six months of 1996 compared with
the first six months of 1995. The average rate earned on interest-bearing
deposits and Federal funds sold decreased 22 basis points to 5.12% from the
first six months of 1995. This decrease was the result of the general decrease
in the interest rates earned on overnight deposits as well as the run-off of
higher earning interest-bearing deposits received through the acquisition of
Acorn Financial Corp ("AFC"). The average rate on taxable securities was 5.58%
for the first six
7
<PAGE>
months of 1996 compared with 6.45% for the first six months of 1995. The
decrease in the yield on taxable securities was a result of reinvestment of U.
S. Government securities at rates lower than a year ago. The average volume of
taxable securities increased $21,614,000 in the comparable period. The average
rate on non-taxable securities increased by 30 basis points. This increase was
the result of the sale in the first six months of 1995 of certain tax-exempt
securities obtained in the AFC, together with the reduction in the calls and
maturities of high-yielding zero coupon bonds which also occurred in 1995. The
volume in this category decreased $16,490,000, with the offset in taxable
securities and loans. The rate earned on loans decreased slightly due to the
competitive pressures of both the commercial and mortgage markets. Offsetting
the slight reduction in the rate earned on loans was the increase in the average
volume by $5,000,000. Total interest income, on a fully taxable equivalent
basis, decreased $2,295,000 due to both the decrease in yields and earning
assets.
The average cost of interest-bearing liabilities increased 18 basis points
to 4.08% from 3.90% paid in the first six months of 1995. The average rate paid
on interest-bearing demand deposits and savings deposits decreased 7 basis
points while rates paid on money market deposits increased 50 basis points.
Pinnacle has taken action at appropriate intervals to adjust the rates on all
deposits to not only keep them in line with market rates, but to meet the needs
of its particular customer bases. For example, two of the subsidiary banks have
added a third level of interest rates for certain of its high-balance money
market customers. This move was done to avert the move of these customers to
money market mutual funds. The average rate paid on other time deposits has
increased 41 basis points. Rates have remained relatively flat on time deposits
for 1996; however, the effect of management's increases in rates paid on longer-
term time deposits in previous years are continuing to add to the increased rate
paid. The increase in rates paid on other time deposits in previous quarters
has also caused customers to switch their savings deposits into other time
deposits, as evidenced by the decrease in savings deposits and the corresponding
increase in the average balance of other time deposits.
The average rate paid on short-term borrowings increased 12 basis points,
while the average balance increased $2,591,000. Increases or decreases in the
average balance of this category fluctuate due to Pinnacle's subsidiary banks'
daily liquidity needs. The average balance in Pinnacle's notes payable
increased $5,990,000; while the rate paid decreased 94 basis points. This
decrease was due to lower rates in indices (Prime or LIBOR) which is the
interest basis the notes payable are tied.
Although the average balance in interest-paying liabilities has decreased
since the first six months of 1995 and rates have increased only slightly, the
shift of deposits to higher paying deposit categories has resulted in interest
expense being $364,000 higher in the first six months of 1996 compared to the
same period of 1995.
A detailed Analysis of Net Interest Income for the six and three month
periods ended June 30, 1996 and 1995 is included on Pages 15 and 16.
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.
There was no provision for loan losses in the first six months of 1996,
compared to $150,000
8
<PAGE>
for the first six months of 1995. In the fourth quarter of 1995, Pinnacle
reversed the provision for loan losses made in the first six months due to
several factors, including the level of allowance for possible loan losses to
total loans, which has been steadily increasing for the last five years,
management's assessment of the overall adequacy for allowance for loan losses,
as well as the downward trend of net charge-offs to loans. Pinnacle had net
recoveries of $38,000 in the first six months of 1996 compared to net recoveries
of $55,000 in 1995. The allowance for loan losses was $6,061,000, or 1.83% of
total loans, at June 30, 1996, compared to 1.95% at December 31, 1995.
Total nonperforming assets totalled $7,242,000 at June 30, 1996, a decrease
of $1,057,000, over the $8,299,000 at December 31, 1995. Non-performing assets
consisted of $4,708,000 in non-accrual loans, $1,436,000 in loans past due
greater than 90 days and still accruing, $884,000 in restructured loans, and
$214,000 in other real estate owned. Investment in impaired loans as defined by
management totalled $5,030,000 at quarter end, with $3,626,000 in commercial
loans and the remaining balance in real estate loans. All are included in the
above total nonperforming assets amount.
NONINTEREST INCOME AND EXPENSE
The major components of Pinnacle's noninterest income consist of service
charges on deposit accounts and other banking income, trust fees and net gains
or losses on the sale of securities. Fees on banking services and other income
were $2,389,000 for the six months ended June 30, 1996 compared to $2,550,000 in
the same period of 1995. Income on the sale of non-deposit type products
increased $105,000 from 1995, while in 1995 there was a gain on the sale of an
installment note of approximately $319,000. Trust fees increased 9% on a
period-to-period basis. Total trust assets under management amounted to
$259,000,000 at June 30, 1996, or a 14% increase of a year ago.
Gains on the sale of securities, on a pre-tax basis, were $133,000 for the
first six months of 1996 compared to net gains of $4,265,000 in the same period
of 1995. The net gains in 1996 are related to the sales in Pinnacle's U. S.
Government securities portfolio. The gains in 1995 related to the sale of U. S.
Government securities as well as the sale of an equity security and sale of
securities acquired through the purchase of AFC in 1995.
Security sales relating to Pinnacle's U. S. Government securities portfolio
are made as part of Pinnacle's disciplined portfolio funds management system.
The timing of these sales and the determination of the acceptable maturity for
the reinvestment of the proceeds is made dependent on the slope of the yield
curve and on management's assessment of the acceptable interest rate risk for
Pinnacle. The use of the securities portfolio to manage interest rate risk is
especially crucial to Pinnacle because of the fact its loan to asset ratio is an
unusually low 40%. This results in a securities portfolio significantly larger
than comparable financial institutions.
Management has always viewed the gains recorded on this program as closely
related to its net interest income as opposed to one-time security gains or
losses. Accordingly, since implementation of the program, the yield on
Pinnacle's U. S. Government portfolio has outperformed the U. S. Treasury yield
by 31 basis points and by including the net gains since inception of the
program, the total yield is 137 basis points higher than the same Index. For
the first six months of 1996, due to the relative flatness of the yield curve,
the portfolio has only outperformed the Index by 14 basis points and by
including the net gain, by 22 basis points.
Noninterest expense decreased 9% for the first six months of 1996 compared
to the same period last year. Employee compensation and benefits increased 2%
due to normal raises. Occupancy
9
<PAGE>
expense decreased 18%, primarily due to a $434,000 write-off of a branch
building demolished in the first six months of 1995. Offsetting that reduction
was the increase in real estate taxes and depreciation for the new building
built to replace the demolished branch. Other expenses decreased 22% due to
several factors; including lower data processing costs of $200,000 as conversion
costs were included in the 1995 expenses and the reduction of FDIC insurance
premiums of almost $700,000 due to the recapitalization of the BIF insurance
fund. A refund of Pinnacle's overpayment of FDIC insurance premiums was
received in the third quarter of 1995.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated basis
including the accounts of its subsidiary banks. The provision for income taxes
was $686,000 for the first six months of 1996 compared with a provision of
$1,709,000 for the first six months of 1995. The lower provision for taxes in
the first six months of 1996 was primarily the result of lower pre-tax income in
the first six months of 1996, versus the higher pre-tax income in the same
period of 1995.
NET INCOME - THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Consolidated net income was $2,238,000, or $0.51 per share, on a fully
diluted basis for the three months ended June 30, 1996 (the "second quarter"),
compared to $4,656,000, or $1.05 per share, earned in the second quarter of
1995. The annualized return on average assets was 1.12% for the second quarter
of 1996 and 2.30% for the second quarter of 1995. For each period, the return
on average equity was 12.9% and 26.8%, respectively.
The decrease in net income was primarily the product of a decrease in net
interest income and the net gains recorded on sales of securities during the
period. Net interest income decreased $596,000, or 8%. Net securities losses
of $(130,000) were recorded in the second quarter compared to net gains of
$3,450,000 for the same period a year ago. Other income, exclusive of
securities transactions, increased $92,000, or 6%. Other expense decreased
$697,000, or 11%.
NET INTEREST INCOME
During the second quarter of 1996, Pinnacle's average earning assets were
$746,082,000 consistent with the comparable period of the previous year. The
net interest margin of the second quarter of 1996 was 3.64% compared to 4.04%
for 1995. Net interest income on a fully taxable equivalent basis was
$6,797,000 for the second quarter of 1996, or 9% lower than the comparable
period in 1995. Actual net interest income decreased 8%.
The yield earned on total earning assets was 7.17% for the second quarter
of 1996 compared to 7.52% for the same period of 1995. The decrease resulted
primarily from the decrease in the yields earned on interest-bearing deposits,
as well as taxable and nontaxable securities. The yield on interest-bearing
deposits dropped 45 basis points while the average balance decreased 78% as
interest-bearing deposits acquired from AFC matured and the balances in Federal
funds sold dropped due to the increase in the taxable securities and loan
categories. While the average balance of taxable securities increased
$14,491,000, the rate earned dropped 51 basis points due to lower rates earned
on U. S. Government securities. The average balance in loans increased
$13,766,000. Although the yield earned on loans increased slightly from period-
to-period, loans earn a higher yield than taxable securities and thus somewhat
offset the drop on other interest-earning categories. Total interest income, on
a fully taxable equivalent basis decreased $583,000.
10
<PAGE>
The average cost of interest-bearing liabilities increased only by 5 basis
points to 4.09% from the 4.04% paid in the second quarter of 1995. The average
rates paid on interest-bearing demand deposits and savings deposits dropped 14
basis points, money market deposits increased 48 basis points (primarily as a
result of the new higher-rate money market account), and other time deposits
increased 16 basis points.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the second quarter of 1996,
compared to $75,000 for the second quarter of 1995. As previously mentioned,
this provision was reversed in the fourth quarter of 1995. Pinnacle had net
recoveries of $20,000 in 1996 compared to net recoveries of $3,000 in 1995.
NONINTEREST INCOME AND EXPENSE
Fees on banking services and other income were $1,176,000 for the three
months ended June 30, 1996 compared to $1,101,000 in the same period of 1995,
an increase of 7% due primarily to the increase on fees earned on sales of non-
deposit products. Trust fees increased 3% to $571,000.
On a pre-tax basis, net losses on the sale of securities were $(130,000)
for the second quarter of 1996 compared to net gains on the sale of securities
of $3,450,000 in the same period of 1995. The net losses in the second quarter
of 1996 consisted of gross losses of $130,000. The net gains realized in the
second quarter of 1995 consisted of gross gains of $3,463,000 and gross losses
of $13,000.
Almost all of the net securities losses recorded by Pinnacle in the second
quarter of 1996 related to its U. S. Government securities portfolio. Sales of
these securities resulted in net securities losses of $124,000 recorded in the
second quarter of 1996 and $3,049,000 of net gains recorded in the second
quarter of 1995.
Noninterest expense decreased 11% due to certain nonrecurring costs of a
data processing conversion completed in the second quarter of 1995, a $434,000
charge to earnings was taken for the write-off and destruction of an old branch
building in 1995, and reduced FDIC insurance premiums.
INCOME TAXES
The provision for income taxes was a benefit of $(8,000) for the second
quarter of 1996 compared with a provision of $887,000 for the same period a year
ago, resulting from lower pre-tax income and adjustments to tax bases of certain
assets of Pinnacle.
BALANCE SHEET
Total consolidated assets were $830,700,000 at June 30, 1996, or a 1%
increase from year-end 1995.
Pinnacle's securities portfolio is its most significant balance sheet
asset. Total securities were $426,207,000 at June 30, 1996 and consisted of U.
S. Government securities amounting to $369,332,000, mortgage-backed securities
and CMO's of $8,884,000, state and municipal bonds of $24,152,000, and corporate
and other securities of $23,839,000. The total securities outstanding at June
30, 1996 remained the same from year-end 1995 and retained relatively the same
mix.
11
<PAGE>
U. S. Government securities amounted to $369,332,000 or 44% of assets at
June 30, 1996. The average remaining maturity of these securities was
approximately twenty-one months. U. S. Government securities are part of
Pinnacle's term taxable securities strategy which has been designed to manage
Pinnacle's interest rate risk and to take advantage of the slope in the yield
curve. The decision to undertake intermittent sales of these securities is
based on management's assessment of economic conditions. For example,
management will undertake sales of securities based on the slope of the yield
curve and its determination that the reinvestment of the proceeds into a longer
or shorter term security is an acceptable alternative given management's
assessment of interest rate risk. At June 30, 1996, U. S. Government securities
had gross unrealized losses of $(801,000) on a pre-tax basis.
Other securities held by Pinnacle, amounting to $56,875,000 at June 30,
1996, consisted of mortgage-backed, CMO's, state and municipal, and corporate
and equity securities. At quarter end, these securities had gross unrealized
gains of $8,584,000 and gross unrealized losses of $(487,000) on a pre-tax
basis. Currently, Pinnacle is not using any derivatives for hedging or other
purposes.
Total loans amounted to $330,978,000 at June 30, 1996, up 7% from year-end
1995. The increase is part of a strategic effort on management's part to
increase the loan portfolio without sacrificing credit quality of the portfolio.
The increase was in commercial loans, which increased 12% or approximately
$10,400,000 and residential real estate loans which increased 6% or
approximately $8,600,000. At June 30, 1996, 29% of the loans were commercial,
real estate loans amounted to 56%, and installment loans were 15% of the
portfolio. Pinnacle's loan to asset ratio was 40% at June 30, 1996.
Goodwill and other intangibles amounted to $18,234,000, or 24% of
stockholders' equity at June 30, 1996.
Total deposits were $705,013,000 at June 30, 1996, or 1% lower than year-
end 1995. The decrease in deposits was primarily in transaction accounts,
including both noninterest-bearing and interest-bearing demand of approximately
$5,400,000, which balances fluctuate based on customer needs and are not as rate
sensitive as savings and time deposits. There was also an approximate
$5,900,000 drop in savings deposits. Offsetting the drop in savings deposits
was an increase in other time deposits of approximately $3,400,000. Management
believes the drop in savings deposits is the result of the customers attempting
to earn higher rates by moving to non-bank and special term deposits at other
financial institutions or brokerage-type companies. Changing demographics of
certain of the banking center locations has also led to the shift and loss of
deposits. Management continues to take an active role to increase and maintain
interest rates on deposits and provide products to reduce the disintermediation
of funds. As evidenced by the shift in deposits to other time deposits,
customers are more willing to commit their funds to defined periods of time;
Pinnacle's rates and new deposit products are not only attracting new customers,
but maintaining existing customers. At June 30, 1996, the percentage of total
deposits for each category were: Noninterest-bearing deposits, 13%; Interest-
bearing demand deposits, 12%; Savings accounts (including money market
accounts), 36%; and Other time deposits, 39%.
Pinnacle's notes payable were $25,950,000 at June 30, 1996. Outstandings
consist of $18,000,000 remaining on the note used to purchase AFC, and
$7,950,000 drawn on Pinnacle's revolving line which is used for purchasing
equity securities and other corporate needs. At year-end 1995, outstandings
consisted of $20,000,000 on the AFC note and $600,000 drawn on the revolving
line.
12
<PAGE>
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $76,389,000 at June 30, 1996 and
$78,961,000 at December 31, 1995. The ratio of equity to assets was 9.20% and
9.64% at each period end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage Capital
Ratio with a minimum level of Tier One capital to total assets of 3.00%. Tier
One capital consists of common stock, additional paid-in capital and retained
earnings, and is exclusive of Pinnacle's allowance for loan losses, goodwill and
other intangibles, and unrealized gains (losses) on securities available for
sale. In addition, the Board has issued Risk-Based Capital Guidelines with a
minimum standard of total regulatory capital to risk weighted assets of 8.00%.
The structure of Pinnacle's balance sheet results in a Risk-Based Capital Ratio
significantly in excess of the guidelines.
The following table provides an analysis of the minimum capital
requirements (as defined), ratios and the excess over the minimum which Pinnacle
holds as capital as of June 30, 1996, in thousands (except percentages).
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
<S> <C> <C> <C> <C> <C>
Leverage Capital . . . . 3.00% $24,237 6.60% $53,585 $29,348
Risk-based Capital:
Tier One. . . . . . . 4.00 13,410 15.98 53,585 40,175
Total (Tier Two). . . 8.00 26,821 17.24 57,799 30,978
</TABLE>
At December 31, 1995, Pinnacle's total risk-based capital ratio was 18.09%.
In addition, each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At June 30, 1996, Pinnacle and each of its subsidiary banks was
in compliance with the current capital guidelines and are considered "well-
capitalized" under regulatory standards.
Book value per share was $17.75 at June 30, 1996 compared to $18.05 at
December 31, 1995. Dividends amounting to $0.62 per share were paid in the
first six months of 1996.
LIQUIDITY
As characteristic of the banking industry, Pinnacle's indicators of
liquidity are principally its deposit base, loan and investment portfolios. On a
short term basis, adjustments are made in these categories based on deposit
fluctuations and loan demand. Longer term, liquidity is determined by growth
objectives, rate pricing policies and the ability to borrow debt or raise
equity. In general, 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, adjusted for non-
cash items. Cash flows from investing
13
<PAGE>
activities consist of loans made to and collected from customers; and purchases,
sales and maturities of securities available for sale. Cash flows from
financing activities are determined by Pinnacle's deposit base and from
Pinnacle's ability to borrow and repay debt and issue or repurchase stock. For
the six months ended June 30, 1996, cash flows were generated primarily from a
$17,500,000 increase in short-term borrowings and net proceeds from notes
payable of $5,350,000. Cash flow uses and needs included a $7,800,000 decrease
in deposits; a $21,300,000 net loan principal advanced, and $2,700,000 to pay
dividends. Pinnacle's net cash position decreased $14,500,000 with the decrease
primarily in Federal funds sold of $12,150,000 and the remainder in cash and due
from banks.
Pinnacle's subsidiary banks have a relatively stable base of deposits and
any increased loan demand can be sufficiently funded without a material change
in its balance sheet. Pinnacle's corporate strategy includes profitable
acquisitions. Certain acquisitions could be funded with debt. Reductions of
debt would be made from Pinnacle's earnings.
At June 30, 1996, Pinnacle had a line of credit of $10,000,000 with an
unaffiliated bank from which $7,950,000 had been drawn. The remaining
outstanding of $18,000,000 is related to the AFC acquisition and is secured by
the stock of Pinnacle's subsidiary banks.
Regulatory requirements exist which influence Pinnacle's liquidity and cash
flow needs. These requirements include the maintenance of satisfactory capital
ratios on a consolidated and subsidiary bank basis, restrictions on the amount
of dividends which a subsidiary bank may pay and reserve requirements with the
Federal Reserve Bank. Based on these restrictions, at July 1, 1996, bank
subsidiaries could have declared approximately $2,563,000 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 also not aware of any known trends,
events or uncertainties that will have, or that are reasonably likely to have, a
material effect on Pinnacle except the pending acquisition of Financial
Security, as previously discussed in the Notes to Consolidated Financial
Statements. Management is also not aware of any current recommendations by the
regulatory authorities which, if implemented, would have an adverse material
effect on Pinnacle. There are several issues which have been pending before
Congress, including recapitalization of the SAIF fund, and the elimination of
the Thrift Charter. The recapitalization of the SAIF fund is currently
estimated to cost Pinnacle approximately $1,000,000 on a pre-tax basis, but
could change materially upon settlement of the issue before Congress.
14
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
----------------------------- ----------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits and Federal funds sold. $ 3,996 $ 53 5.31% $ 6,015 $ 154 5.12%
Taxable securities. . . . . . . . . . . . . . . . 396,480 5,729 5.78 395,190 11,031 5.58
Nontaxable securities . . . . . . . . . . . . . . 21,856 673 12.32 22,113 1,346 12.17
Loans . . . . . . . . . . . . . . . . . . . . . . 323,750 6,921 8.55 318,133 13,403 8.43
-------- -------- ------ --------- ------- ------
Total interest-earning assets . . . . . . . . . 746,082 13,376 7.17 741,451 25,934 7.00
Noninterest-earning assets:
Cash and due from banks . . . . . . . . . . . . . 24,254 23,965
Allowance for loan losses . . . . . . . . . . . . (6,069) (6,050)
Other assets. . . . . . . . . . . . . . . . . . . 46,449 45,777
-------- --------
Total assets. . . . . . . . . . . . . . . . . . $810,716 $805,143
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits. . . . . . . . . $ 88,634 $ 456 2.06% $ 88,416 $ 905 2.05%
Savings deposits. . . . . . . . . . . . . . . . . 205,677 1,514 2.94 206,886 3,070 2.97
Money market deposits . . . . . . . . . . . . . . 47,014 406 3.45 45,818 768 3.35
Other time deposits . . . . . . . . . . . . . . . 270,948 3,671 5.42 270,657 7,360 5.44
Short-term borrowings . . . . . . . . . . . . . . 7,700 107 5.56 3,912 109 5.57
Notes payable . . . . . . . . . . . . . . . . . . 23,384 425 7.27 21,549 782 7.26
-------- -------- ------ --------- ------- ------
Total interest-bearing liabilities. . . . . . . 643,357 6,579 4.09 637,238 12,994 4.08
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . 90,649 90,441
Other liabilities . . . . . . . . . . . . . . . . 6,812 6,811
Stockholders' equity. . . . . . . . . . . . . . . 69,898 70,653
-------- --------
Total liabilities and stockholders' equity. . . $810,716 $805,143
-------- --------
-------- --------
Net interest income and margin. . . . . . . . . . . . $6,797 3.64% $12,940 3.49%
-------- ------ ------- ------
-------- ------ ------- ------
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1996. The fully taxable
equivalent adjustment to interest income for the three and six months ended June
30, 1996 was $260 and $512, respectively. The average balance on nonaccrual
loans is included in the total loans category. The average balances do not
include the effects of SFAS No. 115.
15
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
---------------------------- ----------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits and Federal funds sold. $ 18,185 $ 262 5.76% $ 20,034 $ 535 5.34%
Taxable securities. . . . . . . . . . . . . . . . 381,989 6,010 6.29 373,576 12,044 6.45
Nontaxable securities . . . . . . . . . . . . . . 32,617 1,018 12.48 38,603 2,291 11.87
Loans . . . . . . . . . . . . . . . . . . . . . . 309,984 6,669 8.61 313,267 13,359 8.53
-------- ------- ----- -------- -------- -----
Total interest-earning assets . . . . . . . . . 742,775 13,959 7.52 745,480 28,229 7.57
Noninterest-earning assets:
Cash and due from banks . . . . . . . . . . . . . 24,201 24,553
Allowance for loan losses . . . . . . . . . . . . (6,348) (6,294)
Other assets. . . . . . . . . . . . . . . . . . . 50,892 49,507
-------- --------
Total assets. . . . . . . . . . . . . . . . . . $811,520 $813,246
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits. . . . . . . . . $ 87,409 $ 443 2.03% $ 86,979 $ 847 1.95%
Savings deposits. . . . . . . . . . . . . . . . . 221,390 1,738 3.14 225,398 3,470 3.08
Money market deposits . . . . . . . . . . . . . . 50,104 372 2.97 51,653 735 2.85
Other time deposits . . . . . . . . . . . . . . . 253,919 3,342 5.26 254,725 6,412 5.03
Short-term borrowings . . . . . . . . . . . . . . -0- -0- 0.00 1,321 36 5.45
Notes payable . . . . . . . . . . . . . . . . . . 27,501 565 8.22 27,539 1,129 8.20
-------- ------- ----- -------- -------- -----
Total interest-bearing liabilities. . . . . . . 640,323 6,460 4.04 647,615 12,629 3.90
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . 90,444 90,259
Other liabilities . . . . . . . . . . . . . . . . 11,121 7,610
Stockholders' equity. . . . . . . . . . . . . . . 69,632 67,762
-------- --------
Total liabilities and stockholders' equity . . $811,520 $813,246
-------- --------
-------- --------
Net interest income and margin. . . . . . . . . . . . $ 7,499 4.04% $15,600 4.19%
------- ----- -------- -----
------- ----- -------- -----
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1995. The fully taxable
equivalent adjustment to interest income for the three and six months ended June
30, 1995 was $364 and $841, respectively. The average balance on nonaccrual
loans is included in the total loans category. The average balances do not
include the effects of SFAS No. 115.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is filed as part of this Form 10-Q.
Description No. Under
Exhibit Item 601 of Exhibit
Number Regulation S-K Description
------ -------------- -----------
1 (20) Report furnished
to securities
holders. Second
Quarter Report.
27 (27) Financial Data Schedule
(b) Reports on Form 8-K.
A Form 8-K dated April 22, 1996 was filed by Pinnacle on April
29, 1996 to report the signing of a definitive agreement for the acquisition
of Financial Security Corp. and its wholly-owned subsidiary, Security Federal
Savings and Loan Association of Chicago, Illinois. A copy of the definitive
agreement was included with the filing.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE BANC GROUP, INC.
Dated: August 6, 1996 By: /s/ John J. Gleason, Jr.
-------------- ---------------------------
John J. Gleason, Jr.
Director, Vice Chairman and
Chief Executive Officer
By: /s/ Sara J. Mikuta
----------------------------
Sara J. Mikuta
Chief Financial Officer
18
<PAGE>
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
EXHIBITS
TO
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
____________________________________________________
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________
<PAGE>
EXHIBIT 1. REPORT FURNISHED TO SECURITIES HOLDERS.
<PAGE>
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2ND QUARTER SIX MONTHS
(UNAUDITED; IN THOUSANDS ---------------------- --------------------
EXCEPT PER SHARE DATA) 1996 1995 1996 1995
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
FOR THE PERIOD:
Net income...................................................... $ 2,238 $ 4,656 $ 3,794 $ 8,063
Return on average equity........................................ 12.8% 26.8% 10.7% 23.8%
Return on average assets........................................ 1.10 2.30 0.94 1.98
PER SHARE:
Net income--fully diluted....................................... $ 0.51 $ 1.05 $ 0.87 $ 1.82
Dividends....................................................... 0.31 0.29 0.62 0.58
Book value...................................................... 17.75 17.50 17.75 17.50
AT JUNE 30:
Total Assets.................................................... $ 830,700 $ 812,101
Loans........................................................... 330,978 309,311
Deposits........................................................ 705,013 703,069
Stockholders' equity............................................ 76,389 77,041
</TABLE>
- - --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- - --------------------------------------------------------------------------------
Dear Shareholder:
Pinnacle reported net income of $2,238,000, or $0.51 per fully diluted
share, for the second quarter of 1996, compared with $4,656,000, or $1.05 per
share earned in the second quarter of 1995, a per share decrease of 51%. For the
first six months of 1996, net income totalled $3,794,000, or $0.87 per share,
compared with $8,063,000, or $1.82 per share, earned in the first six months of
1995, a per share decrease of 52%. The return on average equity for the first
six months of 1996 was 12.8% and the return on average assets amounted to 1.10%.
Total assets were $830,700,000 at June 30, 1996, up 2% from the same date of the
previous year. Equity capital amounted to $76,389,000 resulting in a book value
per share of $17.75.
The primary factor contributing to the earning declines for the second
quarter and first six months of 1996 versus the same periods one year earlier
was that a significant amount of net gains on the sale of securities were
recorded in the earlier periods. In the second quarter of 1996, net losses of
$130,000 were booked compared to net gains of $3,450,000 in the second quarter
of 1995. For the first six months of 1996, net gains amounted to $133,000 versus
net gains of $4,265,000 recorded for the first six months of 1995. Net interest
income declined 8% in the second quarter of 1996 and 16% for the first six
months compared to the same periods of the previous year. Pinnacle's net
interest margin totalled 3.64% for the second quarter of 1996, down from the
4.04% recorded in the second quarter of the previous year. A lower yield earned
on Pinnacle's taxable securities portfolio was the primary contributor to the
net margin decline. Despite the year-to-year decline, the net interest margin
increased 31 basis points from the 3.33% earned in the first quarter of 1996.
Other items influencing earnings for the second quarter and first six months
of 1996 included lower provisions for loan losses and income taxes and a 9%
decrease in operating expense for the first six months of 1996 primarily as a
result of lower deposit insurance costs, and decreases in occupancy expenses and
data processing costs. Other operating income was down 2% for the year-to-date
as the result of a gain on the sale of an asset recorded in the first half of
1995.
Non-performing assets totalled $7,242,000 at June 30, 1996, a decrease of
$1,057,000, or 13% from the amount at year end. The allowance for loan losses
was $6,061,000, or 1.83% of loans at quarter end. Net recoveries of $38,000 were
recorded during the period. Non-performing assets at June 30, 1996 were 2.19% of
total loans plus other real estate owned, and amounted to 0.87% of total assets.
On April 22, 1996, Pinnacle announced that a definitive agreement had been
signed for the acquisition of Financial Security Corp. and its wholly-owned
subsidiary, Security Federal Savings and Loan Association of Chicago. Pinnacle
and Financial Security are in the process of securing regulatory approvals and
preparing proxy information for the shareholders of each company. The
anticipated closing date is at the end of the third quarter.
At the Board of Directors' meeting on July 16, 1996, the Board declared a
dividend of $0.31 per share payable on August 8 to shareholders of record as of
July 29.
Sincerely,
/s/ John J. Gleason, Jr.
---------------------------------
John J. Gleason, Jr.
Vice Chairman and Chief Executive
Officer
- - --------------------------------------------------------------------------------
<PAGE>
CONSOLIDATED BALANCE SHEETS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
(UNAUDITED; IN THOUSANDS) 1996 1995 1995
------------ --------------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks..................................... $ 24,902 $ 27,273 $ 25,184
Federal funds sold.......................................... 1,950 14,100 3,350
Interest-bearing deposits................................... 3,439 2,726 6,362
Securities--Available for sale.............................. 426,207 426,929 425,563
Loans....................................................... 330,978 309,600 309,311
Less: Allowance for loan losses............................. (6,061) (6,023) (6,380)
------------ --------------- ------------
NET LOANS............................................. 324,917 303,577 302,931
Premises and equipment...................................... 16,786 15,565 15,747
Goodwill and other intangibles.............................. 18,234 19,177 20,121
Other assets................................................ 14,265 9,350 12,843
------------ --------------- ------------
TOTAL................................................. $ 830,700 $ 818,697 $ 812,101
------------ --------------- ------------
------------ --------------- ------------
LIABILITIES:
Demand deposits:
Non-interest bearing.................................... $ 93,741 $ 96,714 $ 90,859
Interest bearing........................................ 86,851 89,230 83,613
Savings deposits............................................ 251,925 257,794 271,999
Other time deposits......................................... 272,496 269,066 256,598
------------ --------------- ------------
TOTAL DEPOSITS........................................ 705,013 712,804 703,069
Short-term borrowings....................................... 17,500 -0- 1,000
Notes payable............................................... 25,950 20,600 24,100
Other liabilities........................................... 5,848 6,332 6,891
------------ --------------- ------------
TOTAL LIABILITIES..................................... 754,311 739,736 735,060
------------ --------------- ------------
STOCKHOLDERS' EQUITY:
Common stock $4.69 par value................................ 20,169 20,505 20,633
20,000,000 shares authorized;
shares issued and outstanding:
6/30/96: 4,302,716
12/31/95: 4,374,469
6/30/95: 4,401,724
Additional paid-in capital.................................. 18,001 17,898 17,873
Retained earnings........................................... 33,649 33,506 32,360
Unrealized gains (losses) in securities
available-for-sale......................................... 4,570 7,052 6,175
------------ --------------- ------------
TOTAL STOCKHOLDERS' EQUITY............................ 76,389 78,961 77,041
------------ --------------- ------------
TOTAL................................................. $ 830,700 $ 818,697 $ 812,101
------------ --------------- ------------
------------ --------------- ------------
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(UNAUDITED; IN THOUSANDS ---------------------- ----------------------
EXCEPT PER SHARE DATA) 1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans....................................................... $ 6,899 $ 6,642 $ 13,358 $ 13,286
Securities.................................................. 6,165 6,691 11,911 13,566
Interest-bearing deposits and Federal funds sold............ 52 261 153 535
---------- ---------- ---------- ----------
INTEREST INCOME......................................... 13,116 13,594 25,422 27,387
INTEREST EXPENSE:
Deposits.................................................... 6,047 5,896 12,103 11,465
Short-term borrowings....................................... 107 1 109 37
Notes payable............................................... 425 564 782 1,128
---------- ---------- ---------- ----------
INTEREST EXPENSE........................................ 6,579 6,461 12,994 12,630
---------- ---------- ---------- ----------
NET INTEREST INCOME............................................. 6,537 7,133 12,428 14,757
Provision for loan losses................................... -0- 75 -0- 150
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..... 6,537 7,058 12,428 14,607
OTHER INCOME:
Banking services and other.................................. 1,176 1,101 2,389 2,550
Trust services.............................................. 571 554 1,118 1,025
Net securities gains........................................ (130) 3,450 133 4,265
---------- ---------- ---------- ----------
OTHER INCOME............................................ 1,617 5,105 3,640 7,840
OTHER EXPENSE:
Employee compensation and benefits.......................... 3,021 2,936 6,032 5,904
Occupancy................................................... 670 1,055 1,349 1,642
Other expenses.............................................. 2,233 2,629 4,207 5,129
---------- ---------- ---------- ----------
OTHER EXPENSE........................................... 5,924 6,620 11,588 12,675
INCOME BEFORE INCOME TAXES...................................... 2,230 5,543 4,480 9,772
Provision for income taxes.................................. (8) 887 686 1,709
---------- ---------- ---------- ----------
NET INCOME.............................................. $ 2,238 $ 4,656 $ 3,794 $ 8,063
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING.......................... 4,342 4,433 4,366 4,433
EARNINGS PER SHARE.............................................. $ 0.51 $ 1.05 $ 0.87 $ 1.82
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE>
CORPORATE INFORMATION
- - ----------------------------------------------------------------------------
CORPORATE HEADQUARTERS
2215 York Road, Suite 208
Oak Brook, Illinois 60521
(708) 574-3550
SUBSIDIARY BANKS
[LOGO]
Pinnacle Bank
CICERO, BERWYN, NORTH RIVERSIDE,
LAGRANGE PARK, HARVEY,
OAK PARK, WESTMONT
Pinnacle Bank of the Quad-Cities
SILVIS, GREEN ROCK-COLONA
Pinnacle Bank, F.S.B.
BATAVIA, ELBURN
COMMON STOCK
Common stock is traded on NASDAQ
with the ticker symbol "PINN"
and listed with the
abbreviations "PinBG"
and "PinclBns"
PRINCIPAL MARKET MAKERS
The Chicago Corporation
Howe, Barnes Investments, Inc.
Chicago Capital, Inc.
Herzog, Heine, Gedald, Inc.
[LOGO]
[LOGO]
SECOND QUARTER REPORT
JUNE 30, 1996
- - ----------------------------------------------------------------------------
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<PAGE>
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<S> <C>
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<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 24901989
<INT-BEARING-DEPOSITS> 3439380
<FED-FUNDS-SOLD> 1950000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426207187
<INVESTMENTS-CARRYING> 0
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<LOANS> 330977732
<ALLOWANCE> 6061167
<TOTAL-ASSETS> 830699840
<DEPOSITS> 705012868
<SHORT-TERM> 17500000
<LIABILITIES-OTHER> 584366
<LONG-TERM> 25950000
0
0
<COMMON> 20168981
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<TOTAL-LIABILITIES-AND-EQUITY> 830699840
<INTEREST-LOAN> 13357598
<INTEREST-INVEST> 11910972
<INTEREST-OTHER> 153110
<INTEREST-TOTAL> 25421680
<INTEREST-DEPOSIT> 12102625
<INTEREST-EXPENSE> 12993569
<INTEREST-INCOME-NET> 12428111
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 133149
<EXPENSE-OTHER> 11588358
<INCOME-PRETAX> 4480322
<INCOME-PRE-EXTRAORDINARY> 3794322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3794322
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 3.49
<LOANS-NON> 4708000
<LOANS-PAST> 1436000
<LOANS-TROUBLED> 884000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6023011
<CHARGE-OFFS> (73340)
<RECOVERIES> 111496
<ALLOWANCE-CLOSE> 6061167
<ALLOWANCE-DOMESTIC> 2572380
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3488787
</TABLE>
