<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
For the Fiscal year ended DECEMBER 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 YORK ROAD, SUITE 208, OAK BROOK, ILLINOIS 60521
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 574-3550
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $3.12 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 17, 1997, was approximately $98,451,000.
As of March 17, 1997, the registrant had 7,577,420 shares outstanding of
common stock, $3.12 par value.
Parts of the 1996 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 15, 1997 have been
incorporated by reference into Part III of the Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORM 10-K TABLE OF CONTENTS
PART I
Item 1. Business................................................. 1
Item 2. Properties............................................... 5
Item 3. Legal Proceedings........................................ 5
Item 4. Submission of Matters to a Vote of Security.............. 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.............. 6
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............................................. 7
SIGNATURES....................................................... 15
<PAGE>
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, 1996
the Corporation had total consolidated assets of $1,048,376,000, total loans
of $525,069,000, total deposits of $877,552,000, and total stockholders'
equity of $100,824,000. The Corporation's principal office is 2215 York Road,
Suite 208, Oak Brook, Illinois 60521. The Corporation has fourteen banking
locations in the metropolitan areas of Chicago and Quad-Cities, Illinois.
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., was
merged into Pinnacle on December 31, 1992. In 1996, Batavia Savings Bank,
F.S.B. changed its name to Pinnacle Bank, F.S.B. ("FSB").
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. On September 30, 1996, Financial Security
Corporation ("FinSec") and its subsidiary thrift, Security Federal Savings
and Loan Association of Chicago ("SF"), were purchased. FinSec was liquidated
into the Corporation and SF was a separate subsidiary until it was merged
into Pinnacle Bank on January 31, 1997.
The Corporation owns 100% of the common stock of Pinnacle Bank, Quad-Cities
Bank, SF and FSB.
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.
FSB and SF are Federally chartered savings banks which are principally
engaged in the business of attracting savings and other funds from the
general public and investing these funds, principally by
1
<PAGE>
originating residential mortgage loans and investing in investment grade
securities. In addition to residential mortgage loans, FSB and SF make
commercial, consumer and installment loans. The banks offer a full range of
deposit services including demand, savings and time deposits. FSB will merge
into Pinnacle Bank the second quarter of 1997.
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, 1996, the Bank had total assets of $644
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. As of December
31, 1996, the Bank had total assets of $112 million.
FSB 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. A new Elburn branch, replacing a leased facility, opened
in the second quarter of 1996. As of December 31, 1996, the Bank had total
assets of $69 million.
SF was organized in 1907 as a Federally chartered building and loan
association. In 1937, SF converted to a Federally chartered savings and loan
association. SF was acquired by FinSec on December 29, 1992, as part of SF's
conversion from a Federally chartered mutual savings association to a
Federally chartered stock savings association. SF's main office is located in
Chicago, Illinois with a limited service branch located in Niles, Illinois.
As of December 31, 1996, SF had total assets of $216 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 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. Many of the
competitors of the subsidiary banks are larger and have greater resources
than the subsidiary banks.
2
<PAGE>
EMPLOYEES
At December 31, 1996, the Corporation and its subsidiary banks employed 369
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 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 FSB and SF, 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.
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 FSB and SF
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. FSB and SF are members of the Federal Home Loan Bank of Chicago.
The Federal Reserve System, the FDIC, the OTS and the State of Illinois
Office of Banks and Real Estate 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 examina-
3
<PAGE>
tions, 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.
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.
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.
4
<PAGE>
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.
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 one year remains on the term of the lease.
Pinnacle Bank owns its main banking office located at 6000 West Cermak Road,
Cicero, Illinois 60804. The main office consists of approximately 41,500
square feet.
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. 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. Seven 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. Eleven 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.
FSB owns its main banking office located at 165 West Wilson Street, Batavia,
Illinois 60510. The banking office consists of 8,640 square feet. A new
banking office at 415 South Main Street, Elburn, Illinois, was built in 1996
and consists of approximately 2,400 square feet.
SF owns its main banking office located at 1209 North Milwaukee Avenue,
Chicago, Illinois 60622. The banking office consists of approximately 20,000
square feet. A limited service banking leased facility containing
approximately 900 square feet is located at 5697 West Touhy Avenue, Niles,
Illinois 60714. Approximately two years remain on the lease.
Each of the subsidiary banks has sufficient space for current banking needs
as well as any foreseeable expansion.
ITEM 3. LEGAL PROCEEDINGS
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.
5
<PAGE>
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) on the National Market System 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 (adjusted for a
3-for-2 stock split effective February 10, 1997).
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
CASH CASH
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ----------------------------- --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1st.......................... $ 22.67 $ 20.33 $ 0.21 $ 21.00 $ 17.83 $ 0.19
2nd.......................... 23.00 18.67 0.21 22.17 19.33 0.19
3rd.......................... 20.17 18.50 0.21 21.33 18.67 0.19
4th.......................... 20.00 17.83 0.21 22.67 19.33 0.19
</TABLE>
In 1996, the Corporation purchased 236,879 shares of its common stock at
market prices in privately negotiated and market transactions as part of its
announced stock repurchase program. Shares totalling 1,285,413 were issued
for the acquisition of FinSec. In 1995, the Corporation purchased 68,632
shares of its common stock at market prices in privately negotiated and
market transactions.
NUMBER OF SHAREHOLDERS
As of March 17, 1997, the Corporation had approximately 500 shareholders of
record. In addition, the Corporation believes that it has approximately 850
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 1996 Annual Report to Stockholders included as Exhibit 2.
The information required is contained on page 26 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 1996 Annual Report
to Stockholders included as Exhibit 2. The information is contained on pages
27 through 40 of Exhibit 2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the 1996 Annual Report to Stockholders included as Exhibit 2. The
information is contained as follows:
6
<PAGE>
PAGE OF
EXHIBIT 2
---------
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........................... 8-24
Report of Independent Public Accountants
Arthur Andersen LLP................................................ 25
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 15,
1997, 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 9
of the Definitive Proxy Statement for the Annual Meeting to be held on April 15,
1997, 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 15,
1997, 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 9 and 10 of
the Definitive Proxy Statement for the Annual Meeting to be held on April 15,
1997 under the title "Certain Relationships, Related Transactions and Other
Information Regarding Management", this portion which is expressly incorporated
herein by reference.
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.
7
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION NO.
EXHIBIT UNDER ITEM 601 OF
NUMBER REGULATION S-K EXHIBIT DESCRIPTION
- ------------- ------------------- -------------------------------------------------------------------------------------
<S> <C> <C>
- (2) Plan of Acquisition, Reorganization, Management, Liquidation or Succession. The
Agreement and Plan of Merger between the Corporation and Financial Security Corp. and
its subsidiary bank, Security Federal Savings and Loan Association of Chicago, was
filed as an Exhibit to the Corporation's Report of Form 8-K dated April 22, 1996 and
filed on April 29, 1996.
- (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 the
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) Annual Report to Security Holders. The Corporation is including, as an Exhibit, its
1996 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.
- (21) Subsidiaries of the Registrant. The information is included in ITEM 1, BUSINESS on
page 1.
27 (27) Financial Data Schedule.
</TABLE>
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
A report on Form 8-K/A was filed on December 6, 1996. This Form 8-K/A was an
amendment to its Form 8-K dated September 30, 1996 and filed on October 15,
1996, which reported the acquisition of Financial Security Corp. and its
subsidiary, Security Federal Savings and Loan Association of Chicago. At the
time of the Form 8-K filing, it was impractical to provide the financial
information required by Item 7 for the Acquisition. As a result, the Corporation
filed the Form 8-K/A to provide the financial information as required.
8
<PAGE>
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 1996 Annual Report to Stockholders
included as Exhibit 2. The information required is contained in Table 1,
"Analysis of Net Interest Income" on page 29 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 1996 Annual Report to Stockholders included as Exhibit 2. The information
required is contained in Table 2, "Analysis of Volume/ Rate Variance" on page 30
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 1996 Annual Report to Stockholders
included as Exhibit 2. This information is contained in Table 7, "Interest Rate
Sensitivity Position" on page 39 and discussed on page 40 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:
DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
U. S. Treasury and U. S. Government agencies . . . $373,072 $370,545 $316,200
State and municipal. . . . . . . . . . . . . . . . 23,450 25,839 35,171
Mortgage-backed securities and floating rate
collateralized mortgage obligations. . . . . . . 5,943 10,307 14,764
Corporate and other. . . . . . . . . . . . . . . . 32,093 20,238 20,365
-------- -------- --------
Total securities . . . . . . . . . . . . . . . . $434,558 $426,929 $386,500
-------- -------- --------
-------- -------- --------
The following table shows the maturities of securities in thousands at
December 31, 1996 and weighted average fully taxable equivalent yields:
U. S. TREASURY AND
FEDERAL AGENCY
SECURITIES STATE AND MUNICIPAL
----------------- -------------------
One year or less . . . . . . . . $ -0- 0.00% $ 3,001 12.39%
One year to five years . . . . . 370,587 5.93 10,783 12.86
Five to ten years. . . . . . . . 2,485 6.14 7,783 12.87
Over ten years . . . . . . . . . -0- 0.00 1,883 13.44
No fixed maturity. . . . . . . . -0- 0.00 -0- 0.00
-------- ------- ------- ------
$373,072 5.93% $23,450 12.85%
-------- ------- ------- ------
-------- ------- ------- ------
9
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES, FLOATING
RATE COLLATERALIZED
MORTGAGE OBLIGATIONS,
CORPORATE AND OTHER
DEBT SECURITIES EQUITY SECURITIES TOTAL
-------------------- -------------------- ------------------
<S> <C>
One year or less . . . . . . . $ 254 9.50% $ -0- 0.00% $ 3,255 12.16%
One year to five years . . . . -0- 0.00 -0- 0.00 381,370 6.13
Five years to ten years. . . . -0- 0.00 -0- 0.00 10,268 11.24
Over ten years . . . . . . . . -0- 0.00 -0- 0.00 1,883 13.44
No fixed maturity. . . . . . . 5,943 8.65 31,839 4.75 37,782 5.37
------ ------ ------- ----- -------- ------
$6,197 8.69% $31,839 4.75% $434,558 6.26%
------ ------ ------- ----- -------- ------
------ ------ ------- ----- -------- ------
</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% and the average tax equivalent yield
on the equity portfolio assumes a 70% dividend received deduction for December
31, 1996.
III. LOAN PORTFOLIO
The following table sets forth the outstanding loans, in thousands, at the
following dates:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial and other . . . . . . . . . . . . . . . . $ 111,454 $ 83,940 $ 68,788 $ 74,855 $ 82,118
Consumer . . . . . . . . . . . . . . . . . . . . . . 54,535 49,464 38,982 38,442 43,806
Real estate:
Residential........................................ 307,217 135,085 119,520 112,138 92,811
Commercial......................................... 52,628 42,073 22,220 24,170 25,185
---------- ---------- ---------- ---------- ----------
Total gross loans.................................. 525,834 310,562 249,510 249,605 243,920
Unearned income...................................... 765 962 1,106 1,529 2,002
---------- ---------- ---------- ---------- ----------
Net loans.......................................... $ 525,069 $ 309,600 $ 248,404 $ 248,076 $ 241,918
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the maturity distribution of the following
categories of loans at December 31, 1996 in thousands.
REMAINING MATURITY
---------------------------------------------
ONE YEAR ONE TO OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ----------- ---------- ----------
Commercial and other . . . . . $63,471 $ 38,789 $ 9,194 $111,454
Real estate:
Residential. . . . . . . . . 18,984 84,838 203,395 307,217
Commercial . . . . . . . . . 12,149 25,890 14,589 52,628
------- ----------- ---------- ----------
$94,604 $149,517 $227,178 $471,299
------- ----------- ---------- ----------
------- ----------- ---------- ----------
Of the loans listed in the maturity schedule above, a total of $376,695 are
due after one year; $291,167 of these loans have predetermined interest rates
and $85,528 of these loans have floating interest rates.
10
<PAGE>
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, are made in the local market area served by Pinnacle
subsidiaries and each of these areas is closely monitored by management for
economic changes. Certain acquisitions, especially the FinSec acquisition, have
added loans to Pinnacle's loan portfolio which are not necessarily made in
Pinnacle's local market area. See "Loan Concentrations" and "Risk Elements" for
further discussion regarding the impact of this acquisition. 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:
DECEMBER 31
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans . . . . . $7,441 $4,791 $ 748 $5,283 $2,646
Past due 90 days or more
and still accruing . . . 633 2,293 552 585 1,067
Restructured loans . . . . 1,330 931 -0- -0- -0-
------ ------ ------ ------ -----
$9,404 $8,015 $1,300 $5,868 $3,713
------ ------ ------ ------ -----
------ ------ ------ ------ -----
Other real estate owned. . $ 939 $ 284 $2,416 $3,444 $1,803
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 30 through 32 of the Corporation's 1996 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
11
<PAGE>
natural geographic concentration of credit risk exists within the
Corporation's defined customer market areas with the exception of loans
acquired from the acquisition of SF. Included in the SF loan portfolio are
certain purchased and participated loans outside Pinnacle's defined customer
markets. These loans totalled approximately $58,337,000, or approximately 11%
of the Corporation's loan portfolio. These loans are located in the following
areas: 3.9% in California; 1.74% in the West (excluding California); 2.2% in
Texas; and 2% in the Midwest (excluding the Chicago Metropolitan area).
Certain of these areas, particularly California and a portion of the Eastern
states, are experiencing adverse economic conditions, which has resulted in
increased past due non-accrual loans as evidenced by the increase in
non-performing loans discussed above. All remaining loans are in the
geographic market areas including the Chicago metropolitan area and the
Quad-Cities metropolitan area of Illinois.
POTENTIAL PROBLEM LOANS. Currently, there are no known problem loans
which have not already been identified by Pinnacle's system of review of the
credit quality of the loan portfolio. This process, which is detailed in the
following Section IV, "Summary of Loan Loss Experience", includes an
independent credit review system as well as an internal process in which
management reports to the Board of Directors via a report ("Watch List")
which includes other potential problem loans identified by management prior
to the independent credit review process or below the scope of the
independent review. The process of both independent and internal credit
review was incorporated at SF and the integration of the process actually
began prior to the acquisition as part of Pinnacle's due diligence.
The Watch List includes credits which are rated by management and the
independent review process as "5" or worse. A credit rating of "5" would
indicate that the loan is considered a ""special mention'' loan by regulatory
examiners. Currently, approximately $9,216,000 of loans in Pinnacle's
portfolio are classified as a "5" and included in the Watch List, but are not
considered non-performing by management. These, as discussed further, are
monitored monthly by both management and the Board of Directors of each
subsidiary bank. Over one-half of these loans relate to SF.
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
1996 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 31 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
12
<PAGE>
request management to allocate the total allowance for loan losses into
certain categories. Accordingly, management has allocated the allowance for
loan losses by loan category based on historical charge-off experience and
management's evaluation of potential losses in the loan portfolio. The
specific allocations are not intended to be indicative of future charge-offs.
The unallocated portion of the allowance for loan losses represents 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>
1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -------------------------------------------------------------------------------------------------
Commercial and other. . . $2,293 21.1% $1,366 27.1% $1,051 27.7%
Consumer. . . . . . . . . 244 10.4 36 15.7 147 15.4
Real estate . . . . . . . 1,564 68.5 858 57.2 826 56.9
Unallocated . . . . . . . 4,263 -- 3,763 -- 2,205 --
----------------------------------------------------------------------
$8,364 100.0% $6,023 100.0% $4,229 100.0%
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
1993 1992
--------------------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -----------------------------------------------------------------------------
Commercial and other. . . $1,710 30.2% $1,503 33.9%
Consumer. . . . . . . . . 540 54.7 453 17.7
Real estate . . . . . . . 750 15.1 430 48.4
Unallocated . . . . . . . 547 -- 615 --
--------------------------------------------------
$3,547 100.0% $3,001 100.0%
--------------------------------------------------
--------------------------------------------------
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 a bi-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, 1996, 1995 and 1994.
13
<PAGE>
The aggregate amount of certificates of deposit, in denominations of $100,000 or
more, by maturity, as of December 31, 1996 are shown below, in thousands.
Three months or less . . . . . . . . . . . . $22,591
Over three months through six months . . . . 21,126
Over six months through twelve months. . . . 14,347
Over twelve months . . . . . . . . . . . . . 16,876
-------
Total. . . . . . . . . . . . . . . . . . . . $74,940
-------
-------
VI. RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for years
ended December 31, 1996, 1995 and 1994. 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.
December 31
-----------------------
1996 1995 1994
-----------------------
Return on average assets . . . . . . . . . . . . . . 0.82% 1.55% 0.32%
Return on average stockholders' equity . . . . . . . 9.02 18.09 3.35
Dividend payout ratio. . . . . . . . . . . . . . . . 79.12 40.89 213.70
Average stockholders' equity to average assets . . . 9.05 8.55 9.61
VII. SHORT-TERM BORROWINGS
Information required in this table is incorporated herein by reference to the
1996 Annual Report to Stockholders included as Exhibit 2. The information
required is contained in Table 6, "Short-term Borrowings and FHLB Advances" on
page 38 of Exhibit 2, within the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 17, 1997.
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 17, 1997.
/s/ RICHARD W. BURKE /s/ JAMES L. GREENE
------------------------------ -------------------------------
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/ SAMUEL M. GILMAN /s/ JAMES J. McDONOUGH
------------------------------ -------------------------------
Samuel M. Gilman James J. McDonough
/s/ ALBERT GIUSFREDI /s/ WILLIAM C.NICKELS
------------------------------ -------------------------------
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 11
EXHIBIT 1 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts,
adjusted for 3-for-2 stock split declared January 21, 1997)
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
PRIMARY EARNINGS PER SHARE 1996 1995 1994
- -------------------------------------------------------------------------------
Computation Required by Regulation S-K
and for Statement of Income (Note 1):
Net income .............................. $ 7,127 $ 12,493 $ 2,255
Weighted average number of common and
common equivalent shares outstanding:
Common shares ......................... 6,810,215 6,603,885 6,647,252
Dilutive effect of stock option shares
(Note 2) ............................. 19,017 22,667 37,404
------------------------------------
Total common and
common equivalent shares ............ 6,829,232 6,626,552 6,684,656
Earnings per share - primary ............ $ 1.05 $ 1.89 $ 0.34
====================================
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
FULLY DILUTED EARNINGS PER SHARE 1996 1995 1994
- -------------------------------------------------------------------------------
Computation Required by Regulation S-K
and for Statement of Income (Note 1):
Net income .............................. $ 7,127 $ 12,493 $ 2,255
Weighted average number of common and
common equivalent shares outstanding:
Common shares ......................... 6,810,215 6,603,885 6,647,252
Dilutive effect of stock option shares
(Note 2) ............................. 19,017 24,624 42,147
------------------------------------
Total common and
common equivalent shares ............ 6,829,232 6,628,509 6,689,399
Earnings per share - fully diluted ...... $ 1.05 $ 1.89 $ 0.34
====================================
Note 1: See the Consolidated Statements of Income for Earnings per share
computations on page 5 of the Corporation's 1996 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. See Note 11 in Notes to
Consolidated Financial Statements on pages 15 and 16 of the
Corporation's 1996 Annual Report to Stockholders contained herein
as Exhibit 2.
<PAGE>
EXHIBIT 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
PINNACLE BANC GROUP, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Percent
1996 1995 Change
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year:
Net income....................................... $ 7,127 $ 12,493 (43)%
Return on average equity......................... 9.0% 18.1%
Return on average assets......................... 0.82 1.55
Per Share:
Net income....................................... $ 1.05 $ 1.89 (44)%
Book value....................................... 13.23 12.03 10
Dividends........................................ 0.83 0.77 8
At Year End:
Total assets..................................... $1,048,376 $ 818,697 28%
Loans............................................ 525,069 309,600 70
Portfolio funds.................................. 439,332 443,755 (1)
Deposits......................................... 877,552 712,805 23
Notes payable.................................... 32,800 20,600 59
Stockholders' equity............................. 100,824 78,961 28
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................................................... 2
Consolidated Financial Statements................................................ 4
Report of Independent Public Accountants......................................... 25
Selected Financial Data.......................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 27
Board of Directors, Executive Officers, Bank and Banking Center Presidents, and
Department Heads............................................................... 41
Shareholder Information.......................................................... 42
Corporate Information............................................................ 43
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 2 - ANNUAL REPORT TO SECURITY HOLDERS
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholder:
Each year this letter serves as our forum to review Pinnacle's performance for
the past year as well as an opportunity to communicate our objectives for the
future. The recently completed year was one of mixed results from our viewpoint.
While the financial results were not up to Pinnacle's high performance standards
and the price of Pinnacle common shares declined, some significant strides were
made in achieving our stated objectives. An acquisition was completed bringing
total assets to in excess of $1 billion and improvement was made in Pinnacle's
core banking function including internally generated loan growth of 14% in 1996.
FINANCIAL PERFORMANCE
In last year's letter, we stated that while 1995 was a successful one for
Pinnacle from a numbers standpoint, 1996 would be much more challenging. We were
concerned that the relatively low rate environment coupled with Pinnacle's high
volume of U. S. Government securities and a relatively flat yield curve would
continue to put pressure on Pinnacle's net interest margin and earnings in the
near term. Unfortunately, we were correct. Net income for 1996 totalled
$7,127,000, or $1.05 per share, adjusted for the 3-for-2 stock split which was
effective on February 10, 1997, compared to net income of $12,493,000, or $1.89
per share, earned in 1995, a per share decrease of 44%. The return on average
equity for 1996 was 9.0% and the return on average assets amounted to 0.82%.
In fact, the relatively low rate environment was the primary reason for the
earnings decrease. Pinnacle's net interest margin declined to 3.51% in 1996 from
3.90% in 1995. Lower yields earned on U. S. Government securities, which made up
a significant portion of Pinnacle's balance sheet, and moderately higher deposit
costs resulting from the reallocation of funds by customers from savings and
money market deposits to time accounts, were contributors to the lower net
interest margin. In addition, net income was negatively impacted by the fact
that only $159,000 in net gains on the sale of securities were recorded in 1996
compared to $4,731,000 of gains booked in 1995.
Total assets were $1.05 billion at December 31, 1996, a 28% increase from the
same date of the previous year. Total loans were $525 million, up 70%, and total
deposits amounted to $878 million, a 23% increase. Equity capital totalled $101
million, an increase of 28%. Book value was $13.23 at December 31, 1996,
adjusted for the stock split. The increase in each of the balance sheet
categories was the result of the acquisition which was completed at the end of
the third quarter of 1996.
Pinnacle's common stock price did not fare well in 1996. The stock closed at
year-end 1996 at $18.83, adjusted for the stock split, versus a closing price of
$22.33 on December 31, 1995, a decline of 16%. This was especially disappointing
since the decline took place in a year in which significant gains were recorded
in the market in general and in bank stocks in particular. Our belief is that
the decrease was attributable to two factors. First, Pinnacle's earnings results
in 1996 were lower than historical levels. Second, an over supply of shares in
the marketplace during mid-year and the effect of the cash/stock allocation in
the acquisition completed in September limited the opportunity for any price
appreciation since supply outweighed demand.
MOMENTUM FOR THE FUTURE
The year's most significant accomplishment was the acquisition of Financial
Security Corp. and its wholly-owned subsidiary, Security Federal Savings and
Loan Association of Chicago, which was completed on September 30, 1996. The
acquisition added $213 million in year end assets to Pinnacle pushing the
company to over $1 billion in assets and accomplishing an objective that was
first stated in our 1994 annual report letter, and reaffirmed last year--to
reach $1 billion in assets by year-end 1996. As a result of the transaction, two
new locations were added to the Pinnacle franchise, one on the near northwest
side of Chicago and the other in north suburban Niles. The acquisition also made
some important additions to Pinnacle's management team and increased the
company's total loan to asset ratio to 50%, both key factors in future success
for Pinnacle. The acquisition was completed using a combination of cash and
stock, Pinnacle's first such transaction since 1989. It was our hope that the
issuance of stock to a new group of shareholders would increase the liquidity in
Pinnacle common shares and narrow the quoted spread between the bid and asked
side of the market. In fact, since the transaction, trading volume has increased
and the quoted spread has narrowed. An additional benefit of the acquisition was
the change to the NASDAQ National Market System from the Small Cap Market for
trading in Pinnacle common shares.
Pinnacle made some tangible strides in accomplishing another of its objectives.
A recurring theme in these annual letters has been the necessity to continue to
improve the core earnings of the banking function. Total loans increased 14%
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
in 1996, not including the effect of the acquisition. This marked the first time
since 1988 that Pinnacle has had any meaningful internal loan growth. We believe
this growth was the result of a stronger focus on the lending function, coupled
with marketing efforts including a business calling program. We feel we have
succeeded in a highly competitive lending environment by being a little more
aggressive on pricing while keeping our credit standards in tact.
We also made strides in making Pinnacle a more visible provider of financial
services. Hopefully, you have heard our radio advertising highlighting our home
equity product, small business lending, trust alternatives, or Pinnacle's newest
product which is PC Banking for banking at home by computer. We were able to
increase our financial service products per household in 1996, although we still
have plenty of room to go to meet our goals. We continue to complete the
integration of our banking centers through the merger of Pinnacle's thrift
subsidiaries into Pinnacle Bank. In addition, Pinnacle plans to open its first
new branch location by the end of the summer in a west suburban location. By the
end of the third quarter, Pinnacle will have thirteen locations in the Chicago
area at which any customer can transact business with an additional two
locations in the metropolitan area of the Quad-Cities, Illinois.
On the non-banking side of the performance ledger, Pinnacle's equity portfolio
of investments in other banks and thrifts continued to evolve into a major
earnings contributor for the future. At year-end 1996, the portfolio totalled
$28.2 million with $8.7 million in unrealized appreciation. An interesting way
to view this portfolio is that through these investments, Pinnacle holds an
additional $250 million in non-balance sheet banking assets as an alternative to
purchasing 100% of another financial institution. The plan is to use these
investments as a vehicle to supplement improving core bank earnings, thereby
achieving a high performance objective.
OUR OBJECTIVES
Our goals continue to remain the same as we have communicated in the past:
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. On the corporate side, we can accomplish these goals through
continued acquisitions and common share repurchases. As part of Pinnacle's
equity management program, a 6% increase in the dividend was announced in
January, 1997, the ninth consecutive annual increase since Pinnacle became a
publicly traded company in 1988; and a 3-for-2 stock split was effective in
February, 1997, the third such split since 1990. 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.
The recently completed year is a perfect example of this necessity. In past
years, Pinnacle has relied for its success on non-core bank earnings--the
investment portfolio, tax planning strategies and other innovative programs
unrelated to traditional banking. These items can continue to play an important
role for Pinnacle. However, the core bank portion of earnings must be enhanced
in order to provide a more consistent earnings stream and to lessen the effect
of an interest rate environment which may not be favorable to Pinnacle's
investment portfolio as was the case in 1996.
In summary, while the financial numbers for 1996 relating to earnings and stock
price performance were not up to Pinnacle's corporate standards, the
acquisition, loan growth, marketing efforts, and equity portfolio made the year
an acceptable foundation for the future. Pinnacle's performance in the past has
been strong as evidenced by an average return on equity of 17.3% and a return on
assets of 1.62% for the nine year life of Pinnacle as a publicly traded company.
Pinnacle's performance in the future will hinge on our ability to accomplish the
aforementioned objectives and management is confident in its ability to do so.
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>
(in thousands, except per share amounts) at December 31
--------------------
<S> <C> <C>
1996 1995
<CAPTION>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks...................................................... $ 21,745 $ 27,273
Federal funds sold........................................................... 1,350 14,100
--------------------
Total cash and cash equivalents............................................ 23,095 41,373
Interest-bearing deposits.................................................... 3,424 2,726
Securities--Available for sale (Note 3)...................................... 434,558 426,929
(Amortized cost of $423,857 in 1996 and $418,637 in 1995)
Loans (Note 4)............................................................... 525,069 309,600
Less: Allowance for loan losses (Note 5)..................................... (8,364) (6,023)
--------------------
Net loans.................................................................. 516,705 303,577
Premises and equipment (Note 6).............................................. 17,301 15,565
Goodwill and other intangibles (Note 2)...................................... 25,366 19,177
Other assets................................................................. 27,927 9,350
--------------------
Total...................................................................... $1,048,376 $ 818,697
--------------------
Liabilities:
Demand deposits:
Noninterest-bearing........................................................ $ 101,127 $ 96,715
Interest-bearing........................................................... 88,489 89,230
Savings deposits............................................................. 297,399 257,794
Other time deposits.......................................................... 390,537 269,066
--------------------
Total deposits............................................................. 877,552 712,805
Short-term borrowings and FHLB advances (Note 8)............................. 28,525 --0--
Notes payable (Note 8)....................................................... 32,800 20,600
Other liabilities............................................................ 8,675 6,331
--------------------
Total liabilities.......................................................... 947,552 739,736
--------------------
Commitments and Contingencies (Notes 14 & 15)
Stockholders' equity (Notes 10, 11, 12 and 16):
Preferred stock.............................................................. --0-- --0--
1,000 shares authorized, none issued
Common stock, $3.125 par..................................................... 23,811 20,505
20,000,000 shares authorized; shares issued and outstanding: 1996:
7,619,487; 1995: 6,561,704
Additional paid-in capital................................................... 37,980 17,898
Retained earnings............................................................ 31,985 33,506
Unrealized gain on securities available for sale, net of tax (Notes 1 & 3)... 7,048 7,052
--------------------
Total stockholders' equity................................................. 100,824 78,961
--------------------
Total...................................................................... $1,048,376 $ 818,697
--------------------
--------------------
</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
(in thousands, except per share amounts) December 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans............................................................ $31,143 $26,316 $20,485
Securities:
Taxable........................................................ 23,133 23,347 19,437
Tax exempt..................................................... 1,746 2,571 2,923
Interest-bearing deposits, Federal funds sold and other.......... 252 1,063 75
-------------------------------
Interest income................................................ 56,274 53,297 42,920
-------------------------------
Interest Expense:
Deposits:
Interest-bearing demand........................................ 1,841 1,732 1,376
Savings........................................................ 8,085 8,341 7,015
Other time..................................................... 16,719 13,664 7,496
Short-term borrowings and FHLB advances.......................... 728 39 470
Notes payable.................................................... 1,745 1,963 283
-------------------------------
Interest expense............................................... 29,118 25,739 16,640
-------------------------------
Net Interest Income................................................ 27,156 27,558 26,280
Provision for loan losses (Note 5)............................... --0-- --0-- 900
-------------------------------
Net interest income after provision for loan losses............ 27,156 27,558 25,380
-------------------------------
Other Income:
Other income (Note 17)........................................... 7,562 7,225 5,461
Net securities gains (losses).................................... 159 4,731 (9,845)
-------------------------------
Other income (loss)............................................ 7,721 11,956 (4,384)
-------------------------------
Other Expense:
Salaries, profit sharing and other employee benefits (Note 9).... 12,678 12,051 9,459
Occupancy (Note 6)............................................... 2,674 3,137 1,848
Amortization of goodwill and other intangibles (Note 2).......... 2,033 1,885 1,681
Other expense (Note 17).......................................... 8,315 6,809 8,072
-------------------------------
Other expense.................................................. 25,700 23,882 21,060
-------------------------------
Income (loss) before income taxes.................................. 9,177 15,632 (64)
Provision (benefit) for income taxes (Note 7).................... 2,050 3,139 (2,319)
-------------------------------
Net income..................................................... $ 7,127 $12,493 $ 2,255
-------------------------------
Earnings per share (Note 10):
Net income..................................................... $1.05 $1.89 $0.34
Weighted average number of common and common equivalent
shares outstanding............................................ 6,829,232 6,626,552 6,684,656
</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,
(in thousands, except per share amounts) Stock Capital Earnings Net of Tax Total
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993.......................... $ 21,014 $ 17,406 $ 32,436 $ --0-- $ 70,856
Net income........................................ 2,256 2,256
Dividends paid--$0.72 per share................... (4,797) (4,797)
Purchase and retirement of common stock........... (417) (2,311) (2,728)
Exercise of stock options......................... 56 145 201
Unrealized gain on securities available for sale,
net of tax (Notes 1 & 3)......................... 3,048 3,048
<CAPTION>
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.......................... 20,653 17,551 27,584 3,048 68,836
Net income........................................ 12,493 12,493
Dividends paid--$0.77 per share................... (5,109) (5,109)
Purchase and retirement of common stock........... (268) (1,463) (1,731)
Exercise of stock options......................... 120 334 454
Addition to capital (Notes 7 & 12)................ 14 14
Unrealized gain on securities available for sale,
net of tax (Notes 1 & 3)......................... 4,004 4,004
<CAPTION>
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......................... $ 20,505 $ 17,899 $ 33,505 $ 7,052 $ 78,961
Net income........................................ 7,127 7,127
Dividends paid--$0.83 per share................... (5,639) (5,639)
Purchase and retirement of common stock........... (740) (4,057) (4,797)
Exercise of stock options......................... 29 103 132
Correction of deferred tax valuation allowance
(Note 7)......................................... 1,049 (1,672) (623)
Issuance of common stock for acquisition (Note
2)............................................... 4,017 19,978 23,995
Unrealized gain (loss) on securities available for
sale, net of tax (Notes 1 & 3)................... 1,668 1,668
<CAPTION>
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......................... $ 23,811 $ 37,980 $ 31,985 $ 7,048 $ 100,824
-------------------------------------------------------------
-------------------------------------------------------------
</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>
(in thousands, except per share amounts) For the year ended December 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 7,127 $ 12,493 $ 2,255
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation................................................ 1,619 1,273 651
Amortization of goodwill and other intangibles.............. 2,033 1,885 1,681
Amortization of purchase accounting adjustments............. 175 147 54
Provision for loan losses................................... --0-- --0-- 900
Premium amortization........................................ 649 246 1,467
Discount accretion.......................................... (6,894) (20,738) (6,091)
Increase (decrease) in deferred loan fees................... 264 (183) (264)
(Gain) loss on sales of securities.......................... (159) (4,731) 9,845
Decrease (increase) in interest receivable.................. (8,108) 407 2,875
Deferred income taxes....................................... (311) 824 (401)
Decrease (increase) in other assets......................... 20,018 5,107 (2,416)
Increase (decrease) in other liabilities.................... (7,699) (1,786) 1,864
Other, net.................................................. (1,222) 10 --0--
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total adjustments......................................... 365 (17,538) 10,165
Net cash provided by (used for) operating activities...... 7,492 (5,045) 12,420
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note 1)..... (19,050) (14,800) --0--
Proceeds from sales of securities available for sale............ 1,112,527 3,096,014 1,624,942
Purchases of securities available for sale...................... (1,101,715)(3,088,494)(1,614,524)
Proceeds from maturities and paydowns of securities............. 10,048 26,915 20,660
Net decrease (increase) in interest-bearing deposits............ 31,990 12,458 (1,490)
Net loan principal (advanced) collected......................... (39,836) 9,798 (626)
Premises and equipment, net..................................... (2,638) (1,709) (610)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Net cash provided by (used for) investing activities...... (8,674) 40,182 28,352
Cash flows from financing activities:
Net increase (decrease) in total deposits....................... (21,817) (18,043) (33,733)
Net increase (decrease) in short-term borrowings................ 2,825 (4,800) (8,800)
Proceeds from notes payable..................................... 24,500 31,800 11,200
Principal reductions of notes payable........................... (12,300) (16,600) (5,800)
Issuance of common stock........................................ 132 454 201
Purchase and retirement of common stock......................... (4,797) (1,731) (2,727)
Dividends paid.................................................. (5,639) (5,109) (4,798)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Net cash used for financing activities.................... (17,096) (14,029) (44,457)
Net increase (decrease) in cash and cash equivalents.............. (18,278) 21,108 (3,685)
Cash and cash equivalents at beginning of year.................... 41,373 20,265 23,950
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at end of year.......................... $ 23,095 $ 41,373 $ 20,265
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash paid during year for:
Interest........................................................ $ 29,221 $ 25,691 $ 16,645
Income taxes.................................................... 1,525 2,207 1,526
</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
- --------------------------------------------------------------------------------
ALL DOLLARS IN THE FOLLOWING FOOTNOTES ARE IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS.
ACCOUNTING POLICIES:(1)
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 and thrift 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:
CONSOLIDATION - (A)
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"), Security
Federal Savings and Loan Association ("SF"), and Pinnacle Bank, FSB (formerly
Batavia Savings Bank) ("FSB"). 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.
STATEMENTS OF CASH FLOWS - (B)
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 1996,
Financial Security ("FinSec") and its subsidiary, SF, were purchased for a
combination of stock and cash. The cash portion of the acquisition price was
$20,140; the non-cash portion of the acquisition consisted of 1,285,413
(adjusted for stock split, see Footnote 10) shares valued at $23,995. At the
date of purchase, the balance sheet of FinSec included cash and cash equivalents
of $1,090, resulting in a net cash position of $19,050. In 1995, Acorn Financial
Corp ("AFC") and its subsidiary bank, Suburban Trust & Savings Bank ("STSB") was
purchased by the Corporation and cash of $23,414 was paid for the acquisition.
At the date of purchase, the balance sheet of AFC included cash and cash
equivalents of $8,614 resulting in a net cash position of $14,800.
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 1996, the amount was $6,022 for the acquisition of FinSec. In 1995,
this amount was $23,414 for the acquisition of AFC.
SECURITIES - (C)
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, 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.
LOANS - (D)
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.
- --------------------------------------------------------------------------------
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
the related loan's yield. The Corporation generally amortizes these amounts over
the contractual life of the related loans.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan". This standard was amended in October, 1994, by SFAS
No. 118, "Accounting for Creditors for Impairment of a Loan--Income Recognition
and Disclosure". SFAS No. 114 addresses the accounting for loans when it is
probable that all principal and interest amounts due on a loan will not be
collected in accordance with its contractual terms (i.e. "impaired loans").
Pursuant to SFAS No. 114, to the extent the recorded investment of an impaired
loan exceeds the present value of the loan's expected future cash flows or other
measures of value, a valuation allowance is established for the difference. The
corresponding allocation or charge will be to either the allowance for loan
losses or to the provision for loan losses, respectively, depending on the
adequacy of the overall allowance for loan losses. The Corporation adopted SFAS
No. 114 and SFAS No. 118 effective as of January 1, 1995. There was no effect on
the financial position and results of operation of the Corporation upon adopting
these standards.
ALLOWANCE FOR LOAN LOSSES - (E)
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.
PREMISES AND EQUIPMENT - (F)
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.
OTHER REAL ESTATE - (G)
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.
INCOME TAXES - (H)
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.
SFAS No. 109, "Accounting for Income Taxes", 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.
NEW ACCOUNTING PRONOUNCEMENTS - (I)
LONG-LIVED ASSETS
Effective January 1, 1996, Pinnacle adopted 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. If impairment is indicated,
any impairment is recorded in current earnings. There was no effect of the
adoption of this standard on the financial position and results of operations of
Pinnacle.
- --------------------------------------------------------------------------------
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
STOCK BASED COMPENSATION
In October, 1995, SFAS No. 123, "Accounting for Stock Based
Compensation" was issued. This standard establishes accounting and reporting
standards for stock-based awards, such as stock options, granted in fiscal years
beginning after December 31, 1994. SFAS No. 123 establishes a fair value of
accounting for stock options, with compensation expense reported for the fair
value of these types of instruments in current earnings. Entities may elect not
to adopt the fair value method of accounting, but are required to make pro forma
disclosures of net income and earnings per share as if the statement was
adopted. The Corporation elected not to adopt the fair value method. See
Footnote 11.
TRANSFERS OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In 1996, FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and Statement
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS Statement
No. 125". The statement addresses the parameters in which the transfers of
assets and extinguishment of liabilities are considered a sale and removed from
the balance sheet or recorded as secured borrowings. This statements affects the
Corporation through certain financial instruments such as loan participations or
repurchase agreements and whether the Corporation has relinquished total control
over the transfer of assets or extinguishment of liabilities. The effective date
of the standard was for fiscal years beginning after December 31, 1996. The
Corporation adopted SFAS No. 125 and SFAS No. 127 on January 1, 1997 and there
was no significant effect on its consolidated financial position or results of
operations.
ESTIMATES - (J)
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.
ACQUISITIONS: (2)
Effective September 30, 1996, Pinnacle completed the acquisition of FinSec
and its subsidiary, SF. The total purchase price was $44,756, common shares
issued were 1,285,413 (adjusted for stock split) valued at $23,995, and the
remainder was paid in cash. Funds utilized to pay for the cash portion of the
acquisition were obtained from funds on hand at Financial Security, a dividend
from SF, and borrowed from an unaffiliated bank.
At the date of the purchase, FinSec was liquidated and SF will remain a
separate subsidiary of Pinnacle until January 31, 1997 at which time SF will be
merged with and into PB. As of the date of the purchase, FinSec had total assets
of approximately $250,000. Goodwill, based on management's estimates of fair
value of assets acquired and liabilities assumed, approximates $8,100 which is
being amortized on a straight-line basis over fifteen years. Fair value
appraisals, tax net operating loss carrybacks, and determination of termination
benefits are being updated and will be adjusted, if necessary, when completed.
Management does not anticipate material changes to the above goodwill amount.
This transaction is being accounted for using the purchase method of
accounting and, accordingly, the excess of the aggregate purchase price over the
fair value of the net assets acquired consisted of goodwill. Because the
acquisition occurred at September 30, 1996, the income effect of SF is included
in Pinnacle's results of operations for the last three months of 1996.
The following unaudited results of operations reflect the acquisition of
FinSec as if the acquisition had occurred at the beginning of 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
--------------------
Net interest income....... $ 32,285 $ 35,847
Net income................ 4,201 13,998
Net income per share
(adjusted for stock
split)................... 0.53 1.77
</TABLE>
On January 6, 1995, the Corporation completed the acquisition of AFC and
its subsidiary STSB. The purchase price was $23,414 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. Goodwill of approximately $13,000
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
- --------------------------------------------------------------------------------
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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:
<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, 1996 and 1995, the Corporation had goodwill of $23,576 and
$17,047, respectively. Goodwill is stated net of accumulated amortization of
$19,158 and $17,466 at December 31, 1996 and 1995, 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, Bank of Silvis in 1989, BNB and The Henry County Bank in 1991, Batavia
Savings Bank in 1992, AFC in 1995, and FinSec in 1996. Goodwill is being
amortized on straight line and accelerated methods over periods of 10 years to
20 years. Amortization of goodwill amounted to $1,692 in 1996, $1,544 in 1995,
and $1,340 in 1994.
Other intangibles consist of a deposit base intangible totalling $1,790
and $2,130 as of December 31, 1996 and 1995, 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 $1,619 and $1,278 at December 31, 1996 and 1995, respectively.
Amortization of the deposit base intangible, which is being amortized over an
estimated 10-year life, amounted to $341 in 1996, 1995, and 1994.
SECURITIES: (3)
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, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S. Government agencies........................... $ 373,142 $ 67 $ 137 $ 373,072
Mortgage-backed securities........................................... 3,221 --0-- 260 2,961
Floating rate collateralized mortgage obligations.................... 2,990 2 10 2,982
State and municipal.................................................. 21,076 2,597 223 23,450
Other debt securities................................................ 251 3 --0-- 254
--------------------------------------------------
Total debt securities.............................................. 400,680 2,669 630 402,719
Corporate and other equity securities................................ 23,177 8,662 --0-- 31,839
--------------------------------------------------
Total securities................................................... $ 423,857 $ 11,331 $ 630 $ 434,558
<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 $ 461 $ --0-- $ 370,545
Mortgage-backed securities........................................... 3,001 17 23 2,995
Floating rate collateralized mortgage obligations.................... 7,335 6 29 7,311
State and municipal.................................................. 22,918 2,925 4 25,840
Other debt securities................................................ 1,461 21 --0-- 1,482
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total debt securities.............................................. 404,799 3,430 56 408,173
Corporate and other equity securities................................ 13,838 4,918 --0-- 18,756
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total securities................................................... $ 418,637 $ 8,348 $ 56 $ 426,929
<CAPTION>
--------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value or carrying value of debt
securities at December 31, 1996 and 1995, 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>
1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 2,714 $ 2,746 $ 367,916 $ 368,503
Due after one year through five years... 378,139 378,754 14,265 15,007
Due after five years through ten
years................................. 11,279 12,813 9,364 11,289
Due after ten years..................... 2,337 2,463 2,918 3,068
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
394,469 396,776 394,463 397,867
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.............. 3,221 2,961 3,001 2,995
Floating rate collateralized mortgage
obligations........................... 2,990 2,982 7,335 7,311
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Total debt securities................. $ 400,680 $ 402,719 $ 404,799 $ 408,173
<CAPTION>
------------------------ ------------------------
</TABLE>
------------------------
Proceeds from sales of debt securities during 1996 were $1,110,249. Gross
gains of $349 and gross losses of $190 were realized on those sales. Proceeds
from sales of debt securities during 1995 were $3,092,834. Gross gains of $4,279
and gross losses of $273 were realized on those sales.
At December 31, 1996 and 1995, securities carried at approximately $31,468
and $29,477, 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, 1996
or 1995, which constituted an unusual credit risk for the Corporation.
LOANS: (4)
The composition of loans included in the accompanying consolidated balance
sheets is as follows:
<TABLE>
<CAPTION>
December 31
--------------------
<S> <C> <C>
1996 1995
<CAPTION>
--------------------
<S> <C> <C>
Commercial and other................ $ 111,454 $ 83,940
Real estate--
Residential....................... 307,217 135,085
Commercial and construction....... 52,628 42,073
Consumer............................ 54,535 49,464
<CAPTION>
--------------------
<S> <C> <C>
Gross loans....................... 525,834 310,562
Less--Unearned income............... 765 962
<CAPTION>
--------------------
<S> <C> <C>
Loans, net of unearned income..... $ 525,069 $ 309,600
<CAPTION>
--------------------
</TABLE>
The balance of impaired loans at December 31, 1996, was $6,485, while the
average balance for the year was $7,543. Impaired loans secured by real estate
totalled $3,247; commercial loans totalled $2,744; with the remaining $494 in
installment loans. The balance of impaired loans at December 31, 1995 was
$5,740, while the average balance for the year was $5,992. No portion of the
allowance for loan losses was allocated to the impaired loans at December 31,
1996 and 1995. Interest income recognized on impaired loans was approximately
$62 in 1996 and $267 in 1995.
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 with
the exception of loans acquired from the acquisition of SF. Included in SF loan
portfolio are certain purchased and participated loans outside the Corporation's
defined customer markets. These loans totalled approximately $58,337 of the
total loan portfolio of the Corporation and are in the following areas: 3.9% in
California; 1.74% in the West (excluding California); 2.2% in Texas; and 2% in
the Midwest (excluding the Chicago metropolitan area). All remaining loans are
in the geographic market areas including the Chicago metropolitan area and the
Quad-Cities metropolitan area of Illinois and Iowa.
- --------------------------------------------------------------------------------
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES: (5)
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Beginning balance.............. $6,023 $4,228 $3,547
Balances acquired (Note 2)..... 2,982 1,946 --0--
Loans charged off.............. (839) (372) (306)
Recoveries on loans............ 198 221 87
Provision for loan losses...... --0-- --0-- 900
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Ending balance............... $8,364 $6,023 $4,228
<CAPTION>
-------------------------------
</TABLE>
PREMISES AND EQUIPMENT: (6)
A summary of premises and equipment is detailed below:
<TABLE>
<CAPTION>
December 31
--------------------
<S> <C> <C>
1996 1995
<CAPTION>
--------------------
<S> <C> <C>
Land.................................. $ 2,745 $ 2,454
Buildings & improvements.............. 14,143 13,092
Leasehold improvements................ 478 351
Furniture and equipment............... 6,909 5,587
<CAPTION>
--------------------
<S> <C> <C>
Total............................... 24,275 21,484
Accumulated depreciation.............. (6,974) (5,919)
<CAPTION>
--------------------
<S> <C> <C>
Premises and equipment................ $ 17,301 $ 15,565
<CAPTION>
--------------------
</TABLE>
Depreciation expense for the year ended December 31, 1996, 1995, and 1994
was $1,604, $1,272, and $651, 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, leases its banking facility
in North Riverside under an agreement expiring in the year 2007, and leases its
banking facility in Niles under an agreement expiring in 1999. Future minimum
lease payments on these operating leases at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Future Minimum
Year Lease Payments
<S> <C>
- --------------------------------------------------
1997............................. $ 188
1998............................. 163
1999............................. 162
2000............................. 144
Later years...................... 644
<CAPTION>
---------------
<S> <C>
Total minimum payments
required....................... $ 1,301
<CAPTION>
---------------
</TABLE>
Rental expenses for leases, included in the consolidated statements of
income as occupancy expenses, amounted to $177 in 1996, $156 in 1995, and $182
in 1994. 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>
- --------------------------------------------------
1997............................. $109
1998............................. 104
1999............................. 26
2000 and after................... --0--
<CAPTION>
---------------
<S> <C>
Total minimum net rentals........ $239
<CAPTION>
---------------
</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 $157 in 1996 and $179 in 1995.
INCOME TAXES: (7)
The provision for income taxes in the consolidated statements of income is
composed of the following:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Federal
Current...................... $2,361 $2,315 $(1,157)
Deferred..................... (311) 824 (401)
State.......................... --0-- --0-- (761)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Provision (benefit) for
income taxes.............. $2,050 $3,139 $(2,319)
<CAPTION>
-------------------------------
</TABLE>
Not included in the above table, but credited directly to stockholders'
equity in 1995 were taxes in the amount of $14 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 provision
(benefit) for taxes on security gains (losses) was $54 in 1996, $1,609 in 1995,
and $(3,347) in 1994.
- --------------------------------------------------------------------------------
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The following table reconciles the provision (benefit) 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
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Tax provision at Federal
statutory rate............... $ 3,121 $ 5,314 $ (22)
Tax-exempt income.............. (690) (1,028) (1,860)
Amortization of purchase
accounting assets and
goodwill and other
intangibles.................. 619 692 606
Dividend received deduction.... (207) (901) (171)
Securities writedown........... (24) (240) --0--
State income taxes, net of
Federal income tax benefit... --0-- --0-- (474)
Other, net..................... (769) (698) (398)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Provision (benefit) for
income taxes................ $ 2,050 $ 3,139 $ (2,319)
<CAPTION>
-------------------------------
</TABLE>
The components of and changes in the net deferred tax asset were as
follows:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1995
<S> <C> <C>
--------------------
Deferred tax assets:
Allowance for loan losses............ $ 2,249 $ 1,366
Deferred compensation................ 631 657
Other reserves....................... 254 190
State tax operating loss
carryforward........................ 3,188 1,691
Federal regular tax operating loss
carryforward........................ 1,238 1,238
Alternative minimum tax credit
carryforward........................ 207 1,284
Other................................ 704 243
<CAPTION>
--------------------
<S> <C> <C>
Gross deferred tax assets.......... 8,471 6,669
Valuation allowance.............. (2,296) (1,784)
<CAPTION>
--------------------
<S> <C> <C>
Gross deferred tax assets, net of
valuation allowance............... 6,175 4,885
<CAPTION>
--------------------
<S> <C> <C>
Deferred tax liabilities:
Partnership interests................ 397 --0--
Depreciation......................... 255 292
Purchase accounting adjustments...... 592 874
Other................................ 419 757
Unrealized gain on securities........ 3,653 1,240
<CAPTION>
--------------------
<S> <C> <C>
Gross deferred tax liabilities..... 5,316 3,163
<CAPTION>
--------------------
<S> <C> <C>
Net deferred tax asset................. $ 859 $ 1,722
<CAPTION>
--------------------
</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. A valuation allowance of $1,049 had been set up against the parent company
only Federal net operating loss carryforward in 1993, when the Corporation
adopted the provisions of SFAS No. 109. In reviewing its 1996 tax planning
strategies relating to the parent company only Federal net operating loss
carryforward, a portion which expires in 1999, the Corporation recognized that
it did not need that specific valuation allowance because of the effect of the
market value adjustment related to SFAS No. 115 on the parent company equity
portfolio. A correcting entry was made in 1996 to reverse the valuation
allowance and record the SFAS no. 115 adjustment. At the time of the correction,
the adjustment to equity (including the SFAS No. 115 adjustment) was less than
1% of equity. Management reviewed the effect of this adjustment on prior period
financial statements and determined it was immaterial to those financial
statements due to the amount of the adjustment and because any correcting entry
would have had no impact on the income or earnings per share of the Corporation.
No restatement of prior periods was made. The valuation allowance at December
31, 1996 relates solely to the 1995 and 1996 state net operating loss
carryforward. 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, 1996, the Federal net operating loss carryforward amounted to
approximately $3,641 which expires, if unused, in the years 1999 to 2001. At
December 31, 1996 and 1995, the State net operating loss carryforward amounted
to $42,510 and $23,549, respectively, which expires, if unused, in the years
2010 through 2012.
At December 31, 1996, the Corporation had an alternative minimum tax
credit carryforward of approximately $207, which is not subject to expiration.
- --------------------------------------------------------------------------------
14
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
BORROWINGS, FHLB ADVANCES AND NOTES PAYABLE: (8)
Included in short-term borrowings are Federal Home Loan advances with the
following maturities and rates:
<TABLE>
<CAPTION>
Amount Rate Maturity
<S> <C> <C>
- -------------------------------
$5,000 5.65% 3/4/97
2,500 7.27 5/6/98
2,500 7.44 5/6/99
- ---------
$10,000
- ---------
</TABLE>
The Corporation maintains qualifying collateral against these advances
including its Federal Home Loan Bank Stock and 1 - 4 Family residential
mortgages.
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, 1996, the notes payable were a $15,000 note used to
finance the acquisition of AFC in 1994; a $15,000 note used for the acquisition
of FinSec and other equity securities and a $5,000 line for working capital of
which $2,800 was outstanding. Total outstandings were $32,800 at December 31,
1996. During 1995, the total lines were composed of a $23,000 demand loan used
for the acquisition of AFC and a $7,000 revolving line of credit. Total
outstandings were $20,600 at December 31, 1995.
The notes payable bear interest at a floating rate tied to the prime rate
or LIBOR, are due on demand and are secured by stock of the Corporation's
subsidiary bank stock and with respect to the acquisition line, secured by
certain equity securities of the parent company.
RETIREMENT AND INCENTIVE PLANS: (9)
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 $424 for
1996, $414 for 1995, and $337 for 1994.
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.
SF maintained certain retirement and incentive plans for its employees
including a qualified non-contributory defined benefit pension plan and a
Supplemental Retirement Agreement for one officer to provide supplemental
retirement, death and disability benefits. In conjunction with the acquisition,
these plans are in the process of being terminated and as of the most current
valuation are fully funded. No gain or loss on termination is expected.
CAPITAL STOCK: (10)
On January 21, 1997, the Board of Directors of the Corporation approved a
3-for-2 stock split payable February 10, 1997 to stockholders of record on
February 3, 1997. The stock split has been recorded retroactively for
consolidated financial statement purposes by adjusting the par value of the
Corporation's common stock and the number of shares outstanding. Disclosures
regarding earnings per share and stock options have been adjusted accordingly
for all periods presented.
STOCK OPTION PLAN: (11)
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 369,999
shares.
The following table summarizes stock option transactions for 1996, 1995,
and 1994 giving effect to stock splits. At December 31, 1996, 65,250 option
shares under the 1990 Plan were
- --------------------------------------------------------------------------------
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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,
1993........................... 119,691 $ 12.50
Options granted............... --0-- --0--
Options exercised............. (17,927) 11.20
--------------------------
Outstanding at December 31,
1994........................... 101,764 12.73
Options granted............... 7,500 19.09
Options exercised............. (38,515) 11.79
--------------------------
Outstanding at December 31,
1995........................... 70,749 13.91
Options granted............... 3,750 21.33
Options exercised............. (9,249) 14.30
--------------------------
Outstanding at December 31,
1996........................... 65,250 $ 14.28
--------------------------
</TABLE>
In 1995, the Corporation derived tax deductions from the disposition of
stock option shares by participants 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.
The range of options exercisable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Exercise Number of
Price Shares Maturity
<S> <C> <C>
- ---------------------------------
$12.00 9,000 1/21/97
13.20 27,000 1/21/97
13.57 18,000 4/14/97
19.08 7,500 1/17/00
21.33 3,750 1/23/01
-----
65,250
-----
</TABLE>
The Corporation accounts for its stock option plan under Accounting
Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense has been recognized for stock
options granted. SFAS 123 prescribes a fair value based method for determining
compensation expense under stock option plans, but allows corporations to use
APB No. 25 if they provide pro forma information compiled under the new
standard. Had compensation cost been computed using the methodology contained in
SFAS No. 123, net income would have been reduced by the following for options
issued in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
--------------------
Net Income:
As reported.............. $ 7,127 $ 12,493
As adjusted.............. 7,116 12,472
Earnings Per Share:
As reported.............. $ 1.05 $ 1.89
As adjusted.............. 1.04 1.88
</TABLE>
The fair value of the options granted during 1996 and 1995 is estimated to
be $4.23 and $4.31, respectively, using the Black-Scholes option value model
with the following assumption for 1996 and 1995; dividend yield of 4.37% and
3.77%, a risk free interest rate of 5.95% and 7.37%, volatility of 24.38% and
22.11%, and an expected average life of five years.
FinSec maintained five stock based plans, including an ESOP Plan, a
Supplemental Retirement Plan, a Recognition and Retention Plan ("RRP"), an
Incentive Stock Option Plan, and a Directors Stock Option Plan. At the
acquisition, any unearned or unexercised shares in the ESOP, RRP and Incentive
Stock Option and Directors Stock Option Plan were 100% vested. These plans are
in the process of being terminated and stock and/or cash is being paid to its
participants. Included in Other Assets in the Consolidated Balance Sheets is a
loan to the ESOP of $516 which, along with accrued interest, will be paid to the
Corporation when final termination is made.
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, 1995......... $ 3,055
Additions.......................... 6,455
Collections........................ (1,038)
---------
Balance, December 31, 1996......... $ 8,472
---------
</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.
- --------------------------------------------------------------------------------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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 $229 in 1996, $250 in 1995, and $262 in 1994.
CONTINGENCIES: (13)
During the first quarter of 1994, a judgment in the amount of $2,300 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 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.
SF has sold two parcels of foreclosed real estate in California, whereby
the City of Los Angeles funds the sale through the issuance of bonds, but the
seller has full recourse liability until the bonds are repaid. There is a
contingent liability of $664 related to sales under this program.
DISCLOSURES ABOUT ESTIMATED FAIR
VALUE OF FINANCIAL INSTRUMENTS: (14)
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:
CASH AND DUE FROM BANKS, FEDERAL
FUNDS SOLD AND INTEREST BEARING DEPOSITS - (A)
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.
SECURITIES - (B)
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 the security is carried at cost.
LOANS - (C)
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.
DEPOSIT LIABILITIES - (D)
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,
1996. 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.
- --------------------------------------------------------------------------------
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
SHORT TERM BORROWINGS AND NOTES
PAYABLE - (E)
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.
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS - (F)
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>
1996
--------------------
<S> <C> <C>
Estimated
Carrying Fair
Value Value
<CAPTION>
--------------------
<S> <C> <C>
Financial assets:
Cash and due from banks,
Federal funds sold and
interest-bearing deposits.... $ 26,519 $ 26,519
Securities.................... 434,558 434,558
Loans, net.................... 516,705 506,906
Financial liabilities:
Deposits...................... (877,552) (874,542)
Short-term borrowings......... (28,525) (28,525)
Notes payable................. (32,800) (32,800)
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------
<S> <C> <C>
Estimated
Carrying Fair
Value Value
<CAPTION>
--------------------
<S> <C> <C>
Financial assets:
Cash and due from banks,
Federal funds sold and
interest-bearing deposits.... $ 44,099 $ 44,099
Securities.................... 426,929 426,929
Loans, net.................... 303,577 306,361
Financial liabilities:
Deposits...................... (712,805) (713,888)
Short term borrowings......... --0-- --0--
Notes payable................. (20,600) (20,600)
</TABLE>
LIMITATIONS - (G)
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no actively traded market exists for a significant
portion of the Corporation's financial instruments, fair value estimates are
based on judgments regarding future 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.
FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK: (15)
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, 1996 and 1995, the
subsidiary banks had the following financial instruments with off-balance-sheet
risk:
<TABLE>
<CAPTION>
Contract Amount
--------------------
<S> <C> <C>
1996 1995
--------------------
Commitments to extend credit....... $ 72,882 $ 70,651
Standby letters of credit and
financial guarantees written...... 3,890 2,982
</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
- --------------------------------------------------------------------------------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
REGULATORY REQUIREMENTS: (16)
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, 1997, the subsidiary banks could have declared approximately $2,489
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, 1996 and 1995, the non-interest
bearing cash balances maintained to meet reserve requirements were $11,750 and
$10,527, respectively.
The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by the Federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain minimum amounts and ratios
of total and Tier 1 capital to risk weighted assets and Tier 1 leverage capital
to average assets. If banks do not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could have a direct
material effect on a bank's financial statements. Management believes, as of
December 31, 1996, that the Corporation and its subsidiary banks meet all
capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Board categorized the Corporation and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the institution's categories. To be categorized as well
capitalized, banks must maintain minimum total risk-based, Tier 1 based and Tier
1 leverage ratios as set forth below.
- --------------------------------------------------------------------------------
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The following table presents selected capital information for the
Corporation (Consolidated) and significant subsidiaries as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
Prompt Corrective
Actual Minimum Requirements Action Provisions
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
<CAPTION>
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated:
Tier One Capital.................................. $ 67,003 13.76% $ 19,484 4.00% $ 29,226 6.00%
Total (Tier Two) Capital.......................... 73,120 15.01 38,967 8.00 48,714 10.00
Leverage Capital.................................. 67,003 6.56 40,884 4.00 51,106 5.00
Pinnacle Bank:
Tier One Capital.................................. 47,867 19.05 10,053 4.00 15,080 6.00
Total (Tier Two) Capital.......................... 51,028 20.30 20,106 8.00 25,133 10.00
Leverage Capital.................................. 47,867 7.75 24,712 4.00 30,890 5.00
SF:
Tier One Capital.................................. 19,508 14.76 5,286 4.00 7,929 6.00
Total (Tier Two) Capital.......................... 21,175 16.02 10,572 8.00 13,215 10.00
Leverage Capital.................................. 19,508 9.77 7,989 4.00 9,986 5.00
PBQC:
Tier One Capital.................................. 7,413 15.23 1,947 4.00 2,921 6.00
Total (Tier Two) Capital.......................... 8,022 16.48 3,894 8.00 4,868 10.00
Leverage Capital.................................. 7,413 6.68 4,437 4.00 5,546 5.00
December 31, 1995
Consolidated:
Tier One Capital.................................. 52,732 16.84 12,528 4.00 18,792 6.00
Total (Tier Two) Capital.......................... 56,647 18.09 25,056 8.00 31,320 10.00
Leverage Capital.................................. 52,732 6.60 31,981 4.00 39,977 5.00
Pinnacle Bank:
Tier One Capital.................................. 47,130 21.76 8,663 4.00 12,995 6.00
Total (Tier Two) Capital.......................... 49,837 23.01 17,326 8.00 21,658 10.00
Leverage Capital.................................. 47,130 7.88 23,939 4.00 29,923 5.00
PBQC:
Tier One Capital.................................. 7,373 16.55 1,782 4.00 2,673 6.00
Total (Tier Two) Capital.......................... 7,930 17.80 3,565 8.00 4,456 10.00
Leverage Capital.................................. 7,373 6.97 4,233 4.00 5,292 5.00
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
OTHER INCOME AND OTHER EXPENSE: (17)
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>
1996 1995 1994
<S> <C> <C> <C>
-------------------------------
Other income:
Banking services........ $3,016 $3,139 $ 2,378
Trust services.......... 2,283 2,307 1,758
Other income............ 2,263 1,779 1,325
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total................. $7,562 $7,225 $ 5,461
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Other expense:
Equipment expense....... $1,647 $1,317 $ 829
FDIC insurance
premium................ 1,044 984 1,399
Data processing......... 1,150 1,206 890
Litigation expense...... --0-- --0-- 750
Other expense........... 4,474 3,302 4,204
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total................. $8,315 $6,809 $ 8,072
<CAPTION>
-------------------------------
</TABLE>
PARENT COMPANY STATEMENTS: (18)
Presented on the following pages are the balance sheets, statements of
income and statements of cash flows for the Parent Company.
- --------------------------------------------------------------------------------
21
<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
--------------------
<S> <C> <C>
1996 1995
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash in subsidiary banks...................................................... $ 13 $ 9
Investment in subsidiary banks................................................ 106,176 79,066
Goodwill and purchase accounting adjustments.................................. 2,460 3,018
Securities.................................................................... 28,234 18,184
(amortized cost: 1996--$19,573
1995--$13,266)
Other assets.................................................................. 624 899
--------------------
Total....................................................................... $ 137,507 $ 101,176
--------------------
Liabilities and stockholders' equity:
Notes payable................................................................. $ 32,800 $ 20,600
Accrued income taxes.......................................................... 1,356 948
Other liabilities............................................................. 2,527 667
Stockholders' equity.......................................................... 100,824 78,961
--------------------
Total....................................................................... $ 137,507 $ 101,176
- ------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
For the year ended December 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks............................................ $ 8,653 $ 10,013 $ 4,274
Dividend and interest income............................................... 831 1,157 1,490
Net securities gains....................................................... --0-- 695 1,772
Other income............................................................... 252 44 30
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total.................................................................... 9,736 11,909 7,566
Expenses:
Interest on notes payable.................................................. 1,745 1,964 283
Employee compensation and benefits......................................... 608 639 531
Amortization of goodwill and purchase accounting adjustments............... 564 637 1,311
Other expenses............................................................. 488 352 642
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total.................................................................... 3,405 3,592 2,767
Income before income taxes and undistributed earnings of subsidiary banks.... 6,331 8,317 4,799
Provision (benefit) for income taxes....................................... (1,050) (1,383) (398)
Equity in undistributed earnings of subsidiary banks....................... (254) 2,793 (2,942)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Net income................................................................... $ 7,127 $ 12,493 $ 2,255
<CAPTION>
-------------------------------
</TABLE>
- --------------------------------------------------------------------------------
23
<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
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 7,127 $ 12,493 $ 2,255
Adjustments to reconcile net income to net cash provided by operating
activities:
Excess of equity in undistributed earnings of subsidiaries (over) under
dividends received................................................... 254 (2,793) 2,942
Amortization of goodwill and purchase accounting adjustments........... 564 637 1,311
Gain on sales of securities............................................ --0-- (695) (1,772)
Increase (decrease) in interest payable................................ 360 (67) 179
(Increase) decrease in other assets.................................... 275 (458) (280)
Decrease in other liabilities and accrued income taxes................. 2,097 (103) (117)
Other, net............................................................. 21 (344) (780)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total adjustments.................................................... 3,571 (3,823) 1,483
Net cash provided by operating activities............................ 10,698 8,670 3,738
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note 1).............. (6,022) (23,414) --0--
Purchases of securities.................................................. (8,930) (108) (4,923)
Proceeds from sales of securities........................................ 1,862 3,057 2,871
Proceeds from maturities and paydowns of securities...................... 500 2,829 --0--
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Net cash used for investing activities............................... (12,590) (17,636) (2,052)
Cash flows from financing activities:
Proceeds from notes payable.............................................. 24,500 31,800 11,200
Principal reductions of notes payable.................................... (12,300) (16,600) (5,800)
Issuance of common stock................................................. 132 454 201
Purchase and retirement of common stock.................................. (4,797) (1,731) (2,727)
Dividends paid........................................................... (5,639) (5,109) (4,798)
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Net cash provided by (used for) financing activities................. 1,896 8,814 (1,924)
Net increase (decrease) in cash and cash equivalents....................... 4 (152) (238)
Cash and cash equivalents at beginning of year............................. 9 161 399
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at end of year................................... $ 13 $ 9 $ 161
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Cash paid during year for:
Interest................................................................. $ 1,385 $ 2,031 $ 104
Income taxes............................................................. 1,525 2,207 1,526
</TABLE>
- --------------------------------------------------------------------------------
24
<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, 1996
and 1995, 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, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Banc Group,
Inc. and Subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 21, 1997
- --------------------------------------------------------------------------------
25
<PAGE>
SELECTED FINANCIAL DATA
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands; except per share data) For the year ended December 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income........................................ $ 56,274 $ 53,297 $ 42,920 $ 40,779 $ 42,054
Interest expense....................................... 29,118 25,739 16,640 17,670 20,233
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income.................................. 27,156 27,558 26,280 23,109 21,821
Provision for loan losses.............................. --0-- --0-- 900 1,700 1,753
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after provision for loan
losses.............................................. 27,156 27,558 25,380 21,409 20,068
Other income........................................... 7,562 7,225 5,461 5,616 5,413
Net securities gains (losses).......................... 159 4,731 (9,845) 8,740 10,950
Other expense.......................................... 25,700 23,882 21,060 20,467 20,282
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes........................... 9,177 15,632 (64) 15,298 16,149
Income tax provision (benefit)......................... 2,050 3,139 (2,319) 4,005 3,235
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before cumulative effect of change in
accounting for income taxes......................... 7,127 12,493 2,255 11,293 12,914
Cumulative effect of change in accounting for income
taxes............................................... --0-- --0-- --0-- 1,700 --0--
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income............................................. $ 7,127 $ 12,493 $ 2,255 $ 12,993 $ 12,914
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per common share data (adjusted for stock split):
Earnings per share--fully diluted
Income before cumulative effect of change in
accounting for income taxes....................... $ 1.05 $ 1.89 $ 0.34 $ 1.66 $ 1.87
Net income......................................... 1.05 1.89 0.34 1.91 1.87
Book value........................................... 13.23 12.03 10.41 10.54 9.35
Dividends paid....................................... 0.83 0.77 0.72 0.64 0.59
Average common and common equivalent shares outstanding
on a fully diluted basis............................. 6,829 6,627 6,685 6,792 6,896
At end of year:
Total assets......................................... $1,048,376 $ 818,697 $ 684,892 $ 722,382 $ 746,195
Loans................................................ 525,069 309,600 248,404 248,076 241,918
Portfolio funds...................................... 439,332 443,755 389,316 420,742 453,007
Deposits............................................. 877,552 712,805 599,879 633,613 660,756
Notes payable........................................ 32,800 20,600 5,400 --0-- 14,509
Stockholders' equity................................. 100,824 78,961 68,836 70,856 63,295
Selected financial ratios:
Return on average assets............................. 0.82% 1.55% 0.32% 1.80% 1.94%
Return on average equity............................. 9.02 18.09 3.35 18.88 21.49
Net interest margin.................................. 3.51 3.90 4.28 3.70 3.87
Dividend payout...................................... 79.12 40.89 213.70 33.22 31.13
Average equity to average assets..................... 9.05 8.55 9.61 9.52 9.05
Allowance for loan losses to year-end loans.......... 1.59 1.95 1.70 1.43 1.24
Net charge-offs to average loans..................... 0.17 0.05 0.09 0.48 0.75
Nonperforming assets to year-end assets.............. 0.99 1.01 0.54 1.29 0.74
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
NET INCOME
1996 COMPARED TO 1995
NET INCOME
Consolidated net income was $7,127,000, or $1.05 per share, on a fully diluted
basis in 1996, a decrease from the $12,493,000, or $1.89 per share, earned in
1995. All per share amounts have been adjusted for the 3-for-2 stock split
declared January 21, 1997. The return on average assets was 0.82% for 1996 and
1.55% for 1995. For each year, the return on average equity was 9% and 18.1%,
respectively. Return on average assets and equity for each year, calculated
including the effects of SFAS No. 115, would not be materially different.
Net income for 1996 included pre-tax securities gains on $159,000 compared to
pre-tax gains in 1995 of $4,731,000. The majority of the securities gains in
1996 and 1995 were part of the ongoing term portfolio management system which
Pinnacle has followed since 1988.
Net interest income decreased slightly (approximately 1%) primarily as a result
of the lower yields earned on taxable securities and a shift of deposits into
higher interest categories and the resulting higher interest costs.
Other income increased 5%, with the increase primarily due to the acquisition of
Financial Security ("FinSec") by Pinnacle. Other expense also increased 8%, with
approximately half the increase due to the acquisition and the remaining
increase due to a reversal of a loss contingency accrual in 1995 that related to
a case settled in the Corporation's favor. Absent these items, other expense
would have increased slightly or 1%.
Net income in 1996 included the effects of the acquisition of FinSec and its
subsidiary, Security Federal Savings & Loan Association of Chicago ("SF") which
occurred on September 30, 1996. FinSec was liquidated into Pinnacle while SF
remained a subsidiary of the Corporation. On January 31, 1997, SF will be merged
into PB. The acquisition was accounted for as a purchase and, accordingly, the
income and expense is included only from the date of acquisition.
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.
Pinnacle's average earning assets were $801,822,000 in 1996, or 8% higher than
the previous year. The increase in average earning assets was due to the
acquisition as well as the increase in average loans from 1995. Offsetting the
increase in average earning assets was the decrease in the net interest margin.
The net interest margin decreased 39 basis points to 3.51% in 1996 compared to
3.90% in 1995. The decrease in the net interest margin is a result of lower
yields earned primarily on taxable securities, offset by the increase in the
cost of deposits. Net interest income on a fully-equivalent basis was
$28,147,000, or 3% lower than a year ago.
The yield earned on total earning assets was 7.14% in 1996 compared to 7.36% in
1995. The decrease resulted primarily from the lower level of yields earned on
taxable securities as well as interest-bearing deposits. The yield earned on
interest-bearing deposits decreased 83 basis points as a result of the decrease
in rates on overnight deposits as well as the decrease in average balances in
this category and the maturity of higher-yielding interest-bearing deposits
acquired in 1995 from the AFC acquisition. The average rate on taxable
securities decreased 38 basis points to 5.78% from 6.16% of a year ago. Average
balances in taxable securities increased $20,680,000; however, the decrease in
the yield earned offset the increase in the average balances, and interest
income on taxable securities decreased $214,000. The average yield earned on
loans decreased 20 basis points to 8.34% from 8.54% of a year ago. The average
balance in loans increased 21%, partly from the acquisition. The majority of the
growth in average loans resulted from a concerted effort on the part of
management to increase the loan portfolio without sacrificing the credit quality
of the portfolio. The effect on the average balance of loans due to the
acquisition will be more visible in 1997; as evidenced by the increase in the
ratio of loans to earning assets at December 31, 1996 of 54%, compared to the
ratio in 1995 of 41%. The ratio of average loans to average earning assets
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
was 47% in 1996 compared to 42% a year ago. These factors resulted in the
increase in interest income on average loans of $4,781,000, more than offsetting
the slight decrease in the yield. Total interest income, on a fully taxable
equivalent basis, increased $2,506,000 due to the positive impact of the
increased loan portfolio.
The average cost of interest-bearing liabilities increased 19 basis points to
4.21% in 1996 from 4.02% in 1995. The average rate paid on interest-bearing
demand deposits increased slightly by 7 basis points to 2.07% while the rate
paid on savings deposits decreased 15 basis points. These deposit categories are
considered core deposit categories and are less susceptible to market and rate
changes. The interest rate paid on money market deposits increased 50 basis
points to 3.44% in 1996. Pinnacle has taken action at appropriate intervals to
adjust the rates paid 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, thus the increase in that rate
category. The average rate paid on other time deposits has increased 25 basis
points to 5.53%. Rates have remained relatively flat on time deposits for 1996;
however, the effect of management's increase in rates paid on longer-term time
deposits in previous years are continuing to add to the increases in rates paid.
The acquisition of SF has added to the increase in rates as certain of time
deposits acquired were at higher rates than those offered by Pinnacle at the
time of acquisition. Absent the affects of the acquisition of SF, the average
balance in certain deposit accounts have decreased, particularly in savings and
money market deposits, as the increase on rates paid on time deposits has caused
customers to switch those deposits into other time deposits, as evidenced by the
increase in the other time deposit categories. Interest expense paid on all
deposits increased $2,908,000.
The average balance in short-term borrowings increased for two reasons. The
increase in loan demand contributed to the $11,503,000 increase in average
balances, as well as the acquisition of SF, whose short-term borrowings include
fixed-term advances from the Federal Home Loan Bank. The average rate paid on
short-term borrowings decreased 60 basis points; however, the increase in
average balances resulted in increased interest expense of $689,000. The
interest rate paid on notes payable decreased 84 basis points. The decrease was
due to lower rates in indices (Prime or LIBOR) which are the interest rate basis
to which the notes payable are tied. Average notes payable balances slightly
decreased.
Interest expense for 1996 has increased $3,378,000 compared to 1995. An increase
in the average interest-bearing liabilities of $51,290,000 and the shift of
higher paying deposits categories has resulted in the increase.
A detailed Analysis of Net Interest Income for the three years ended December
31, 1996, 1995 and 1994 is included in Table 1. An Analysis of the Volume/Rate
Variance for the last three years is found in Table 2.
- --------------------------------------------------------------------------------
28
<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, 1996 December 31, 1995 December 31, 1994
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest
<CAPTION>
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits at
banks and Federal funds
sold......................... $ 5,344 $ 252 4.72% $ 19,137 $ 1,063 5.55% $ 1,742 $ 75
Taxable securities............. 399,903 23,133 5.78 379,223 23,347 6.16 367,372 19,438
Non-taxable securities......... 21,928 2,645 12.06 36,140 3,895 10.78 34,966 4,429
Loans.......................... 374,647 31,235 8.34 309,818 26,454 8.54 248,000 20,611
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-earning
assets...................... 801,822 57,265 7.14 744,318 54,759 7.36 652,080 44,553
Noninterest-earning assets:
Cash and due from banks........ 24,486 23,755 18,107
Allowance for loan losses...... (6,750) (6,383) (4,068)
Other assets................... 53,369 46,455 33,542
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets................. $ 872,927 $ 808,145 $ 699,661
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $ 88,897 $ 1,841 2.07% $ 86,573 $ 1,732 2.00% $ 74,565 $ 1,376
Savings deposits............... 217,175 6,451 2.97 219,852 6,852 3.12 215,662 5,721
Money market deposits.......... 47,497 1,634 3.44 50,732 1,489 2.94 50,509 1,295
Other time deposits............ 302,128 16,719 5.53 258,569 13,664 5.28 195,657 7,496
Short term borrowings.......... 12,092 728 6.02 589 39 6.62 10,989 470
Notes payable.................. 24,500 1,745 7.12 24,684 1,964 7.96 3,857 283
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing
liabilities................. 692,289 29,118 4.21 640,999 25,740 4.02 551,239 16,641
Noninterest-bearing liabilities:
Demand deposits................ 93,901 91,481 74,827
Other liabilities.............. 7,756 6,588 6,358
Stockholders' equity........... 78,981 69,077 67,237
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total liabilities and
stockholders'
equity...................... $ 872,927 $ 808,145 $ 699,661
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income and margin..... $ 28,147 3.51% $ 29,019 3.90% $ 27,912
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in thousands)
<S> <C>
Rate
<S> <C>
Assets:
Interest earning assets:
Interest-bearing deposits at
banks and Federal funds
sold......................... 4.31%
Taxable securities............. 5.29
Non-taxable securities......... 12.67
Loans.......................... 8.31
<S> <C>
Total interest-earning
assets...................... 6.83
Noninterest-earning assets:
Cash and due from banks........
Allowance for loan losses......
Other assets...................
<S> <C>
Total assets.................
<S> <C>
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... 1.85%
Savings deposits............... 2.65
Money market deposits.......... 2.56
Other time deposits............ 3.83
Short term borrowings.......... 4.28
Notes payable.................. 7.34
<S> <C>
Total interest-bearing
liabilities................. 3.02
Noninterest-bearing liabilities:
Demand deposits................
Other liabilities..............
Stockholders' equity...........
<S> <C>
Total liabilities and
stockholders'
equity......................
<S> <C>
Net interest income and margin..... 4.28%
- -----------------------------------
</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, 1996,
1995 and 1994 were, in thousands, $991, $1,462, and $1,632, 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.
- --------------------------------------------------------------------------------
29
<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) 1996 versus 1995 1995 versus 1994
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change due to Change due to
-------------------- Total ---------------------- Total
Volume Rate Change Volume Rate Change
<CAPTION>
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits at banks and Federal funds
sold................................................... $ (766) $ (45) $ (811) $ 749 $ 239 $ 988
Taxable securities...................................... 1,273 (1,487) (214) 627 3,282 3,909
Nontaxable securities................................... (1,532) 282 (1,250) 149 (683) (534)
Loans................................................... 5,535 (754) 4,781 5,138 705 5,843
<CAPTION>
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest income................................. 4,510 (2,004) 2,506 6,663 3,543 10,206
<CAPTION>
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest paid on:
Interest-bearing demand deposits........................ 46 63 109 221 136 357
Savings deposits........................................ (83) (318) (401) 111 1,020 1,131
Money market deposits................................... (95) 240 145 6 188 194
Other time deposits..................................... 2,302 753 3,055 2,411 3,756 6,167
Short-term borrowings................................... 762 (73) 689 (445) 14 (431)
Notes payable........................................... (15) (204) (219) 1,528 153 1,681
<CAPTION>
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest expense................................ 2,917 461 3,378 3,832 5,267 9,099
<CAPTION>
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....................................... $ 1,593 $ (2,465) $ (872) $ 2,831 $ (1,724) $ 1,107
<CAPTION>
------------------------------- ---------------------------------
</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 a bi-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.
There has been no provision for loan losses in both 1996 and 1995. Pinnacle had
net charge-offs of $641,000 or 0.17% of average loans compared to $151,000 or
0.05% of average loans in 1995. The ratio of the allowance for loan losses to
total loans was 1.59% at December 31, 1996 compared to 1.95% of a year ago.
While Pinnacle's ratio of
- --------------------------------------------------------------------------------
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
allowance for loan losses to total loans has decreased from a year ago, and the
ratio of net charge-offs to average loans has increased, management made no
provision for loan losses for the past two years and believes the allowance for
loan losses is adequate due to the following factors. First, a significant
portion of its loan portfolio is in residential real estate, particularly the
loans acquired in the FinSec acquisition, and the majority of the loans in this
category are within the loan policy guidelines of loan to value ratio of 80%.
Second, the total ratio of non-performing loans to total loans declined during
1996 to 1.79% at December 31, 1996 from 2.59% at year-end 1995. Third, the loan
review process by management is operating effectively. This loan review process
was instituted at SF and significant watch list credits were monitored by
Pinnacle management prior to the acquisition on September 30, 1996, as part of
its due diligence.
At December 31, 1996, total non-performing loans, defined as non-accrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $9,404,000 compared with $8,015,000 of a year ago. While this is a
significant increase, 51% of the non-performing loans at December 31, 1996
resulted from the acquisition of SF. Prior to the acquisition, SF provided
$1,275,000 to their allowance for loan losses to cover potential loan losses on
classified loans. All restructured loans, including a $494,000 loan acquired
from SF, are performing as agreed. Loans considered impaired under SFAS No. 114
and disclosed in the Notes to the Financial Statements are included in the
non-performing category. These included non-accrual loans, restructured loans,
and loans classified as at least doubtful under Pinnacle's credit risk
classification system. Without the acquisition, non-performing loans would have
decreased $3,453,000 from a year ago.
In addition, Pinnacle held $939,000 classified as other real estate owned
("OREO") at December 31, 1996. 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 property is recorded as an offset
to expense. During 1996, all property carried at December 31, 1995 was sold with
no significant impact on the results of operations. The remaining OREO consists
of $667,000 acquired from SF and $272,000 at PB.
------------------------
TABLE 3. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding..................... $ 374,647 $ 309,818 $ 248,000 $ 238,826 $ 185,797
-----------------------------------------------------
Total loans at year end....................... $ 525,069 $ 309,600 $ 248,404 $ 248,076 $ 241,918
-----------------------------------------------------
Allowance for loan losses at beginning of
year........................................ $ 6,023 $ 4,229 $ 3,547 $ 3,001 $ 2,517
Balance acquired.............................. 2,982 1,945 --0-- --0-- 130
Loans charged off:
Commercial and other........................ 365 257 186 769 692
Consumer.................................... 125 115 78 107 313
Real estate................................. 349 --0-- 42 552 667
-----------------------------------------------------
Total..................................... 839 372 306 1,428 1,672
-----------------------------------------------------
Recoveries of loans previously charged off:
Commercial and other........................ 138 168 14 126 198
Consumer.................................... 48 53 65 86 74
Real estate................................. 12 --0-- 9 62 1
-----------------------------------------------------
Total..................................... 198 221 88 274 273
-----------------------------------------------------
Net loans charged off......................... 641 151 218 1,154 1,399
-----------------------------------------------------
Provision charged to expense.................. --0-- --0-- 900 1,700 1,753
-----------------------------------------------------
Allowance for loan losses at end of year...... $ 8,364 $ 6,023 $ 4,229 $ 3,547 $ 3,001
-----------------------------------------------------
Ratio of net charge-offs to average loans
outstanding................................. 0.17% 0.05% 0.09% 0.48% 0.75%
-----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Total non-performing assets were $10,343,000, or 1.97% of total loans plus other
real estate owned at December 31, 1996. Total non-performing assets were 0.99%
of total assets at year end. Table 4 provides data regarding non-performing
assets.
NET SECURITIES GAINS
In 1996, net securities gains were not a significant factor in the earnings. On
a pre-tax basis, net securities gains were $159,000 compared to $4,731,000 in
1995. The net gains realized in 1996 consisted of gross gains of $349,000 and
gross losses of $190,000.
The net gains in 1996 are primarily related to the sales in Pinnacle's U. S.
Government securities portfolio. The decrease in the gains taken is primarily a
product of the slope of the yield curve, which remained relatively flat in 1996.
The gains in 1995 also related to Pinnacle's U. S. Government securities
portfolio as well as the sale of an equity security and sale of securities
acquired through the purchase of AFC in 1995. At December 31, 1996, the U. S.
Government securities had a remaining maturity of fifteen 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 has
been crucial to Pinnacle because of its relatively low loan to asset ratio,
while increased to 50% at year-end 1996 due to the acquisition, on average was
43% throughout 1996. Management has always viewed the gains recorded on the U.
S. Government security term portfolio 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 30 basis points and, by
including the net gains since the inception of the program, the total yield is
130 basis points higher than the same Index. For 1996, due to the relative
flatness of the yield curve, the portfolio has only outperformed the Index by 16
basis points, and including the net gain by 20 basis points.
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 $5,279,000 for 1996 compared to
$4,918,000 in 1995. The increase was due primarily to the acquisition. Trust
services decreased slightly due primarily to the decrease in estate
administration fees. Assets under management at year end amounted to
$268,000,000, or 11% above the total one year earlier. The increase in the
amount of assets under management was due primarily as a result of the increase
in market value of assets under management. Fee income related to that increased
value will be realized in 1997.
NON-INTEREST EXPENSE
Non-interest expense totalled $25,700,000 an increase of 8% of a year ago.
Employee compensation and benefits increased 5% primarily due to general
employee raises. The acquisition of SF added approximately $376,000 to the
increase in employee compensation in 1996. Occupancy expense totalled
$2,674,000, or 15% lower than a year ago. Included in 1995 was a $434,000 write-
off relating to the demolition of an old branch
------------------------
TABLE 4. NON-PERFORMING ASSETS
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
Nonaccrual.................................................... $ 7,441 $ 4,791 $ 748 $ 5,283 $ 2,646
Past due 90 days or more and still accruing................... 633 2,293 552 585 1,067
Restructured.................................................. 1,330 931 --0-- --0-- --0--
-----------------------------------------------------
Nonperforming loans......................................... $ 9,404 $ 8,015 $ 1,300 $ 5,868 $ 3,713
-----------------------------------------------------
Other real estate owned....................................... $ 939 $ 284 $ 2,416 $ 3,444 $ 1,803
Ratios:
Nonperforming loans/total loans............................. 1.79% 2.59% 0.52% 2.37% 1.53%
Nonperforming assets/total assets........................... 0.99 1.01 0.54 1.29 0.74
Net charge-offs/average loans............................... 0.17 0.05 0.09 0.48 0.75
Allowance for loan losses/total loans....................... 1.59 1.95 1.70 1.43 1.24
Allowance for loan losses/nonperforming loans............... 88.94 75.15 325.28 60.44 80.82
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
office building in 1995 and a $150,000 accrual for a lease buyout on a storage
facility which occurred in January, 1996. Absent these two factors, occupancy
expense would have increased 5%, primarily due to the acquisition. Other expense
increased 22% primarily due to the acquisition which contributed 23% of the
increase, the result of a reversal of a loss contingency accrual in 1995 for
litigation settled in Pinnacle's favor, and a $744,000 charge to earnings for
the SAIF fund recapitalization recorded in the third quarter of 1996. Absent
these changes, other expense would have decreased 4%.
INCOME TAXES
Pinnacle's Federal and State income tax return is prepared on a consolidated
basis including the accounts of its subsidiaries. Due to the lower level of
pre-tax income, there was a reduction in the Federal tax provision to $2,050,000
compared to $3,139,000 of a year ago. There continues to be no provision for
state income taxes in 1996 as in 1995 due to the significant holdings of U. S.
Government securities which are exempt from state tax. See Note 7 to the
Consolidated Financial Statements for additional detail on the provision for
taxes.
NET INCOME
1995 COMPARED TO 1994
NET INCOME
Consolidated net income was $12,493,000, or $1.89 per share, on a fully diluted
basis in 1995, an increase from the $2,255,000, or $0.34 per share, earned in
1994. The return on average assets was 1.55% for 1995 and 0.32% for 1994. For
each year, the return on average equity was 18.1% and 3.4%, respectively. Return
on average assets and equity for 1995, calculated including the effects of SFAS
No. 115 would not be materially different.
Net income for 1995 included pre-tax securities gains of $4,730,000 compared
with $(9,845,000) of net securities losses in 1994. The majority of the
securities gains were taken in the second quarter of 1995 and were part of the
ongoing term portfolio management system which Pinnacle has followed since 1988.
Net interest income increased 5%, primarily as a result of the increase in
average earning assets of 14% due to the acquisition of Acorn Financial Corp
("AFC").
Other factors contributing to the improved earnings for Pinnacle was a decrease
in the provision for loan losses and the increase in other operating income due
to the acquisition. Other operating expense was up 13% also primarily due to the
acquisition.
The results for 1995 include the acquisition of AFC and its subsidiary bank,
Suburban Trust & Savings Bank, on January 6, 1995. AFC was liquidated into
Pinnacle and concurrent with the liquidation, Suburban Trust & Savings Bank
("Suburban") was merged with Pinnacle Bank, a wholly-owned subsidiary of
Pinnacle. The acquisition was accounted for as a purchase. Results of operations
of Suburban, including purchase accounting adjustments, are included in the
operating results of Pinnacle Bank.
NET INTEREST INCOME
Pinnacle's average earning assets were $744,318,000 in 1995, or 14% higher than
the previous year. The increase in average earning assets was due to the
acquisition. The net interest margin for 1995 was 3.90% compared to 4.28% for
1994. The decrease in the net interest margin has been the result of the
relatively low level of interest rates coupled with the structure of Pinnacle's
balance sheet, its low loan-to-deposit ratio, and high volume of short-term U.
S. Government securities. Net interest income on a fully tax-equivalent basis
was $29,019,000 in 1995, or 4% higher than in 1994. Actual net interest income
increased 5%.
The yield earned on total earning assets was 7.36% in 1995 compared to 6.83% in
1994. The increase resulted from a higher level of interest rates in the entire
year of 1995 compared to 1994. As a result of the reinvestment of securities
proceeds from the term portfolio management system into higher yielding
securities, the average rate on taxable securities was 6.16% for 1995 compared
to 5.29% of a year ago. The average volume of taxable securities increased
$11,851,000 due to the acquisition of Suburban. This, coupled with the increased
yield, increased interest income on taxable securities by $3,909,000. The
average yield earned on loans increased to 8.54% for 1995 compared to 8.31% of a
year ago. While the increase in the yield on average loans is not large, the
ratio of average loans to average earning assets was 41.6% in 1995 compared to
38% of a year ago. The average volume of loans increased to $309,818,000 or 25%
in 1995 due to the acquisition. The average yield earned on short-term
investments increased 124 basis points to 5.55% in 1995 while
- --------------------------------------------------------------------------------
33
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
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 3.02% in 1994. The average rate paid on interest-bearing
demand and savings deposits increased 35 basis points. The average rate paid on
money market deposits increased 38 basis points. Pinnacle has taken action at
appropriate intervals to adjust the rates paid on these accounts in order to
keep these accounts in line with market rates. The average rate paid on other
time deposits has had the largest increase due to changes in the level of
interest rates, with a 145 basis point increase. Absent the effect of the
acquisition, the average balances in certain of the deposit categories,
including savings deposits and money market deposits have decreased while other
time deposits have increased. Management believes the decrease in savings
deposits is partially the result of the previous low interest rate environment
where customers attempted to achieve higher yields by switching funds to
non-bank investments or special-term deposits at other financial institutions.
Additionally, certain of the banking locations are in older, mature
neighborhoods where the deposits are being lost due to death, moving, or
changing demographics of the neighborhood. Management has taken steps to limit
the disintermediation of funds by raising interest rates in certain time deposit
categories beginning in the latter half of 1994 and continuing through 1995.
Special-term deposits have also been introduced. Management has also added other
deposit options including free checking, as well as non-bank investment choices,
for its customer base. While the non-bank investment option does not necessarily
retain or attract new deposits, the fee income generated offsets some of the
cost of lost deposits. These steps have resulted in new accounts and current
customers' committing their funds to longer time periods as evidenced by the
increase in average time deposit balances. All these moves by management have,
however, added to the increase in the rate paid on certain deposit categories as
indicated above.
The average balance in short-term borrowings decreased due to the greater
availability of investible funds resulting from the acquisition. The average
balance in notes payable increased to $24,684,000 due to the acquisition of AFC.
The average rate paid on notes payable has increased as the rates paid on these
notes are tied to either prime or LIBOR-based indices, which have increased
since 1994.
As a result of the increase in rates paid, as well as average balances, total
interest expense was $9,099,000 higher in 1995 compared to 1994.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses in 1995 compared to $900,000 for 1994.
Pinnacle had net charge-offs of $151,000, or 0.05% of average loans, in 1995
compared to net charge-offs of $218,000, or 0.09% of average loans in 1994. The
allowance for loan losses was $6,023,000, or 1.95% of loans, at December 31,
1995, compared to 1.70% of loans at year-end 1994. The decrease in the provision
for loan losses to zero from $900,000 of a year ago was made due to several
circumstances, including the level of allowance for possible loan losses to
total loans, which has been steadily increasing for the last five years,
management's assessment of the overall adequacy of the allowance for loan
losses, as well as the downward trend of net charge-offs to average loans.
At December 31, 1995, nonperforming loans, defined as nonaccrual loans; loans
past due greater than 90 days and still accruing; and restructured loans, were
$8,015,000 compared with $1,300,000 at the previous year end. While this
increase is significant, approximately 50% of these loans are attributed to the
acquisition in 1995. At the date of the acquisition, AFC was required by
Pinnacle to have a reserve of at least 2.5% of total loans to cover the
potential problem loans in the portfolio as well as those loans which were noted
during the due diligence performed by Pinnacle. A restructured loan which was
acquired from AFC, included in the above total, is current and performing as
agreed. All of Pinnacle's impaired loans are included in the nonperforming
category.
In addition, Pinnacle held $284,000 classified as other real estate owned at
December 31, 1995. Total non-performing assets were $8,299,000, or 2.68% of
total loans plus other real estate owned at December 31, 1995. Total
non-performing assets were 1.01% of total assets at year end.
NET SECURITIES GAINS
In 1995, a significant factor contributing to Pinnacle's higher net income was
net securities gains. On a pre-tax basis, net securities gains were $4,730,000
compared to losses of $(9,845,000) in
- --------------------------------------------------------------------------------
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
OTHER NON-INTEREST INCOME
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.
- --------------------------------------------------------------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INCOME TAXES
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.
BALANCE SHEET
Total assets were $1,048,376,000 at December 31, 1996, or 28% higher than total
assets of $818,697,000 at year-end 1995. The increase in total assets related
primarily to the acquisition of FinSec on September 30, 1996.
SECURITIES
Until the acquisition, Pinnacle's securities portfolio was its most significant
Balance Sheet asset and still totals 41% of total assets. All securities are
available for sale and carried at fair value with corresponding (after tax)
valuation adjustments included in stockholders' equity. Total securities were
$434,558,000 on December 31, 1996 and consisted of U. S. Government securities
of $373,072,000; mortgage-backed securities and collateralized mortgage
obligations totalled $5,943,000; State and municipal bonds totalled $23,450,000
and corporate and other securities totalled $32,093,000. Total securities
increased 2% in 1996. The increase was primarily due to the increased in
purchases of parent company only equity securities as well as the increased
market value of those same equity 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.
LOANS
Total loans were $525,069,000 at December 31, 1996, an increase of 70% from a
year ago. All categories of loans increased due to the acquisition of FinSec,
with the largest increase from the acquisition in real estate loans. Absent the
effects of the acquisition, loans increased $43,413,000, or 14%, with the
largest increase in commercial and residential real estate related loans.
Pinnacle's loan to asset ratio increased to 50% from 38% of a year ago due to
the acquisition. This ratio, while much higher than previous years, still
remains lower than the industry average of approximately 60%. Management's goal
is to continue to increase this ratio through quality loan growth across a
consistent spectrum of commercial, consumer and real estate borrowers. Strategic
plans include maintaining the level of loans at SF at its current balance of
approximately $170,000,000 by allowing paydowns on participated loans as
scheduled, potential package loan sales and offsetting this by growth in SF's
natural geographic area.
At December 31, 1996, Pinnacle's mix of loans consisted of 69% in real estate
loans, 21% in commercial loans and the remainder in consumer loans. The shift in
mix of loans to real estate loans relate primarily to the make-up of the SF
portfolio which, as a thrift, emphasizes lending in this area. See Note 4 in the
Notes to Consolidated Financial Statements for a detailed analysis of loans by
composition and geographic mix.
- --------------------------------------------------------------------------------
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
DEPOSITS
Total deposits were $877,552,000 at December 31, 1996, or 23% higher than
year-end 1995. All of the increase related to the acquisition. Table 5 provides
an analysis of deposits by category for the past three years.
Absent the effect of the acquisition, interest-bearing demand deposits have
decreased $5,000,000 and savings deposits have dropped approximately
$13,000,000. Other time deposits have increased approximately $8,000,000.
Management believes the drop in savings and the corresponding increase in time
deposits was due to Pinnacle customers being more willing to commit their funds
to defined periods of time. Management continues to take an active role to
monitor interest rates on deposits and provide products to reduce the
disintermediation of funds.
Pinnacle's deposit base continues to be made up of a high amount of low cost
core deposits in comparison with peer group institutions. The impact on earnings
of this deposit base has been somewhat offset by increased rates on these
deposits in the earlier part of the year and the increase in rates paid on time
deposits caused a shift from savings to time deposits.
GOODWILL
Goodwill and other intangibles amounted to $25,366,000, or 25% of stockholders'
equity, at December 31, 1996. Goodwill and other intangibles relate to premiums
paid in Pinnacle's acquisitions. The increase from year-end 1995 was the result
of the acquisition of FinSec, where approximately $8,100,000 in goodwill was
recorded.
DEFERRED INCOME TAXES
The primary components of Pinnacle's net deferred tax asset at December 31, 1996
are differences between the book and tax bases of securities and other assets,
allowance for loan losses, purchased accounting adjustments, deferred
compensation and deferred loan fees. A detailed analysis of the components of
the deferred tax assets is contained in Note 7 to the Consolidated financial
Statements. At December 31, 1996, Pinnacle had a consolidated Federal net
operating loss carryforward of $3,641,000 the benefit of which is included in
the deferred tax asset and, if not used, expires from the years 1999 to 2001.
All of the Federal net operating loss carryforward relates to the parent company
and is subject to significant limitations on its usage. It is Pinnacle's intent
to utilize certain of the net operating loss carryforward in 1997 through
potential sales of certain of its equity portfolio in order not to lose the cash
benefit of the carryforward. At December 31, 1996, Pinnacle had, for state tax
purposes, a net operating loss carryforward of $42,510,000 which expires, if
unused, in the years 2010 through 2012.
SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase
("repos") and FHLB advances constitute all of Pinnacle's short-term borrowings.
These short-term borrowings are not subject to FDIC deposit insurance premiums
or reserve requirements.
Short-term borrowings and FHLB advances increased to $28,525,000 at December 31,
1996 from no balance of a year ago. The increase was due to added loan demand
and the acquisition,
------------------------
TABLE 5. PERCENTAGE OF TOTAL DEPOSITS BY CATEGORY
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Amount Pct. Amount Pct. Amount Pct.
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
Demand:
Noninterest-bearing........................ $ 101,127 11.5% $ 96,715 13.6% $ 73,922 12.3%
Interest-bearing........................... 88,489 10.1 89,230 12.5 74,699 12.5
Savings...................................... 249,918 28.5 211,615 29.7 202,172 33.7
Money market................................. 47,481 5.4 46,179 6.5 49,297 8.2
Other time less than $100,000................ 315,597 36.0 236,462 33.2 181,967 30.3
Other time greater than $100,000............. 74,940 8.5 32,604 4.5 17,822 3.0
-------------------------------------------------------------------
Total deposits............................... $ 877,552 100% $ 712,805 100% $ 599,879 100%
-------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
which included fixed term FHLB advances. Table 6 highlights short-term
borrowings and FHLB advances for the prior three years.
NOTES PAYABLE
Pinnacle had $32,800,000 outstanding in notes payable at December 31, 1996,
compared to $20,600,000 at December 31, 1995. During 1996, Pinnacle increased
borrowings by $12,200,000 and increased the total outstanding line to
$35,000,000. The borrowings included a refinancing of the line of $15,000,000 to
acquire AFC in 1995; $15,000,000 to finance a portion of the FinSec acquisition
and other equity security purchases; and the remaining $2,800,000 used for other
corporate needs. Pinnacle had a revolving line of credit of $5,000,000 at
December 31, 1996, of which $2,800,000 was drawn.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $100,824,000 at December 31, 1996 up
28% from $78,961,000 at December 31, 1995. The ratio of equity to assets was
9.62% and 9.64% 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. 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, 1996,
and December 31, 1995, Pinnacle's total risk-based capital ratio was 15.01% and
18.09%, respectively, assuming the deduction of all goodwill and other
intangibles in compliance with the guidelines. The reduction in the ratio was
the result of the FinSec acquisition. Each of Pinnacle's subsidiary banks must
meet similar minimum capital requirements as prescribed by Federal and state
banking regulatory authorities. At December 31, 1996, Pinnacle and each of its
subsidiary banks was in compliance with the current capital guidelines. For a
detailed analysis of regulatory capital ratios, see Note 16 to the Consolidated
Financial Statements. This footnote includes capital ratios for Pinnacle and
certain of its significant subsidiaries.
Book value per share was $13.23 at December 31, 1996 compared to $12.03 at
December 31, 1995. During 1996, Pinnacle repurchased 236,879 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 $0.83 per
share were paid in 1996. Shares totalling 1,285,413 (adjusted for stock split)
were issued for the acquisition of FinSec.
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
------------------------
TABLE 6. SHORT-TERM BORROWINGS AND FHLB ADVANCES
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
-------------------------------
Amount Outstanding:
At year end........................................................ $ 28,525 $ --0-- $ 4,800
Average during year................................................ 12,092 589 10,989
Maximum month end.................................................. 45,950 2,500 22,200
Average Interest Rate:
At year end........................................................ 6.79% 6.73% 3.40%
During year........................................................ 6.02 6.62 4.28
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
1996, cash flows were generated from a $20,860,000 net decrease in securities, a
$31,990,000 decrease in interest-bearing deposits, a $12,200,000 net increase in
notes payable, $7,492,000 from earnings, and a $2,825,000 increase in short-term
borrowings. Cash flow uses and needs included a $21,817,000 decrease in
deposits, a $39,836,000 increase in loans, net cash of $19,050,000 to purchase
FinSec, and $10,436,000 to pay dividends and repurchase common stock. Pinnacle's
net cash position decreased $18,278,000 with the majority of the decrease in
Federal funds sold.
Pinnacle's subsidiary banks have a relatively stable base of deposits and any
increased loan demand can be sufficiently funded without a material change in
its balance sheet. Pinnacle's corporate strategy includes acquisitions. These
acquisitions are funded with both debt and issuance of stock. Reductions of debt
would be made from Pinnacle's earnings. At December 31, 1996, Pinnacle had a
line of credit of $5,000,000 with an unaffiliated bank.
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, 1997, bank
subsidiaries could have declared approximately $2,489,000 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.
Management had no significant commitments for capital expenditures at December
31, 1996. It is the intent of management to merge both SF and Pinnacle Bank, FSB
into PB in the first half of 1997. No significant change is anticipated in the
financial condition of Pinnacle due to the merger.
Table 7 details the Corporation's interest rate sensitive position at December
31, 1996. The table
------------------------
TABLE 7. 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..................................... $ 4,279 $ 397 $ 98 $ --0-- $ 4,774
Taxable securities............................................ 372,338 2,308 541 35,921 411,108
Tax-exempt securities......................................... 1,123 --0-- 1,369 20,958 23,450
Loans, net.................................................... 123,184 28,303 55,527 318,055 525,069
-----------------------------------------------------
Total....................................................... 500,924 31,008 57,535 374,934 964,401
-----------------------------------------------------
Cumulative total............................................ $ 500,924 $ 531,932 $ 589,467 $ 964,401
------------------------------------------
Rate Sensitive Liabilities:
Interest-bearing demand....................................... $ --0-- $ --0-- $ --0-- $ 88,489 $ 88,489
Savings deposits.............................................. 297,399 --0-- --0-- --0-- 297,399
Time deposits................................................. 115,866 89,173 87,839 97,659 390,537
Purchased funds............................................... 22,500 750 275 5,000 28,525
Notes payable................................................. 32,800 --0-- --0-- --0-- 32,800
-----------------------------------------------------
Total....................................................... 468,565 89,923 88,114 191,148 837,750
-----------------------------------------------------
Cumulative total............................................ $ 468,565 $ 558,488 $ 646,602 $ 837,750
------------------------------------------
Cumulative gap.............................................. $ 32,359 $ (26,556) $ (57,135) $ 126,651
------------------------------------------
Cumulative ratio of earning assets to interest-bearing
liabilities.................................................... 1.07x 0.95x 0.91x 1.15x
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
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 7 includes U. S. Government securities as
repricing within the earliest period presented since these securities are
recorded as available for sale and have been historically sold prior to maturity
as part of Pinnacle's portfolio funds management system. Table 7 also 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 2.93x for 1-90 days;
2.04x for 91-180 days; and 1.69x for 181-365 days.
------------------------
QUARTERLY DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the year
ended December 31, 1996.
<TABLE>
<CAPTION>
1996
Three Months Ended
------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
<S> <C> <C> <C> <C>
------------------------------------------
Net interest income......................................... $5,891 $6,537 $6,560 $8,168
Provision for loan losses................................... --0-- --0-- --0-- --0--
------------------------------------------
Net interest income after provision for loan losses......... $5,891 $6,537 $6,560 $8,168
Net income.................................................. $1,557 $2,237 $1,185 $2,148
------------------------------------------
Earnings per share (adjusted for stock split)............... $0.24 $0.35 $0.18 $0.28
------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
40
<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
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
Kenneth C. Whitener, Jr.,EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
Richard W. Burke,SECRETARY
BANK AND BANKING CENTER PRESIDENTS
Robert A. Becker,PINNACLE BANK, F.S.B.
Robert J. Boucek,LAGRANGE PARK BANKING CENTER
Mark P. Burns,VICE CHAIRMAN
Larry R. Clark,PINNACLE BANK OF THE QUAD-CITIES
William P. Gleason,PINNACLE BANK
Patrick J. Hunt,SECURITY FEDERAL SAVINGS AND LOAN ASSOCIATION
Dennis J. Irvin,HARVEY BANKING CENTER
Joanna Kmiec,BERWYN BANKING CENTER
Richard G. Pogvara,OAK PARK BANKING CENTER
William A. Spoo,CICERO BANKING CENTER
DEPARTMENT HEADS
Keith J. Gottschalk,DIRECTOR OF OPERATIONS
Richard M. Kennedy,DIRECTOR OF LOAN OPERATIONS
Glenn M. Mazade,CHIEF CREDIT OFFICER
Denise Medema,DIRECTOR OF PERSONNEL
Sara J. Mikuta,CHIEF FINANCIAL OFFICER AND TREASURER
Ronald J. Rous,CASHIER
Dennis M. Sheen,TRUST DEPARTMENT
Kenneth C. Whitener, Jr.,CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
41
<PAGE>
SHAREHOLDER INFORMATION
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
MARKET PRICE AND The Corporation's common stock is traded in the over-the- counter
DIVIDENDS market and is quoted on the National Association of Securities
Dealers Automated Quotation System (NASDAQ), the National Market.
The Corporation's ticker symbol is "PINN" and newspaper listings
use the abbreviations "PinBG" and "PinnaclBcGp". The following
table sets forth the high and low sales price by quarter as
reported by NASDAQ. All per share amounts have been adjusted to
give effect for the 3-for-2 stock split effective February 10,
1997.
</TABLE>
<TABLE>
<CAPTION>
1996
- --------------------------------------------
<S> <C> <C> <C>
Cash
Quarter High Low Dividends
<CAPTION>
- --------------------------------------------
<S> <C> <C> <C>
First $ 22.67 $ 20.33 $ 0.21
Second 23.00 18.67 0.21
Third 20.17 18.50 0.21
Fourth 20.00 17.83 0.21
<CAPTION>
1995
- --------------------------------------------
Cash
Quarter High Low Dividends
- --------------------------------------------
<S> <C> <C> <C>
First $ 21.00 $ 17.83 $ 0.19
Second 22.17 19.33 0.19
Third 21.33 18.67 0.19
Fourth 22.67 19.33 0.19
</TABLE>
<TABLE>
<S> <C>
MARKET MAKERS Principal market makers are: The Chicago Corporation; Howe Barnes
Investments, Inc.; Chicago Capital, Inc.; Herzog, Heine, Geduld,
Inc.; and M. A. Schapiro & Co., 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 15, 1997 at 3:00 p.m.
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PINNACLE BANC GROUP, INC.
Corporate Headquarters
2215 York Road, Suite 208
Oak Brook, Illinois 60521
[LOGO] 630/574-3550
</TABLE>
SUBSIDIARY BANKS:
<TABLE>
<S> <C>
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 60804 Silvis, Illinois 61282
and 309/752-1200
2500 South Cicero Avenue GREEN ROCK-COLONA BANKING CENTER
Cicero, Illinois 60804 107 First Street
708/780-5000 Green Rock, Illinois 61241
OAK PARK BANKING CENTER 309/792-3384
840 South Oak Park Avenue PINNACLE 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 630/879-5300
Harvey, Illinois 60426 ELBURN BANKING CENTER
708/333-2010 415 South Main Street
BERWYN BANKING CENTER Elburn, Illinois 60119
7112 West Cermak Road 630/365-9292
Berwyn, Illinois 60402 SECURITY FEDERAL SAVINGS
and AND LOAN ASSOCIATION
7373 West 25th Street CHICAGO/WEST TOWN BANKING CENTER
North Riverside, Illinois 60546 1209 North Milwaukee Avenue
708/788-4700 Chicago, Illinois 60622
LAGRANGE PARK BANKING CENTER 773/227-7020
Oak Avenue at Sherwood Road NILES BANKING CENTER
LaGrange Park, Illinois 60525 5697 Touhy Avenue
708/579-2000 Niles, Illinois 60714
WESTMONT BANKING CENTER 847/647-8555
640 Pasquinelli Drive
Westmont, Illinois 60559
630/654-2800
</TABLE>
- --------------------------------------------------------------------------------
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,745
<INT-BEARING-DEPOSITS> 3,424
<FED-FUNDS-SOLD> 1,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 434,558
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 525,069
<ALLOWANCE> (8,364)
<TOTAL-ASSETS> 1,048,376
<DEPOSITS> 877,552
<SHORT-TERM> 28,525
<LIABILITIES-OTHER> 8,675
<LONG-TERM> 32,800
0
0
<COMMON> 23,811
<OTHER-SE> 77,013
<TOTAL-LIABILITIES-AND-EQUITY> 1,048,376
<INTEREST-LOAN> 31,143
<INTEREST-INVEST> 24,879
<INTEREST-OTHER> 252
<INTEREST-TOTAL> 56,274
<INTEREST-DEPOSIT> 26,645
<INTEREST-EXPENSE> 29,118
<INTEREST-INCOME-NET> 27,156
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 159
<EXPENSE-OTHER> 25,700
<INCOME-PRETAX> 9,177
<INCOME-PRE-EXTRAORDINARY> 7,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,127
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 3.51
<LOANS-NON> 7,441
<LOANS-PAST> 633
<LOANS-TROUBLED> 1,330
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,023
<CHARGE-OFFS> 839
<RECOVERIES> 198
<ALLOWANCE-CLOSE> 8,364
<ALLOWANCE-DOMESTIC> 4,101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,263
</TABLE>
