<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, 1997
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
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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 306, Oak Brook, Illinois 60523
-----------------------------------------------------------------
(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, 1998, was approximately $148,212,000.
As of March 17, 1998, the registrant had 7,507,523 shares outstanding of
common stock, $3.12 par value.
Parts of the 1997 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 21, 1998 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........................................................ 4
Item 3. Legal Proceedings................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............... 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 5
Item 6. Selected Financial Data........................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 6
Item 8. Financial Statements and Supplementary Data....................... 6
Item 9. Disagreements on Accounting and Financial Disclosures............. 6
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
i
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PART I
ITEM 1. BUSINESS
Pinnacle Banc Group, Inc. (the "Corporation") is a multi-bank holding company
registered under the Bank Holding Company Act and is engaged in the business
of banking through the ownership of subsidiary banks. At December 31, 1997
the Corporation had total consolidated assets of $1,034,811,000, total loans
of $510,207,000, total deposits of $846,469,000, and total stockholders'
equity of $115,458,000. The Corporation's principal office is 2215 York
Road, Suite 306, Oak Brook, Illinois 60523. The Corporation has fifteen
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"). In April, 1997,
FSB was merged into Pinnacle Bank.
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 and Pinnacle
Bank of the Quad-Cities.
The Corporation is a legal entity separate and distinct from its subsidiary
banks. The major sources of the Corporation's revenues are dividends from
its subsidiary banks and gains on sales of its equity securities.
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.
1
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The Pinnacle Bank, a state banking corporation organized under the laws of
Illinois, was formed on July 9, 1993 through the merger of the Cicero Bank,
Harvey Bank and Berwyn Bank with and into the LaGrange Park Bank. The Cicero
Bank was originally organized in 1921, the Harvey Bank in 1937, the Berwyn
Bank in 1937 and the LaGrange Park Bank in 1962. The Bank's main office is
located in Cicero, Illinois, with full service branches in Harvey, Berwyn,
Oak Park, LaGrange Park, Westmont, Elburn, Batavia, and Chicago (West Town)
and limited service facilities in Cicero, Niles and North Riverside. In
January, 1998, a full service branch opened in Warrenville, Illinois. At
December 31, 1997, the Bank had total assets of $866 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 Colona (formerly
Green Rock), Illinois. Each community is part of the Quad-Cities area of
Illinois. As of December 31, 1997, the Bank had total assets of $117
million. In the second quarter of 1998, a full service branch will open in
Moline, Illinois.
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.
EMPLOYEES
At December 31, 1997, the Corporation and its subsidiary banks employed 370
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.
2
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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. 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"). Pinnacle Bank is a member of
the Federal Home Loan Bank of Chicago.
The Federal Reserve System, the FDIC 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
examinations, the banks must furnish periodic reports to the regulatory
authorities containing a full and accurate statement of its affairs. As
members of the FDIC, the banks' deposits are insured as provided by law.
Effective January 1, 1993, a risk-based deposit insurance assessment program
was placed into effect by the FDIC. Insurance premiums are to be determined
based on the level of a bank's capital and supervisory evaluation. As of the
current date, each of the Corporation's subsidiary banks were in the lowest
premium assessment category.
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.
3
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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
reporting requirements including statements by management regarding internal
controls and regulatory compliance.
GOVERNMENT MONETARY POLICIES
The earnings of banks and bank holding companies are affected by the policies
of regulatory authorities including the Federal Reserve Board which regulates
the money supply. Among the methods employed by the Federal Reserve Board
are open market operations in U. S. Government securities, changes in the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or
paid on deposits. The monetary policies of the Federal Reserve Board have had
a significant effect on the operating results of commercial and savings banks
in the past and are expected to continue to do so in the future.
FINANCIAL INFORMATION
For financial information regarding the Corporation, see ITEM 8, FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA, and ITEM 14, EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
ITEM 2. PROPERTIES
The corporate offices of the Corporation are located at 2215 York Road, Suite
306, Oak Brook, Illinois 60523. These offices, consisting of approximately
2,000 square feet, have been leased by the Corporation until 2002.
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 nine 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. The Batavia Banking Center consists of 8,640 square
feet and is located at 165 West Wilson Street, Batavia, Illinois 60510. The
Elburn Banking Center consists of approximately 2,400 square feet and is
located at 415 South Main Street, Elburn, Illinois 60119. The Chicago (West
Town) Banking Center consists of approximately 20,000 square feet and is
located at 1209 North Milwaukee Avenue, Chicago, Illinois 60622. The newly
constructed Warrenville Banking Center, which opened January 5, 1998,
consists of approximately 4,500 square feet and is located at 3601 Winfield
Road, Warrenville, Illinois 60555. All aforementioned buildings are owned by
Pinnacle Bank. The LaGrange Park Banking Center
4
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is located in a leased office at Oak and Sherwood Streets, LaGrange Park,
Illinois 60525. Six years remain on the term of the lease. The office
consists of approximately 11,500 square feet.
Pinnacle Bank has three limited service banking facilities. An owned
facility containing approximately 2,500 square feet is located at 2500 South
Cicero Avenue, Cicero, Illinois 60804. 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. Ten years remain on the term of the lease. A
limited service leased banking facility containing approximately 900 square
feet is located at 5697 West Touhy Avenue, Niles, Illinois 60714.
Approximately one year remains on the lease.
Pinnacle Bank has a lease, expiring in 2008, on approximately 26,000 square
feet of office space located at 1144 Lake Street, Oak Park, Illinois 60301.
The space will be used as an operations center housing all operating
departments of Pinnacle Bank which are currently located in various banking
centers. The move to the leased office space is anticipated during the
second quarter of 1998.
Pinnacle Bank of the Quad-Cities owns it main banking office located at 1100
First Avenue, Silvis, Illinois 61282. The main office consists of
approximately 10,600 square feet. Pinnacle Bank of the Quad-Cities has a
full service branch office located at 107 First Street, Colona, Illinois
61241, which consists of approximately 4,000 square feet. In the second
quarter of 1998, Pinnacle Bank of the Quad-Cities will have a full service
branch office in Moline, Illinois, which will consist of approximately 3,700
square feet.
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.
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.
<TABLE>
<CAPTION>
1997 1996
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CASH CASH
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $23.50 $18.67 $0.22 $22.67 $20.33 $0.21
2nd 21.75 19.50 0.22 23.00 18.67 0.21
3rd 24.50 21.00 0.22 20.17 18.50 0.21
4th 29.38 24.25 0.22 20.00 17.83 0.21
</TABLE>
5
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In 1997, the Corporation purchased 173,436 shares of its common stock at
market prices in privately negotiated and market transactions. 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.
NUMBER OF SHAREHOLDERS
As of March 17, 1998, the Corporation had approximately 425 shareholders of
record. In addition, the Corporation believes that it has approximately
2,175 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 1997 Annual Report to Stockholders included as Exhibit 13.
The information required is contained on page 26 of Exhibit 13, 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 1997 Annual Report
to Stockholders included as Exhibit 13. The information is contained on
pages 27 through 41 of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is contained on pages 39 through
41 of the 1997 Annual Report to Stockholders included as Exhibit 13 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the 1997 Annual Report to Stockholders included as Exhibit 13.
The information is contained as follows:
PAGE OF
EXHIBIT 13
----------
Consolidated Balance Sheets.................... 6
Consolidated Statements of Income.............. 7
Consolidated Statements of Changes in
Stockholders' Equity......................... 8
Consolidated Statements of Cash Flows.......... 9
Notes to Consolidated Financial Statements..... 10
Report of Independent Public Accountants
Arthur Andersen LLP........................ 25
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
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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 21,
1998, 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 10
of the Definitive Proxy Statement for the Annual Meeting to be held on April
21, 1998, 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
21, 1998, 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 page 11 of the
Definitive Proxy Statement for the Annual Meeting to be held on April 21,
1998 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.
EXHIBIT /
DESIGNATION NO.
UNDER ITEM 601 OF
REGULATION S-K EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
(3) Articles of Incorporation and By-laws. This Exhibit was
filed on Form SE on March 18, 1996 and is incorporated herein
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
incorporated herein by reference.
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(10) (a) 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 incorporated
herein by reference.
(b) Employment Contracts. These items were filed as Exhibit
10 to the Corporation's Form 10-Q filed May 8, 1997 and are
incorporated herein by reference.
(11) Statement Re Computation of Per Share Earnings. Footnote 10,
Notes to the Consolidated Financial Statements, is included
in the 1997 Annual Report to Stockholders and is herein
incorporated by reference.
(13) Annual Report to Security Holders. The Corporation is
including, as an Exhibit, its 1997 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) Financial Data Schedule.
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
None.
8
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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 1997 Annual Report to Stockholders
included as Exhibit 13. The information required is contained in Table 1,
"Analysis of Net Interest Income" on page 29 of Exhibit 13, 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
1997 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 2, "Analysis of Volume/Rate Variance" on page 30
of Exhibit 13, 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 1997 Annual Report to Stockholders
included as Exhibit 13. This information is discussed under the subsection
"Market Risk" on pages 39 through 41 of Exhibit 13, within the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
II. INVESTMENT PORTFOLIO
The following table presents the book value of securities in thousands at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
U. S. Treasury and U. S. Government agencies.. $355,925 $373,072 $370,545
State and municipal........................... 22,242 23,450 25,839
Mortgage-backed securities and floating rate
collateralized mortgage obligations......... 4,615 5,943 10,307
Corporate and other........................... 51,452 32,093 20,238
------------------------------
Total securities............................ $434,234 $434,558 $426,929
------------------------------
------------------------------
</TABLE>
The following table shows the maturities of securities in thousands at December
31, 1997 and weighted average fully taxable equivalent yields:
<TABLE>
<CAPTION>
U. S. TREASURY AND FEDERAL
AGENCY SECURITIES STATE AND MUNICIPAL
-------------------------- -----------------------
<S> <C> <C> <C> <C>
One year or less........... $ 972 2.85% $ 2,893 12.89%
One year to five years..... 354,503 5.68 11,117 12.82
Five to ten years.......... 450 4.96 6,089 12.33
Over ten years............. -0- 0.00 2,143 14.58
No fixed maturity.......... -0- 0.00 -0- 0.00
-------------------------- -----------------------
$355,925 5.67% $22,242 12.84%
-------------------------- -----------------------
-------------------------- -----------------------
</TABLE>
9
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<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES, FLOATING
RATE COLLATERALIZED
MORTGAGE OBLIGATIONS,
CORPORATE AND OTHER
DEBT SECURITIES EQUITY SECURITIES TOTAL
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
One year or less........... $ -0- 0.00% $ -0- 0.00% $ 3,865 9.83%
One year to five years..... -0- 0.00 -0- 0.00 365,620 5.87
Five years to ten years.... -0- 0.00 -0- 0.00 6,539 11.68
Over ten years............. -0- 0.00 -0- 0.00 2,143 14.58
No fixed maturity.......... 4,615 8.28 51,452 4.59 56,067 5.10
--------------------- --------------------- ---------------------
$4,615 8.28% $51,452 4.59% $434,234 6.22%
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
</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, 1997.
III. LOAN PORTFOLIO
The following table sets forth the outstanding loans, in thousands, at the
following dates:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and other... $111,990 $111,454 $ 83,940 $ 68,788 $ 74,855
Consumer............... 62,294 54,535 49,464 38,982 38,442
Real estate:
Residential.......... 291,578 307,217 135,085 119,520 112,138
Commercial........... 45,107 52,628 42,073 22,220 24,170
----------------------------------------------------
Total gross loans.... 510,969 525,834 310,562 249,510 249,605
Unearned income........ 762 765 962 1,106 1,529
----------------------------------------------------
Net loans............ $510,207 $525,069 $309,600 $248,404 $248,076
----------------------------------------------------
----------------------------------------------------
</TABLE>
The following table sets forth the maturity distribution of the following
categories of loans at December 31, 1997 in thousands.
<TABLE>
<CAPTION>
REMAINING MATURITY
-------------------------------------------------
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and other........ $58,548 $ 44,558 $ 8,884 $111,990
Real estate:
Residential............ 22,388 87,519 181,671 291,578
Commercial............. 11,565 23,278 10,264 45,107
-------------------------------------------------
$92,501 $155,355 $200,819 $448,675
-------------------------------------------------
-------------------------------------------------
</TABLE>
10
<PAGE>
Of the loans listed above in the maturity schedule, a total of $356,174 are due
after one year; $315,139 of these loans have predetermined interest rates and
$41,035 of these loans have floating interest rates.
COLLATERAL AND APPRAISAL GUIDELINES
Subsidiary banks of the Corporation make loans which are collateralized by
different types of assets. A collateral guideline manual is maintained by each
bank which details collateral requirements for any collateralized loan which a
bank may make. The loan operations area has responsibility for monitoring all
compliance with collateral requirements. Collateral requirements for the most
commonly funded loans include an 85% - 95% (depending on maturity)
loan-to-value ratio for loans secured by U. S. Government securities, 70% for
NYSE traded stock, 65% for AMEX and 50% for all other common stocks, with the
exception of control stocks which are not acceptable as collateral. Commercial
loans for working capital can have a maximum loan-to-value ratio of 80% against
eligible accounts if secured by receivables, a maximum of 50% if secured by
inventory and a maximum of 80% if secured by equipment. Real estate loans can
have a maximum loan-to-value ratio of 80% unless private mortgage insurance is
provided for advances over 80%. Commercial real estate loans typically are
funded at a lower loan-to value ratio and require the personal guarantee of the
borrower(s). Home equity loans require a loan-to-value ratio of 80% of the
appraised value less any debt.
Loans made by subsidiary banks of the Corporation which are collateralized by
real estate require an appraisal prior to funding of the loan. These loans are
reappraised when management believes that the financial condition or resources
of the borrower have deteriorated or when the collectibility of the loan is in
question. Loans collateralized by real estate are not necessarily reappraised
on an annual or quarterly basis by policy; however, all loans secured by real
estate, 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:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.............. $4,392 $7,441 $4,791 $ 748 $5,283
Past due 90 days or more and
still accruing.............. 1,064 633 2,293 552 585
Restructured loans............ 1,223 1,330 931 -0- -0-
------------------------------------------
$6,679 $9,404 $8,015 $1,300 $5,868
------------------------------------------
------------------------------------------
Other real estate owned....... $ 442 $ 939 $ 284 $2,416 $3,444
</TABLE>
A discussion regarding the nonperforming assets listed above is contained
within the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the subsection "Provision for Loan
Losses" on pages 30 through 31 of the Corporation's 1997 Annual Report to
Stockholders included as Exhibit 13.
11
<PAGE>
LOAN CONCENTRATIONS. Loan concentrations are defined as amounts loaned to
a multiple number of borrowers engaged in similar activities, which would cause
them to be similarly impacted by economic or other conditions. Although the
Corporation has a diversified loan portfolio, a substantial natural geographic
concentration of credit risk exists within the Corporation's defined customer
market areas 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 $48,808,000, at December 31, 1997, or approximately 10% of the
Corporation's loan portfolio. These loans are located in the following areas:
6.02% in California and 1.73% in the Midwest (excluding the Chicago
Metropolitan area). Certain of these areas, particularly California, are
experiencing adverse economic conditions, which has resulted in increased past
due non-accrual loans. 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 $5,475,000 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.
IMPAIRED LOANS. Loans considered impaired under SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", includes nonaccrual loans greater than
$100,000, 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
1997 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 3, "Analysis of the Allowance for Loan Losses"
on page 31 of Exhibit 13, within the section titled "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The Corporation's subsidiary banks do not allocate the allowance for loan
losses by specific loan categories. However, bank disclosure guidelines issued
by the Securities and Exchange Commission request management to allocate the
total allowance for loan losses into certain categories. Accordingly,
management has allocated the allowance for loan losses by loan category based
on historical charge-off experience and management's evaluation of potential
losses in the loan portfolio. The specific allocations are not intended to be
indicative of future charge-offs. The unallocated portion of the allowance for
loan losses represents that portion of the
12
<PAGE>
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>
1997 1996 1995
------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and other... $1,328 21.9% $2,293 21.1% $1,366 27.1%
Consumer............... 115 12.1 244 10.4 36 15.7
Real estate............ 1,207 66.0 1,564 68.5 858 57.2
Unallocated............ 4,870 - 4,263 - 3,763 -
------------------------------------------------------------------------
$7,520 100.0% $8,364 100.0% $6,023 100.0%
------------------------------------------------------------------------
------------------------------------------------------------------------
1994 1993
------------------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and other... $1,051 27.7% $1,710 30.2%
Consumer............... 147 15.4 540 15.1
Real estate............ 826 56.9 750 54.7
Unallocated............ 2,205 - 547 -
------------------------------------------------
$4,229 100.0% $3,547 100.0%
------------------------------------------------
------------------------------------------------
</TABLE>
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area. Control
of loan quality is continually monitored by management. Management's system of
review of the loan portfolio and the attendant determination of the adequacy of
the allowance for loan losses is made up of a number of factors. The most
significant part of the system is the independent credit review system which
reviews all commercial credits in excess of $100,000 and all commercial real
estate credits in excess of $250,000 on 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, 1997, 1996 and 1995.
13
<PAGE>
The aggregate amount of certificates of deposit, in denominations of $100,000
or more, by maturity, as of December 31, 1997 are shown below, in thousands.
<TABLE>
<CAPTION>
<S> <C>
Three months or less..................... $25,385
Over three months through six months..... 15,431
Over six months through twelve months.... 17,891
Over twelve months....................... 9,348
-------
Total............................... $68,055
-------
-------
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for years
ended December 31, 1997, 1996, and 1995. The return on average assets and the
return on average stockholders' equity is calculated by dividing net income for
the period by average assets or average stockholders' equity, respectively. The
dividend payout ratio is calculated by dividing total dividends paid by net
income.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Return on average assets......................... 1.43% 0.82% 1.55%
Return on average stockholders' equity........... 15.36 9.02 18.09
Dividend payout ratio............................ 46.14 79.12 40.89
Average stockholders' equity to average assets... 9.28 9.05 8.55
</TABLE>
VII. SHORT-TERM BORROWINGS
Information required in this table is incorporated herein by reference to the
1997 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 6, "Short-term Borrowings and FHLB Advances" on
page 38 of Exhibit 13, 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, 1998.
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 Chief Financial Officer
Chief Executive Officer and Treasurer
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, 1998.
/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>
--------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
EXHIBITS
TO
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-------------------------------------
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------
<PAGE>
ANNUAL REPORT
1997
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
FINANCIAL HIGHLIGHTS
PINNACLE BANC GROUP, INC.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands, except per share data) Percent
<CAPTION>
1997 1996 Change
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year:
Net income..................................... $ 14,429 $ 7,127 102%
Return on average equity....................... 15.4% 9.0%
Return on average assets....................... 1.43 0.82
Per Share:
Net income..................................... $ 1.91 $ 1.04 82%
Book value..................................... 15.39 13.23 16
Dividends...................................... 0.88 0.83 5
At Year End:
Total assets................................... $1,034,811 $1,048,376 (1)%
Loans.......................................... 510,207 525,069 (3)
Portfolio funds................................ 437,262 439,332 0
Deposits....................................... 846,469 877,552 (4)
Notes payable.................................. 20,000 32,800 (39)
Stockholders' equity........................... 115,458 100,824 15
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................................................... 2
Consolidated Financial Statements................................................ 6
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............................................................... 42
Shareholder Information.......................................................... 43
Corporate Information............................................................ 44
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholder:
Each year this letter serves as our "State of the Company" address. It provides
us with an opportunity to review our efforts and results over the past year, and
gives us a forum to communicate our objectives and challenges for the future. On
almost all fronts, 1997 was a successful year; earnings were strong, Pinnacle's
common stock price increased significantly, and progress continued to be made on
a number of fronts which will be providers for future successes.
FINANCIAL RESULTS
We believe that any report to the shareholders should begin with the financial
results--the scorecard. Net income for 1997 was $14,429,000, or $1.91 per share
(all per share amounts are on a diluted basis). On a per share basis, this
represented an 82% increase from the $7,127,000, or $1.04 per share, earned in
1996. On a dollars earned basis, 1997 represented a record level with earnings
per share tying the high water mark set in 1993. The return on average equity in
1997 was 15.4% and the return on average assets amounted to 1.43%.
The significant increase in earnings for 1997, in comparison with the previous
year, was primarily the result of two factors. Net securities gains of $8.3
million on a pre-tax basis were recorded in 1997 compared with a minimal amount
in 1996. Approximately two-thirds of the gains resulted from Pinnacle's term
portfolio program while the remaining one-third was the result of gains recorded
on the sale of equity securities. In addition, net interest income increased 23%
as a result of both a higher level of earning assets and an increase in the net
interest margin.
Total assets were $1.034 billion at December 31, 1997. Total loans amounted to
$510 million and total deposits ended the year at $846 million. While these
categories were down 3% and 4%, respectively, from the prior year end, the
decline was not unexpected. The decrease resulted from the restructuring of the
balance sheet of an acquisition completed fifteen months earlier. Stockholders'
equity was $115 million at year end, up 15%, and equated to a book value of
$15.39 per share.
Pinnacle's common stock price improved significantly in 1997. The year end
closing price of $29 represented a 58% increase from the prior year end close.
While we recognize that a major portion of this increase can be attributed to a
stock market which provided significant returns in 1997, we feel strongly that
Pinnacle's improved earnings performance played a key role.
A UNIQUE INCOME STATEMENT
Pinnacle's earnings statement has always been unique in comparison with other
banking corporations. Because of that, a few editorial comments are necessary in
our estimation. Three points, in particular, are key. First, independent
analysis of Pinnacle's income statement many times results in net securities
gains being subtracted or ignored in order to arrive at core earnings. It is not
that simple. Gains on the sale of U. S. Treasury (term) securities consist of
two pieces: an interest rate movement portion and a slope, or maturity
adjustment piece. The portion due to a downward interest rate movement has a
corresponding negative impact on net interest income going forward since the
reinvestment of proceeds of the sale are invested at a lower yield than the rate
that was being earned on the securities sold. Therefore, any analysis
subtracting net gains on term securities from
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
net income needs an upward adjustment to net interest income to take into
account the lower reinvestment yield.
The second point involves the equity portfolio. At year end, Pinnacle's
investment in common stocks of other financial institutions had a market value
of $48 million which included unrealized appreciation of $22 million. Unrealized
appreciation, by definition, is not included in Pinnacle's earnings statement,
although this appreciation is included in Pinnacle's stockholders' equity
account and, therefore, book value. The increase in net unrealized appreciation,
or unrecorded gain, amounted to $13 million on a pre-tax basis in 1997. In
addition to the absence of this fact in the earnings statement, net interest
income is also negatively impacted by the fact that $48 million of invested
funds are earning a low dividend yield. Therefore, the subtracting of actual
gains recorded on the sale of equity securities from net income needs to be
offset by an adjustment which takes into account the low book yield being earned
and the alternative use of these funds.
The third point relates to the amortization of goodwill and the concept of cash
earnings. Each of Pinnacle's acquisitions has been accounted for under the
purchase method of accounting. This method results in the creation of goodwill,
or premium paid, which is amortized over subsequent years as a charge to
earnings. The cash nature of Pinnacle's acquisitions has dictated this
accounting method as opposed to the pooling method which does not result in
goodwill or a reduction in future earnings. Pinnacle's charge to earnings for
the amortization of goodwill was $2.4 million in 1997; an expense that was
non-cash and not deductible for tax purposes. As a result, cash earnings per
share were $2.23, or $0.32 per share, higher than the amount reported. Cash
basis return on average assets was 1.70% and cash basis return on average equity
amounted to 24.1%.
Each of these items adds up to the fact that Pinnacle's earnings have always
differed from other banking organizations and, most likely, will continue to do
so in the future. Our efforts continue to focus on improving the core bank.
Nevertheless, just focusing on core earnings, however defined, can be
misleading. We ask that you view Pinnacle over a longer term, not just a quarter
or a year. Since Pinnacle became a publicly-held company in 1988, the average
return on equity has equaled 17.1% and the average return on assets has totalled
1.60% in the ten-year period.
PROGRESS IN 1997
Any successful year is a combination of a number of factors. On the banking
side, efforts continued to be made to enhance core earnings through positioning
Pinnacle as a convenience, service-oriented provider of progressive financial
products. This objective was evidenced in a number of ways. A year of planning
and construction culminated in Pinnacle's first new market banking center
opening in the first week of 1998 in Warrenville. A second new branch is slated
for opening in the second quarter of 1998 in Moline which, upon completion, will
give customers sixteen Pinnacle banking locations. Additionally, space has been
leased for a state-of-the-art Operations Center in Oak Park which will provide a
more efficient consolidation of backroom processing and allow room for future
expansion.
The assimilation of the West Town and Niles Banking Centers, acquired in
September, 1996, was completed, including the data processing and charter
conversions to Pinnacle Bank. Projected expense savings from the acquisition
were met. The Batavia and Elburn locations were
- --------------------------------------------------------------------------------
3
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
also merged into Pinnacle Bank creating a single chartered bank in the Chicago
area and allowing customers to bank at any desired location. Personnel upgrades
in 1997 included the Warrenville Banking Center, lending officer additions, loan
operations and new posts for marketing, CRA/compliance and loan workout/
documentation.
Marketing and advertising efforts received a major focus during 1997. The year
saw the first attempt at significant advertising on primary television, coupled
with radio and newspaper supplements. Pinnacle's initial attempt at the sale of
a defined product--the PinnPoint account--met with success, primarily through
the introduction of a check card. Continued efforts were made with internal
training and sales culture improvement. Improvement continued to be made in the
area of problem assets acquired as part of Pinnacle's prior acquisitions.
Nonperforming assets declined 29% with minimal additions to the list from
internally generated loans, and no charge to earnings for loan loss provisions
in 1997.
On the corporate side, two items stand out. First, Pinnacle's equity portfolio
consisting of investments in other financial institutions increased
substantially in 1997 through a combination of new purchases and market
appreciation. At December 31, 1997, the equity portfolio totalled $48 million
with $22 million in unrealized appreciation. This represented an increase in
unrealized appreciation of $13 million during 1997, not including gains of $2.8
million recorded in income from the sale of certain positions. While Pinnacle
was the beneficiary in 1997 of a strong bull market in bank stocks, the creation
of this portfolio a number of years ago as an alternative use of funds has
resulted in another unique program which will enhance future earnings.
The second success on the corporate side was the improved liquidity in
Pinnacle's common stock. Average daily volume in 1997 totalled 8,000 shares,
twice that of 1996 and six times the volume of 1995. With the increase in volume
has come a narrowing in the quoted bid-ask spread and an increase in the number
of market makers to seven.
Every year is not perfect, though, and there are always a few things we can do
better. We had hoped to continue our expansion in 1997 through an acquisition,
but were unable to for a combination of reasons, not the least of which is
price. Instead, we chose the branching route for the present time. Pinnacle's
loan portfolio did not show the same successful growth in 1997 that it did in
1996. However, originations were made at a record level; pay downs were just
higher than planned. Commercial loans, absent leases, were up 9% and consumer
loans increased 14%, but declines in real estate loans negated these increases.
Finally, in the needs-to-improve area is Pinnacle's sales culture. We made some
good strides in 1997 in this area, but we, as many other banks, still battle the
conventional "banker's mentality" of limited hours and waiting for the customer
to approach us.
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
achieve returns on equity and assets significantly in excess of peer group and
consistent with Pinnacle's return over the past ten-year period. 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 5%
increase in the dividend was announced in January, 1998, the tenth consecutive
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
annual increase since Pinnacle became a publicly-traded company in 1988. On the
banking side, we will continue our efforts to improve the core earnings of the
bank and ensure that responsive, quality service will differentiate Pinnacle
banks from our competitors.
In 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. We continue to make progress on this front, but we can
always do better.
In summary, we are pleased with the financial results for 1997, from both an
earnings and common stock price standpoint. We believe that the progress made in
a number of areas in 1997 will provide a foundation for the future successes.
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
- --------------------------------------------------------------------------------
5
<PAGE>
Consolidated BALANCE SHEETS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
at December 31
----------------------
(in thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks................................... $ 31,103 $ 21,745
Federal funds sold........................................ 2,800 1,350
----------------------
Total cash and cash equivalents......................... 33,903 23,095
Interest-bearing deposits................................. 228 3,424
Securities--Available for sale (Note 3)................... 434,234 434,558
(Amortized cost of $409,123 in 1997 and $423,857 in
1996)
Loans (Note 4)............................................ 510,207 525,069
Less: Allowance for loan losses (Note 5).................. (7,520) (8,364)
----------------------
Net loans............................................... 502,687 516,705
Premises and equipment (Note 6)........................... 18,451 17,301
Goodwill and other intangibles (Note 2)................... 23,076 25,366
Other assets.............................................. 22,232 27,927
----------------------
Total................................................... $1,034,811 $1,048,376
----------------------
Liabilities:
Demand deposits:
Noninterest-bearing..................................... $ 104,644 $ 101,127
Interest-bearing........................................ 96,092 88,489
Savings deposits.......................................... 281,737 297,399
Other time deposits....................................... 363,996 390,537
----------------------
Total deposits.......................................... 846,469 877,552
Short-term borrowings and FHLB advances (Note 8).......... 38,525 28,525
Notes payable (Note 8).................................... 20,000 32,800
Other liabilities......................................... 14,359 8,675
----------------------
Total liabilities....................................... 919,353 947,552
----------------------
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.................................. 23,449 23,811
20,000,000 shares authorized; shares issued and
outstanding: 1997: 7,503,773; 1996: 7,619,487
Additional paid-in capital................................ 38,578 37,980
Retained earnings......................................... 36,856 31,985
Unrealized gain on securities available for sale, net of
tax (Notes 1 & 3)........................................ 16,575 7,048
----------------------
Total stockholders' equity.............................. 115,458 100,824
----------------------
Total................................................... $1,034,811 $1,048,376
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
December 31
----------------------------------
(in thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans..................................................... $ 42,928 $ 31,143 $ 26,316
Securities:
Taxable................................................. 24,154 23,133 23,347
Tax exempt.............................................. 1,520 1,746 2,571
Interest-bearing deposits, Federal funds sold and other... 65 252 1,063
----------------------------------
Interest income......................................... 68,667 56,274 53,297
----------------------------------
Interest Expense:
Deposits:
Interest-bearing demand................................. 1,806 1,841 1,732
Savings................................................. 8,715 8,085 8,341
Other time.............................................. 21,169 16,719 13,664
Short-term borrowings and FHLB advances................... 1,766 728 39
Notes payable............................................. 1,853 1,745 1,963
----------------------------------
Interest expense........................................ 35,309 29,118 25,739
----------------------------------
Net Interest Income......................................... 33,358 27,156 27,558
Provision for loan losses (Note 5)........................ --0-- --0-- --0--
----------------------------------
Net interest income after provision for loan losses..... 33,358 27,156 27,558
----------------------------------
Other Income:
Other income (Note 17).................................... 8,436 7,562 7,225
Net securities gains...................................... 8,340 159 4,731
----------------------------------
Other income............................................ 16,776 7,721 11,956
----------------------------------
Other Expense:
Salaries, profit sharing and other employee benefits (Note
9)....................................................... 14,131 12,678 12,051
Occupancy (Note 6)........................................ 2,815 2,674 3,137
Amortization of goodwill and other intangibles (Note 2)... 2,394 2,033 1,885
Other expense (Note 17)................................... 8,873 8,315 6,809
----------------------------------
Other expense........................................... 28,213 25,700 23,882
----------------------------------
Income before income taxes.................................. 21,921 9,177 15,632
Provision for income taxes (Note 7)....................... 7,492 2,050 3,139
----------------------------------
Net income.............................................. $ 14,429 $ 7,127 $ 12,493
----------------------------------
Earnings per share (Note 10):
Basic................................................... $1.91 $1.05 $1.89
Diluted................................................. 1.91 1.04 1.89
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
7
<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, 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
-------------------------------------------------------------
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 on securities available for sale,
net of tax
(Notes 1 & 3).................................... 1,668 1,668
-------------------------------------------------------------
Balance, December 31, 1996.......................... $ 23,811 $ 37,980 $ 31,985 $ 7,048 $ 100,824
Net income........................................ 14,429 14,429
Dividends paid--$0.88 per share................... (6,657) (6,657)
Purchase and retirement of common stock........... (543) (2,901) (3,444)
Exercise of stock options......................... 181 598 779
Unrealized gain (loss) on securities available for
sale, net of tax (Notes 1 & 3)................... 9,527 9,527
-------------------------------------------------------------
Balance, December 31, 1997.......................... $ 23,449 $ 38,578 $ 36,856 $ 16,575 $ 115,458
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31
-------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 14,429 $ 7,127 $ 12,493
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation................................ 1,698 1,619 1,273
Amortization of goodwill and other
intangibles............................... 2,394 2,033 1,885
Amortization of purchase accounting
adjustments............................... (69) 175 147
Provision for loan losses................... --0-- --0-- --0--
Premium amortization........................ 286 649 246
Discount accretion.......................... (1,301) (6,894) (20,738)
Increase (decrease) in deferred loan fees... (88) 264 (183)
Gain on sales of securities................. (8,340) (159) (4,731)
Decrease (increase) in interest
receivable................................ 4,078 (8,108) 407
Deferred income taxes....................... 502 (311) 824
Decrease in other assets.................... 1,617 20,018 5,107
Increase (decrease) in other liabilities.... 280 (7,699) (1,786)
Other, net.................................. 79 (1,222) 11
-------------------------------------
Total adjustments......................... 1,136 365 (17,538)
Net cash provided by (used for) operating
activities.............................. 15,565 7,492 (5,045)
Cash flows from investing activities:
Cash portion of acquisitions, net of cash
acquired (Note 1)............................. --0-- (19,050) (14,800)
Proceeds from sales of securities available for
sale.......................................... 1,575,182 1,112,527 3,096,014
Purchases of securities available for sale...... (1,552,282) (1,101,715) (3,088,494)
Proceeds from maturities and paydowns of
securities.................................... 1,025 10,048 26,915
Net decrease in interest-bearing deposits....... 3,197 31,990 12,458
Net loan principal (advanced) collected......... 14,106 (39,836) 9,798
Premises and equipment, net..................... (2,780) (2,638) (1,709)
-------------------------------------
Net cash provided by (used for) investing
activities.............................. 38,448 (8,674) 40,182
Cash flows from financing activities:
Net decrease in total deposits.................. (31,083) (21,817) (18,043)
Net increase (decrease) in short-term
borrowings.................................... 10,000 2,825 (4,800)
Proceeds from notes payable..................... 21,600 24,500 31,800
Principal reductions of notes payable........... (34,400) (12,300) (16,600)
Issuance of common stock........................ 779 132 454
Purchase and retirement of common stock......... (3,444) (4,797) (1,731)
Dividends paid.................................. (6,657) (5,639) (5,109)
-------------------------------------
Net cash used for financing activities.... (43,205) (17,096) (14,029)
Net increase (decrease) in cash and cash
equivalents..................................... 10,808 (18,278) 21,108
Cash and cash equivalents at beginning of year.... 23,095 41,373 20,265
-------------------------------------
Cash and cash equivalents at end of year.......... $ 33,903 $ 23,095 $ 41,373
-------------------------------------
Cash paid during year for:
Interest........................................ $ 35,527 $ 29,221 $ 25,691
Income taxes.................................... 6,506 1,525 2,207
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
9
<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") and Pinnacle Bank of the Quad-Cities ("PBQC"). In 1997,
Security Federal Savings and Loan Association ("SF"), and Pinnacle Bank, FSB
(formerly Batavia Savings Bank) ("FSB"), which were previously separate
subsidiaries, were merged into PB. Significant intercompany accounts and
transactions have been eliminated in the preparation of these statements.
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)
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" 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.
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.
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.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118, "Accounting for Creditors for Impairment of a Loan--Income
Recognition and Disclosure" address 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
- --------------------------------------------------------------------------------
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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.
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.
(I)
NEW ACCOUNTING PRONOUNCEMENTS -
EARNINGS PER SHARE
In March, 1997, the FASB issued SFAS No. 128, "Earnings per Share".
The new statement was effective for financial statements for periods ending
after December 15, 1997 and superseded Accounting Principles Board Opinion 15.
SFAS No. 128 replaces primary earnings per share ("EPS") with basic EPS. Basic
EPS is computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for any potentially dilutive
securities is included. Diluted EPS replaced fully diluted EPS and includes the
effects of stock options. In using the treasury stock method to compute dilution
for options, the average share price for the period is used, rather than the
more dilutive greater of the average share price or end-of-period share price
required by the previous standard. Pinnacle adopted SFAS No. 128 on December 31,
1997 and, accordingly, all prior EPS data presented has been restated. See also
Footnote 10.
COMPREHENSIVE INCOME
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement is effective for fiscal years beginning after December
15, 1997 with earlier application permitted. This statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. The object of the statement is to report a measure
of all changes in equity of an enterprise that results from transactions and
other economic events of the period other than transactions with owners. Items
included in comprehensive income include revenues, gains and losses that under
generally accepted accounting principles are directly charged to equity.
Examples
- --------------------------------------------------------------------------------
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
include foreign currency transactions, pension liability adjustments and
unrealized gains and losses on securities (SFAS 115 adjustment). Pinnacle will
adopt this statement in the first quarter of 1998 and will include in its
reported comprehensive income, the change in unrealized gains and losses on
securities.
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 remained a
separate subsidiary of Pinnacle until January 31, 1997 at which time SF was
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, approximated $8,200 which is
being amortized on a straight-line basis over fifteen years. Certain adjustments
to goodwill relating to the FinSec acquisition were made in 1997 upon receipt of
final appraisal numbers. The adjustments were not material to the financial
statements.
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.
- --------------------------------------------------------------------------------
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
This transaction was accounted for using the purchase method of accounting
and the excess of the aggregate purchase price paid over the fair value of the
net assets acquired consisted of goodwill. The results of operations of STSB
have been included in the consolidated financial statements since date of
acquisition. No pro forma financial information is presented for 1995 since the
acquisition closely coincides with the beginning of the year and would not
differ significantly from the results reported.
At December 31, 1997 and 1996, the Corporation had goodwill of $21,627 and
$23,576, respectively. Goodwill is stated net of accumulated amortization of
$21,211 and $19,158 at December 31, 1997 and 1996, respectively. Goodwill
represents the excess of the aggregate purchase price paid over the fair value
of the net assets received in the purchases of First National Bank of Cicero and
Bank of LaGrange Park in 1980, First National Bank in Harvey in 1982, Bank of
Silvis in 1989, Berwyn National Bank 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 $2,053 in 1997, $1,692 in 1996,
and $1,544 in 1995.
Other intangibles consist of a deposit base intangible totalling $1,449
and $1,790 as of December 31, 1997 and 1996, 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 $1,960 and $1,619 at December 31, 1997 and 1996, respectively.
Amortization of the deposit base intangible, which is being amortized over an
estimated 10-year life, amounted to $341 in 1997, 1996, and 1995.
(3)
SECURITIES:
The amortized cost and the estimated fair value of the Corporation's
securities as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
<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........................... $ 355,904 $ 208 $ 187 $ 355,925
Mortgage-backed securities........................................... 2,384 11 57 2,338
Floating rate collateralized mortgage obligations.................... 2,279 5 7 2,277
State and municipal.................................................. 19,426 3,003 187 22,242
--------------------------------------------------
Total debt securities.............................................. 379,993 3,227 438 382,782
Corporate and other equity securities................................ 29,130 22,325 3 51,452
--------------------------------------------------
Total securities................................................... $ 409,123 $ 25,552 $ 441 $ 434,234
<CAPTION>
--------------------------------------------------
1996
--------------------------------------------------
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........................... $ 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
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total debt securities.............................................. 400,680 2,669 630 402,719
Corporate and other equity securities................................ 23,177 8,662 --0-- 31,839
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total securities................................................... $ 423,857 $ 11,331 $ 630 $ 434,558
<CAPTION>
--------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at December
31, 1997 and 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<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................. $ 3,097 $ 3,056 $ 2,714 $ 2,746
Due after one year through five years... 361,897 362,640 378,139 378,754
Due after five years through ten
years................................. 8,080 9,563 11,279 12,813
Due after ten years..................... 2,256 2,908 2,337 2,463
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
$ 375,330 $ 378,167 $ 394,469 $ 396,776
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.............. 2,384 2,338 3,221 2,961
Floating rate collateralized mortgage
obligations........................... 2,279 2,277 2,990 2,982
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Total debt securities................. $ 379,993 $ 382,782 $ 400,680 $ 402,719
<CAPTION>
------------------------ ------------------------
</TABLE>
------------------------
Proceeds from sales of debt securities during 1997 were $1,557,505. Gross
gains of $6,693 and gross losses of $1,195 were realized on those sales.
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.
At December 31, 1997 and 1996, securities carried at approximately $36,200
and $31,468, 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, 1997
or 1996, 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>
1997 1996
<CAPTION>
--------------------
<S> <C> <C>
Commercial and other................ $ 111,990 $ 111,454
Real estate--
Residential....................... 291,578 307,217
Commercial and construction....... 45,107 52,628
Consumer............................ 62,294 54,535
<CAPTION>
--------------------
<S> <C> <C>
Gross loans....................... 510,969 525,834
Less--Unearned income............... 762 765
<CAPTION>
--------------------
<S> <C> <C>
Loans, net of unearned income..... $ 510,207 $ 525,069
<CAPTION>
--------------------
</TABLE>
The balance of impaired loans at December 31, 1997, was $3,723 while the
average balance for the year was $5,240. Impaired loans secured by real estate
totalled $2,398 and commercial loans totalled $1,325. The balance of impaired
loans at December 31, 1996 was $6,485, while the average balance for the year
was $7,543. No portion of the allowance for loan losses was allocated to the
impaired loans at December 31, 1997 and 1996. Interest income recognized on
impaired loans was approximately $625 in 1997 and $62 in 1996.
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 $48,808, or 9.5%,
of the total loan portfolio of the Corporation and are in the following areas:
6.02% in California; and 1.73% 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.
- --------------------------------------------------------------------------------
14
<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>
1997 1996 1995
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Beginning balance............ $ 8,364 $ 6,023 $ 4,228
Balances acquired (Note 2)... --0-- 2,982 1,946
Loans charged off............ (1,377) (839) (372)
Recoveries on loans.......... 533 198 221
Provision for loan losses.... --0-- --0-- --0--
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Ending balance............. $ 7,520 $ 8,364 $ 6,023
<CAPTION>
-------------------------------
</TABLE>
PREMISES AND EQUIPMENT: (6)
A summary of premises and equipment is detailed below:
<TABLE>
<CAPTION>
December 31
--------------------
<S> <C> <C>
1997 1996
<CAPTION>
--------------------
<S> <C> <C>
Land.................................. $ 2,820 $ 2,745
Buildings & improvements.............. 15,272 14,143
Leasehold improvements................ 474 478
Furniture and equipment............... 8,741 6,909
<CAPTION>
--------------------
<S> <C> <C>
Total............................... 27,307 24,275
Accumulated depreciation.............. (8,856) (6,974)
<CAPTION>
--------------------
<S> <C> <C>
Premises and equipment................ $ 18,451 $ 17,301
<CAPTION>
--------------------
</TABLE>
Depreciation expense for the year ended December 31, 1997, 1996, and 1995
was $1,698, $1,604, and $1,272, respectively.
The Corporation leases office space for its corporate headquarters under
an agreement expiring in the year 2002, 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. In December,
1997, PB committed to 26,000 square feet of office space in Oak Park, Illinois,
to use as an operations center to house all operating departments of PB which
are currently housed at various banking premises. This ten-year lease expires in
2008, with a five-year termination clause. Future minimum lease payments on
these operating leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Future Minimum
Year Lease Payments
<S> <C>
- --------------------------------------------------
1998............................. $ 457
1999............................. 514
2000............................. 504
2001............................. 511
Later years...................... 2,706
<CAPTION>
---------------
<S> <C>
Total minimum payments
required....................... $ 4,692
<CAPTION>
---------------
</TABLE>
Rental expenses for leases, included in the consolidated statements of
income as occupancy expenses, amounted to $233 in 1997, $177 in 1996, and $156
in 1995. 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
Year Net Lease Rentals
<S> <C>
- ----------------------------------------------------
1998............................. $ 123
1999............................. 32
2000............................. 10
2001............................. 10
Later years...................... 8
<CAPTION>
-----------------
<S> <C>
Total minimum net rentals........ $ 183
<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 $151 in 1997 and $157 in 1996.
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>
1997 1996 1995
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Federal
Current..................... $ 6,990 $ 2,361 $ 2,315
Deferred.................... 461 (311) 824
State:
Deferred.................... 41 --0-- --0--
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Provision for income
taxes.................... $ 7,492 $ 2,050 $ 3,139
<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 $2,836 in 1997, $54 in 1996,
and $1,609 in 1995.
- --------------------------------------------------------------------------------
15
<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, except 1997 where the taxable income in excess of $10
million is taxed at 35%.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
-------------------------------
Tax provision at Federal
statutory rate............. $ 7,572 $ 3,121 $ 5,314
Tax-exempt income........... (600) (690) (1,028)
Amortization of purchase
accounting assets and
goodwill and other
intangibles................ 808 619 692
Dividend received
deduction.................. (194) (207) (901)
Securities writedown........ --0-- (24) (240)
Other, net.................. (94) (769) (698)
-------------------------------
Provision for income
taxes................... $ 7,492 $ 2,050 $ 3,139
-------------------------------
</TABLE>
The components of and changes in the net deferred tax asset were as
follows:
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
<S> <C> <C>
--------------------
Deferred tax assets:
Allowance for loan losses......... $ 2,557 $ 2,249
Deferred compensation............. 633 631
Other reserves.................... 208 254
State tax operating loss
carryforward..................... 3,147 3,188
Federal regular tax operating loss
carryforward..................... 1,170 1,238
Alternative minimum tax credit
carryforward..................... 207 207
Other............................. 268 704
--------------------
Gross deferred tax assets......... 8,190 8,471
Valuation allowance............... (2,296) (2,296)
--------------------
Gross deferred tax assets, net of
valuation allowance.............. 5,894 6,175
--------------------
Deferred tax liabilities:
Partnership interests............. 810 397
Depreciation...................... 221 255
Purchase accounting adjustments... 605 592
Other............................. 433 419
Unrealized gain on securities..... 8,536 3,653
--------------------
Gross deferred tax
liabilities................... 10,605 5,316
--------------------
Net deferred tax asset
(liability)...................... $ (4,711) $ 859
--------------------
</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, 1997 and 1996 relates solely to the 1995 and 1996 state net operating loss
carryforward. Also included in the net deferred tax asset (liability) 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, 1997, the Federal net operating loss carryforward amounted to
approximately $3,440 which expires, if unused, in the years 1999 to 2001. At
December 31, 1997 and 1996, the State net operating loss carryforward amounted
to $42,098 and $42,510 which expires, if unused, in the years 2010 through 2012.
At December 31, 1997 and 1996, the Corporation had an alternative minimum
tax credit carryforward of approximately $207, which is not subject to
expiration.
BORROWINGS, FHLB ADVANCES AND(8)
NOTES PAYABLE:
Included in short-term borrowings are Federal Home Loan advances with the
following maturities and rates:
<TABLE>
<CAPTION>
Amount Rate Maturity
<S> <C> <C>
- ---------------------------------
$ 2,500 7.27% 5/6/98
2,500 7.44 5/6/99
-----
$ 5,000
-----
</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
- --------------------------------------------------------------------------------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
requirements of the parent company with an unaffiliated bank. At December 31,
1997, the notes payable totalled $20,000 of a $35,000 line of credit. Of the
$20,000 outstanding, $19,000 was tied to LIBOR and the remaining was tied to
prime rate. Total outstandings were $32,800 at December 31, 1996.
The notes payable mature on October 31, 1998 and are secured by stock of
the Corporation's subsidiary bank stock and by certain equity securities of the
parent company.
(9)
RETIREMENT AND INCENTIVE PLANS:
The Corporation maintains a trusteed, profit-sharing plan covering
substantially all employees who have met age and service requirements. Annual
contributions are made in accordance with a resolution passed by the Boards of
Directors of the Corporation and each subsidiary bank and amounted to $434 for
1997, $424 for 1996, $414 for 1995.
The Corporation and each subsidiary bank maintain profit incentive plans
which are available to certain key executives. Distributions are based on the
performance levels of the Corporation and each subsidiary bank, and are subject
to the Board of Directors' approval.
(10)
CAPITAL STOCK AND EARNINGS PER
SHARE:
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.
As of December 31, 1997, Pinnacle adopted SFAS No. 128, "Earnings per
Share". Basic earnings per share were computed by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted
earnings per share were determined on the assumptions that stock options
outstanding were converted on January 1 of each applicable year. The following
table shows the computation of shares outstanding for calculating earnings per
share.
<TABLE>
<CAPTION>
For the Year ended December 31
---------------------------------
1997
---------------------------------
Per Share
Income Shares Amount
<S> <C> <C> <C>
---------------------------------
Basic Earnings Per Share
Income available to common
stockholders............... $ 14,429 7,540,505 $ 1.91
---
Common stock equivalents:
Stock option
outstanding.............. 86,250
Treasury stock method..... (76,463)
---------
Net....................... 9,787
---------
Diluted Earnings Per Share
Income available to common
stockholders plus assumed
conversions................ $ 14,429 7,550,292 $ 1.91
<CAPTION>
---------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Year ended December 31
-----------------------------------
1996
-----------------------------------
Per Share
Income Shares Amount
<S> <C> <C> <C>
-----------------------------------
Basic Earnings Per Share
Income available to common
stockholders............... $ 7,127 6,810,215 $ 1.05
---
Common stock equivalents:
Stock option
outstanding.............. 65,250
Treasury stock method..... (46,233)
---------
Net....................... 19,017
---------
Diluted Earnings Per Share
Income available to common
stockholders plus assumed
conversions................ $ 7,127 6,829,232 $ 1.04
<CAPTION>
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Year ended December 31
---------------------------------
1995
---------------------------------
Per Share
Income Shares Amount
<S> <C> <C> <C>
---------------------------------
Basic Earnings Per Share
Income available to common
stockholders............... $ 12,493 6,603,885 $ 1.89
---
Common stock equivalents:
Stock option
outstanding.............. 70,749
Treasury stock method..... (48,082)
---------
Net....................... 22,667
---------
Diluted Earnings Per Share
Income available to common
stockholders plus assumed
conversions................ $ 12,493 6,626,552 $ 1.89
<CAPTION>
---------------------------------
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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 1997, 1996,
and 1995 giving effect to stock splits. At December 31, 1997, 86,250 option
shares under the 1990 Plan were outstanding. All options outstanding, except
those issued in 1997, may be exercised at any time during the five year period
from the date of grant. Of the options granted in 1997, 14,607 were exercisable
at date of grant; 12,369 are exercisable January 21, 1998; 9,738 are exercisable
January 21, 1999 and January 21, 2000; and the remaining are exercisable on
January 21, 2001. All are immediately exercisable upon a change in control.
<TABLE>
<CAPTION>
Weighted
Number of Average Price
Shares Per Share
<S> <C> <C>
--------------------------
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
Options granted.............. 75,000 20.00
Options exercised............ (54,000) 23.42
--------------------------
Outstanding at December 31,
1997.......................... 86,250 $ 20.28
--------------------------
</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, 1997 are as follows:
<TABLE>
<CAPTION>
Exercise Number of
Price Shares Maturity
<S> <C> <C>
- -----------------------------------
$ 19.09 7,500 1/17/00
21.33 3,750 1/23/01
18.67 7,500 1/21/02
20.53 67,500 1/21/02
-----------
86,250
-----------
</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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
--------------------
Net Income:
As reported......... $ 14,429 $ 7,127
As adjusted......... 13,420 7,116
Diluted Earnings Per
Share:
As reported......... $ 1.91 $ 1.04
As adjusted......... 1.78 1.04
</TABLE>
The fair value of the options granted during 1997 is estimated to be $4.14
for those exercisable at $18.67 and $3.54 for those exercisable at $20.53. These
were estimated using the Black-Scholes option value model with the following
assumptions for 1997: a dividend yield of 4.51%; a risk-free interest rate of
6.33%; volatility of 33.59%; and an expected average life of three years. The
fair value of the options granted in 1996 was $4.23 with the following
assumptions: a dividend yield of 4.37%; a risk-free interest rate of 5.95%;
volatility of 24.38%; and an average life of five years.
- --------------------------------------------------------------------------------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
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,
1996..................... $ 8,472
Additions................. 1,258
Collections............... (2,086)
---------
Balance, December 31,
1997..................... $ 7,644
---------
</TABLE>
Directors of the Corporation and subsidiaries were customers of and had
transactions with the subsidiaries in the ordinary course of business during the
period presented above and additional transactions may be expected in the
future. In management's opinion, all outstanding loans, commitments and deposit
relationships included in such transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others, and did not involve more than a normal
risk of collectibility or other unfavorable features.
One director of the Corporation is a partner in a law firm that provides
various legal services to the Corporation and its subsidiary banks. Fees for
these services were $268 in 1997, $229 in 1996, and $250 in 1995.
CONTINGENCIES: (13)
The Corporation and the subsidiary banks are subject to 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 $656 related to sales under this program.
(14)
DISCLOSURES ABOUT ESTIMATED FAIR
VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires the disclosure of the fair value of financial instruments for which it
is practicable to estimate that value, and the disclosure of the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
(A)
CASH AND DUE FROM BANKS, FEDERAL
FUNDS SOLD AND INTEREST BEARING DEPOSITS -
For these short-term instruments, the carrying value approximates fair
value because these instruments are short-term in nature and do not present
unanticipated credit concerns.
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.
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, 1997. 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.
- --------------------------------------------------------------------------------
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
(E)
SHORT TERM BORROWINGS AND NOTES
PAYABLE -
Rates currently available to the Corporation and Subsidiaries for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
OFF-BALANCE SHEET FINANCIAL (F)
INSTRUMENTS -
The fair value of unrecognized financial instruments including commitments
to extend credit, standby letters of credit and financial guarantees are
insignificant and, therefore, not presented.
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1997
--------------------
Estimated
Carrying Fair
Value Value
<S> <C> <C>
--------------------
Financial assets:
Cash and due from banks,
Federal funds sold and
interest-bearing deposits.... $ 34,131 $ 34,131
Securities.................... 434,234 434,234
Loans, net.................... 502,687 508,952
Financial liabilities:
Deposits...................... (846,469) (840,104)
Short-term borrowings......... (38,525) (38,525)
Notes payable................. (20,000) (20,000)
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------
Estimated
Carrying Fair
Value Value
<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>
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.
(15)
FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK:
The Corporation has, through its subsidiary banks, financial instruments
with off-balance sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated financial
statements. The contract amounts of those instruments reflect the extent of
involvement the subsidiary banks have in particular classes of financial
instruments. The Corporation is not using any derivative products for hedging or
other purposes.
The subsidiary banks' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. Each subsidiary bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. At December 31, 1997 and 1996, the
subsidiary banks had the following financial instruments with off-balance-sheet
risk:
<TABLE>
<CAPTION>
Contract Amount
--------------------
1997 1996
<S> <C> <C>
--------------------
Commitments to extend credit....... $ 89,243 $ 72,882
Standby letters of credit and
financial guarantees written...... 3,642 3,890
</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
- --------------------------------------------------------------------------------
20
<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, 1998, the subsidiary banks could have declared approximately $4,308
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, 1997 and 1996, the non-interest
bearing cash balances maintained to meet reserve requirements were $13,632 and
$11,750, 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, 1997, that the Corporation and its subsidiary banks meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, 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.
- --------------------------------------------------------------------------------
21
<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, 1997
and 1996:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
Minimum Requirements Prompt Corrective
Actual Action Provisions
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<CAPTION>
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
Tier One Capital.................................. $ 75,807 15.71% $ 19,298 4.00% $ 28,947 6.00%
Total (Tier Two) Capital.......................... 81,859 16.97 38,596 8.00 48,245 10.00
Leverage Capital.................................. 75,807 7.49 40,469 4.00 50,587 5.00
PINNACLE BANK:
Tier One Capital.................................. 60,922 14.96 16,293 4.00 24,440 6.00
Total (Tier Two) Capital.......................... 66,037 16.21 32,587 8.00 40,734 10.00
Leverage Capital.................................. 60,922 7.21 33,808 4.00 42,260 5.00
PBQC:
Tier One Capital.................................. 7,649 15.73 1,945 4.00 2,918 6.00
Total (Tier Two) Capital.......................... 8,257 16.98 3,891 8.00 4,863 10.00
Leverage Capital.................................. 7,649 6.53 4,682 4.00 5,853 5.00
DECEMBER 31, 1996
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
</TABLE>
(17)
OTHER INCOME AND OTHER EXPENSE:
The following is the detail of the "Other income" and "Other expense"
lines on the Consolidated Statements of Income for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
-------------------------------
Other income:
Banking services........ $3,230 $3,016 $ 3,139
Trust services.......... 2,549 2,283 2,307
Other income............ 2,657 2,263 1,779
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total................. $8,436 $7,562 $ 7,225
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Other expense:
Equipment expense....... $1,772 $1,647 $ 1,317
FDIC insurance
premium................ 257 1,044 984
Data processing......... 1,387 1,150 1,206
Other expense........... 5,457 4,474 3,302
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Total................. $8,873 $8,315 $ 6,809
<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.
- --------------------------------------------------------------------------------
22
<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>
1997 1996
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash in subsidiary banks....................................................... $ 61 $ 13
Investment in subsidiary banks................................................. 91,891 106,176
Goodwill and purchase accounting adjustments................................... 2,162 2,460
Securities..................................................................... 48,217 28,234
(amortized cost: 1997--$25,895
1996--$19,573)
Other assets................................................................... 815 624
--------------------
Total........................................................................ $ 143,146 $ 137,507
--------------------
Liabilities and stockholders' equity:
Notes payable.................................................................. $ 20,000 $ 32,800
Accrued income taxes........................................................... 6,623 1,356
Other liabilities.............................................................. 1,065 2,527
Stockholders' equity........................................................... 115,458 100,824
--------------------
Total........................................................................ $ 143,146 $ 137,507
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
For the year ended
December 31
-------------------------------
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks........................................... $ 12,534 $ 8,653 $ 10,013
Dividend and interest income.............................................. 807 831 1,157
Net securities gains...................................................... 2,842 --0-- 695
Other income.............................................................. 29 252 44
-------------------------------
Total................................................................... 16,212 9,736 11,909
Expenses:
Interest on notes payable................................................. 1,853 1,745 1,964
Employee compensation and benefits........................................ 701 608 639
Amortization of goodwill.................................................. 409 409 409
Other expenses............................................................ 334 643 580
-------------------------------
Total................................................................... 3,297 3,405 3,592
Income before income taxes and undistributed earnings of subsidiary banks... 12,915 6,331 8,317
Provision (benefit) for income taxes...................................... 334 (1,050) (1,383)
Equity in undistributed earnings of subsidiary banks...................... 1,848 (254) 2,793
-------------------------------
Net income.................................................................. $ 14,429 $ 7,127 $ 12,493
-------------------------------
</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
-------------------------------
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 14,429 $ 7,127 $ 12,493
Adjustments to reconcile net income to net cash provided by operating
activities:
Excess of equity in undistributed earnings of subsidiaries (over) under
dividends received................................................... (1,848) 254 (2,793)
Amortization of goodwill............................................... 409 409 409
Gain on sales of securities............................................ (2,842) --0-- (695)
(Increase) decrease in other assets.................................... (191) 275 (458)
Increase (decrease) in other liabilities and accrued income taxes...... (329) 2,457 (170)
Other, net............................................................. 286 176 (116)
-------------------------------
Total adjustments.................................................... (4,515) 3,571 (3,823)
Net cash provided by operating activities............................ 9,914 10,698 8,670
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note 1).............. --0-- (6,022) (23,414)
Purchases of securities.................................................. (15,723) (8,930) (108)
Proceeds from sales of securities........................................ 12,242 1,862 3,057
Proceeds from maturities and paydowns of securities...................... --0-- 500 2,829
-------------------------------
Net cash used for investing activities............................... (3,481) (12,590) (17,636)
Cash flows from financing activities:
Stock redemption--Subsidiary bank........................................ 15,737 --0-- --0--
Proceeds from notes payable.............................................. 21,600 24,500 31,800
Principal reductions of notes payable.................................... (34,400) (12,300) (16,600)
Issuance of common stock................................................. 779 132 454
Purchase and retirement of common stock.................................. (3,444) (4,797) (1,731)
Dividends paid........................................................... (6,657) (5,639) (5,109)
-------------------------------
Net cash provided by (used for) financing activities................. (6,385) 1,896 8,814
Net increase (decrease) in cash and cash equivalents....................... 48 4 (152)
Cash and cash equivalents at beginning of year............................. 13 9 161
-------------------------------
Cash and cash equivalents at end of year................................... $ 61 $ 13 $ 9
-------------------------------
Cash paid during year for:
Interest................................................................. $ 1,969 $ 1,385 $ 2,031
Income taxes............................................................. 6,506 1,525 2,207
</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, 1997
and 1996, 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, 1997. 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, 1997 and 1996 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 14, 1998
- --------------------------------------------------------------------------------
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>
1997 1996 1995 1994 1993
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income...................................... $ 68,667 $ 56,274 $ 53,297 $ 42,920 $ 40,779
Interest expense..................................... 35,309 29,118 25,739 16,640 17,670
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income................................ 33,358 27,156 27,558 26,280 23,109
Provision for loan losses............................ --0-- --0-- --0-- 900 1,700
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after provision for loan
losses............................................ 33,358 27,156 27,558 25,380 21,409
Other income......................................... 8,436 7,562 7,225 5,461 5,616
Net securities gains (losses)........................ 8,340 159 4,731 (9,845) 8,740
Other expense........................................ 28,213 25,700 23,882 21,060 20,467
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes......................... 21,921 9,177 15,632 (64) 15,298
Income tax provision (benefit)....................... 7,492 2,050 3,139 (2,319) 4,005
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before cumulative effect of change in
accounting for income taxes....................... 14,429 7,127 12,493 2,255 11,293
Cumulative effect of change in accounting for
income taxes...................................... --0-- --0-- --0-- --0-- 1,700
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income........................................... $ 14,429 $ 7,127 $ 12,493 $ 2,255 $ 12,993
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per common share data:
Earnings per share
Income before cumulative effect of change in
accounting for income taxes
Basic.......................................... $ 1.91 $ 1.05 $ 1.89 $ 0.34 $ 1.68
Diluted........................................ 1.91 1.04 1.89 0.34 1.66
Net income
Basic.......................................... 1.91 1.05 1.89 0.34 1.93
Diluted........................................ 1.91 1.04 1.89 0.34 1.91
Book value....................................... 15.39 13.23 12.03 10.41 10.54
Dividends paid................................... 0.88 0.83 0.77 0.72 0.64
Average common shares outstanding
Basic............................................ 7,541 6,810 6,604 6,647 6,737
Diluted.......................................... 7,550 6,829 6,627 6,685 6,789
At end of year:
Total assets....................................... $1,034,811 $1,048,376 $ 818,697 $ 684,892 $ 722,382
Loans.............................................. 510,207 525,069 309,600 248,404 248,076
Portfolio funds.................................... 437,262 439,332 443,755 389,316 420,742
Deposits........................................... 846,469 877,552 712,805 599,879 633,613
Notes payable...................................... 20,000 32,800 20,600 5,400 --0--
Stockholders' equity............................... 115,458 100,824 78,961 68,836 70,856
Selected financial ratios:
Return on average assets........................... 1.43% 0.82% 1.55% 0.32% 1.80%
Return on average equity........................... 15.36 9.02 18.09 3.35 18.88
Net interest margin................................ 3.69 3.51 3.90 4.28 3.70
Dividend payout.................................... 46.14 79.12 40.89 213.70 33.22
Average equity to average assets................... 9.28 9.05 8.55 9.61 9.52
Allowance for loan losses to year-end loans........ 1.47 1.59 1.95 1.70 1.43
Net charge-offs to average loans................... 0.16 0.17 0.05 0.09 0.48
Nonperforming assets to year-end assets............ 0.69 0.99 1.01 0.54 1.29
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
NET INCOME
1997 COMPARED TO 1996
NET INCOME
Consolidated net income was $14,429,000, or $1.91 per share in 1997, an increase
from the $7,127,000, or $1.04 per share, earned in 1996. All per share amounts
reflect the adoption of SFAS No. 128, "Earnings per Share", and are shown on a
diluted basis. The return on average assets was 1.43% for 1997 and 0.82% for
1996. For each year, the return on average equity was 15.4% and 9%,
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 1997 included pre-tax securities gains of $8,340,000 compared to
pre-tax gains in 1996 of $159,000. The net gains in 1997 consisted of gains of
$5.5 million from the sales of U. S. Treasury securities as part of Pinnacle's
term portfolio program and gains of $2.8 million recorded on the sales of equity
securities as part of Pinnacle's equity investment program in other financial
institutions.
Net interest income increased 23% in 1997 compared to the previous year. The
increase was the result of a 16% rise in average earning assets. The increased
level of earning assets was the result of the acquisition of FinSec completed at
the end of the third quarter of 1996.
Other income increased 12% while other expense increased 10% on a year-to-year
basis. The increases in these categories were primarily attributable to the
acquisition completed in September, 1996.
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 $928,104,000 in 1997, or 16% higher than
the previous year. The increase in average earning assets was due to the
acquisition. The net interest margin increased 18 basis points to 3.69% in 1997
compared to 3.51% in 1996. The increase is the result of the increase in yields
earned on taxable securities as well as the increase in the percent of average
loans (a higher yielding category) to average earning assets to 56% in 1997 from
47% in 1996. These increases were slightly offset by the increase in deposit
costs of 13 basis points. Net interest income on a fully-taxable equivalent
basis was $34,213,000, or 22% higher than a year ago.
The yield earned on total earning assets was 7.49% in 1997 compared to 7.14% in
1996. The increase resulted from the increased level of yields earned on taxable
securities. The average rate on taxable securities increased 40 basis points
while the average balance decreased approximately $9 million. The effect of the
acquisition of FinSec is evident in the effect loans had on interest income.
While the yield on loans remained flat at 8.34%, the increase in average loans
outstanding of $141 million added approximately $12 million to net interest
income. The yield earned on interest-bearing deposits decreased to 3.72% due to
continued maturity of interest-bearing certificates. The yield on non-taxable
securities decreased 44 basis points as high-yielding zero coupon municipals
were called and paid down. Total interest income, on a fully taxable equivalent
basis, increased $12,257,000.
The average cost of interest-bearing liabilities increased 14 basis points to
4.35% in 1997 from 4.21% in 1996. The average rate paid on interest-bearing
demand deposits decreased slightly by 5 basis points to 2.02% while the rate
paid on savings deposits decreased 7 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 slightly to
3.47%, indicating Pinnacle has maintained a level amount of high money market
customer balances which are offered a third level of interest rates tied to a
Treasury index. The average rate paid on other time deposits has increased 11
basis points primarily due to the acquisition. Certain of SF time deposits were
brokered deposits and higher "special rate" deposits which matured throughout
1997 and were not renewed. Average balances of
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
other time deposits for SF decreased $32 million. Average balances in savings
deposits have increased on a year-to-year basis due to the acquisition, but are
also lower on a fourth quarter-to-fourth quarter comparison, decreasing $12
million as customers continue to move their money to higher paying time deposits
or mutual funds. On the positive side, both interest-bearing and
noninterest-bearing deposits increased $4 million on a fourth quarter-to-fourth
quarter basis. Pinnacle continues to monitor the needs of its current customer
base as well as its potential customer base, and in the fourth quarter began
marketing a "package" of deposit products, which included a free checking
account, and will continue to market this and other deposit products to meet its
customer's needs. Interest expense paid on all deposits increased $5,045,000.
The average balance in short-term borrowings increased $17 million. The increase
related to the acquisition which included fixed-term advances from the Federal
Home Loan Bank, which was included in balances for the entire year, as well as
the liquidity needs of funding other time deposit maturities. The average rate
on these borrowings remained flat; however, the increase in average balances
resulted in increased interest expense of $1,038,000. The interest rate paid on
notes payable dropped slightly to 7.08% as the indices to which these are tied
remained relatively flat throughout the year. Average notes payable balances
slightly increased.
Interest expense for 1997 has increased $6,191,000 compared to 1996. An increase
in the average interest-bearing liabilities of $119 million has primarily added
to the increase.
A detailed Analysis of Net Interest Income for the three years ended December
31, 1997, 1996, and 1995 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>
Year ended
(Dollars in thousands) Year ended Year ended December 31, 1995
December 31, 1997 December 31, 1996 --------------------
-------------------------------- --------------------------------
<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......................... $ 1,746 $ 65 3.72% $ 5,344 $ 252 4.72% $ 19,137 $ 1,063
Taxable securities............. 390,847 24,154 6.18 399,903 23,133 5.78 379,223 23,347
Nontaxable securities.......... 19,814 2,303 11.62 21,928 2,645 12.06 36,140 3,895
Loans.......................... 515,697 43,000 8.34 374,647 31,235 8.34 309,818 26,454
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-earning
assets...................... 928,104 69,522 7.49 801,822 57,265 7.14 744,318 54,759
Noninterest-earning assets:
Cash and due from banks........ 26,194 24,486 23,755
Allowance for loan losses...... (7,989) (6,750) (6,383)
Other assets................... 66,204 53,369 46,455
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets................. $1,012,513 $ 872,927 $ 808,145
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $ 89,306 $ 1,806 2.02% $ 88,897 $ 1,841 2.07% $ 86,573 $ 1,732
Savings deposits............... 244,055 7,084 2.90 217,175 6,451 2.97 219,852 6,852
Money market deposits.......... 46,976 1,631 3.47 47,497 1,634 3.44 50,732 1,489
Other time deposits............ 375,616 21,169 5.64 302,128 16,719 5.53 258,569 13,664
Short-term borrowings.......... 29,380 1,766 6.01 12,092 728 6.02 589 39
Notes payable.................. 26,175 1,853 7.08 24,500 1,745 7.12 24,684 1,964
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing
liabilities................. 811,508 35,309 4.35 692,289 29,118 4.21 640,999 25,740
Noninterest-bearing liabilities:
Demand deposits................ 99,315 93,901 91,481
Other liabilities.............. 7,746 7,756 6,588
Stockholders' equity........... 93,944 78,981 69,077
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total liabilities and
stockholders'
equity...................... $1,012,513 $ 872,927 $ 808,145
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income and margin..... $ 34,213 3.69% $ 28,147 3.51% $ 29,019
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in thousands)
<S> <C>
Rate
<S> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits at
banks and Federal funds
sold......................... 5.55%
Taxable securities............. 6.16
Nontaxable securities.......... 10.78
Loans.......................... 8.54
-----
<S> <C>
Total interest-earning
assets...................... 7.36
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...................... 2.00%
Savings deposits............... 3.12
Money market deposits.......... 2.94
Other time deposits............ 5.28
Short-term borrowings.......... 6.62
Notes payable.................. 7.96
------
<S> <C>
Total interest-bearing
liabilities................. 4.02
Noninterest-bearing liabilities:
Demand deposits................
Other liabilities..............
Stockholders' equity...........
<S> <C>
Total liabilities and
stockholders'
equity......................
<S> <C>
Net interest income and margin..... 3.90%
- ----------------------------------- -----
</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, 1997,
1996 and 1995 were, in thousands, $854, $991, and $1,462, respectively. The
average balance of nonaccrual loans is included in the total loans category in
each year. The average balances do not include the effect 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) 1997 versus 1996 1996 versus 1995
------------------------------- -------------------------------
<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................................................... $ (170) $ (17) $ (187) $ (766) $ (45) $ (811)
Taxable securities...................................... (524) 1,545 1,021 1,273 (1,487) (214)
Nontaxable securities................................... (255) (87) (342) (1,532) 282 (1,250)
Loans................................................... 11,760 5 11,765 5,535 (754) 4,781
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest income................................. 10,811 1,446 12,257 4,510 (2,004) 2,506
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest paid on:
Interest-bearing demand deposits........................ 8 (43) (35) 46 63 109
Savings deposits........................................ 798 (165) 633 (83) (318) (401)
Money market deposits................................... (18) 15 (3) (95) 240 145
Other time deposits..................................... 4,067 383 4,450 2,302 753 3,055
Short-term borrowings................................... 1,041 (3) 1,038 762 (73) 689
Notes payable........................................... 119 (11) 108 (15) (204) (219)
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest expense................................ 6,015 176 6,191 2,917 461 3,378
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....................................... $ 4,796 $ 1,270 $ 6,066 $ 1,593 $ (2,465) $ (872)
<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.
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 1997 and 1996. Pinnacle had
net charge-offs of $844,000, or 0.16%, of average loans compared to $641,000, or
0.17%, of average loans in 1996. The ratio of the allowance for loan losses to
total loans was 1.47% at December 31, 1997 compared to 1.59% of a year ago.
While Pinnacle's ratio of allowance for loan losses to total loans has decreased
from a year ago, 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 Pinnacle's problem loans
originated from the acquisitions of FinSec and AFC. As part of each merger
agreement, additional provisions were made to each of these financial
institution's allowance for loan losses prior to the
- --------------------------------------------------------------------------------
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
acquisition to cover any loss potential of the problem loans which were
designated during Pinnacle's due diligence. Second, 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%. Third, the
total ratio of non-performing loans to total loans declined during 1997 to 1.31%
at December 31, 1997 from 1.79% at year-end 1996. Finally, 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 and no new significant problem credits have been identified. Table 3
provides data regarding the analysis of the allowance for loan losses.
At December 31, 1997 total nonperforming loans, defined as nonaccrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $6,679,000 compared with $9,404,000 of a year ago. The decrease in
nonperforming loans is significant in that a majority of the reduction in these
loans from year-end 1996, or 69% of the decrease, resulted in payments and
payoffs of nonperforming loans as opposed to charging off the loans. Loans
considered impaired under SFAS No. 114 and disclosed in the Notes to the
Financial Statements are included in the nonperforming category. These included
nonaccrual loans, restructured loans, and loans classified as at least doubtful
under Pinnacle's credit risk classification system.
In addition, Pinnacle held $442,000 classified as other real estate owned
("OREO") at December 31, 1997. Other real estate includes property acquired
through 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 1997,
all property carried at December 31, 1996 was sold with no significant impact on
the results of operations.
Total nonperforming assets were $7,121,000, or 1.39% of total loans plus other
real estate owned at December 31, 1997. Total nonperforming assets were 0.69% of
total assets at year end. Table 4 provides data regarding nonperforming assets.
------------------------
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>
1997 1996 1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding..................... $ 515,697 $ 374,647 $ 309,818 $ 248,000 $ 238,826
-----------------------------------------------------
Total loans at year end....................... $ 510,207 $ 525,069 $ 309,600 $ 248,404 $ 248,076
-----------------------------------------------------
Allowance for loan losses at beginning of
year........................................ $ 8,364 $ 6,023 $ 4,229 $ 3,547 $ 3,001
Balance acquired.............................. --0-- 2,982 1,945 --0-- --0--
Loans charged off:
Commercial and other........................ 769 365 257 186 769
Consumer.................................... 132 125 115 78 107
Real estate................................. 476 349 --0-- 42 552
-----------------------------------------------------
Total..................................... 1,377 839 372 306 1,428
-----------------------------------------------------
Recoveries of loans previously charged off:
Commercial and other........................ 81 138 168 14 126
Consumer.................................... 63 48 53 65 86
Real estate................................. 389 12 --0-- 9 62
-----------------------------------------------------
Total..................................... 533 198 221 88 274
-----------------------------------------------------
Net loans charged off......................... 844 641 151 218 1,154
-----------------------------------------------------
Provision charged to expense.................. --0-- --0-- --0-- 900 1,700
-----------------------------------------------------
Allowance for loan losses at end of year...... $ 7,520 $ 8,364 $ 6,023 $ 4,229 $ 3,547
-----------------------------------------------------
Ratio of net charge-offs to average loans
outstanding................................. 0.16% 0.17% 0.05% 0.09% 0.48%
-----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
TABLE 4. NONPERFORMING ASSETS
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
Nonaccrual................................................... $ 4,392 $ 7,441 $ 4,791 $ 748 $ 5,283
Past due 90 days or more and still accruing.................. 1,064 633 2,293 552 585
Restructured................................................. 1,223 1,330 931 --0-- --0--
-----------------------------------------------------
Nonperforming loans........................................ $ 6,679 $ 9,404 $ 8,015 $ 1,300 $ 5,868
-----------------------------------------------------
Other real estate owned...................................... $ 442 $ 939 $ 284 $ 2,416 $ 3,444
-----------------------------------------------------
Nonperforming assets....................................... $ 7,121 $ 10,343 $ 8,299 $ 3,716 $ 9,312
-----------------------------------------------------
Ratios:
Nonperforming loans/total loans............................ 1.31% 1.79% 2.59% 0.52% 2.37%
Nonperforming assets/total assets.......................... 0.69 0.99 1.01 0.54 1.29
Net charge-offs/average loans.............................. 0.16 0.17 0.05 0.09 0.48
Allowance for loan losses/total loans...................... 1.47 1.59 1.95 1.70 1.43
Allowance for loan losses/nonperforming loans.............. 112.59 88.94 75.15 325.28 60.44
</TABLE>
------------------------
NET SECURITIES GAINS
In 1997, net securities gains were a significant factor in the earnings. On a
pre-tax basis, net securities gains were $8,340,000 compared to $159,000 in
1996. The net gains realized in 1997 consisted of gross gains of $9,527,000 and
gross losses of $1,187,000.
The net gains in 1997 consisted of gains of approximately $5.5 million in
Pinnacle's U. S. Government securities portfolio, and gains of approximately
$2.8 million of equity securities as part of Pinnacle's equity investment
program in other financial institutions. The gains in 1996 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.
In prior years, Pinnacle has made decisions to sell its U. S. Government
portfolio, take applicable gains and losses and reinvest in acceptable
maturities when the slope of the yield curve and the reinvestment rate were
acceptable in terms of managing Pinnacle's interest rate risk. 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 slope
program, the yield on Pinnacle's U. S. Government portfolio has outperformed the
U. S. Treasury yield by 29 basis points. In 1997, due to the relative flatness
of the yield curve, the portfolio was approximately the same as the Index.
Management reviewed other methods of enhancing the yield of the term portfolio
and in May, 1997, began utilizing a reverse repurchase and repurchase agreement
program whereby approximately $325 million was loaned to an unaffiliated broker
and collateralized in return by similar securities. This transaction involves
the utilization of three-year Treasuries and meets the accounting requirements
of netting assets and liabilities on the balance sheet. Greater interest spread
occurs in this transaction when the securities involved are the newly auctioned
three-year Treasuries. Management reviews the strategy, on an ongoing basis, to
determine if the sale of its portfolio at auction date is acceptable upon review
of the reinvestment rate and term as it relates to the management of the
interest rate risk of the organization.
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 $5,887,000 for 1997 compared to
$5,279,000 in 1996. The increase was due primarily to the acquisition. Trust
services increased 12% due primarily to the increase in market value of assets
under management, to which a significant amount of fee income is tied. Assets
under management at year end amounted to $320,000,000, or 19% above the total
one year earlier. The increase in the amount of assets under management was also
primarily a result of the increase in market value of assets under management.
NON-INTEREST EXPENSE
Non-interest expense totalled $28,213,000, an increase of 10% of a year ago.
Employee compensation and benefits increased 11% with the majority
- --------------------------------------------------------------------------------
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
of the increase due to the full year of compensation for employees from the 1996
acquisition. Occupancy expense increased 5% primarily due to the acquisition.
Other expense increased 7%, primarily due to the acquisition which included
increased goodwill amortization, increased data processing expenses and
consulting expenses which were paid to former SF employees.
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 higher level of
pre-tax income, there was an increase in the Federal tax provision to $7,492,000
compared to $2,050,000 of a year ago. There was a small deferred provision for
state income taxes in 1997 as Pinnacle realized a portion of the state tax net
operating loss carryforward recognized in 1994. See Note 7 to the Consolidated
Financial Statements for additional detail on the provision for taxes.
NET INCOME
1996 COMPARED TO 1995
NET INCOME
Consolidated net income was $7,127,000, or $1.04 per share, on a 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, as well as the adoption of SFAS No. 128. The return on average
assets was 0.82% for 1997 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
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, 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 was 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
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
- --------------------------------------------------------------------------------
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 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.
PROVISION FOR LOAN LOSSES
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 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
- --------------------------------------------------------------------------------
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and disclosed in the Notes to the Financial Statements are included in the
non-performing category. 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. 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. 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.
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.
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 increase 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 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
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.
CASH EARNINGS
Most of Pinnacle's acquisitions have been made with both the issuance of shares
of common stock and cash or cash only and, as a result, the purchase method of
accounting was utilized. This method created goodwill, which is the difference
between the fair value of assets purchased and the underlying historical cost of
the assets purchased. Pinnacle's goodwill is being amortized as a non-cash
reduction of net income over time periods from ten to twenty years. If these
acquisitions had met stringent accounting rules and no cash had been exchanged,
the pooling of interest method of accounting would have been used. There would
be no goodwill created and no reduction in net income as a result of the
amortization of that goodwill. By computing cash earnings and related ratios,
analysts and peer financial institutions have
- --------------------------------------------------------------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
been equalizing the difference these two accounting methods have on bank
earnings and earnings per share. The following table outlines Pinnacle's cash
earnings and related ratios.
(IN THOUSANDS; EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Twelve Months Ended
December 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
-------------------------------
Net income............. $ 14,429 $ 7,127 $ 12,493
Goodwill
amortization.......... 2,394 2,033 1,885
-------------------------------
Cash net income........ $ 16,823 $ 9,160 $ 14,378
-------------------------------
Cash EPS:
Basic................ $ 2.23 $ 1.35 $ 2.18
Diluted.............. 2.23 1.34 2.17
Cash ROA:
Average assets....... $1,012,513 $ 872,927 $ 808,145
Average goodwill..... 24,237 20,445 19,874
-------------------------------
Average tangible
assets.............. $ 988,276 $ 852,482 $ 788,271
-------------------------------
Cash ROA............... 1.70% 1.07% 1.82%
Cash ROE:
Average equity....... $ 93,944 $ 78,981 $ 69,077
Average goodwill..... 24,237 20,445 19,874
-------------------------------
Average tangible
equity.............. $ 69,707 $ 58,536 $ 49,203
-------------------------------
Cash ROE............... 24.13% 15.65% 29.22%
</TABLE>
BALANCE SHEET
Total assets were $1,034,811,000 at December 31, 1997, or 1% lower than total
assets of $1,048,376,000 at year-end 1996.
SECURITIES
Until the SF acquisition, Pinnacle's securities portfolio was its most
significant Balance Sheet asset and still totals 42% 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 $434,234,000 on December 31, 1997 and consisted of U. S.
Government securities of $355,925,000; mortgage-backed securities and
collateralized mortgage obligations totalled $4,615,000; State and municipal
bonds totalled $22,242,000 and corporate and other securities totalled
$51,452,000. Total securities remained relatively the same in 1997 as in 1996.
U. S. Government securities decreased $17 million in 1997. Because these
securities are available for sale, they are utilized to handle liquidity needs
and, when sold, reductions are made in Federal funds borrowings. Corporate and
other securities increased $20 million due to purchases of equity securities by
the parent company as well as the increased market value of those same
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 $510,207,000 at December 31, 1997, a decrease of 3% from a year
ago. Real estate loans decreased $15 million, with the majority of the decrease
from loans acquired in the SF acquisition. As anticipated, paydowns made in
purchased participated loans totalled approximately $10 million and paydowns in
commercial real estate totalled approximately $5 million. Absent the effect of
the paydowns in participated loans, loans remained stable. The loan to asset
ratio was 49%, slightly down from 50% of a year ago, and still substantially
lower than the peer group ratio of 60%. Management's goal continues to be growth
in the loan portfolio and has conservatively planned for 4% growth in 1998, with
continued planned runoff of its purchased participation portfolio at SF.
At December 31, 1997, Pinnacle's mix of loans consisted of 66% in real estate
loans, 22% in commercial loans and the remainder in consumer loans. This mix
remained consistent with balances at year-end 1996. See Note 4 in the Notes to
Consolidated Financial Statements for a detailed analysis of loans by
composition and geographic mix.
DEPOSITS
Total deposits were $846,469,000 at December 31, 1997, or 4% lower than year-end
1996. Table 5 provides an analysis of deposits by category for the past three
years.
While noninterest-bearing and interest-bearing demand deposits increased $11.1
million in 1997, or 6%, savings and other time deposits continued to decrease on
a year-to-year basis. Savings deposits decreased $15.7 million as customers
continued to move their money to non-deposit products such as mutual funds or
committed them to longer term other time deposits. Other time deposits decreased
$26.5 million. Other time deposits at SF dropped $32 million and were primarily
high rate "special" term certificates and brokered certificates. Excluding the
decrease from the runoff at SF, other time deposits increased $5.5 million,
including new money as well as customers shifting from savings to other time
deposits. Management
- --------------------------------------------------------------------------------
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
continues to take an active role to monitor interest rates on deposits and
provide products to meet customer and market needs.
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 the increase in rates paid on
time deposits which caused a shift from savings to time deposits.
TABLE 5. PERCENTAGE OF TOTAL DEPOSITS BY CATEGORY
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
Amount Pct. Amount Pct. Amount Pct.
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
Demand:
Noninterest-bearing........................ $ 104,644 12.4% $ 101,127 11.5% $ 96,715 13.6%
Interest-bearing........................... 96,092 11.4 88,489 10.1 89,230 12.5
Savings...................................... 239,061 28.2 249,918 28.5 211,615 29.7
Money market................................. 42,677 5.0 47,481 5.4 46,179 6.5
Other time less than $100,000................ 295,940 35.0 315,597 36.0 236,462 33.2
Other time greater than $100,000............. 68,055 8.0 74,940 8.5 32,604 4.5
-------------------------------------------------------------------
Total deposits............................... $ 846,469 100% $ 877,552 100% $ 712,805 100%
-------------------------------------------------------------------
</TABLE>
------------------------
GOODWILL
Goodwill and other intangibles amounted to $23,076,000, or 20% of stockholders'
equity, at December 31, 1997. Goodwill and other intangibles relate to premiums
paid in Pinnacle's acquisitions and goodwill amortization on a year-to-year
basis decreases earnings per share by approximately $0.32 per share.
DEFERRED INCOME TAXES
The primary components of Pinnacle's net deferred tax asset at December 31, 1997
are differences between the book and tax bases of securities and other assets,
partnership interests, allowance for loan losses, purchase 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, 1997, Pinnacle had a
consolidated Federal net operating loss carryforward of $3,440,000 the benefit
of which is included in the deferred tax assets and, if not used, expires in 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. At
December 31, 1997, Pinnacle had, for state tax purposes, a net operating loss
carryforward of $42,098,000 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 $38,525,000 at December 31,
1997 from $28,525,000 of a year ago. The increase was due to the maturity and
runoff of time deposits, primarily at SF. Table 6 highlights short-term
borrowings and FHLB advances for the prior three years.
- --------------------------------------------------------------------------------
37
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
TABLE 6. SHORT-TERM BORROWINGS AND FHLB ADVANCES
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
-------------------------------
Amount Outstanding:
At year end........................................................ $ 38,525 $ 28,525 $ --0--
Average during year................................................ 29,380 12,092 589
Maximum month end.................................................. 49,781 45,950 2,500
Average Interest Rate:
At year end........................................................ 7.27% 6.79% 6.73%
During year........................................................ 6.01 6.02 6.62
</TABLE>
------------------------
NOTES PAYABLE
Pinnacle had $20,000,000 outstanding in notes payable at December 31, 1997,
compared to $32,800,000 at December 31, 1996. During 1997, one of Pinnacle's
subsidiary banks had a stock redemption totalling $15.8 million which was used
to pay down a significant portion of the debt. The debt has been used during the
year for operating needs as well as the purchase of equity securities at the
holding company level. Pinnacle has a line of credit of $35,000,000 at an
unaffiliated bank which is secured by the stock of subsidiary banks as well as a
portion of the equity portfolio.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $115,458,000 at December 31, 1997 up
15% from $100,824,000 at December 31, 1996. The ratio of equity to assets was
11.16% and 9.62% 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 4.00%. 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, 1997, and December 31, 1996, Pinnacle's total
risk-based capital ratio was 16.96% and 15.01%, respectively, assuming the
deduction of all goodwill and other intangibles in compliance with the
guidelines. Each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At December 31, 1997, 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 its significant
subsidiaries.
Book value per share was $15.39 at December 31, 1997 compared to $13.23 at
December 31, 1996. During 1997, Pinnacle repurchased 173,436 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 $0.88 per
share were paid in 1997.
LIQUIDITY
As is characteristic of the banking industry, Pinnacle's indicators of liquidity
are principally its deposit base, loan and securities portfolios. On a short
term basis, adjustments are made in these categories based on deposit
fluctuations and loan demand. Longer term, liquidity is determined by growth
objectives, rate pricing policies and the ability to borrow debt or raise
equity. In general, Pinnacle is able to meet deposit withdrawals and to fund
loan demand through earnings and the maturity or sale of securities. Pinnacle
would also be able to respond to short term cash flow needs through short term
borrowings. On a longer term basis, Pinnacle has the ability to incur debt or to
raise equity through the sale of preferred or common stock.
Pinnacle's cash flows are comprised of three general types. Cash flows from
operating activities are primarily Pinnacle's net income. Cash flows from
investing activities consist of loans made to and collected from customers; and
purchases,
- --------------------------------------------------------------------------------
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 1997, cash flows
were generated from a $23,925,000 net decrease in securities, a $3,197,000
decrease in interest-bearing deposits, paydowns of loans of $14,106,000,
$15,565,000 from earnings, and a $10,000,000 increase in short-term borrowings.
Cash flow uses and needs included a $31,083,000 decrease in deposits, a
$12,800,000 reduction in notes payable, and $10,101,000 to pay dividends and
repurchase common stock. Pinnacle's net cash position increased $10,808,000 with
the majority of the increase in cash and due from banks.
Pinnacle's subsidiary banks have a relatively stable base of deposits and any
increased loan demand can be sufficiently funded without a material change in
its balance sheet. Pinnacle's corporate strategy includes 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, 1997, Pinnacle had a
secured line of credit of $35,000,000 with an unaffiliated bank, whereby
$20,000,000 had been drawn.
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, 1998, bank
subsidiaries could have declared approximately $4,308,000 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, 1997.
All Federally insured financial institutions have been mandated by the
regulators to provide assurance that their financial institution will not have
major disruptions as a result of computer issues as they relate to the date
change for the Year 2000. Pinnacle has established a task force that is dealing
with this issue as it relates to its data processing system, service providers,
vendors and credit customers. This task force has been charged with monitoring
the compliance of their major data processing system through ongoing
correspondence, meetings and reports of its major data processor. Vendors and
service providers have been categorized as to urgency and if determined by the
task force to be noncompliant, contingency plans will be made. Pinnacle began
converting its data processing systems in 1994 and at that time invested
significant monies in new equipment and software. Pinnacle has continued to
upgrade its personal computers and software to Year 2000 compliant computers as
part of normal ongoing upgrade of systems and software. Additional maintenance
or modification costs will continue to be expensed as incurred, while costs of
any hardware or software will be capitalized and amortized over its useful life.
Correspondence has been made with large credit customers as Year 2000
noncompliance by credit customers could have an impact on the collectibility of
their loans. No estimate, however, can be made at this time on what impact that
could have on future earnings and the overall adequacy of the reserve for loan
losses of Pinnacle.
MARKET RISK
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument. Market risk sensitive instruments
include derivative financial instruments and other financial instruments which
generally are disclosed under Footnote 14 in the Notes to Financial Statements
"Disclosure about Estimated Fair Value of Financial Instruments". Market risk in
a financial institution is broken into four categories: interest rate risk;
foreign exchange rate risk; commodity price risk; and equity price risk. At
Pinnacle, market risk is interest rate risk with a certain portion of equity
price risk as it relates to its equity portfolio at the parent company. No other
market risk exposures currently relate to Pinnacle.
INTEREST RATE RISK
Interest rate risk is the exposure of a company's current or future earnings and
capital to interest rate changes. Interest rate risk has many components
including repricing risk, basis risk, yield curve risk, option risk, and price
risk. Repricing risk results from timing differences between rate changes or
cash flows from the underlying assets and liabilities such as long-term fixed
rate securities funded by variable rate deposits. Basis risk
- --------------------------------------------------------------------------------
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
results from weak correlation between coupon rate changes of assets and
liabilities such as prime based loans changing by 25 basis points and LIBOR
based deposits changing by 50 basis points. Yield curve risk results from
changes in the slope of the yield curve. Option risk results when a financial
instrument's cash flow timing or amount can change as a result of market
interest rate changes such as prepayment risk in mortgage loans when interest
rates drop and refinancing of mortgages are prevalent. Price risk results from
changes in value of marked-to-market financial instruments when interest rates
change, such as held-for-sale loan portfolios.
Pinnacle measures the effect of interest rate risk on both pro forma earnings
for the current and future fiscal year and the present value equity of its
subsidiary banks using simulation analysis. Measurement includes exposure to
immediate, parallel shifts in interest rates of 200 basis points, plus and
minus, and is monitored within a specified and Board approved range. Critical to
the measurement is the assumptions made by management as to calculating its pro
forma earnings and present value equity. These assumptions include the
following:
VOLUME ASSUMPTIONS The current balance sheet reflects most recent decisions
made with respect to current events and does not project future growth or
changes. This establishes the base case from which all percentage changes are
calculated.
PREPAYMENT SPEEDS Market consensus speeds described as the average PSA
assumptions calculated from reporting primary dealers are used.
REPLACEMENT RATE The current "offered" rates are utilized for loans and
deposits. The current market rate is utilized for securities.
REINVESTMENT TERM Assumptions are used based on policy limits of the
asset/liability policy and are reviewed annually.
MARKET RATE Historical information is used to determine how the coupon rate of
specific balance sheet categories change as interest rates change.
CHARACTERISTICS OF NONMATURITY DEPOSITS Includes statistics regarding the
distribution of its nonmaturity deposit accounts and determined through analysis
conducted through subsidiary banks' data processing systems.
The following sensitivity analysis highlights the results of the simulation as
of December 31, 1997, for 1998 pro forma net income, as well as change in
present value equity for Pinnacle's subsidiary banks. All results are within
guidelines set by management policy.
------------------------
<TABLE>
<CAPTION>
1998 Pro
Change in Forma Present
Basis Net % Value %
Points Income Change Equity Change
<S> <C> <C> <C> <C>
- -----------------------------------------------------------
-200 $11,972 16.22% $169,676 3.61%
Base Scenario 10,301 -- 163,757 --
+200 8,625 (16.27) 153,544 (6.24)
Risk Limit (+ /
-) 20.00 15.00
<CAPTION>
- -----------------------------------------------------------
</TABLE>
Actual results may vary depending on specific events transpiring in future
periods.
PARENT COMPANY MARKET RISK
At the parent company level, most of the market risk centers on its equity
portfolio in other financial institutions' stock. At December 31, 1997, equity
securities recorded at fair value of $48.2 million, with unrealized appreciation
of $22.3 million, have exposure to price risk. This risk is estimated as the
potential loss in fair value resulting from a 20% adverse change in prices
quoted by stock exchanges and amounts to $9.6 million. This price risk does not
have a direct effect on the net income of Pinnacle, although would reduce any
gains which may be taken on the sale of certain equity securities in the future.
Debt at the holding company level is subject to interest rate risk as its credit
lines are tied to both LIBOR and prime rates. Credit lines tied to these indices
are at the discretion of management and can be adjusted as these rates change.
Currently, $19 million of total notes payable outstanding at year end is tied to
LIBOR and the remaining $1 million is tied to prime. If these indices rates
increased 200 basis points, interest expense would have increased by
approximately $500,000 on a pre-tax basis. The actual results could vary as
management has the ability to adjust its level of borrowings and indices tied to
LIBOR and prime.
MANAGEMENT OF MARKET RISK
This analysis is performed at least quarterly, and in the event projected pro
forma earnings or present value equity fall outside stated guidelines,
management will take steps to adjust the maturity structure of its balance sheet
to bring the variability of earnings or present value equity into compliance
with stated guidelines. These changes would normally be made through the
purchase and sale of debt securities. All securities owned by Pinnacle
- --------------------------------------------------------------------------------
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
are available for sale and the proceeds from the sale of debt securities could
be reinvested in an alternative maturity range in order to respond to a change
in interest rates. Currently, Pinnacle is not using any derivative products for
hedging or other purposes; however, if necessary, consideration would be given
to utilization of these products to manage interest rate risk.
FORWARD-LOOKING INFORMATION
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations relate to Pinnacle's expectations as to
future events relating to such items as the adequacy of the allowance for loan
losses, changes in economic conditions including interest rates, management's
ability to manage interest rate, liquidity and credit risks, impact on
operations and credit losses as its relates to the Year 2000 issue. Such
statements are not statements of historical fact and are forward-looking
statements. Pinnacle believes the assumptions on which these statements are
founded are reasonable, based on management's knowledge of its business and
operations; however, there is no assurance the assumptions will prove to have
been correct.
QUARTERLY DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
Three Months Ended Three Months Ended
------------------------------------------ ------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------ ------------------------------------------
Net interest income....... $8,093 $8,374 $8,462 $8,429 $5,891 $6,537 $6,560 $8,168
Provision for loan
losses.................. --0-- --0-- --0-- --0-- --0-- --0-- --0-- --0--
------------------------------------------ ------------------------------------------
Net interest income after
provision for loan
losses.................. $8,093 $8,374 $8,462 $8,429 $5,891 $6,537 $6,560 $8,168
Net income................ $2,739 $3,444 $4,663 $3,583 $1,557 $2,237 $1,185 $2,148
------------------------------------------ ------------------------------------------
Diluted earnings per share
(adjusted for stock
split).................. $0.36 $0.46 $0.62 $0.47 $0.24 $0.35 $0.18 $0.27
------------------------------------------ ------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
41
<PAGE>
BOARD OF DIRECTORS, EXECUTIVE OFFICERS, BANK AND BANKING CENTER
PRESIDENTS, AND DEPARTMENT HEADS
- ----------------------------------------------------------------------
BOARD OF DIRECTORS
Richard W. Burke,PARTNER, BURKE, WARREN, MACKAY & SERRITELLA, P.C.
Mark P. Burns,VICE CHAIRMAN OF PINNACLE BANK
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
Glenn M. Mazade,CHIEF CREDIT OFFICER
Sara J. Mikuta,CHIEF FINANCIAL OFFICER AND TREASURER
BANK AND BANKING CENTER PRESIDENTS
Bob G. Rosson,BATAVIA BANKING CENTER
Robert J. Boucek,LAGRANGE PARK BANKING CENTER
Mark P. Burns,VICE CHAIRMAN OF PINNACLE BANK
Larry R. Clark,PINNACLE BANK OF THE QUAD-CITIES
William P. Gleason,PINNACLE BANK
Charles B. Hall,WARRENVILLE BANKING CENTER
Patrick J. Hunt,WEST TOWN BANKING CENTER
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
Michael J. Kidney,DIRECTOR OF REGULATORY COMPLIANCE
Michele V. Latz,DIRECTOR OF MARKETING
Glenn M. Mazade,CHIEF CREDIT OFFICER
Denise Medema,DIRECTOR OF PERSONNEL
Sara J. Mikuta,CHIEF FINANCIAL OFFICER AND TREASURER
Jeffrey T. Osterman,DIRECTOR OF INVESTMENT PRODUCTS
Ronald J. Rous,CASHIER
Dennis M. Sheen,TRUST DEPARTMENT
Kenneth C. Whitener, Jr.,CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
42
<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>
1997
- --------------------------------------------
<S> <C> <C> <C>
Cash
Quarter High Low Dividends
<CAPTION>
- --------------------------------------------
<S> <C> <C> <C>
First $ 23.50 $ 18.67 $ 0.22
Second 21.75 19.50 0.22
Third 24.50 21.00 0.22
Fourth 29.38 24.25 0.22
<CAPTION>
1996
- --------------------------------------------
Cash
Quarter High Low Dividends
- --------------------------------------------
<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
</TABLE>
<TABLE>
<S> <C>
MARKET MAKERS Principal market makers are: Sandler O'Neill & Partners; Howe
Barnes Investments, Inc.; ABN-AMRO Chicago Corporation; J.J.B.
Hilliard, W.L. Lyons; Chicago Capital, Inc.; Herzog, Heine,
Geduld, Inc.; and McDonald & Company Sec., 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 21, 1998 at 3:00 p.m.
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PINNACLE BANC GROUP, INC.
Corporate Headquarters
2215 York Road, Suite 306
Oak Brook, Illinois 60523
[LOGO] (630) 574-3550
</TABLE>
SUBSIDIARY BANKS:
<TABLE>
<S> <C>
PINNACLE BANK NILES BANKING CENTER
CICERO BANKING CENTER 5697 Touhy Avenue
6000 West Cermak Road Niles, Illinois 60714
Cicero, Illinois 60804 (847) 647-8555
and OAK PARK BANKING CENTER
2500 South Cicero Avenue 840 South Oak Park Avenue
Cicero, Illinois 60804 Oak Park Illinois 60304
(708) 780-5000 (708) 848-6700
BATAVIA BANKING CENTER WARRENVILLE BANKING CENTER
165 West Wilson Street 3601 Winfield Road
Batavia, Illinois 60510 Warrenville, Illinois 60555
(630) 879-5300 (630) 393-4300
BERWYN BANKING CENTER WESTMONT BANKING CENTER
7112 West Cermak Road 640 Pasquinelli Drive
Berwyn, Illinois 60402 Westmont, Illinois 60559
and (630) 654-2800
7373 West 25th Street WEST TOWN BANKING CENTER
North Riverside, Illinois 60546 1209 North Milwaukee Avenue
(708) 788-4700 Chicago, Illinois 60622
ELBURN BANKING CENTER (773) 227-7020
415 South Main Street PINNACLE BANK OF THE QUAD-CITIES
Elburn, Illinois 60119 SILVIS BANKING CENTER
(630) 365-9292 1100 First Avenue
HARVEY BANKING CENTER Silvis, Illinois 61282
174 East 154th Street (309) 752-1200
Harvey, Illinois 60426 COLONA BANKING CENTER
(708) 333-2010 107 First Street
LAGRANGE PARK BANKING CENTER Colona, Illinois 61241
Oak Avenue at Sherwood Road (309) 792-3384
LaGrange Park, Illinois 60525
(708) 579-2000
</TABLE>
- --------------------------------------------------------------------------------
44
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