<PAGE>
_____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-18283
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3190818
------------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 York Road, Suite 306, Oak Brook, Illinois 60523
-----------------------------------------------------------------
(Address of principal executive offices)
(630) 574-3550
------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:As of October 30, 1998, the registrant
had 7,507,523 shares outstanding of
common stock, $3.12 par value.
__________________________________________________________________________
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Presented on the following pages are the unaudited consolidated balance
sheets of Pinnacle Banc Group, Inc. and subsidiaries ("Pinnacle") for September
30, 1998 and December 31, 1997, the related consolidated statements of income
for the three and nine month periods ended September 30, 1998 and 1997, and the
related consolidated statements of cash flows for the nine month periods ended
September 30, 1998 and 1997.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for a complete
financial statement. In the opinion of management, all adjustments, such as
estimated provisions for profit sharing and bonus arrangements normally
determined at year end, considered necessary for a fair presentation have been
included.
Footnote disclosure has been omitted since it would substantially duplicate
the disclosure contained in the latest audited financial statements of Pinnacle
contained in the 1997 Annual Report to Shareholders with the exception of the
disclosure of the Adoption of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", SFAS No. 130, "Reporting Comprehensive
Income", and the pro forma impact of the adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, SEPTEMBER 30 DECEMBER 31
EXCEPT PER SHARE DATA) ------------ -----------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS:
Cash and due from banks $24,490 $31,103
Federal funds sold 900 2,800
---------- ----------
Total cash and cash equivalents 25,390 33,903
Interest-bearing deposits 143 228
Securities:
Available for sale 435,349 434,234
(amortized cost:
9/30/98 - $414,150
12/31/97 - $409,123)
Loans, net of unearned discount 524,666 510,207
Less: Allowance for loan losses (7,193) (7,520)
---------- ----------
Net loans 517,473 502,687
Premises and equipment 20,536 18,451
Goodwill 21,264 23,076
Other assets 24,220 22,232
---------- ----------
Total $1,044,375 $1,034,811
========== ==========
LIABILITIES:
Demand deposits:
Noninterest-bearing $114,061 $104,644
Interest-bearing 84,103 96,092
Savings deposits 287,817 281,737
Other time deposits 384,681 363,996
---------- ----------
Total deposits 870,662 846,469
Short-term borrowings 22,425 38,525
Notes payable 21,300 20,000
Other liabilities 10,754 14,359
---------- ----------
Total liabilities 925,141 919,353
STOCKHOLDERS' EQUITY:
Common stock, $3.125 par 23,461 23,449
20,000,000 shares authorized;
shares issued and outstanding:
9/30/98 - 7,507,523
12/31/97 - 7,503,773
Additional paid-in capital 38,638 38,578
Retained earnings 43,240 36,856
Unrealized gains in securities
available for sale 13,895 16,575
--------- ----------
Total stockholders' equity 119,234 115,458
--------- ----------
Total $1,044,375 $1,034,811
========== ==========
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, FOR THE THREE MONTHS FOR THE NINE MONTHS
EXCEPT PER SHARE DATA) ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $10,676 $10,712 $31,473 $32,276
Securities:
Taxable 5,747 6,094 16,945 18,049
Tax exempt 342 396 1,045 1,189
Interest-bearing
deposits, Federal
funds sold and other 15 11 208 57
------ ------ ------ ------
Interest income 16,780 17,213 49,671 51,571
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 429 449 1,332 1,359
Savings 2,195 2,168 6,410 6,566
Other time 5,502 5,271 16,304 15,966
Short-term borrowings 148 456 531 1,241
Notes payable 356 407 1,042 1,511
------ ------- ------ ------
Interest expense 8,630 8,751 25,619 26,643
------ ------- ------ ------
Net Interest Income 8,150 8,462 24,052 24,928
Provision for
loan losses 0 0 0 0
------ ------- ------ ------
Net interest
income after
provision for
loan losses 8,150 8,462 24,052 24,928
OTHER INCOME:
Banking services and other 1,495 1,491 4,584 4,320
Trust services 700 738 2,066 1,902
Net securities gains 3,253 3,187 8,429 5,753
------ ------ ------ ------
Other income 5,448 5,416 15,079 11,975
OTHER EXPENSE:
Salaries, profit sharing
and other employee
benefits 3,617 3,539 10,814 10,422
Occupancy 737 647 2,203 1,990
Amortization of goodwill
and other intangibles 604 600 1,812 1,794
Other operating expenses 2,320 2,076 7,310 6,326
------ ------ ------ ------
Other expense 7,278 6,862 22,139 20,532
------ ------ ------ ------
Income before income taxes 6,320 7,016 16,992 16,371
Provision for income taxes 1,885 2,353 5,428 5,526
------ ------ ------ ------
Net Income $4,435 $4,663 $11,564 $10,845
====== ====== ======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic 7,507,523 7,511,551 7,507,413 7,549,162
Diluted 7,528,084 7,520,208 7,536,600 7,553,156
EARNINGS PER SHARE:
Basic $0.59 $0.62 $1.54 $1.44
Diluted $0.58 $0.61 $1.53 $1.43
Dividends per share $0.23 $0.22 $0.69 $0.66
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
(IN THOUSANDS) ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $4,435 $4,663 $11,564 $10,845
Other comprehensive
income, net of tax:
Unrealized gains
(losses) on
securities 3,577 7,331 4,369 14,142
Less: reclassification
adjustment for gains
(losses) included in
net income (3,253) (3,187) (8,429) (5,753)
------- ------ ------ ------
Net unrealized gains
(losses) on
securities 324 4,144 (4,060) 8,389
Income tax expense
(benefit) related to
unrealized gains (losses)
on securities 110 1,409 (1,380) 2,852
------- ------ ------ ------
Other comprehensive
income (loss), net
of tax 214 2,735 (2,680) 5,537
------- ------ ------ ------
Comprehensive income $4,649 $7,398 $8,884 $16,382
====== ====== ====== =======
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED SEPTEMBER 30
------------------------------
1998 1997
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,564 $10,845
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,496 1,328
Amortization of goodwill and
other intangibles 1,812 1,794
Amortization of purchase accounting
adjustments 46 (51)
Discount accretion (664) (1,028)
Premium amortization 192 202
Provision for loan losses 0 0
Gain on sale of securities (8,429) (5,753)
Decrease in interest receivable (5,325) 4,127
Increase in interest payable 247 353
Decrease in other assets 3,366 678
Increase (decrease) in other
liabilities (2,464) 920
Other, net (99) 163
------ ------
Total adjustments (9,822) 2,733
Net cash provided by operating
activities 1,742 13,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 720,110 1,220,055
Proceeds from maturities and paydowns
of securities 5,676 2,446
Purchase of securities (722,086) (1,199,421)
Net decrease in interest-bearing
deposits 85 3,155
Net loan principal
collected (advanced) (14,699) 14,985
Premises and equipment expenditures (3,626) (1,380)
-------- --------
Net cash provided by (used for)
investing activities (14,540) 39,840
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
total deposits 24,193 (39,846)
Net increase (decrease) in
short-term borrowings (16,100) 10,956
Proceeds from notes payable 19,475 18,800
Principal reductions of notes payable (18,175) (30,975)
Issuance of common stock 72 709
Purchase and retirement of common stock 0 (3,468)
Dividends paid (5,180) (5,006)
------- --------
Net cash provided by (used for)
financing activities 4,285 (48,830)
Net increase (decrease) in cash and
cash equivalents (8,513) 4,588
Cash and cash equivalents at beginning
of period 33,903 23,095
------- -------
Cash and cash equivalents at end
of period $25,390 $27,683
======= ========
CASH PAID DURING PERIOD FOR:
Interest $25,372 $26,630
Income taxes 3,347 4,285
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
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 replaces 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
adopted SFAS No. 128 on December 31, 1997 and, accordingly, all prior EPS data
presented has been restated.
The following table shows the computation of shares outstanding for
calculating earnings per share for the three and nine months ended September
30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
BASIC EARNINGS
PER SHARE:
Common shares
outstanding 7,507,523 7,511,551 7,507,413 7,549,162
COMMON STOCK EQUIVALENTS:
Stock options
outstanding 82,500 86,250 82,500 86,250
Treasury stock method (61,939) (77,593) (53,313) (82,256)
--------- ---------- ---------- ---------
Net 20,561 8,657 29,187 3,994
--------- ---------- ---------- ---------
DILUTED EARNINGS
PER SHARE:
Common shares outstanding
plus assumed
conversions 7,528,084 7,520,208 7,536,600 7,553,156
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
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 include foreign currency translations, pension liability adjustments
and unrealized gains and losses on securities (SFAS 115 adjustment). Pinnacle
adopted this statement in the first quarter of 1998 and has included its
comprehensive income in a separate financial statement as part of its
consolidated financial statements.
DERIVATIVE INSTRUMENTS
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards requiring every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Because Pinnacle does not use derivatives for hedging or other purposes, the
impact of this standard, effective for fiscal years beginning after June 15,
1999, will be immaterial.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
NET INCOME - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Consolidated net income was $11,564, or $1.53 per share, on a diluted
basis for the nine months ended September 30, 1998, compared to the $10,845,
or $1.43 per share, earned in the first nine months of 1997. The annualized
return on average assets was 1.52% for the first nine months of 1998 and
1.42% for the first nine months of 1997. For each period, the return on
average equity was 15.2% and 15.4%, respectively. Return on average assets and
equity for the same periods, calculated using the effects of SFAS No. 115,
would not be materially different.
The primary factor for higher earnings was higher gains recorded on the
sale of securities. Net securities gains totalled $8,429 compared to $5,753 in
gains during the same period a year ago. Net interest income decreased 4% to
$24,052 with a corresponding decrease in the net interest margin to 3.54%
from 3.66% for the same periods. Lower yields on earning assets was the primary
factor in lower net interest income and net interest margin. Other operating
income, excluding net securities gains, increased 7% compared with the same
period of 1997. Other expenses increased 8%.
NET INTEREST INCOME
The primary component of Pinnacle's consolidated earnings is net interest
income, or the difference between interest income on earning assets and
interest paid on supporting liabilities. The net interest margin is net
interest income expressed as a percentage of average earning assets.
Pinnacle's earning assets consist of loans, securities, interest-bearing
deposits at financial institutions and Federal funds sold. Supporting
liabilities primarily consist of deposits, Federal funds purchased, other
short-term borrowings, and Pinnacle's notes payable. A portion of Pinnacle's
interest income is earned on tax exempt investments such as state and
municipal bonds. In an effort to state this tax exempt income and its
resultant yields on a basis comparable to all other taxable investments, an
adjustment is made to analyze this income on a taxable equivalent basis.
During the first nine months of 1998, Pinnacle's average earning assets
were $926,642, a 1% decrease from the comparable period of the previous year.
The net interest margin for the first nine months of 1998 was 3.54%, down from
3.66% of the same period a year ago. Net interest income on a fully taxable
equivalent basis was $24,626 for the first nine months of 1998, or 4% lower
than the comparable period in 1997. Actual net interest income decreased 4% as
the result of the decrease in the net interest margin and the decrease in
average earning assets.
The yield earned on total earning assets was 7.23% for the first nine
months of 1998 compared to 7.47% for the same period of 1997. The decrease
resulted from both a decrease in the rate earned on taxable securities and a
lower volume of loans. The rate earned on interest-bearing deposits and
Federal funds sold increased 165 basis points as the majority of assets in this
category consisted of higher paying Federal funds than those assets a year ago.
The average rate on taxable securities decreased 41 basis points to 5.72% for
the first nine months of 1998. The decrease in the yield on taxable securities
was primarily due to a drop in the rates earned on these securities than on
those carried a year ago. Average volume of taxable securities increased
slightly or 1%. The yield earned on nontaxable securities increased 17 basis
points while average balances decreased 13%. The rate earned on loans
decreased 8 basis points while the average balance decreased 2%. Most of the
decrease in average loans related to the residential mortgage portfolio,
which decreased over $16 million. Included in that decrease was the drop in
purchased participation loans acquired in the acquisition of Security Federal
in 1996 of $10 million and a decrease in multi-family residential of $9
million, a great portion of which was also related to the Security Federal
acquisition. Absent these decreases, the residential portfolio increased
approximately $2 million. The new residential loans, however, replaced those
loans that have been paid off or refinanced due to the low mortgage rate
<PAGE>
environment. Rates earned specifically on residential mortgage loans have
decreased 20 basis points in the last twelve months. Commercial loan growth has
been strong, with an increase of 7%. Rates earned on commercial loans have
remained relatively flat, as prime rate has remained flat on a year to year
basis. Pinnacle anticipates that the yield on commercial loans will drop in
the last quarter with the adjustment made to the prime rate early in October,
1998. Consumer loans have increased 7%, or approximately $8 million. The rate
earned on these loans has decreased slightly and will continue to decrease as
loans in this category which are tied to prime total $28 million.
The average cost of interest-bearing liabilities decreased 3 basis points
to 4.31% from 4.34% paid in the first nine months of 1997. The average rate
paid on interest-bearing demand deposits decreased 13 basis points while the
rates paid on savings deposits increased slightly by 3 basis points and the
rates paid on money market deposits increased 11 basis points. In the first
part of the fourth quarter, Pinnacle reduced rates on all the above categories
to keep in line with the decreasing rate environment. The average rate
paid on other time deposits increased 2 basis points to 5.63% from 5.61% of a
year ago. Rates paid on other time deposits have decreased in the third
quarter of 1998 due to the rate environment. Rates in the first two quarters
of 1998 have been relatively flat. Certain special "high rate" deposits,
which were in the portfolio at Security Federal, have been maturing in the
last twelve months. These have been replaced with a higher than market rate,
14-month time deposit that was implemented in the first quarter of 1998, in
conjunction with the opening of a new Chicago-area branch and marketing
campaign. This promotion, which negates the impact of the higher rate
maturing deposits, brought in approximately $39 million of which two-thirds
were new deposits. In June, 1998, this same promotion was implemented in
conjunction with Pinnacle's new branch which opened in Moline, Illinois.
By September 30, 1998, this promotion had brought in approximately $7 million
in deposits of which approximately half were new customers. The average
balance in savings deposits also decreased $7,935 on a year to year basis as
customers switched their funds to higher rate time deposits. Average savings
deposits have remained constant throughout 1998.
The average rate paid on short-term borrowings increased 43 basis points,
while the average balance decreased $17 million. Increases or decreases in the
average balance of this category fluctuate due to Pinnacle's subsidiary banks'
daily liquidity needs, such as loan growth and the maturity of the above-
mentioned Security Federal's time deposits. The average balance in Pinnacle's
notes payable decreased $8,099 due primarily to a stock redemption by Pinnacle
Bank in July, 1997, proceeds of which were used to pay down a portion of the
notes payable. The rate paid decreased 26 basis points as the indices (Prime
or LIBOR), to which the notes payable are tied, were lower in the first nine
months of 1998 compared to a year ago.
A detailed Analysis of Net Interest Income for the three and nine month
periods ended September 30, 1998 and 1997 is included on Pages 16 and 17.
PROVISION FOR LOAN LOSSES
Management records a provision for loan losses in an amount sufficient to
maintain the allowance for loan losses at a level commensurate with the risks in
the loan portfolio. The allowance for loan losses is adjusted through charges
to current income based on factors such as past loan loss experience,
management's evaluation of potential losses in the loan portfolio, and
prevailing economic conditions.
There was no provision for loan losses in the first nine months of 1998,
as well as no provision for the first nine months of 1997. Pinnacle had net
charge-offs of $327 in the first nine months of 1998 compared to net
charge-offs of $368 in 1997. Pinnacle continues not to record a provision for
loan losses due to several factors, including the level of allowance for
possible loan losses to total loans; management's assessment of the overall
adequacy of the allowance for loan losses as well as the high level of real
estate secured loans within the portfolio. Insignificant losses have been
recorded on real estate secured loans in the last three years.
Total nonperforming assets totalled $7,389 at September 30, 1998, an
increase of $268, over the $7,121 at December 31, 1997. Non-performing assets
consisted of $3,858 in non-accrual loans, $1,773 in loans past due greater than
90 days and still accruing, $1,148 in restructured loans, and $610 in other
real estate owned.
Pinnacle maintains a system of review of the credit quality of the loan
portfolio, including the use of an independent credit review system as well as
an internal "Watch List" to identify potential problem loans. Currently,
<PAGE>
there are approximately $3,734 in potential problem loans which are identified
through that review process that are not considered nonperforming and are not
included in totals above.
NONINTEREST INCOME AND EXPENSE
The major components of Pinnacle's noninterest income consist of service
charges on deposit accounts and other banking income, trust fees and net gains
or losses on the sale of securities. Fees on banking services and other income
were $4,584 for the nine months ended September 30, 1998 compared to $4,320
in the same period of 1997. The increase in fees on banking services and
other income primarily related to higher business service charges and
overdraft income of $162 and ATM surcharges of $60. Trust fees increased
9% on a period to period basis. Total trust assets under management amounted
to $331,000 at September 30, 1998, or a 7% increase of a year ago.
Gains on the sale of securities, on a pre-tax basis, were $8,429 for
the first nine months of 1998 compared to net gains of $5,753 in the same
period of 1997. The net gains on a year-to-date basis in 1998 consisted
of $8,497 recorded on the sale of equity securities as part of Pinnacle's
equity investment program in other financial institutions and net losses of
$60 recorded on the sale of U. S. Treasury securities as part of Pinnacle's
portfolio funds management system. The net gains in 1997 consisted of
sales of equity securities of $2,842 and net gains on the portfolio
funds management system of $2,911.
Security sales were taken in the equity investment portfolio to
reallocate portfolio funds based on management's assessment of the financial
performance of certain issues as well as market conditions as it
related to those issues.
Security sales relating to Pinnacle's U. S. Government securities
portfolio are made as part of Pinnacle's disciplined portfolio funds management
system. The timing of these sales and the determination of the acceptable
maturity for the reinvestment of the proceeds is made dependent on the slope of
the yield curve and on management's assessment of the acceptable interest rate
risk for Pinnacle.
Management has always viewed the gains recorded on the U. S. Government
program as closely related to its net interest income as opposed to one-time
security gains or losses. Accordingly, since implementation of the program,
the yield on Pinnacle's U. S. Government portfolio has outperformed the
U. S. Treasury yield for comparable maturities by 25 basis points and by
including the net gains since inception of the program, the total yield is
122 basis points higher than the same index. For the first nine months of
1998, due to the relative flatness of the yield curve, the portfolio has
slightly outperformed the index by 4 basis points but by including the net
loss on sale, outperformed the index by 2 basis points.
Noninterest expense increased 8% for the first nine months of 1998
compared to the same period last year. Employee compensation and benefits
increased 4% which includes the addition of personnel for the Warrenville
and Moline banking centers which opened January, 1998, and June, 1998,
respectively. Occupancy expense increased 11% which was also affected by
the opening of the banking centers as well as the Pinnacle Bank Operations
Center in the second quarter of 1998. The Operations Center houses all
backroom functions of Pinnacle Bank which were previously housed in separate
banking centers. Other operating expense increased 16%, or $984, with
advertising relating to the two new campaigns (time deposit product and home
equity loan product), as well as the opening of the new banking centers
contributing approximately half, or $504, of the increase. Equipment expense
increased 7%, or $100, as a result of the new banking centers and Operations
Center and expenses relating to other real estate owned increased $354 due to
added market writedowns of distressed properties held in this category.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated basis
including the accounts of its subsidiary banks. The provision for income
taxes was $5,428 for the first nine months of 1998 compared with a provision
of $5,526 for the first nine months of 1997. The lower provision for taxes
in the first nine months of 1998 was primarily the result of the realization
of certain tax credits received on the tax return which had not been
previously benefited.
<PAGE>
NET INCOME - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Consolidated net income was $4,435, or $0.58 per share, on a diluted
basis for the three months ended September 30, 1998 (the "third quarter"),
compared to $4,663, or $0.61 per share, earned in the third quarter of 1997.
The annualized return on average assets was 1.74% for the third quarter of
1998 and 1.86% for the third quarter of 1997. For each period, the return on
average equity was 16.7% and 19.6%, respectively.
The primary factors for the decrease in net income was the decrease in
net interest income and higher other operating expense. Net interest income
decreased $312, or 4%. Net securities gains of $3,253 were recorded
versus net gains of $3,187 for the same period a year ago. Other income,
exclusive of securities transactions, decreased $34, or 2%. Other expense
increased $416, or 6%.
NET INTEREST INCOME
During the third quarter of 1998, Pinnacle's average earning assets were
$933,443 compared to $918,026 with the comparable period of the previous year.
The net interest margin of the third quarter of 1998 was 3.57% compared to
3.78% for 1997. Net interest income on a fully taxable equivalent basis was
$8,338 for the third quarter of 1998, or 4% lower than the comparable
period in 1997. Actual net interest income decreased 4%.
The yield earned on total earning assets was 7.27% for the third quarter
of 1998 compared to 7.60% for the same period of 1997. The decrease resulted
primarily from the decrease in the yield on taxable securities. The yield on
interest-bearing deposits increased 161 basis points as the majority of
balances in that category in 1998 were high-earning Federal funds sold.
While the average balance of taxable securities increased $13,462, the
yield earned decreased 56 basis points. The yield earned on loans
decreased 11 basis points to 8.30% while the average balance increased
$5,126 on a quarter-to-quarter basis. Total interest income, on a fully
taxable equivalent basis, decreased $465.
The average cost of interest-bearing liabilities decreased by 2 basis
points to 4.36% from the 4.38% paid in the third quarter of 1997. The
average rate paid on interest-bearing demand deposits decreased 9 basis
points while savings deposit rates increased 3 basis points. The average
rate paid on money market accounts increased 25 basis points. The average
rates paid on other time deposits decreased 2 basis points. The rates paid
on short-term borrowings increased 49 basis points as a higher portion of
that balance consisted of FHLB borrowings with a higher fixed rate. The
rates paid on notes payable decreased 44 basis points.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the third quarter of 1998,
as well as no provision for the third quarter of 1997. Pinnacle had net
recoveries of $2 in 1998 compared to net recoveries of $116 in 1997.
NONINTEREST INCOME AND EXPENSE
Fees on banking services and other income were $1,495 for the three
months ended September 30, 1998 compared to $1,491 in the same period of 1997.
Trust fees decreased 5% to $700.
On a pre-tax basis, net gains on the sale of securities were $3,253 for
the third quarter of 1998 compared to net gains on the sale of securities of
$3,187 in the same period of 1997. The gross and net gains in the third
quarter of 1998 were $3,253. The gross and net losses realized in the third
quarter of 1997 were $3,187.
All of the net securities gain recorded by Pinnacle in the third quarter
of 1998 related to its equity investment portfolio. The net securities gains
in the third quarter of 1997 related to its U. S. Government securities
portfolio.
Non-interest expense increased 6% primarily as a result of increased
occupancy and equipment expenses which related to the opening of the two new
branches in Warrenville and Moline, as well as Pinnacle Bank's new Operations
Center.
<PAGE>
INCOME TAXES
The provision for income taxes was $1,885 for the third quarter of
1998 compared with $2,353 provision for the third quarter of 1997. The
lower provision for taxes in the third quarter of 1998 was primarily the
result of lower pre-tax income in the third quarter of 1998 as well as
realization of certain tax credits.
CASH EARNINGS PER SHARE
All of Pinnacle's acquisitions have been made with both the issuance
of stock and cash or cash only and, as a result, the purchase method of
accounting was utilized. This method creates goodwill, or the difference
between the fair value of assets purchased and the historical cost of those
assets. Goodwill is being amortized as a noncash reduction of net income
over time periods from 10 to 20 years. If pooling of interest method of
accounting had been used (after meeting stringent accounting rules and no
cash had been exchanged), no goodwill would have been created and no reduction
in net income would have been made for the amortization. The following
outlines Pinnacle's cash earnings, earnings per share and related ratios for
the quarter and nine months ended September 30, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- -------------------
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $4,435 $4,663 $11,564 $10,845
Goodwill amortization 604 600 1,812 1,794
------ ------ ------- -------
Cash net income $5,039 $5,263 $13,376 $12,639
------ ------ ------- -------
------ ------ ------- -------
EARNINGS PER SHARE,
DILUTED
Cash EPS $0.66 $0.70 $1.77 $1.67
As reported 0.58 0.61 1.53 1.43
CASH ROA
Average assets $1,020,236 $1,003,209 $1,012,148 $1,016,365
Average goodwill 21,618 24,123 22,220 24,272
---------- ---------- ---------- ----------
Average tangible
assets $998,618 $979,086 $989,928 $992,093
-------- -------- -------- --------
-------- -------- -------- --------
Cash ROA 2.02% 2.15% 1.80% 1.70%
As reported 1.74 1.86 1.52 1.42
CASH ROE
Average equity $106,275 $95,026 $101,624 $93,940
Average goodwill 21,618 24,123 22,220 24,272
-------- ------- -------- -------
Average tangible
equity $84,657 $70,903 $79,404 $69,668
------- ------- ------- -------
------- ------- ------- -------
Cash ROE 23.8% 29.7% 22.5% 24.2%
As reported 16.7 19.6 15.2 15.4
</TABLE>
BALANCE SHEET
Total consolidated assets were $1,044,375 at September 30, 1998, or a 1%
increase from year-end 1997.
Total securities were $435,349 at September 30, 1998 and consisted of
U. S. Government securities amounting to $366,302, mortgage-backed securities
and CMO's of $2,858, state and municipal bonds of $19,788, and corporate and
other securities of $46,401. The total securities outstanding at September 30,
1998 was approximately the same as year-end 1997 and retained relatively the
same mix.
U. S. Government securities amounted to $366,302, or 35% of assets, at
September 30, 1998. The average remaining maturity of these securities was
approximately 32 months. U. S. Government securities are part of Pinnacle's
term taxable securities strategy which has been designed to manage Pinnacle's
interest rate risk and to take advantage of the slope in the yield curve.
<PAGE>
The decision to undertake intermittent sales of these securities is based
on management's assessment of economic conditions. For example, management
will undertake sales of securities based on the slope of the yield curve and
its determination that the reinvestment of the proceeds into a longer or
shorter term security is an acceptable alternative given management's
assessment of interest rate risk. At September 30, 1998, U. S. Government
securities had gross unrealized gains of $11,905 and gross unrealized losses
of $(49) on a pre-tax basis.
Other securities held by Pinnacle, amounting to $69,047 at September 30,
1998, consisted of mortgage-backed, CMO's, state and municipal, and corporate
and equity securities. At quarter end, these securities had gross unrealized
gains of $12,808 and gross unrealized losses of $(3,465) on a pre-tax basis.
Currently, Pinnacle is not using any derivatives for hedging or other purposes.
Total loans amounted to $524,666 at September 30, 1998, up 3% from year
end. The increase in loans is primarily in commercial loans which increased
$19,915 and installment loans which increased $5,511. This increase is offset
by the decrease in real estate loans which decreased $10,968. The drop in real
estate loans relates primarily to the planned decrease in out-of-state
purchased loans and to the decrease in multi-family loans, both relating to
loans acquired in the Security Federal acquisition in 1996. At September 30,
1998, 25% of the loans were commercial, 62% were real estate, and 13% were
installment loans. Pinnacle's loan to asset ratio was 50% at September 30,
1998.
Goodwill and other intangibles amounted to $21,264, or 18% of stockholders'
equity at September 30, 1998.
Total deposits were $870,662 at September 30, 1998, or 3% higher
than year-end 1997. The increase in deposits was primarily in other time
deposits which increased $20,685. As previously mentioned, a promotion
corresponding with the opening of the two new banking centers in 1998 brought
in significant new time deposit money. Noninterest-bearing demand deposits
increased $9,417, but was offset by the decrease in interest-bearing demand
deposits of $11,989; savings deposits increased $6,080. At September 30,
1998, the percentage of total deposits for each category were
noninterest-bearing deposits, 13%; interest-bearing demand deposits, 10%;
savings accounts (including money market accounts), 33%; and other time
deposits, 44%.
Pinnacle's notes payable were $21,300 at September 30, 1998. Pinnacle's
notes payable are borrowings under a $35,000 revolving line of credit.
Outstandings were used for the acquisition of Acorn Financial Corp in
January, 1995; for the acquisition of Financial Security; the purchase of
other equity securities; and other corporate needs.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $119,234 at September 30,
1998 and $115,458 at December 31, 1997. The ratio of equity to assets was
11.42% and 11.16% at each period end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage
Capital Ratio with a minimum level of Tier One capital to total assets of
4.00%. Tier One capital consists of common stock, additional paid-in capital
and retained earnings, and is exclusive of Pinnacle's allowance for loan
losses, goodwill and other intangibles, and unrealized gains (losses) on
securities available for sale. In addition, the Board has issued Risk-Based
Capital Guidelines with a minimum standard of total regulatory capital to
risk weighted assets of 8.00%. The structure of Pinnacle's balance sheet
results in a Risk-Based Capital Ratio significantly in excess of the
guidelines.
The following table provides an analysis of the minimum capital
requirements (as defined for a well-capitalized bank), ratios and the
excess over the minimum which Pinnacle holds as capital as of September
30, 1998, in thousands (except percentages).
<PAGE>
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
-------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Leverage Capital 4.00% $40,924 8.22% $84,075 $43,151
Risk-based Capital:
Tier One 4.00 20,507 16.40 84,075 63,568
Total (Tier Two) 8.00 41,014 17.65 90,493 49,479
</TABLE>
At December 31, 1997, Pinnacle's total risk-based capital ratio was
16.97%.
In addition, each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At September 30, 1998, Pinnacle and each of its subsidiary
banks was in compliance with the current capital guidelines and are considered
"well-capitalized" under regulatory standards.
Book value per share was $15.88 at September 30, 1998 compared to $15.39
at December 31, 1997. Dividends amounting to $0.69 per share were paid in the
first nine months of 1998. Tangible book value (stockholders' equity less
goodwill) was $13.05 at September 30, 1998 compared to $12.31 at December 31,
1997.
LIQUIDITY AND MARKET RISK
As characteristic of the banking industry, Pinnacle's indicators of
liquidity are principally its deposit base, loan and investment portfolios.
On a short term basis, adjustments are made in these categories based on
deposit fluctuations and loan demand. Longer term, liquidity is determined
by growth objectives, rate pricing policies and the ability to borrow debt or
raise equity. In general, Pinnacle is able to meet deposit withdrawals and
to fund loan demand through earnings and the maturity or sale of securities.
Pinnacle would also be able to respond to short term cash flow needs through
short-term borrowings. On a longer term basis, Pinnacle has the ability to
incur debt or to raise equity through the sale of preferred or common
stock.
Pinnacle's cash flows are comprised of three general types. Cash flows
from operating activities are primarily Pinnacle's net income, adjusted for
non-cash items. Cash flows from investing activities consist of loans made
to and collected from customers; and purchases, sales and maturities of
securities available for sale. Cash flows from financing activities are
determined by Pinnacle's deposit base and from Pinnacle's ability to borrow
and repay debt and issue or repurchase stock. For the nine months ended
September 30, 1998, cash flows were generated primarily from operations of
$1,742, the net decrease in securities of $3,700, and the increase in deposits
of $24,193. Cash flow uses and needs include the advance of net loan principal
of $14,699, a $16,100 reduction in other borrowed funds, and $5,180 to pay
dividends. Pinnacle's net cash position decreased $8,513, with the decrease
primarily 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 of
other financial institutions. Certain acquisitions could be funded with debt
and/or issuances of stock. Reductions of debt would be made from Pinnacle's
earnings.
At September 30, 1998, Pinnacle had a line of credit of $35,000 with an
unaffiliated bank from which $21,300 had been drawn. The outstanding balance
relates to the acquisitions, equity purchases and other corporate needs, and
is secured by the stock of Pinnacle's subsidiary banks as well as certain
equity securities of the holding company.
<PAGE>
Market risk at Pinnacle consists primarily of interest rate risk and, to
some extent, market price risk. No significant changes have occurred at
Pinnacle in the interest rate or market price risk since year-end 1997.
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 October 1, 1998, bank subsidiaries could have declared approximately
$2,862 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 is also not aware of any current
recommendations by the regulatory authorities which, if implemented,
would have an adverse material effect on Pinnacle.
YEAR 2000
Throughout the first nine months of 1998, Pinnacle's Year 2000 task force
has continued to monitor the readiness of its major data processing provider,
other critical vendor suppliers, and its large commercial customers.
Currently, Pinnacle has completed its testing strategies and plans and
has requested the testing strategies and plans from its critical vendors.
Pinnacle's main data processing provider began testing in a proxy
environment during August, 1998. Year 2000 renovated software from Pinnacle's
major data processor was implemented by Pinnacle in October, 1998, with no
current processing issues. Testing on that software for Year 2000
compliance will continue through March, 1999. Contingency planning has begun
for mission critical tasks and will be continually monitored and updated to
ensure uninterrupted customer services and backroom processing. Pinnacle,
however, cannot necessarily ensure uninterruption with certain vendors such
as utility companies and phone companies, but those vendor plans are being
monitored as an ongoing part of the assessment. Currently, all critical
dates mandated by the regulators have been met by the data processing vendor
and Pinnacle is also on schedule for its review of any in-house critical
systems, software, and equipment. Any costs associated with this issue will
continue to be expensed as incurred or capitalized in the event of equipment
or software replacement. The impact is currently estimated to be less than
$0.01 per share on Pinnacle's diluted earnings per share and not material
to the financial position of Pinnacle. Large commercial customers are
being assessed by management as to Year 2000 readiness and ability to
manage their relationship with Pinnacle's banking subsidiaries.
Currently, it is unknown what impact a high risk customer's inability to
repay its bank obligations will have on the adequacy of Pinnacle's allowance
for possible loan losses or its financial position.
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 it relates to the Year 200 issue.
Such statements are not statements of historical fact and are forward-looking
statements. Pinnacle believes the assumptions of 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.
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
THOUSANDS) -------------------------- -------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Interest-bearing
deposits and
Federal funds
sold $1,260 $15 4.76% $5,150 $208 5.39%
Taxable
securities 399,906 5,747 5.75 394,950 16,945 5.72
Nontaxable
securities 16,907 518 12.25 17,224 1,583 12.25
Loans 515,370 10,688 8.30 509,318 31,509 8.25
------- ------ ----- ------- ------ -----
Total
interest-earning
assets 933,443 16,968 7.27 926,642 50,245 7.23
Noninterest-earning
assets:
Cash and due
from banks 25,792 26,420
Allowance for
loan losses (7,195) (7,287)
Other assets 68,196 66,373
------ ------
Total
assets $1,020,236 $1,012,148
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Interest-bearing
demand deposits $88,520 $429 1.94% $92,836 $1,332 1.91%
Savings deposits 238,544 1,766 2.96 237,836 5,206 2.92
Money market
deposits 46,734 429 3.67 45,201 1,204 3.55
Other time
deposits 387,928 5,502 5.67 385,780 16,304 5.63
Short-term
borrowing 8,942 148 6.62 11,023 531 6.42
Notes payable 20,697 356 6.88 20,380 1,042 6.82
------- ----- ---- ------- ------ -----
Total interest-
bearing
liabilities 791,365 8,630 4.36 793,056 25,619 4.31
Noninterest-
bearing
liabilities:
Demand
deposits 112,686 108,260
Other
liabilities 9,910 9,208
Stockholders'
equity 106,275 101,624
--------- ---------
Total liabilities
and stockholders'
equity $1,020,236 $1,012,148
========== ==========
Net interest
income and margin $8,338 3.57% $24,626 3.54%
====== ==== ======= ====
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1998. The fully taxable
equivalent adjustment to interest income for the three and nine months
ended September 30, 1998 was $188 and $573, respectively. The average
balance on nonaccrual loans is included in the total loans category.
The average balances do not include the effect of SFAS No. 115.
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
THOUSANDS) ------------------------- -------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Interest-bearing
deposits and
Federal funds
sold $1,399 $ 11 3.15% $2,032 $57 3.74%
Taxable
securities 386,444 6,094 6.31 392,795 18,049 6.13
Nontaxable
securities 19,939 600 12.04 19,880 1,801 12.08
Loans 510,244 10,728 8.41 517,382 32,324 8.33
------- ------ ----- ------- ------ -----
Total
interest-earning
assets 918,026 17,433 7.60 932,089 52,231 7.47
Noninterest-earning
assets:
Cash and due
from banks 26,486 25,835
Allowance for
loan losses (7,953) (8,024)
Other assets 66,650 66,465
------- -------
Total
assets $1,003,209 $1,016,365
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Interest-bearing
demand deposits $88,315 $449 2.03% $88,693 $1,359 2.04%
Savings deposits 243,080 1,779 2.93 245,771 5,337 2.89
Money market
deposits 45,521 389 3.42 47,583 1,229 3.44
Other time
deposits 370,374 5,271 5.69 379,432 15,966 5.61
Short-term
borrowing 29,802 456 6.13 27,632 1,241 5.99
Notes payable 22,254 407 7.32 28,479 1,511 7.08
-------- ------ ----- ------- ------ ----
Total
interest-bearing
liabilities 799,346 8,751 4.38 817,590 26,643 4.34
Noninterest-bearing
liabilities:
Demand deposits 100,495 97,872
Other
liabilities 8,342 6,963
Stockholders'
equity 95,026 93,940
------- -------
Total liabilities
and stockholders'
equity $1,003,209 $1,016,365
========== ==========
Net interest income
and margin $8,682 3.78% $25,588 3.66%
====== ==== ====== ====
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1997. The fully taxable
equivalent adjustment to interest income for the three and nine months
ended September 30, 1997 was $220 and $660, respectively. The average
balance on nonaccrual loans is included in the total loans category.
The average balances do not include the effect of SFAS No. 115.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-Q.
<TABLE>
<CAPTION>
DESCRIPTION NO.
EXHIBIT UNDER ITEM 601 EXHIBIT
NUMBER OF REGULATION S-K DESCRIPTION
<S> <C> <C> <C>
1 (20) Report furnished to
securities holders.
Third Quarter Report.
27 (27) Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE BANC GROUP, INC.
Dated: OCTOBER 30, 1998 By: /S/ JOHN J. GLEASON, JR.
------------------------
John J. Gleason, Jr.
Director, Vice Chairman and
Chief Executive Officer
By: /S/ SARA J. MIKUTA
------------------
Sara J. Mikuta
Chief Financial Officer
and Treasurer
<PAGE>
______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
EXHIBITS
TO
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
____________________________________________________
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________
<PAGE>
EXHIBIT 1. REPORT FURNISHED TO SECURITIES HOLDERS.
<PAGE>
October 21, 1998
Dear Shareholder:
Pinnacle reported net income of $4,435,000, or $0.58 per diluted share, for
the third quarter of 1998. On a per share basis, net income was 5% lower
than the $4,663,000, or $0.61 per share, earned in the third quarter of
1997. The return on average equity was 16.7% for the third quarter of
1998 and the return on average assets amounted to 1.74%.
Net income for the first nine months of 1998 was $11,564,000 or $1.53 per
share, compared with $10,845,000, or $1.43 per share, earned in the first
nine months of 1997, a 7% per share increase. The return on average equity
was 15.2% for the first nine months of 1998 and the return on average assets
totalled 1.52%.
Total consolidated assets amounted to $1.044 billion at September 30, 1998,
up 2% from the same quarter end in 1997. Total loans were $525 million, an
increase of 3%, and total deposits amounted to $871 million, up 4%.
Stockholders' equity totalled $119 million, resulting in a book value per
share of $15.88, an increase of 9% over the same period end in 1997.
Lower net interest income and an increase in operating expenses were the
primary factors contributing to the decline in earnings in the third quarter.
Net interest income declined 4% as lower yields earned on taxable securities
securities and the loan portfolio contributed to a 21 basis point decline
in Pinnacle's net interest margin to 3.57%. Operating expense increased 6%
due to higher occupancy costs as a result of the opening of two new banking
offices and Pinnacle's operations center, and increased marketing and
advertising costs.
On a year-to-date comparative basis, these factors were offset by higher gains
recorded on the sale of securities and a 7% increase in other operating income.
Net gains on the sale of securities totalled $3.3 million in the third quarter
and $8.4 million for the first nine months of 1998. The net gains recorded
in 1998 were primarily the result of the sale of equity securities. Equity
securities were sold during the quarter in order to reallocate portfolio
funds based on management's assessment of the financial performance of certain
issues. At September 30, 1998, Pinnacle's equity portfolio consisting of
investments in other financial institutions had unrealized appreciation of
$6.6 million. There were no sales of U. S. Government securities during
the third quarter of 1998. At September 30, 1998, Pinnacle's term
securities portfolio had an average maturity of 32 months and unrealized
appreciation of $11.9 million.
Non-performing assets totalled $7,389,000 at September 30, 1998, an increase
of $268,000 from the amount at year end. The allowance for loan losses was
$7,193,000, or 1.37% of loans at quarter end. Non-performing assets at
September 30, 1998 were 1.41% of total loans plus other real estate owned,
and amounted to 0.71% of total assets.
At the Board of Directors' meeting on October 20, 1998, the Board declared a
dividend of $0.23 per share payable on November 12 to shareholders of record
as of November 2.
Very truly yours,
/S/ JOHN J. GLEASON, JR.
John J. Gleason, Jr.
Vice Chairman and
Chief Executive Officer
<PAGE>
PINNACLE BANC GROUP, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR
SEPTEMBER 30 TO DATE
------------------------ --------------------
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $8,150 $8,462 $24,052 $24,928
Provision for loan
losses 0 0 0 0
Net securities gains 3,253 3,187 8,429 5,753
Non-interest income 2,195 2,229 6,650 6,222
Non-interest expense 7,278 6,862 22,139 20,532
Provision for income
taxes 1,885 2,353 5,428 5,526
Net income 4,435 4,663 11,564 10,845
BALANCE SHEET (end of period)
Total assets $1,044,375 $1,019,615
Loans 524,666 509,789
Portfolio funds 436,392 427,577
Deposits 870,662 837,706
Debt 21,300 20,625
Stockholders' equity 119,234 109,464
PER SHARE DATA
Earnings per share $0.58 $ 0.61 $1.53 $ 1.43
Book value 15.88 14.60 15.88 14.60
Dividends 0.23 0.22 0.69 0.66
Cash earnings per share 0.66 0.70 1.77 1.67
Tangible book value 13.05 11.44 13.05 11.44
RATIOS
Return on average equity 16.7% 19.6% 15.2% 15.4%
Return on average assets 1.74 1.86 1.52 1.42
Net interest margin 3.57 3.78 3.54 3.66
Non-performing assets /
total assets 0.71 0.77 0.71 0.77
MARKET DATA
Stock price range (during the quarter):
High $34.13 $24.50
Low 24.50 21.00
Close 26.50 24.25
Annual dividend rate 0.92 0.88
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
FINANCIAL DATA SCHEDULE.
<ARTICLE> 9
<CIK> 0000827085
<NAME> PINNACLE BANC GROUP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,490
<INT-BEARING-DEPOSITS> 143
<FED-FUNDS-SOLD> 900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 435,349
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 435,349
<LOANS> 524,666
<ALLOWANCE> (7,193)
<TOTAL-ASSETS> 1,044,375
<DEPOSITS> 870,662
<SHORT-TERM> 22,425
<LIABILITIES-OTHER> 10,754
<LONG-TERM> 21,300
0
0
<COMMON> 23,461
<OTHER-SE> 95,773
<TOTAL-LIABILITIES-AND-EQUITY> 1,044,375
<INTEREST-LOAN> 31,473
<INTEREST-INVEST> 17,990
<INTEREST-OTHER> 208
<INTEREST-TOTAL> 49,671
<INTEREST-DEPOSIT> 24,046
<INTEREST-EXPENSE> 25,619
<INTEREST-INCOME-NET> 24,052
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 8,429
<EXPENSE-OTHER> 22,139
<INCOME-PRETAX> 16,992
<INCOME-PRE-EXTRAORDINARY> 16,992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,564
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.53
<YIELD-ACTUAL> 3.54
<LOANS-NON> 3,858
<LOANS-PAST> 1,773
<LOANS-TROUBLED> 1,148
<LOANS-PROBLEM> 3,734
<ALLOWANCE-OPEN> 7,520
<CHARGE-OFFS> 610
<RECOVERIES> 282
<ALLOWANCE-CLOSE> 7,193
<ALLOWANCE-DOMESTIC> 2,383
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,813
</TABLE>
