<PAGE>
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 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 (I.R.S. Employer
of 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 July 31, 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 June 30,
1998 and December 31, 1997, the related consolidated statements of income for
the three and six month periods ended June 30, 1998 and 1997, and the related
consolidated statements of cash flows for the six month periods ended June 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".
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30 DECEMBER 31
---------- -----------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 30,628 $31,103
Federal funds sold 800 2,800
---------- -----------
Total cash and cash equivalents 31,428 33,903
Interest-bearing deposits 102 228
Securities:
Available for sale 426,366 434,234
(amortized cost:
6/30/98 - $405,585
12/31/97 - $409,123
Loans, net of unearned discount 509,591 510,207
Less: Allowance for loan losses (7,191) (7,520)
---------- -----------
Net loans 502,400 502,687
Premises and equipment 20,435 18,451
Goodwill 21,868 23,076
Other assets 27,352 22,232
---------- -----------
Total $1,029,951 $1,034,811
---------- -----------
---------- -----------
LIABILITIES:
Demand deposits:
Noninterest-bearing $111,661 $104,644
Interest-bearing 90,429 96,092
Savings deposits 282,205 281,737
Other time deposits 391,235 363,996
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Total deposits 875,530 846,469
Short-term borrowings 8,025 38,525
Notes payable 15,900 20,000
Other liabilities 14,184 14,359
---------- -----------
Total liabilities 913,639 919,353
STOCKHOLDERS' EQUITY:
Common stock, $3.125 par 23,461 23,449
20,000,000 shares authorized;
shares issued and outstanding:
6/30/98 - 7,507,523
12/31/97 - 7,503,773
Additional paid-in capital 38,638 38,578
Retained earnings 40,532 36,856
Unrealized gains in securities available
for sale 13,681 16,575
---------- -----------
Total stockholders' equity 116,312 115,458
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Total $1,029,951 $1,034,811
---------- -----------
---------- -----------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED JUNE 30 ENDED JUNE 30
--------------------- -------------------
1998 1997 1998 1997
--------------------- -------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 10,457 $10,896 $20,797 $21,564
Securities:
Taxable 5,591 5,998 11,198 11,955
Tax exempt 343 394 703 793
Interest-bearing deposits, Federal funds
sold and other 140 15 193 46
--------------------- -------------------
Interest income 16,531 17,303 32,891 34,358
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 464 456 903 910
Savings 2,135 2,217 4,215 4,397
Other time 5,489 5,311 10,802 10,695
Short-term borrowings 102 406 383 784
Notes payable 351 539 686 1,105
--------------------- -------------------
Interest expense 8,541 8,929 16,989 17,891
--------------------- -------------------
Net Interest Income 7,990 8,374 15,902 16,467
Provision for loan losses 0 0 0 0
--------------------- -------------------
Net interest income after provision
for loan losses 7,990 8,374 15,902 16,467
OTHER INCOME:
Banking services and other 1,496 1,381 3,089 2,828
Trust services 686 631 1,366 1,165
Net securities gains 2,278 1,465 5,176 2,566
--------------------- -------------------
Other income 4,460 3,477 9,631 6,559
OTHER EXPENSE:
Salaries, profit sharing and other employee benefits 3,634 3,435 7,197 6,882
Occupancy 763 633 1,466 1,343
Amortization of goodwill and other intangibles 604 600 1,208 1,195
Other operating expenses 2,545 1,976 4,990 4,250
--------------------- -------------------
Other expense 7,546 6,644 14,861 13,670
--------------------- -------------------
Income before income taxes 4,904 5,207 10,672 9,356
Provision for income taxes 1,625 1,763 3,543 3,173
--------------------- -------------------
NET INCOME $3,279 $3,444 $7,129 $6,183
--------------------- -------------------
--------------------- -------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,507,523 7,538,679 7,507,356 7,568,279
DILUTED 7,541,399 7,540,805 7,540,013 7,569,724
EARNINGS PER SHARE:
BASIC $0.44 $0.46 $0.95 $0.82
DILUTED $0.44 $0.46 $0.95 $0.82
DIVIDENDS PER SHARE $0.23 $0.22 $0.46 $0.44
</TABLE>
4
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
(IN THOUSANDS) ENDED JUNE 30 ENDED JUNE 30
--------------------- -------------------
1998 1997 1998 1997
-------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Net income $3,279 $3,444 $7,129 $6,183
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities (804) 6,538 792 6,811
Less: reclassification adjustment for gains (losses)
included in net income (2,278) (1,465) (5,176) (2,566)
-------- ----------- -------- ---------
Net unrealized gains (losses) on securities (3,082) 5,073 (4,384) 4,245
Income tax expense (benefit) related to unrealized
gains (losses) on securities (1,047) 1,725 (1,490) 1,443
-------- ----------- -------- ---------
Other comprehensive income, net of tax (2,035) 3,348 (2,894) 2,802
-------- ----------- -------- ---------
Comprehensive income $1,244 $6,792 $4,235 $8,985
-------- ----------- -------- ---------
-------- ----------- -------- ---------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED JUNE 30
------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,129 $6,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 976 871
Amortization of goodwill and other intangibles 1,208 1,195
Amortization of purchase accounting adjustments 31 (34)
Discount accretion (430) (747)
Premium amortization 150 127
Provision for loan losses 0 0
Gain on sale of securities (5,176) (2,566)
Decrease in interest receivable 49 3,665
Increase in interest payable 267 327
Decrease (increase) in other assets (5,169) 1,381
Increase (decrease) in other liabilities 1,054 (1,706)
Other, net (299) (248)
------- -------
Total adjustments (7,339) 2,265
Net cash provided by (used for) operating activities (210) 8,448
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 712,355 743,627
Proceeds from maturities and paydowns of securities 5,704 1,249
Purchase of securities (708,963) (719,644)
Net decrease in interest-bearing deposits 126 3,042
Net loan principal collected 424 4,495
Premises and equipment expenditures (2,991) (1,142)
------- -------
Net cash provided by investing activities 6,655 31,627
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits 29,061 (20,779)
Net decrease in short-term borrowings (30,500) (2,744)
Proceeds from notes payable 10,925 10,000
Principal reductions of notes payable (15,025) (14,050)
Issuance of common stock 72 709
Purchase and retirement of common stock 0 (3,098)
Dividends paid (3,453) (3,351)
------- -------
Net cash used for financing activities (8,920) (33,313)
Net increase (decrease) in cash and cash equivalents (2,475) 6,762
Cash and cash equivalents at beginning of period 33,903 23,095
------- -------
Cash and cash equivalents at end of period $31,428 $29,857
------- -------
------- -------
CASH PAID DURING PERIOD FOR:
Interest $16,722 $17,766
Income taxes 1,861 2,175
</TABLE>
6
<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 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 six months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Common shares outstanding 7,507,523 7,538,679 7,507,356 7,568,279
Common stock equivalents:
Stock options outstanding 82,500 86,250 82,500 86,250
Treasury stock method (48,624) (84,124) (49,843) (84,805)
--------- --------- --------- ---------
Net 33,876 2,126 32,657 1,445
--------- --------- --------- ---------
DILUTED EARNINGS PER SHARE:
Common shares outstanding
plus assumed conversions 7,541,399 7,540,805 7,540,013 7,569,724
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
NET INCOME - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated net income was $7,129, or $0.95 per share, on a diluted basis
for the six months ended June 30, 1998, compared to the $6,183, or $0.82 per
share, earned in the first six months of 1997. The annualized return on average
assets was 1.41% for the first six months of 1998 and 1.22% for the first six
months of 1997. For each period, the return on average equity was 14.4% and
13.4%, 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 the increase in net securities
gains. Net securities gains were $5,176 compared to $2,566 in gains during the
same period a year ago. Net interest income decreased 3% to $15,902 from
$16,467 with a corresponding decrease in the net interest margin from 3.60% to
3.53% for the same periods. Lower rates earned on earning assets was the
primary factor in lower net interest income and net interest margin. Other
operating income, excluding net securities gains, increased 12% compared with
the same period of 1997. Other expenses increased 9%.
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 six months of 1998, Pinnacle's average earning assets were
$923,185, a 2% decrease from the comparable period of the previous year. The
net interest margin for the first six months of 1998 was 3.53%, down from 3.60%
of the same period a year ago. Net interest income on a fully taxable
equivalent basis was $16,288 for the first six months of 1998, or 4% lower than
the comparable period in 1997. Actual net interest income decreased 3% 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 7.21% for the first six months
of 1998 compared to 7.41% 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 151 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 33 basis points to 5.71% for the first six
months of 1998. The decrease in the yield on taxable securities was primarily a
drop in the rates earned on these securities than those carried a year ago.
Average volume of taxable securities decreased slightly, or 1%. The yield
earned on non-taxable securities increased 15 basis points while the average
balance decreased $2.5 million. The rate earned on loans decreased 6 basis
points while the average balance decreased 3%. Most of the decrease in average
loans relates to the residential mortgage portfolio, which decreased over $21
million due to paydowns of participation's acquired in the acquisition of
Security Federal in 1996 which have not been replaced, as well as the general
refinancing of mortgage loans. Loans which replace the residential mortgages
are at lower rates, therefore, further reducing the yield earned on residential
mortgage loans. Offsetting the decrease in residential loans has been the
increase in commercial loans of $3 million. Yields earned on these loans
remained flat; as prime rate has not changed on a year-to-year basis. Consumer
installment loans have also increased over $3 million, but yields earned on
these loans have remained relatively flat from a year ago.
8
<PAGE>
The average cost of interest-bearing liabilities decreased 5 basis points
to 4.28% from 4.33% paid in the first six months of 1997. The average rate paid
on interest-bearing demand deposits decreased 15 basis points while the rates
paid on savings deposits decreased slightly by 2 basis points and the rates paid
on money market deposits increased 4 basis points. The average rate paid on
other time deposits increased 5 basis points to 5.62% from 5.57% of a year ago.
Rates paid on other time deposits have been relatively flat since the first
quarter of 1997; however, certain special "high rate" deposits which were in the
portfolio at Security Federal which were maturing in the last half of 1997 were
replaced with a higher rate, 14-month time deposit which was implemented in the
first quarter of 1998, in conjunction with the opening of a new Chicago-area
branch and marketing campaign. This promotion brought in approximately $39
million, two-thirds of which were new deposits. In June, 1998, this same
promotion was implemented in conjunction with Pinnacle's new branch which opened
in Moline, Illinois. At the end of June, this promotion brought in
approximately $2 million in new deposits. Both promotions will negate the
effect of the run-off of promotional deposits at Security Federal. The average
balance in savings deposits also decreased $9,663 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 $14,448. Increases or decreases in the
average balance of this category fluctuate due to Pinnacle's subsidiary banks'
daily liquidity needs, such as greater loan growth and the growth in time
deposits. Also contributing the increase was the assumption of Security
Federal's higher rate fixed term advances from the Federal Home Loan Bank. The
average balance in Pinnacle's notes payable decreased $11,424 due primarily to a
stock redemption from Pinnacle Bank in July, 1997, proceeds of which were used
to pay down a portion of the notes payable. The rate paid decreased 19 basis
points as the indices (Prime or LIBOR), to which the notes payable are tied,
were lower in the first six months of 1998 compared to a year ago.
A detailed Analysis of Net Interest Income for the six and three month
periods ended June 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 six months of 1998,
as well as no provision for the first six months of 1997. Pinnacle had net
charge-offs of $329 in the first six months of 1998 compared to net
charge-offs of $484 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 for allowance for loan losses, as well as the high level of real
estate secured loans with the portfolio. No losses of a material amount have
been recorded on real estate secured loans in the last three years.
Total nonperforming assets totalled $7,271 at June 30, 1998, a slight
increase of $150, over the $7,121 at December 31, 1997. Non-performing assets
consisted of $3,877 in non-accrual loans, $1,520 in loans past due greater than
90 days and still accruing, $1,168 in restructured loans, and $706 in other real
estate owned. Approximately one-third of these nonperforming assets resulted
from the acquisition of Security Federal in 1996. The investment in impaired
loans at quarter end includes all nonaccrual loans over $100,000 and
restructured loans. All are included in the above nonperforming asset numbers.
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, there
are approximately $4,234 in potential problem loans which are identified through
that review process that are not considered nonperforming and are not included
in totals above.
9
<PAGE>
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 $3,089 for the six months ended June 30, 1998 compared to $2,828 in the
same period of 1997. The increase in fees on banking services and other income
include higher business and overdraft service charges of $126 and ATM surcharges
of $67. Trust fees increased 17% on a period-to-period basis. Total trust
assets under management amounted to $337,000 at June 30, 1998, or a 15% increase
of a year ago.
Gains on the sale of securities, on a pre-tax basis, were $5,176 for the
first six months of 1998 compared to net gains of $2,566 in the same period of
1997. The net gains on a year to date basis in 1998 consisted of gains of
$5,243 recorded on the sale of equity securities as part of Pinnacle's equity
investment program in other financial institutions and net losses of $60 from
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 losses on the portfolio funds management system of
$276.
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 125 basis points
higher than the same index. For the first six months of 1998, due to the
relative flatness of the yield curve, the portfolio underperformed the index by
3 basis points and by including the net loss under- performed the index by 5
basis points.
Noninterest expense increased 9% for the first six months of 1998 compared
to the same period last year. Employee compensation and benefits increased 5%
which includes the addition of personnel for the Warrenville and Moline banking
centers opened in January, 1998, and June, 1998, respectively. This accounted
for 3% of the increase. Occupancy expense increased 9% 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 back
room functions of Pinnacle Bank, which previously were housed in separate
banking centers. Other operating expense increased 17%, or $739, with the
advertising relating to two new campaigns (time deposit product and home equity
loan product) as well as the opening of the new banking centers contributing 7%,
or $322, of the increase. Equipment expense increased 9%, or $80, as a result
of the new banking and operation centers and expenses relating to other real
estate owned increased $199 due to additional market writedowns and related
expenses 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 $3,543 for the first six months of 1998 compared with a provision of $3,173
for the first six months of 1997. The higher provision for taxes in the first
six months of 1998 was primarily the result of higher pre-tax income in the
first six months of 1998, versus the lower pre-tax income in the same period of
1997.
10
<PAGE>
NET INCOME - THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated net income was $3,279, or $0.44 per share, on a diluted
basis for the three months ended June 30, 1998 (the "second quarter"),
compared to $3,444, or $0.46 per share, earned in the second quarter of 1997.
The annualized return on average assets was 1.29% for the second quarter of
1998 and 1.36% for the second quarter of 1997. For each period, the return
on average equity was 13.20% and 14.7%, respectively.
The primary factors for the decrease in net income was the decrease in net
interest income, higher other expense offset by higher net gains recorded on the
sale of securities. Net interest income decreased $384, or 5%. Net securities
gains of $2,278 were recorded versus net gains of $1,465 for the same period a
year ago. Other income, exclusive of securities transactions, increased $170,
or 8%. Other expense increased $902, or 14%.
NET INTEREST INCOME
During the second quarter of 1998, Pinnacle's average earning assets were
$928,179 compared to $932,132 with the comparable period of the previous year.
The net interest margin of the second quarter of 1998 was 3.52% compared to
3.69% for 1997. Net interest income on a fully taxable equivalent basis was
$8,178 for the second quarter of 1998, or 5% lower than the comparable period in
1997. Actual net interest income decreased 5%.
The yield earned on total earning assets was 7.21% for the second quarter
of 1998 compared to 7.52% for the same period of 1997. The decrease resulted
primarily from the decrease in average earning assets primarily in loans. The
yield on interest-bearing deposits and Federal funds sold increased 69 basis
points while average balances increased $8,896. The average balance of taxable
securities increased slightly and the yield on the portfolio decreased 55 basis
points. The yield earned on loans decreased 13 basis points to 8.26%. The
lower yield on loans is a result of the significant amount of real estate
related loans which were refinanced at lower rates. Total interest income, on a
fully taxable equivalent basis, decreased $802.
The average cost of interest-bearing liabilities decreased by 6 basis
points to 4.29% from the 4.35% paid in the second quarter of 1997. The average
rates paid on interest-bearing demand, savings and money market deposits
decreased 4 basis points. The average rate paid on other time deposits
increased 1 basis point as the new "CD for Me", a higher-rate time deposit,
replaced higher rate time deposits which matured from Security Federal. The
rates paid on other short-term borrowings increased 83 basis points as rates due
to the higher rates of the Federal Home Loan Bank borrowings of Security
Federal. In the previous quarter, the majority of this category was lower rate
Federal funds purchased. Rates paid on notes payable decreased 68 basis points
as the indices to which these loans were tied decreased on a quarter-to-quarter
basis.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the second quarter of 1998, as
well as no provision for the second quarter of 1997. Pinnacle had net
recoveries of $52 in 1998 compared to net charge offs of $84 in 1997.
NONINTEREST INCOME AND EXPENSE
Fees on banking services and other income were $1,496 for the three months
ended June 30, 1998 compared to $1,381 in the same period of 1997, an increase
of 8% due to increased business service charges and ATM fees. Trust fees
increased 9% to $686.
On a pre-tax basis, net gains on the sale of securities were $2,278 for the
second quarter of 1998 compared to net gains on the sale of securities of $1,465
in the same period of 1997. The net gains the second quarter of 1998 consisted
of gross gains of $5,236 and gross losses of $(2,958). The net gains realized
in the second quarter of 1997 consisted of gross gains of $2,656 and gross
losses of $(1,191).
All of the gross securities gains recorded by Pinnacle in the second
quarter of 1998 related to its equity investment portfolio and the gross losses
related to the sale of securities in the managed U. S. Government portfolio.
11
<PAGE>
Primarily all of the net securities gains recorded by Pinnacle in the second
quarter of 1997 related to its equity securities portfolio.
Non-interest expense increased 14% as a result of the added compensation
and employee benefits, occupancy expense and advertising expenses related to the
new banking centers and marketing campaigns.
INCOME TAXES
The provision for income taxes was $1,625 for the second quarter of 1998
compared with $1,763 for the second quarter of 1997. The lower provision for
taxes in the second quarter of 1998 was primarily the result of lower pre-tax
income in the second quarter of 1997.
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 non-cash 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 six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $3,279 $3,444 $7,129 $6,183
Goodwill amortization 604 600 1,208 $1,195
---------- ---------- ---------- ----------
Cash Net Income $3,883 $4,044 $8,337 $7,378
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE, DILUTED
Cash EPS $0.52 $0.54 $1.11 $0.98
As reported 0.44 0.46 0.95 0.82
CASH ROA
Average assets $1,013,264 $1,016,490 $1,008,037 $1,023,052
Average goodwill 22,326 24,420 22,524 24,888
---------- ---------- ---------- ----------
Average tangible assets $990,938 $992,070 $985,513 $998,164
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash ROA 1.57% 1.63% 1.69% 1.48%
As reported 1.29% 1.36% 1.41% 1.21%
CASH ROE
Average equity $99,370 $93,690 $99,260 $93,388
Average goodwill 22,326 24,420 22,524 24,888
---------- ---------- ---------- ----------
Average tangible equity $77,044 $69,270 $76,736 $68,500
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash ROE 20.2% 23.4% 21.7% 21.5%
As reported 13.2% 14.7% 14.4% 13.2%
</TABLE>
12
<PAGE>
BALANCE SHEET
Total consolidated assets were $1,029,951 at June 30, 1998, approximately
the same as year-end 1997.
Total securities were $426,366 at June 30, 1998 and consisted of U. S.
Government securities amounting to $356,627, mortgage-backed securities and
CMO's of $3,875, state and municipal bonds of $19,442, and corporate and other
securities of $46,422. The total securities outstanding at June 30, 1998
decreased 2% from year-end 1997 but retained relatively the same mix.
U. S. Government securities amounted to $356,627, or 35% of assets, at June
30, 1998. The average remaining maturity of these securities was approximately
thirty-four months. U. S. Government securities are part of Pinnacle's term
taxable securities strategy which has been designed to manage Pinnacle's
interest rate risk and to take advantage of the slope in the yield curve. The
decision to undertake intermittent sales of these securities is based on
management's assessment of economic conditions. For example, management will
undertake sales of securities based on the slope of the yield curve and its
determination that the reinvestment of the proceeds into a longer or shorter
term security is an acceptable alternative given management's assessment of
interest rate risk. At June 30, 1998, U. S. Government securities had gross
unrealized gains of $1,302 and gross unrealized losses of $(114) on a pre-tax
basis.
Other securities held by Pinnacle, amounting to $69,739 at June 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 $19,989 and gross unrealized losses of $(396) on a pre-tax basis. Included
in this amount was $16.9 million of unrealized gains on Pinnacle's equity
investment program in other financial institutions. Currently, Pinnacle is not
using any derivatives for hedging or other purposes.
Total loans amounted to $509,591 at June 30, 1998, approximately the same
as year-end 1997. Real estate loans decreased 3%, or $9,595, as purchased
participation loans acquired with Security Federal continued to pay down
approximately $4,518, and multi-family loans, also primarily related to the
Security Federal acquisition, decreased $6,284. Absent these items, real estate
loans increased $1,207. Consumer installment loans increased $3,091, or 5%,
from year end and commercial loans increased $5,887, or 5%. At June 30, 1998,
23% of the loans were commercial, 64% were real estate, and 13% were installment
loans. Pinnacle's loan to asset ratio was 49% at June 30, 1998 and its loan to
deposit ratio was 58%.
Goodwill and other intangibles amounted to $21,868, or 19% of stockholders'
equity at June 30, 1998.
Total deposits were $875,530 at June 30, 1998, or 3% higher than year-end
1997. The increase in deposits was primarily in other time deposits which
increased $27,239. As mentioned previously, a promotion corresponding with the
opening of two new banking centers in 1998 brought in significant new time
deposit money. Noninterest bearing demand deposits increased $7,017 but were
offset by the decrease in interest bearing demand deposits of $5,663. Savings
deposits remained flat. At June 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), 32%; and
other time deposits, 45%.
Pinnacle's notes payable were $15,900 at June 30, 1998. Outstandings were
used for the acquisition of Acorn Financial in 1995; for the acquisition of
Financial Security in 1996; for the purchase of equity securities; and other
corporate needs. Outstandings consisted of $20,000 at year-end 1997.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $116,312 at June 30, 1998 and
$115,458 at December 31, 1997. The ratio of equity to assets was 11.29% and
11.16% at each period end, respectively.
13
<PAGE>
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage Capital
Ratio with a minimum level of Tier One capital to total assets of 3.00%. Tier
One capital consists of common stock, additional paid-in capital and retained
earnings, and is exclusive of Pinnacle's allowance for loan losses, goodwill and
other intangibles, and unrealized gains (losses) on securities available for
sale. In addition, the Board has issued Risk-Based Capital Guidelines with a
minimum standard of total regulatory capital to risk weighted assets of 8.00%.
The structure of Pinnacle's balance sheet results in a Risk-Based Capital Ratio
significantly in excess of the guidelines.
The following table provides an analysis of the minimum capital
requirements (as defined), ratios and the excess over the minimum which Pinnacle
holds as capital as of June 30, 1998, in thousands (except percentages).
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
-------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Leverage Capital 4.00% $39,492 8.18% $80,763 $41,271
Risk-based Capital:
Tier One 4.00 19,841 16.28 80,763 60,922
Total (Tier Two) 8.00 39,683 17.53 86,976 47,293
</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 June 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 $15.49 at June 30, 1998 compared to $15.39 at
December 31, 1997. Dividends amounting to $0.46 per share were paid in the
first six months of 1998. Tangible book value (stockholders' equity less
goodwill) was $12.58 at June 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 six months ended June
30, 1998, cash flows were generated primarily from the net decrease in
securities of $9,096 and the increase in total deposits of $29,062. Cash
flow uses and needs include a $4,100 net reduction in notes payable, a
$30,500 reduction in short-term borrowings, and $3,453 to pay dividends.
Pinnacle's net cash position decreased $2,475, with the decrease primarily in
Federal funds sold.
Pinnacle's subsidiary banks have a relatively stable base of deposits and
any increased loan demand can be sufficiently funded without a material change
in its balance sheet. Pinnacle's corporate strategy includes
14
<PAGE>
acquisitions. Certain acquisitions could be funded with debt and/or issuances
of stock. Reductions of debt would be made from Pinnacle's earnings.
At June 30, 1998, Pinnacle had a line of credit of $35,000 with an
unaffiliated bank from which $15,900 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.
Market risk at Pinnacle consists primarily of interest rate risk and, to
some extent, market price risk. Market risk exposure at Pinnacle has not
changed significantly 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 July 1, 1998, bank
subsidiaries could have declared approximately $369 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, stock redemption, 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 six 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 will begin testing in a proxy environment during August,
1998, which will continue through March, 1999. Contingency planning for
noncompliant critical vendors, if necessary, will be addressed when testing
plans and strategies have been received and reviewed by Pinnacle's task force.
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 not expected to be material
to the financial position of Pinnacle at this time. 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.
15
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
----------------------------- ---------------------------
(DOLLARS IN 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 $10,135 $ 140 5.53% $7,127 $ 193 5.42%
Taxable securities 394,064 5,591 5.58 392,431 11,198 5.71
Nontaxable securities 16,917 520 12.30 17,385 1,066 12.25
Loans 507,063 10,468 8.26 506,242 20,820 8.23
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 928,179 16,719 7.21 923,185 33,277 7.21
Noninterest-earning assets:
Cash and due from banks 26,639 26,739
Allowance for loan losses (7,164) (7,334)
Other assets 65,610 65,447
---------- ----------
Total assets $1,013,264 $1,008,037
---------- ----------
---------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits $97,215 $ 464 1.91% $95,030 $903 1.90%
Savings deposits 237,531 1,732 2.92 237,476 3,440 2.90
Money market deposits 45,741 403 3.52 44,422 775 3.49
Other time deposits 389,813 5,489 5.63 384,688 10,802 5.62
Short-term borrowings 5,916 102 6.90 12,081 383 6.34
Notes payable 21,167 351 6.51 20,219 686 6.79
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities 797,383 8,541 4.29 793,916 16,989 4.28
Noninterest-bearing liabilities:
Demand deposits 108,377 106,010
Other liabilities 8,134 8,851
Stockholders' equity 99,370 99,260
---------- ----------
Total liabilities and
stockholders' equity $1,013,264 $1,008,037
---------- ----------
---------- ----------
Net interest income and margin $ 8,178 3.52% $16,288 3.53%
-------- ----- -------- -----
-------- ----- -------- -----
</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 six months ended June
30, 1998 was $188 and $386, 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.
16
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
----------------------------- -----------------------------
(DOLLARS IN 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 $1,239 $15 4.84% $2,354 $46 3.91%
Taxable securities 391,176 5,998 6.13 396,023 11,955 6.04
Nontaxable securities 19,682 596 12.12 19,850 1,201 12.10
Loans 520,035 10,912 8.39 521,010 21,597 8.29
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 932,132 17,521 7.52 939,237 34,799 7.41
Noninterest-earning assets:
Cash and due from banks 25,970 25,504
Allowance for loan losses (7,918) (8,060)
Other assets 66,306 66,371
---------- ----------
Total assets $1,016,490 $1,023,052
---------- ----------
---------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits $89,366 $456 2.04% $88,885 $910 2.05%
Savings deposits 246,747 1,788 2.90 247,139 3,557 2.88
Money market deposits 49,114 429 3.49 48,631 840 3.45
Other time deposits 378,176 5,311 5.62 384,036 10,695 5.57
Short-term borrowings 26,749 406 6.07 26,529 784 5.91
Notes payable 29,970 539 7.19 31,643 1,105 6.98
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities 820,122 8,929 4.35 826,863 17,891 4.33
Noninterest-bearing liabilities:
Demand deposits 96,827 96,539
Other liabilities 5,851 6,262
Stockholders' equity 93,690 93,388
---------- ----------
Total liabilities and
stockholders' equity $1,016,490 $1,023,052
---------- ----------
---------- ----------
Net interest income and margin $8,592 3.69% $16,908 3.60%
-------- ----- -------- -----
-------- ----- -------- -----
</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 six months ended June
30, 1997 was $218 and $440, 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.
17
<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.
Second quarter report.
27 (27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
</TABLE>
18
<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: JULY 31, 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
19
<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>
August 12, 1998
Dear Shareholder:
Pinnacle Banc Group, Inc. reported net income of $3,279,000, or $0.44 per
diluted share, for the second quarter of 1998. On a per share basis, net income
was 3% lower than the $3,444,000, or $0.46 per share earned in the second
quarter of 1997. The return on average equity was 13.2% for the second quarter
of 1998 and the return on average assets amounted to 1.29%.
Net income for the first six months of 1998 was $7,129,000, or $0.95 per share,
compared to $6,183,000, or $0.82 per share, earned in the first half of 1997, a
16% per share increase. The return on average equity was 14.4% for the first
six months of 1998 and the return on average assets totalled 1.41%.
Total consolidated assets amounted to $1.030 billion at June 30, 1998, up 1%
from the same quarter end in 1997. Total loans were $510 million and total
deposits amounted to $876 million. Stockholders' equity totalled $116 million,
resulting in a book value per share of $15.49, an increase of 12% over the same
period end in 1997.
The lower level of earnings in the second quarter was the result of two factors.
Net interest income declined 5% as lower yields earned on taxable securities and
a decrease in income on the loan portfolio due to both volume and yield
pressures contributed to a 17 basis point decline in Pinnacle's net interest
margin to 3.52%. Net income for the second quarter was also negatively impacted
by a 14% increase in operating expense. The increase resulted from a 6%
increase in employee compensation, 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.
These factors were offset by higher gains recorded on the sale of securities and
an 8% increase in other operating income. Net gains on the sale of securities
totalled $2.3 million in the second quarter of 1998 compared to gains of $1.5
million in the same period of the previous year. The net gains recorded in the
second quarter of 1998 included gains on the sale of equity securities of $5.2
million and a loss on the sale of U. S. Government securities of $2.9 million.
Sales of equity securities were made during the quarter in order to reallocate
portfolio funds based on management's assessment of the financial performance of
certain issues. The sale of U. S. Government securities was made to take
advantage of a higher reinvestment alternative. At June 30, 1998, Pinnacle's
term securities portfolio had unrealized appreciation of $1.3 million and the
equity portfolio consisting of investments in other financial institutions had
unrealized appreciation of $16.9 million.
Non-performing assets totalled $7,271,000 at June 30, 1998, an increase of
approximately $150,000 from the amount at year end. The allowance for loan
losses was $7,191,000, or 1.41% of loans at quarter end. Non-performing assets
at June 30, 1998 were 1.42% of total loans plus other real estate owned, and
amounted to 0.71% of total assets.
At the Board of Directors' meeting on July 21, 1998, the Board declared a
dividend of $0.23 per share payable on August 13 to shareholders of record as of
August 3.
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 JUNE 30 YEAR TO DATE
------------------------ --------------------
1998 1997 1998 1997
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $7,990 $8,374 $15,902 $16,467
Provision for loan losses 0 0 0 0
Net securities gains (losses) 2,278 1,465 5,176 2,566
Non-interest income 2,182 2,012 4,455 3,993
Non-interest expense 7,546 6,644 14,861 13,670
Provision for income taxes 1,625 1,763 3,543 3,173
Net income 3,279 3,444 7,129 6,183
BALANCE SHEET (END OF PERIOD)
Total assets $1,029,951 $1,021,641
Loans 509,591 520,145
Portfolio funds 427,268 418,278
Deposits 875,530 856,773
Debt 15,900 28,750
Stockholders' equity 116,312 104,090
`
PER SHARE DATA
Earnings per share $ 0.44 $ 0.46 $0.95 $ 0.82
Book value 15.49 13.85 15.49 13.85
Dividends 0.23 0.22 0.46 0.44
Cash earnings per share 0.52 0.54 1.11 0.98
Tangible book value 12.58 10.65 12.58 10.65
RATIOS
Return on average equity 13.2 % 14.7 % 14.4 % 13.2 %
Return on average assets 1.29 1.36 1.41 1.21
Net interest margin 3.52 3.69 3.53 3.60
Non-performing assets / total assets 0.71 0.96 0.71 0.96
MARKET DATA
Stock price range
(DURING THE QUARTER):
High $37.00 $21.75
Low 32.00 19.50
Close 33.25 21.00
Annual dividend rate 0.92 0.88
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 30,628
<INT-BEARING-DEPOSITS> 102
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426,366
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 509,591
<ALLOWANCE> (7,191)
<TOTAL-ASSETS> 1,029,951
<DEPOSITS> 875,530
<SHORT-TERM> 8,025
<LIABILITIES-OTHER> 14,184
<LONG-TERM> 15,900
0
0
<COMMON> 23,461
<OTHER-SE> 92,851
<TOTAL-LIABILITIES-AND-EQUITY> 1,029,951
<INTEREST-LOAN> 20,797
<INTEREST-INVEST> 11,901
<INTEREST-OTHER> 193
<INTEREST-TOTAL> 32,891
<INTEREST-DEPOSIT> 15,920
<INTEREST-EXPENSE> 16,989
<INTEREST-INCOME-NET> 15,902
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5,176
<EXPENSE-OTHER> 14,861
<INCOME-PRETAX> 10,672
<INCOME-PRE-EXTRAORDINARY> 10,672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,129
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<YIELD-ACTUAL> 3.53
<LOANS-NON> 3,877
<LOANS-PAST> 1,520
<LOANS-TROUBLED> 1,168
<LOANS-PROBLEM> 4,234
<ALLOWANCE-OPEN> 7,520
<CHARGE-OFFS> 496
<RECOVERIES> 167
<ALLOWANCE-CLOSE> 7,191
<ALLOWANCE-DOMESTIC> 2,384
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,807
</TABLE>
