<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 March 31, 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 April 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 March 31,
1998 and December 31, 1997, and the related unaudited consolidated statements
of income, comprehensive income and cash flows for the three month periods
ended March 31, 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 complete financial statements. 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" and the adoption of SFAS No. 130,
"Reporting Comprehensive Income".
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31 DECEMBER 31
1998 1997
----------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 25,706 $ 31,103
Federal funds sold 7,275 2,800
----------- ------------
Total cash and cash equivalents 32,981 33,903
Interest-bearing deposits 141 228
Securities:
Available for sale 434,140 434,234
(amortized cost: 3/31/98 - $410,274
12/31/97 - $409,123)
Loans, net of unearned discount 508,083 510,207
Less: Allowance for loan losses (7,138) (7,520)
----------- ------------
Net loans 500,945 502,687
Premises and equipment 18,926 18,451
Goodwill and other intangibles 22,472 23,076
Other assets 23,229 22,232
----------- ------------
Total $1,032,834 $1,034,811
----------- ------------
----------- ------------
LIABILITIES:
Demand deposits:
Noninterest-bearing $ 104,581 $104,644
Interest-bearing 92,422 96,092
Savings deposits 283,812 281,737
Other time deposits 390,633 363,996
----------- ------------
Total deposits 871,448 846,469
Short-term borrowings & FHLB advances 7,175 38,525
Notes payable 21,775 20,000
Other liabilities 15,642 14,359
----------- ------------
Total liabilities 916,040 919,353
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $3.125 par 23,461 23,449
20,000,000 shares authorized; shares issued and
outstanding: 3/31/98: 7,507,523
12/31/97: 7,503,773)
Additional paid-in capital 38,638 38,578
Retained earnings 38,979 36,856
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of tax 15,716 16,575
----------- ------------
Total stockholders' equity 116,794 115,458
----------- ------------
Total $1,032,834 $1,034,811
----------- ------------
----------- ------------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED MARCH 31
1998 1997
-------- ---------
<S> <C> <C>
INTEREST INCOME:
Loans $10,341 $10,668
Securities:
Taxable 5,607 5,957
Tax exempt 360 399
Interest-bearing deposits, Federal funds sold
and other 52 31
-------- ---------
Interest income 16,360 17,055
-------- ---------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 438 454
Savings 2,080 2,180
Other time 5,313 5,385
Short-term borrowings 282 378
Notes payable 335 565
-------- ---------
Interest expense 8,448 8,962
-------- ---------
NET INTEREST INCOME 7,912 8,093
Provision for loan losses -0- -0-
-------- ---------
Net interest income after provision for
loan losses 7,912 8,093
-------- ---------
OTHER INCOME:
Banking services and other 1,592 1,447
Trust services 681 533
Net securities gains 2,897 1,101
-------- ---------
Other income 5,170 3,081
-------- ---------
OTHER EXPENSE:
Salaries, profit sharing and other employee
benefits 3,563 3,447
Occupancy 703 709
Amortization of goodwill and other intangibles 604 595
Other operating expenses 2,444 2,274
-------- ---------
Other expense 7,314 7,025
-------- ---------
Income before income taxes 5,768 4,149
Provision for income taxes 1,918 1,410
-------- ---------
NET INCOME $ 3,850 $ 2,739
-------- ---------
-------- ---------
EARNINGS PER SHARE: (NOTE 1)
BASIC $0.51 $0.36
DILUTED $0.51 $0.36
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE THREE MONTHS
ENDED MARCH 31
1998 1997
-------- ---------
<S> <C> <C>
NET INCOME $3,850 $2,739
Other comprehensive income, net of tax:
Unrealized gains on securities 1,595 274
Less: Reclassification adjustment for gains
included in net income (2,897) (1,101)
-------- --------
Net unrealized losses on securities (1,302) (827)
Income tax benefit related to unrealized losses
on securities 443 281
-------- --------
Other comprehensive income (loss), net of tax (859) (546)
-------- --------
COMPREHENSIVE INCOME $2,991 $2,193
-------- --------
-------- --------
</TABLE>
(See Note 2)
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE THREE MONTHS
ENDED MARCH 31
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
-------- --------
<S> <C> <C>
Net income $ 3,850 $ 2,739
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 480 435
Amortization of goodwill and other intangibles 604 595
Amortization of purchase accounting adjustments 37 (29)
Provision for loan losses -0- -0-
Discount accretion (229) (367)
Premium amortization 100 50
Gain on sale of securities (2,897) (1,101)
Decrease in interest receivable 742 1,553
Increase (decrease) in interest payable (244) 420
Increase in other assets (1,738) (2,733)
Increase (decrease) in other liabilities 1,888 (1,515)
Other, net 30 149
-------- --------
Total adjustments (1,227) (2,543)
Net cash provided by operating activities 2,623 196
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 355,768 367,734
Proceeds from maturities and paydowns of securities 320 4,420
Purchase of securities available for sale (354,279) (363,774)
Net decrease in interest-bearing deposits 86 1,551
Net loan principal collected 1,877 3,952
Premises and equipment expenditures (991) (406)
-------- --------
Net cash provided by investing activities 2,781 13,477
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits 24,904 (13,427)
Net increase (decrease) in short-term borrowings (31,350) 6,256
Proceeds from notes payable 5,675 3,550
Principal reductions of notes payable (3,900) (2,800)
Issuance of common stock 72 465
Purchase and retirement of common stock -0- (1,506)
Dividends paid (1,727) (1,686)
-------- --------
Net cash used for financing activities (6,326) (9,148)
Net increase (decrease) in cash and cash equivalents (922) 4,525
Cash and cash equivalents at beginning of period 33,903 23,095
-------- --------
Cash and cash equivalents at end of period $32,981 $27,620
-------- --------
-------- --------
CASH PAID DURING PERIOD FOR:
Interest $8,692 $8,542
Income taxes -0- -0-
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
EARNINGS PER SHARE: (NOTE 1)
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 first quarter of 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31
---------------------
1998 1997
--------- ---------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Common shares outstanding 7,507,190 7,598,207
Common stock equivalents:
Stock options outstanding 82,500 108,000
Treasury stock method (51,124) (100,855)
--------- ---------
Net 31,376 7,145
--------- ---------
DILUTED EARNINGS PER SHARE:
Common shares outstanding
plus assumed conversions 7,538,566 7,605,352
--------- ---------
--------- ---------
</TABLE>
COMPREHENSIVE INCOME: (NOTE 2)
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.
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 - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Consolidated net income was $3,850, or $0.51 per share, on a diluted basis
for the three months ended March 31, 1998 (the "first quarter"), a per share
increase of 42% from the $2,739, or $0.36 per share, earned in the first three
months of 1997. The annualized return on average assets was 1.54% for the
first three months of 1998 and 1.06% for the first three months of 1997. For
each period, the return on average equity was 15.5% and 11.8%, respectively.
Return on average assets and equity for the same periods, calculated using the
effects of SFAS No. 115, would not be materially different.
The primary factor for the higher earnings was the increase in net
securities gains. Securities gains totalled $2,897 for the first quarter of
1998, compared to $1,101 for the same period a year ago. These securities
gains relate primarily to the term portfolio.
Net interest income decreased 2%, or $181. The net interest margin
increased only slightly to 3.53% for the first quarter of 1998 compared to
3.51% for the same period a year ago. While the net interest margin increased
slightly, net interest income decreased due to the decrease in average earning
assets. Average earning assets decreased $28,285, primarily in taxable
securities and loans.
Other income, excluding securities gains, increased 15% primarily in
banking services, as well as ATM fee income, and a gain on sale of fixed
assets. Other expense increased 4%, which includes an increase in advertising
expenses due to the new marketing campaigns which began in the last quarter of
1997.
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, 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 three months of 1998, Pinnacle's average earning assets
were $918,136, compared to $946,421 from a year ago. The decrease was due to
the decline in both average taxable securities and loans. The net interest
margin for the first three months of 1998 was 3.53%, up slightly from 3.51% of
the same period a year ago. Net interest income on a fully taxable equivalent
basis was $8,110 for the first three months of 1998, or 2% lower than the
comparable period in 1997. Actual net interest income decreased 2% as a result
of the decrease in average earning assets and the level net interest margin.
The yield earned on total earning assets was 7.21% for the first three
months of 1998 compared to 7.30% for the same period of 1997. The decrease in
the yield on earning assets resulted mainly from the decreased yield on taxable
securities. The yield on interest-bearing deposits and Federal funds sold
increased 165 basis points to 5.19%. During the last part of the first
quarter, Pinnacle has been in a net funds sold position which earned higher
rates than the same period in 1997 where the balances in this category were
primarily balances held at the Federal Home Loan Bank.
8
<PAGE>
The average rate on taxable securities decreased 20 basis points to 5.74%
for the first three months of 1998 compared to 5.94% of a year ago. The
decrease in the yield on taxable securities was primarily a result of the
general lower level of rates earned on these securities compared to those a
year ago. The average volume of taxable securities decreased $10,144 in the
comparable period, with a corresponding decrease in short-term borrowings of
$7,993. Non-taxable securities also decreased $2,162 and the yield increased
12 basis points to 12.21%. The rate earned on loans remained flat; however,
the average balance decreased $16,584 due to large paydowns in real estate
loans, primarily due to the mortgage industry's refinancing activity.
The average cost of interest-bearing liabilities decreased 2 basis points
to 4.28%. The average rate paid on interest-bearing demand deposits decreased
16 basis points while the rates paid on savings deposits increased 2 basis
points and the rates paid on money market deposits increased 4 basis points.
The rates on other time deposits increased 8 basis points to 5.60%. Average
balances in time deposits decreased $10,455 due to a high level of run-off from
the Security Federal acquisition of high rate broker deposits and special term
deposits. These time deposits had some effect of reducing the average rate
paid on time deposits; however, with the opening of a new Chicago-area branch
and a marketing campaign, Pinnacle Bank introduced a 14-month higher rate time
deposit in the first quarter of 1998. This promotion brought in approximately
$39 million, of which two-thirds of the balance was new deposits. This will
increase the average balances and rate in other time deposits in the subsequent
quarters of 1998, slightly negating the effect of the run-off of the broker
deposits and special term deposits. The average balance in savings deposits
also decreased $10,115 as customers in early 1997 switched their funds to
higher rate deposits and alternative investment products. This reduction in
savings has slowed and Pinnacle's savings balances have remained constant from
the fourth quarter of 1997.
The average balance in short-term borrowings decreased $7,993 due to the
reduction in taxable securities as well as the growth in other time deposits.
The average rate paid on these funds increased 40 basis points as a greater
portion of the balance was in higher rate FHLB fixed borrowings. The average
balance in notes payable decreased $14,073 due to a stock redemption of a
subsidiary bank made in the third quarter of 1997. Funds from that redemption
were used to pay down a portion of the notes payable. The yield on the notes
payable increased 18 basis points as the indices, to which the notes payable
are tied, were higher in the first quarter of 1998 compared to 1997.
A detailed Analysis of Net Interest Income for the three month periods
ended March 31, 1998 and 1997 is included on Page 15.
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 known potential losses in the loan portfolio, and
prevailing economic conditions.
There was no provision for loan losses in the first three months of 1998 as
well as for the first three months of 1997. Pinnacle had net charge-offs of
$382 in the first three months of 1998 compared to net charge-offs of $415 in
1997. The allowance for loan losses was $7,138, or 1.40% of total loans, at
March 31, 1998, compared to 1.47% at December 31, 1997. Pinnacle's management
monitors the need for a provision for loan losses on a continuous basis and
currently feels the level of the allowance for loan losses is adequate based on
several factors including the makeup of its loan portfolio, the level of non-
performing loans to total loans and its credit review system.
9
<PAGE>
Total nonperforming assets totalled $7,193, up $72 from a total of $7,121
at December 31, 1997. Nonperforming assets consisted of $4,403 in nonaccrual
loans, $905 in loans past due greater than 90 days and still accruing, $1,196
in restructured loans, and $689 in other real estate owned. The investment in
impaired loans at quarter end includes all nonaccrual loans over $100 and
restructured loans. All are included in the above non-performing 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 $5,029 in potential problem loans which are identified
through that review process that are not considered nonperforming and are not
included in totals above. Approximately half of these loans are from Security
Federal's portfolio.
NON-INTEREST INCOME AND EXPENSE
The major components of Pinnacle's non-interest 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
increased $145, primarily due to increased service charge income, ATM fees, and
a gain on the sale of fixed assets. Trust fees increased 28% on a period-to-
period basis. Total trust assets under management amounted to $332,000, or a
22% increase of a year ago.
Net gains on the sale of securities, on a pre-tax basis, were $2,897 in the
first three months of 1998 compared to net gains of $1,101, in the same period
of 1997. Almost all gains related to the sales of Pinnacle's U. S. Government
securities portfolio.
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 management's assessment of the acceptable interest rate risk for
Pinnacle.
Management has always viewed the gains recorded on this program as closely
related to its net interest income as opposed to one-time security gains or
losses. Accordingly, since implementation of the program, the yield on
Pinnacle's U. S. Government portfolio has outperformed the U. S. Treasury yield
by 26 basis points and by including the net gains since inception of the
program, the total yield is 138 basis points higher than the same Index.
Management continues to enhance the yield of the portfolio with interest income
received through the use of a master repurchase agreement where approximately
$325 million of the term portfolio was loaned to an unaffiliated broker and
collateralized in return by similar securities.
Non-interest expense increased 4% for the first three months of 1998
compared to the same period last year. Employee compensation and benefits
increased 3% with the majority of the increase due to normal raises. Occupancy
expense decreased $6 and goodwill amortization increased slightly, or $9.
Other operating expenses increased 7%, or $170, with the majority of the
increase in advertising. As previously mentioned, Pinnacle began a new
marketing campaign using both radio and television, as well as direct mail, in
the fourth quarter of 1997. The campaign was intended not only to increase
sales of banking products, but also to increase the name recognition of
Pinnacle in its market areas.
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 $1,918 for the first three months of 1998 compared with $1,410 for the
first three months of 1997. The higher provision for taxes in the first three
months of 1998 was primarily the result of higher pre-tax income in the first
quarter of 1998.
10
<PAGE>
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 ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE QUARTER ENDED
MARCH 31
---------------------
1998 1997
---------- --------
<S> <C> <C>
Net income $3,850 $2,739
Goodwill amortization 604 595
---------- --------
Cash net income $4,454 $3,334
---------- --------
---------- --------
Cash EPS - diluted $0.59 $0.44
CASH ROA:
Average assets $1,002,752 $1,029,687
Average goodwill 22,794 24,258
---------- ---------
Average tangible assets $ 979,958 $1,005,429
---------- ---------
---------- ---------
Cash ROA 1.82% 1.33%
CASH ROE:
Average equity $99,149 $93,083
Average goodwill 22,794 24,258
---------- --------
Average tangible equity $76,355 $68,825
---------- --------
---------- --------
Cash ROE 23.3% 19.4%
</TABLE>
BALANCE SHEET
Total consolidated assets were $1,032,834 at March 31, 1998, or a 1% drop
from year-end 1997.
Total securities were $434,140 at March 31, 1998 and consisted of U. S.
Government securities amounting to $353,240, mortgage-backed securities and
CMO's of $4,210, state and municipal bonds of $20,143, and corporate and other
securities of $56,547. The total securities outstanding at March 31, 1998 was
flat from year-end 1997, and the portfolio at quarter-end retained relatively
the same mix.
U. S. Government securities amounted to $353,240, or 34% of assets at March
31, 1998. The average maturity of these securities was approximately 32
months. Certain 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
11
<PAGE>
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 March
31, 1998, U. S. Government securities had gross unrealized losses of $(2,588)
on a pre-tax basis.
Other securities held by Pinnacle, amounting to $80,900, at March 31,
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 $26,631 and gross unrealized losses of $(177) on a pre-tax basis.
At quarter end, the equity portfolio of the parent company had appreciation
of $23,647. Currently, Pinnacle is not using derivative products for
hedging or other purposes.
Loans are Pinnacle's most significant balance sheet asset. Total loans
amounted to $508,083 at March 31, 1998, consistent with year-end 1997. While
total loans remained flat, real estate loans decreased $8,524. These
decreases were a result of the refinancing that the mortgage industry has
experienced in the first quarter of 1998. Offsetting the decrease in real
estate loans was the increase of $6,967 in commercial loans. Installment and
other loans remained relatively flat. At March 31, 1998, 23% of the loans
were commercial, real estate loans amounted to 64%, and installment loans
were 13% of the portfolio. Pinnacle's loan to asset ratio was 49% at March
31, 1998.
Goodwill and other intangibles amounted to $22,472, or 19% of
stockholders' equity, at March 31, 1998.
Total deposits were $871,448 at March 31, 1998, or 3% higher than
year-end 1997. The increase in deposits was primarily in other time deposits
of $26,637. In the first quarter of 1998, Pinnacle promoted a 14-month time
deposit as part of its marketing plan. This campaign resulted in $39 million
in this new category of time deposits, of which approximately $25 million was
in new customer growth. At March 31, 1998, the percentage of total deposits
for each category were: Noninterest-bearing deposits, 12%; Interest-bearing
demand deposits, 11%; Savings accounts (including money market accounts),
33%; and Other time deposits, 44%.
Pinnacle's notes payable were $21,775 at March 31, 1998. Outstandings
were used for the acquisition of Acorn Financial Corp in January, 1995;
partially for the acquisition of Financial Security in September, 1996; for
the purchase of other equity securities; and for other corporate needs. At
year-end 1997, outstandings were $20,000.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $116,794 at March 31, 1998 and
$115,458 at December 31, 1997. The ratio of equity to assets was 11.31% 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
3.00%. Tier One capital consists of common stock, additional paid-in
capital, 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 March 31, 1998 (in thousands (except
percentages).
12
<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% $40,414 7.78% $78,606 $38,192
Risk-based Capital:
Tier One 4.00 19,515 16.11 78,606 59,091
Total (Tier Two) 8.00 39,030 17.36 84,717 45,687
</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 March 31, 1998, Pinnacle and each of its subsidiary banks were
in compliance with the current capital guidelines and are considered "well-
capitalized" under regulatory standards.
Book value per share was $15.56 at March 31, 1998 compared to $15.39 at
December 31, 1997. Dividends amounting to $0.23 per share were paid in the
first three months of 1998. Tangible book value (stockholders' equity less
goodwill) was $12.56 at March 31, 1998 compared to $12.31 at December 31, 1997.
LIQUIDITY
As is 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. 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 three months ended March 31, 1998, cash flows were generated from earnings
of $2,623, a $1,809 decrease in securities, a $1,877 decrease in loans, a
$1,775 increase in notes payable, and a $24,904 increase in deposits. Cash
flow uses and needs included a $31,350 decrease in short-term borrowings,
$1,727 to pay dividends, and $991 net fixed asset expenditures. Pinnacle's net
cash position decreased $922 with Federal funds increasing $4,475 and cash and
due from banks decreasing $5,397.
Pinnacle's subsidiary banks have a relatively stable base of deposits and
any increased loan demand can be sufficiently funded without a material change
in its balance sheet. Pinnacle's corporate strategy includes profitable
acquisitions. Certain acquisitions would be primarily funded with debt or
stock. Reductions of debt would be made from Pinnacle's earnings.
At March 31, 1998, Pinnacle had a line of credit of $35,000 with an
unaffiliated bank from which $21,775 had been drawn. The outstanding balance
relates to 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.
13
<PAGE>
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 April 1, 1998, bank
subsidiaries could have declared approximately $4,320 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. Currently, Pinnacle Bank, a subsidiary of
Pinnacle, is in the process of building a new branch in the Quad-Cities area of
Illinois. The cost of this branch, including land, is estimated to be
approximately $1,000. Management is also not aware of any current
recommendations by the regulatory authorities which, if implemented, would have
an adverse material effect on Pinnacle.
14
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------------------ ---------------------------------
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 $ 4,086 $ 52 5.19% $ 3,481 $ 31 3.56%
Taxable securities 390,780 5,607 5.74 400,924 5,957 5.94
Nontaxable securities 17,858 545 12.21 20,020 605 12.09
Loans 505,412 10,354 8.19 521,996 10,685 8.19
------------------------------ ---------------------------------
Total interest-earning assets 918,136 16,558 7.21 946,421 17,278 7.30
Noninterest-earning assets:
Cash and due from banks 26,840 25,033
Allowance for loan losses (7,506) (8,204)
Other assets 65,282 66,437
---------- ----------
Total assets $1,002,752 $1,029,687
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 92,821 $ 438 1.89% $ 88,399 $ 454 2.05%
Savings deposits 237,420 1,708 2.88 247,535 1,769 2.86
Money market deposits 43,088 372 3.45 48,143 411 3.41
Other time deposits 379,506 5,313 5.60 389,961 5,385 5.52
Short-term borrowings 18,314 282 6.16 26,307 379 5.76
Notes payable 19,261 335 6.96 33,334 565 6.78
------------------------------------------------------------------------
Total interest-bearing liabilities 790,410 8,448 4.28 833,679 8,963 4.30
Noninterest-bearing liabilities:
Demand deposits 103,618 96,248
Other liabilities 9,575 6,677
Stockholders' equity 99,149 93,083
--------- -----------
Total liabilities and
stockholders' equity $1,002,752 $1,029,687
--------- -----------
--------- -----------
Net interest income and margin $ 8,110 3.53% $ 8,315 3.51%
------------------------ ---------------------
------------------------ ---------------------
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1998 and 1997. The fully
taxable equivalent adjustments to interest income for the three months ended
March 31, 1998 and 1997 were $198 and $222, respectively. The average
balance of nonaccrual loans is included in the total loans category. The
average balances do not include the effects of SFAS 115.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Pinnacle held on April 21, 1998, all of the
proposed Directors listed in the Proxy Statement were elected. Mark P.
Burns, James L. Greene, James A. Maddock, and James J. McDonough received
votes totalling 6,698,672 shares, or 89.2% of the outstanding shares, FOR,
43,815, or 0.6% AGAINST. Kenneth C. Whitener, Jr. received votes totalling
6,698,537 shares, or 89.2% of the outstanding shares, FOR, 43,950 shares, or
0.6% AGAINST. William J. Finn received votes totalling 6,697,994 shares, or
89.2% of the outstanding shares, FOR, 44,493 shares, or 0.6% AGAINST. John
E. O'Neill received votes totalling 6,697,652 shares, or 89.2% of the
outstanding shares, FOR, 44,835 shares, or 0.6% AGAINST. John J. Gleason,
Jr. and William P. Gleason received votes totalling 6,697,117 shares, or
89.2% of the outstanding shares, FOR, 45,370 shares, or 0.6% AGAINST. John
J. Gleason received votes totalling 6,696,709 shares, or 89.2% of the
outstanding shares, FOR, 45,778 shares, or 0.6% AGAINST. Albert Giusfredi
received votes totalling 6,695,840 shares, or 89.2% of the outstanding
shares, FOR, 46,647 shares, or 0.6% AGAINST. James R. Phillip, Jr. received
votes totalling 6,693,672 shares, or 89.2% of the outstanding shares, FOR,
48,815 shares or 0.7% AGAINST. Richard W. Burke received votes totalling
6,648,948 shares, or 88.6% of the outstanding shares, FOR, 93,539 shares, or
1.2% AGAINST. Donald G. King received votes totalling 6,647,805 shares, or
88.5% of the outstanding shares, FOR, 94,682 shares, or 1.3% AGAINST. Samuel
M. Gilman received votes totalling 6,642,805 shares, or 88.5% of the
outstanding shares, FOR, 99,682 shares, or 1.3% AGAINST. William C. Nickels
received votes totalling 6,641,785 shares, or 88.5% of the outstanding
shares, FOR, 100,702 shares, or 1.3% AGAINST. Each of the directors was
elected for a term of one year.
A total of 6,742,487 shares, accounting for 89.8% of the outstanding
shares, were represented in person or by proxy at the Annual Meeting.
No other items were voted on at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-Q.
<TABLE>
<CAPTION>
Exhibit / Description No.
Under Item 601 of Exhibit
Regulation S-K Description
------------------------- -----------------
<S> <C> <C>
20 Report furnished
to securities holders.
First Quarter
Report.
27.1 Financial Data Schedule.
27.2 Restated Financial Data
Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
16
<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: May 1, 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
17
<PAGE>
May 13, 1998
Dear Shareholder:
Pinnacle Banc Group, Inc. reported reported net income of $3,850,000, or $0.51
per share on a fully diluted basis, for the first quarter of 1998, an increase
of 42% on a per share basis from the $2,739,000, or $0.36 per share, earned in
the first quarter of 1997. The return on average equity was 15.5% for the
first three months of 1998 and the return on average assets totalled 1.54%.
Total consolidated assets amounted to $1.033 billion, approximately the same as
year end but down 1% from the same quarter end in 1997. Total loans were $508
million and total deposits amounted to $871 million. Stockholders' equity
totalled $117 million at March 31, 1998, resulting in a book value per share of
$15.56, an increase of 18% over the first quarter end of 1997.
The increase in earnings for the first quarter of 1998 compared with the same
quarter of 1997 was primarily the result of higher gains recorded on the sale
of investment securities. Net gains of $2,897,000 were booked in the first
three months of 1998 versus net gains of $1,101,000 in 1997. The gains in both
periods resulted primarily from the sale of U. S. Treasury securities as part
of Pinnacle's term portfolio program. Minimal gains of $8,000 in the first
quarter of 1998 and $186,000 in the first quarter of 1997 were recorded on the
sale of equity securities as part of Pinnacle's equity investment program in
other financial institutions. At March 31, 1998, the portfolio had a market
value of $53.3 million, with unrealized appreciation of $23.6 million.
Net interest income declined 2% in the first quarter of 1998 compared with the
same period in 1997, with a 3% decline in average earning assets contributing
to the decrease. Other operating income was up 15% with increases in trust
fees and deposit service fees providing the higher level. Other operating
expense increased 4%.
Non-performing assets totalled $7,193,000 at March 31, 1998, an increase of
approximately $72,000, or 1%, from the amount at year end. The allowance for
loan losses was $7,138,000, or 1.40% of loans at quarter end. Non-performing
assets at March 31, 1998 were 1.41% of total loans plus other real estate
owned, and amounted to 0.69% of total assets.
At the Board of Directors' meeting on April 21, 1998, the Board declared a
dividend of $0.23 per share payable on May 14 to shareholders of record as of
May 4.
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 MARCH 31
------------------------------------------
1998 1997 % CHANGE
---------- --------- -------------
<S> <C> <C> <C>
INCOME STATEMENT
Net interest income $7,912 $8,093 (2)%
Provision for loan losses 0 0 0
Net securities gains 2,897 1,101 N/M
Non-interest income 2,273 1,980 15
Non-interest expense 7,314 7,025 4
Provision for income taxes 1,918 1,410 36
Net income 3,850 2,739 41
BALANCE SHEET (END OF PERIOD)
Total assets $1,032,834 $1,039,071 (1)
Loans 508,083 521,117 (3)
Portfolio funds 441,556 432,822 2
Deposits 871,448 864,125 1
Debt 21,775 33,550 (35)
Stockholders' equity 116,794 100,289 16
PER SHARE DATA
Earnings per share - diluted $ 0.51 $ 0.36 42
Book value 15.56 13.24 18
Dividends 0.23 0.22 5
Cash earnings per share 0.59 0.44 34
Tangible book value 12.56 9.98 26
RATIOS
Return on average equity 15.5% 11.8%
Return on average assets 1.54 1.06
Net interest margin 3.53 3.51
Non-performing assets / total assets 0.69 1.03
MARKET DATA
Stock price range
(DURING THE QUARTER):
High $35.50 $23.50
Low 26.25 18.67
Close 34.31 21.88 57
Annual dividend rate 0.92 0.88 5
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,706
<INT-BEARING-DEPOSITS> 141
<FED-FUNDS-SOLD> 7,275
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 434,140
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 508,083
<ALLOWANCE> (7,138)
<TOTAL-ASSETS> 1,032,834
<DEPOSITS> 871,448
<SHORT-TERM> 7,175
<LIABILITIES-OTHER> 15,642
<LONG-TERM> 21,775
0
0
<COMMON> 23,461
<OTHER-SE> 93,333
<TOTAL-LIABILITIES-AND-EQUITY> 1,032,834
<INTEREST-LOAN> 10,341
<INTEREST-INVEST> 5,967
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 16,360
<INTEREST-DEPOSIT> 7,831
<INTEREST-EXPENSE> 8,448
<INTEREST-INCOME-NET> 7,912
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,897
<EXPENSE-OTHER> 7,314
<INCOME-PRETAX> 5,768
<INCOME-PRE-EXTRAORDINARY> 3,850
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,850
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 3.53
<LOANS-NON> 4,403
<LOANS-PAST> 905
<LOANS-TROUBLED> 1,196
<LOANS-PROBLEM> 5,029
<ALLOWANCE-OPEN> 7,520
<CHARGE-OFFS> 419
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 7,138
<ALLOWANCE-DOMESTIC> 2,367
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,771
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,745
<INT-BEARING-DEPOSITS> 3,424
<FED-FUNDS-SOLD> 1,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 434,558
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 525,069
<ALLOWANCE> (8,364)
<TOTAL-ASSETS> 1,048,376
<DEPOSITS> 877,552
<SHORT-TERM> 28,525
<LIABILITIES-OTHER> 8,675
<LONG-TERM> 32,800
0
0
<COMMON> 23,811
<OTHER-SE> 77,013
<TOTAL-LIABILITIES-AND-EQUITY> 1,048,376
<INTEREST-LOAN> 31,143
<INTEREST-INVEST> 24,879
<INTEREST-OTHER> 252
<INTEREST-TOTAL> 56,274
<INTEREST-DEPOSIT> 26,645
<INTEREST-EXPENSE> 29,118
<INTEREST-INCOME-NET> 27,156
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 159
<EXPENSE-OTHER> 25,700
<INCOME-PRETAX> 9,177
<INCOME-PRE-EXTRAORDINARY> 7,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,127
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.51
<LOANS-NON> 7,441
<LOANS-PAST> 633
<LOANS-TROUBLED> 1,330
<LOANS-PROBLEM> 9,216
<ALLOWANCE-OPEN> 6,023
<CHARGE-OFFS> 839
<RECOVERIES> 198
<ALLOWANCE-CLOSE> 8,364
<ALLOWANCE-DOMESTIC> 4,101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,263
</TABLE>
