<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, 1999 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
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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 August 10, 1999, the registrant
had 7,399,343 shares outstanding
of common stock, $3.125 par value.
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<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,
1999 and December 31, 1998, and the related unaudited consolidated statements of
income, comprehensive income and cash flows for the three and six month periods
ended June 30, 1999 and 1998.
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.
Substantially all disclosure has been omitted since it would
substantially duplicate the disclosure contained in the latest audited financial
statements of Pinnacle contained in the 1998 Annual Report to Shareholders.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30 DECEMBER 31
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $27,868 $30,922
Federal funds sold 0 500
------------ ------------
Total cash and cash equivalents 27,868 31,422
Interest-bearing deposits 25 101
Securities:
Available for sale 364,791 520,237
(amortized cost: 6/30/99 - $365,042
12/31/98 - $501,889
Loans, net of unearned discount 556,174 541,356
Less: Allowance for loan losses (6,993) (6,935)
------------ ------------
Net loans 549,181 534,421
Premises and equipment 20,984 20,917
Goodwill 19,453 20,660
Other assets 23,052 18,307
------------ ------------
Total $1,005,354 $1,146,065
============ ============
LIABILITIES:
Demand deposits:
Noninterest-bearing $117,259 $115,809
Interest-bearing 98,991 100,676
Savings deposits 290,829 286,220
Other time deposits 353,644 381,101
------------ ------------
Total deposits 860,723 883,806
Short-term borrowings 29,625 111,245
Notes payable 0 20,750
Other liabilities 11,084 12,888
------------ ------------
Total liabilities 901,432 1,028,689
STOCKHOLDERS' EQUITY:
Common stock, $3.125 par 23,123 23,312
20,000,000 shares authorized;
shares issued and outstanding:
6/30/99 - 7,399,343
12/31/98 - 7,459,743
Additional paid-in capital 38,638 38,638
Retained earnings 42,355 43,407
Unrealized gains (losses) in securities
available for sale (194) 12,019
------------ ------------
Total stockholders' equity 103,922 117,376
------------ ------------
Total $1,005,354 $1,146,065
============ ============
</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
-------------------- --------------------
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $10,867 $10,457 $21,777 $20,797
Securities:
Taxable 5,207 5,591 11,057 11,198
Tax exempt 341 343 687 703
Interest-bearing deposits, Federal funds
sold and other 2 140 5 193
--------------------- ---------------------
Interest income 16,417 16,531 33,526 32,891
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 441 464 870 903
Savings 2,012 2,135 3,975 4,215
Other time 4,508 5,489 9,464 10,802
Short-term borrowings 491 102 1,373 383
Notes payable 296 351 611 686
--------------------- ---------------------
Interest expense 7,748 8,541 16,293 16,989
--------------------- ---------------------
Net Interest Income 8,669 7,990 17,233 15,902
Provision for loan losses 0 0 0 0
--------------------- ---------------------
Net interest income after provision
for loan losses 8,669 7,990 17,233 15,902
OTHER INCOME:
Banking services and other 1,359 1,362 2,658 2,870
Trust services 692 686 1,377 1,366
PMSR income 85 134 85 219
Net securities gains 5,024 2,278 7,606 5,176
--------------------- ---------------------
Other income 7,160 4,460 11,726 9,631
OTHER EXPENSE:
Salaries, profit sharing and other employee benefits 3,769 3,634 7,670 7,197
Occupancy 830 763 1,684 1,466
Amortization of goodwill and other intangibles 603 604 1,206 1,208
Other operating expenses 5,950 2,545 9,225 4,990
--------------------- ---------------------
Other expense 11,152 7,546 19,785 14,861
--------------------- ---------------------
Income before income taxes 4,677 4,904 9,174 10,672
Provision for income taxes 2,604 1,625 5,080 3,543
--------------------- ---------------------
NET INCOME $2,073 $3,279 $4,094 $7,129
===================== =====================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,399,343 7,507,523 7,411,889 7,507,356
DILUTED 7,431,690 7,541,399 7,437,854 7,540,013
EARNINGS PER SHARE:
BASIC $0.28 $0.44 $0.55 $0.95
DILUTED $0.28 $0.44 $0.55 $0.95
DIVIDENDS PER SHARE $0.25 $0.23 $0.50 $0.46
</TABLE>
4
<PAGE>
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
-------------------- ---------------------
1999 1998 1999 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
Net income $2,073 $3,279 $4,094 $7,129
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities (2,902) (804) (10,903) 792
Less: reclassification adjustment for losses
included in net income (5,024) (2,278) (7,606) (5,176)
---------- --------- ---------- ----------
Net unrealized losses on securities (7,926) (3,082) (18,509) (4,384)
Income tax benefit related to unrealized losses
on securities (2,695) (1,047) (6,296) (1,490)
---------- --------- ---------- ----------
Other comprehensive income, net of tax (5,231) (2,035) (12,213) (2,894)
---------- --------- ---------- ----------
Comprehensive income ($3,158) $1,244 ($8,119) $4,235
========== ========= ========== ==========
</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
---------------------------
1999 1998
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,094 $7,129
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 919 976
Amortization of goodwill and other intangibles 1,206 1,208
Amortization of purchase accounting adjustments 81 31
Discount accretion (1,136) (430)
Premium amortization 160 150
Provision for loan losses 0 0
Gain on sale of securities (7,606) (5,176)
(Increase) decrease in interest receivable (830) 49
(Decrease) increase in interest payable (1,381) 267
Increase in other assets (2,395) (5,169)
Increase in other liabilities 5,958 1,054
Other, net (131) (299)
---------- ------------
Total adjustments (5,155) (7,339)
Net cash used for operating activities (1,061) (210)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 93,873 712,355
Proceeds from maturities and paydowns of securities 105,294 5,704
Purchase of securities (53,657) (708,963)
Net decrease in interest-bearing deposits 76 126
Net loan principal collected (advanced) (14,810) 424
Premises and equipment expenditures (1,067) (2,991)
---------- ------------
Net cash provided by investing activities 129,709 6,655
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits (24,496) 29,061
Net decrease in short-term borrowings (81,620) (30,500)
Proceeds from notes payable 5,800 10,925
Principal reductions of notes payable (26,550) (15,025)
Issuance of common stock 0 72
Purchase and retirement of common stock (1,621) 0
Dividends paid (3,715) (3,453)
---------- ------------
Net cash used for financing activities (132,202) (8,920)
Net decrease in cash and cash equivalents (3,554) (2,475)
Cash and cash equivalents at beginning of period 31,422 33,903
---------- ------------
Cash and cash equivalents at end of period $27,868 $31,428
========== ============
CASH PAID DURING PERIOD FOR:
Interest $17,675 $16,722
Income taxes 4,802 1,861
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTE 1: MERGER
Pinnacle has entered into a definitive agreement of merger with Old
Kent Financial Corporation ("Old Kent") of Grand Rapids, Michigan. The merger
is intended to be structured as a pooling-of-interests for accounting purposes
and as a tax-free exchange of shares. Pinnacle's shareholders will receive 5.7
million shares of Old Kent stock, using an exchange ratio of 0.75285, adjusted
to give effect to a 5% stock dividend payable July 19, 1999 to Old Kent
shareholders of record as of June 29, 1999. The merger is subject to the
customary approvals by Pinnacle's shareholders and by the regulatory authorities
and is expected to be completed on September 3, 1999.
NOTE 2: EARNINGS PER SHARE:
The following table shows the computation of shares outstanding for
calculating earnings per share for the three and six months ended June 30, 1999
and 1998 under Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share":
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------- ------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Average common shares outstanding 7,399,343 7,507,523 7,411,889 7,507,356
COMMON STOCK EQUIVALENTS:
Stock options outstanding 118,000 82,500 118,000 82,500
Treasury stock method (85,653) (48,624) (92,035) (49,843)
---------- ---------- ---------- ----------
Net 32,347 33,876 25,965 32,657
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE 7,431,690 7,541,399 7,437,854 7,540,013
========== ========== ========== ==========
</TABLE>
NOTE 3: SEGMENT REPORTING
As of December 31, 1998, Pinnacle adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This statement
requires an enterprise to present segment information using the management
approach. This approach requires segment information to be reported based on how
management organizes segments within a company for making operating decisions
and assessing performance.
Pinnacle's banking subsidiaries consist of two operating segments:
Pinnacle Bank and Pinnacle Bank of the Quad-Cities. These segments meet the six
criteria, as defined in SFAS No. 131, for aggregating similar segments.
Management considers the nature of the products and services and geographic
location in determining reportable segments. The Corporation measures segment
information using the same accounting policies that it uses in the preparation
of consolidated financial statements.
The banking subsidiaries' interest revenue is derived from interest on
loans, investment securities and interest-bearing deposits. The parent company's
interest revenue is derived from interest on investment securities and equity
and dividends from the banking subsidiaries. Transactions between the reportable
segments are recorded on the reportable segments' financial statements and
significant inter-segment accounts and transactions have been eliminated in the
preparation of the consolidated financial statements. The inter-segment
eliminations include revenues and dividends from the banking subsidiaries and
certain interest income for bank accounts of the parent company held at the
banking subsidiaries.
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
------------------------------------------------------
BANKING PARENT INTERSEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $16,050 $1,773 $(1,406) $16,417
Interest expense 7,478 296 (26) 7,748
Provision for loan losses 0 0 0 0
------------------------------------------------------
NET INTEREST INCOME 8,572 1,477 (1,380) 8,669
OTHER INCOME
Other income 2,133 4 (1) 2,136
Net securities gains (12) 5,036 0 5,024
------------------------------------------------------
2,121 5,040 (1) 7,160
OTHER EXPENSE
Amortization of goodwill 500 103 0 603
Depreciation 454 0 0 454
Other expense 7,739 2,357 (1) 10,095
------------------------------------------------------
8,693 2,460 (1) 11,152
INCOME BEFORE INCOME TAXES 2,000 4,057 (1,380) 4,677
Provision for income taxes 620 1,984 0 2,604
------------------------------------------------------
NET INCOME $1,380 $2,073 $(1,380) $2,073
=======================================================
SEGMENT ASSETS $997,369 $107,468 $(99,483) $1,005,354
EXPENDITURES FOR SEGMENT ASSETS 113 0 0 113
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------------------
BANKING PARENT INTERSEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $16,269 $424 $(162) $16,531
Interest expense 8,193 351 (3) 8,541
Provision for loan losses 0 0 0 0
------------------------------------------------------
NET INTEREST INCOME 8,076 73 (159) 7,990
OTHER INCOME
Other income 2,192 3 (13) 2,182
Net securities gains (2,958) 5,236 0 2,278
------------------------------------------------------
(766) 5,239 (13) 4,460
OTHER EXPENSE
Amortization of goodwill 501 103 0 604
Depreciation 493 1 0 494
Other expense 6,152 309 (13) 6,448
------------------------------------------------------
7,146 413 (13) 7,546
INCOME BEFORE INCOME TAXES 164 4,899 (159) 4,904
Provision for income taxes 6 1,619 0 1,625
------------------------------------------------------
NET INCOME $158 $3,280 $(159) $3,279
======================================================
SEGMENT ASSETS $980,679 $140,154 $(90,882) $1,029,951
EXPENDITURES FOR SEGMENT ASSETS 1,999 0 0 1,999
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------
BANKING PARENT INTERSEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $32,818 $3,456 $(2,748) 33,526
Interest expense 15,712 611 (30) 16,293
Provision for loan losses 0 0 0 0
------------------------------------------------------
NET INTEREST INCOME 17,106 2,845 (2,718) 17,233
OTHER INCOME
Other income 4,120 30 (30) 4,120
Net securities gains 802 6,804 0 7,606
------------------------------------------------------
4,922 6,834 (30) 11,726
OTHER EXPENSE
Amortization of goodwill 1,001 205 0 1,206
Depreciation 916 1 0 917
Other expense 14,208 3,484 (30) 17,662
------------------------------------------------------
16,125 3,690 (30) 19,785
INCOME BEFORE INCOME TAXES 5,903 5,989 (2,718) 9,174
Provision for income taxes 3,185 1,895 0 5,080
------------------------------------------------------
NET INCOME $2,718 $4,094 $(2,718) $4,094
======================================================
SEGMENT ASSETS $997,369 $107,468 $(99,483) $1,005,354
EXPENDITURES FOR SEGMENT ASSETS 1,067 0 0 1,067
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------
BANKING PARENT INTERSEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $32,401 $4,819 $(4,329) $32,891
Interest expense 16,324 686 (21) 16,989
Provision for loan losses 0 0 0 0
------------------------------------------------------
NET INTEREST INCOME 16,077 4,133 (4,308) 15,902
OTHER INCOME
Other income 4,455 26 (26) 4,455
Net securities gains (68) 5,244 0 5,176
------------------------------------------------------
4,387 5,270 (26) 9,631
OTHER EXPENSE
Amortization of goodwill 1,003 205 0 1,208
Depreciation 972 1 0 973
Other expense 12,081 625 (26) 12,680
------------------------------------------------------
14,056 831 (26) 14,861
INCOME BEFORE INCOME TAXES 6,408 8,572 (4,308) 10,672
Provision for income taxes 2,101 1,442 0 3,543
------------------------------------------------------
NET INCOME $4,307 $7,130 $(4,308) $7,129
======================================================
SEGMENT ASSETS $980,679 $140,154 $(90,882) $1,029,951
EXPENDITURES FOR SEGMENT ASSETS 2,980 11 0 2,991
</TABLE>
9
<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, 1999 AND 1998
Consolidated net income was $4,094, or $0.55 per share, on a diluted
basis for the six months ended June 30, 1999, compared to the $7,129, or $0.95
per share, earned in the first six months of 1998. The annualized return on
average assets was 0.77% for the first six months of 1999 and 1.41% for the
first six months of 1998. For each period, the return on average equity was 7.8%
and 14.4%, 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 decrease in earnings was primarily the result of expenses related to
Pinnacle's pending merger. On March 19, 1999, Pinnacle announced the signing of
a definitive agreement for the merger of Pinnacle into Old Kent Financial
Corporation. Net interest income increased 8% to $17,233 from $15,902 with a
corresponding increase in the net interest margin to 3.61% from 3.53% for the
same periods. Other operating income, excluding net securities gains, decreased
8% compared with the same period of 1998. Securities gains were $7,606 compared
to $5,176 in gains during the same period a year ago. Other expenses increased
33% from a year ago primarily due to expenses related to the pending merger.
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 1999, Pinnacle's average earning assets
were $976,644, a 6% increase from the comparable period of the previous year.
The net interest margin for the first six months of 1999 was 3.61%, up from
3.53% of the same period a year ago. Net interest income on a fully taxable
equivalent basis was $17,606 for the first six months of 1999, or 8% higher than
the comparable period in 1998. Actual net interest income increased 8% as the
result of the increase in both the net interest margin and average earning
assets.
The yield earned on total earning assets was 6.94% for the first six
months of 1999 compared to 7.21% for the same period of 1998. The decrease
resulted primarily from a decrease in the rate earned on both taxable securities
and loans. The rate earned on interest-bearing deposits and Federal funds sold
decreased 47 basis points as the average volume decreased significantly in 1999.
The average rate on taxable securities decreased 28 basis points due to general
lower rates earned on these securities than those carried a year ago. The
average volume of taxable securities increased 4%. This increase was due to the
purchase in the last quarter of 1998 of an agency-backed CMO and FNMA discount
note. The yield earned on non-taxable securities increased 16 basis points while
the average balance dropped slightly. The rate earned on loans decreased 34
basis points, offset by an increase in the average loan volume of $45,989. The
increase in the average volume of loans was primarily due to the increase in
commercial loans which increased 36%, or $42,043. Consumer loans increased 12%,
or $7,343. Real estate loans, however, decreased 1%, or $3,398. Rates dropped in
all categories of loans, with the largest decrease on a year-to-year basis,
being commercial and consumer. A large portion of these loans are tied to Prime
which dropped from the first six months of 1998. Prime rate increased to 8% the
last part of June, 1999; the effects of the increase will be evident in the
latter half of 1999.
The average cost of interest-bearing liabilities decreased 36 basis
points to 3.92% from 4.28% paid in the first six months of 1998. The average
rate paid on interest-bearing demand deposits decreased 9 basis points while the
rates paid on savings deposits decreased by 29 basis points and the rates paid
on money market deposits
10
<PAGE>
decreased 11 basis points. The drops were made as a result of management's
decision to lower rates on certain products as general market rates declined.
The rates paid on other time deposits decreased 50 basis points to 5.12% from
5.62% of a year ago. Average volume on interest-bearing deposits increased
slightly, or $1,290. The average volume of savings deposits increased 1%, while
the average volume of money market accounts increased 11%. Other time deposits
decreased $15,064. In the first quarter of 1998, coinciding with the opening of
a new branch, a 14-month higher rate deposit was offered. These deposits began
maturing in the first and second quarters of 1999 and total runoff in this
category was approximately $5,000. This promotion was held in conjunction with
the Moline branch opening in June, 1998, and those deposits will begin to mature
in August, 1999. Pinnacle cannot, at this time, predict the runoff of those
deposits which brought in approximately $7 million in new deposits in Moline.
Additionally, higher rate "broker deposits" from the Security Federal
acquisition continue to mature and are not renewed, further reducing average
balances. Approximately $7 million have matured since the second quarter of
1998.
Rates paid on short-term borrowings decreased 128 basis points, while
the average balance increased $42,233. The increase in the average balance
related to a repurchase agreement used to fund the purchase of a FNMA discount
note in the last quarter of 1998 which matured in the first quarter of 1999 as
well as the funding of the significant loan growth on a year-to-year basis. The
average rates paid on Pinnacle's notes payable decreased 107 basis points due to
the decrease in the underlying rates to which the notes payable were tied.
A detailed Analysis of Net Interest Income for the three and six month
periods ended June 30, 1999 and 1998 is included on Pages 18 and 19.
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 1999,
as well as no provision for the first six months of 1998. Pinnacle had net
recoveries of $58 in the first six months of 1999 compared to net charge-offs of
$329 in 1998. 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 totaled $5,618 at June 30, 1999, a decrease
of $317, over the $5,935 at December 31, 1998. Non-performing assets consisted
of $2,471 in non-accrual loans, $2,400 in loans past due greater than 90 days
and still accruing, $480 in restructured loans, and $267 in other real estate
owned. 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 $6,756 in potential problem loans which are identified through
that review process that are not considered nonperforming and are not included
in totals above.
NONINTEREST INCOME AND EXPENSE
The major components of Pinnacle's noninterest income consist of service
charges on deposit accounts and other banking income, trust fees and net gains
or losses on the sale of securities. Fees on banking services and other income
were $2,743 for the six months ended June 30, 1999 compared to $3,089 in the
same period of 1998. The decrease in other income related to decreased income on
Pinnacle's investment in purchased mortgage servicing rights. Trust fees
increased slightly on a period-to-period basis. Total trust assets under
management amounted to $368,000 at June 30, 1999, or a 9% increase of a year
ago.
11
<PAGE>
Gains on the sale of securities, on a pre-tax basis, were $7,606 for the
first six months of 1999 compared to net gains of $5,176 in the same period of
1998. The net gains on a year to date basis in 1999 consisted of gains of $6,803
recorded on the sale of equity securities as part of Pinnacle's equity
investment program in other financial institutions and net gains of $814 from
the sale of U. S. Treasury securities as part of Pinnacle's portfolio funds
management system. The net gains in 1998 consisted of sales of equity securities
of $5,243 and net losses on the portfolio funds management system of $60.
The equity portfolio was substantially liquidated during the second
quarter of 1999 with proceeds used to retire corporate debt.
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 20 basis points and by including the
net gains since inception of the program, the total yield is 118 basis points
higher than the same index. For the first six months of 1999, the portfolio
outperformed the index by 65 basis points and, by including the net gain,
outperformed the index by 120 basis points.
Noninterest expense increased 33% for the first six months of 1999
compared to the same period last year, with expenses relating to the pending
merger contributing significantly to the increase. Employee compensation and
benefits increased 7% with the majority of the increase resulting from normal
raises as well as a higher number of lending personnel at certain of Pinnacle's
banking centers. Occupancy expense increased 15%, primarily due to the opening
of two new banking centers and a new operations center in the first half of
1998. Other operating expense increased 85%, with primarily all of the increase
relating to merger expenses, including investment banker fees, accounting and
legal related services and certain data processing contract buyouts. Absent the
effect of these expenses, other operating expenses would have increased 1%.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated basis
including the accounts of its subsidiary banks. The provision for income taxes
was $5,080 for the first six months of 1999 compared with a provision of $3,543
for the first six months of 1998. An additional valuation allowance was
established against certain deferred state tax assets. In reviewing Pinnacle's
tax situation as it relates to its $43 million state tax carryforward and the
pending merger, it was determined that a valuation allowance was necessary for
$617 of the carryforward which had been recognized as a deferred tax asset in
1994. This valuation reserve, along with any other tax valuation reserve, is
continually reviewed by management to determine if the realization potential of
certain tax assets are more likely than not.
NET INCOME - THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Consolidated net income was $2,073, or $0.28 per share, on a diluted
basis for the three months ended June 30, 1999 (the "second quarter"), compared
to $3,279, or $0.44 per share, earned in the second quarter of 1998. The
annualized return on average assets was 0.80% for the second quarter of 1999 and
1.29% for the second quarter of 1998. For each period, the return on average
equity was 7.9% and 13.2%, respectively.
The primary factors for the decrease in net income were due to the
expenses related to the pending merger. Excluding the effect of the items
related to the merger, net income would have increased approximately 7% over the
second quarter of 1998. Net interest income increased 8% as the result of a 20
basis points increase in the net interest margin, coupled with a 3% increase in
average earning assets. Net securities gains of $5,024 were recorded versus net
gains of $2,278 for the same period a year ago. Other income, exclusive of
securities transactions, decreased 2%. Other expense increased 48% from a year
ago as a result of expenses associated with the merger.
12
<PAGE>
Without these items, other expenses would have declined approximately 2% from
the amount recorded in the second quarter of 1998.
NET INTEREST INCOME
During the second quarter of 1999, Pinnacle's average earning assets
were $951,497 compared to $928,179 with the comparable period of the previous
year. The net interest margin of the second quarter of 1999 was 3.72% compared
to 3.52% for 1998. Net interest income on a fully taxable equivalent basis was
$8,852 for the second quarter of 1999, or 8% higher than the comparable period
in 1998. Actual net interest income also increased 8%.
The yield earned on total earning assets was 6.98% for the second
quarter of 1999 compared to 7.21% for the same period of 1998. The yield on
interest-bearing deposits and Federal funds sold decreased 43 basis points while
average balances decreased $9,978. The average balance of taxable securities
decreased $16,211 and the yield on the portfolio decreased 7 basis points. The
average balance on loans increased $49,807, offset by a decrease in the loan
yield of 45 basis points.
The average cost of interest-bearing liabilities decreased by 44 basis
points to 3.85% from the 4.29% paid in the second quarter of 1998. The average
rates paid on interest-bearing demand, savings and money market deposits
decreased 21 basis points. The average rate paid on other time deposits
decreased 61 basis points as higher rate certificates continue to roll off and
be replaced with lower deposits. The rates paid on other short-term borrowings
decreased 173 basis points as rates paid on these instruments were lower in the
second quarter of 1999 compared to the same quarter a year ago. Rates paid on
notes payable decreased 54 basis points due to lower reference rates.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the second quarter of 1999,
as well as no provision for the second quarter of 1998. Pinnacle had net
charge-offs of $185 in 1999 compared to net recoveries of $52 in 1998.
NONINTEREST INCOME AND EXPENSE
Fees on banking services and other income were $1,444 for the three
months ended June 30, 1999 compared to $1,496 in the same period of 1998. Trust
fees increased 1% to $692.
On a pre-tax basis, net gains on the sale of securities were $5,024 for
the second quarter of 1999 compared to net gains on the sale of securities of
$2,278 in the same period of 1998. The net gains the second quarter of 1999
consisted of gross gains of $6,634 and gross losses of $(1,610). The net gains
realized in the second quarter of 1998 consisted of gross gains of $5,236 and
gross losses of $(2,958).
All of the gross securities gains and losses recorded by Pinnacle in the
second quarter of 1999 related to its equity investment portfolio which was
substantially liquidated during the quarter. Primarily all of the net securities
gains recorded by Pinnacle in the second quarter of 1998 related to its equity
securities portfolio.
Noninterest expense increased 48% as a result of merger related
expenses. Absent these expenses, noninterest expense would have decreased 2%.
INCOME TAXES
The provision for income taxes was $2,604 for the second quarter of 1999
compared with $1,625 for the second quarter of 1998 due primarily to the
increased state tax provision as previously discussed.
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
13
<PAGE>
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 three and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30 JUNE 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $2,073 $3,279 $4,094 $7,129
Goodwill amortization 603 604 1,206 1,208
-------------- -------------- -------------- --------------
Cash Net Income $2,676 $3,883 $5,300 $8,337
============== ============== ============== ==============
EARNINGS PER SHARE, DILUTED
Cash EPS $0.36 $0.52 $0.71 $1.11
As reported 0.28 0.44 0.55 0.95
CASH ROA
Average assets $1,037,933 $1,013,264 $1,062,282 $1,008,037
Average goodwill 19,809 22,326 20,109 22,524
-------------- -------------- -------------- --------------
Average tangible assets $1,018,124 $990,938 $1,042,173 $985,513
============== ============== ============== ==============
Cash ROA 1.05% 1.57% 1.02% 1.69%
As reported 0.80% 1.29% 0.77% 1.41%
CASH ROE
Average equity $104,677 $99,370 $104,667 $99,260
Average goodwill 19,809 22,326 20,109 22,524
-------------- -------------- -------------- --------------
Average tangible equity $84,868 $77,044 $84,558 $76,736
============== ============== ============== ==============
Cash ROE 12.6% 20.2% 12.5% 21.7%
As reported 7.9% 13.2% 7.8% 14.4%
</TABLE>
BALANCE SHEET
Total consolidated assets were $1,005,354 at June 30, 1999, down 12%
from year-end 1998.
Total securities were $364,791 at June 30, 1999 and consisted of U. S.
Government securities amounting to $300,264, mortgage-backed securities and
CMO's of $39,261 state and municipal bonds of $18,211, and corporate and other
securities of $7,055. The total securities outstanding at June 30, 1999
decreased 30% from year-end 1998 due to the maturity of a $100 million par FNMA
discount note purchased in the fourth quarter of 1998 and the sale of
substantially all of Pinnacle's equity portfolio.
U. S. Government securities amounted to $300,264, or 30% of assets, at
June 30, 1999. The average remaining maturity of these securities was
approximately twenty-nine 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, 1999, U. S. Government securities had gross
unrealized gains of $288 and gross unrealized losses of $(1,663) on a pre-tax
basis.
Other securities held by Pinnacle, amounting to $64,527 at June 30,
1999, consisted of mortgage-backed, CMO's, state and municipal, and corporate
and equity securities. At quarter end, these securities had gross
14
<PAGE>
unrealized gains of $2,097 and gross unrealized losses of $(973) on a pre-tax
basis. Currently, Pinnacle is not using any derivatives for hedging or other
purposes.
Total loans amounted to $556,174 at June 30, 1999, up 3% from year-end
1998. Commercial loans increased 14%, or $20,057. Consumer loans increased 3%,
or $2,293, offset by the decrease in real estate mortgages of $7,535, or 2%.
Contributing to the decrease in real estate loans was the continued paydown of
purchased loans acquired with the Security Federal acquisition. Absent these
continued paydowns, real estate loans would have remained flat. At June 30,
1999, 30% of the portfolio were commercial loans, 57% were real estate loans,
and 13% were consumer loans. Pinnacle's loan to asset ratio was 55% at June 30,
1999 and its loan to deposit ratio was 65%.
Goodwill and other intangibles amounted to $19,453, or 19% of
stockholders' equity at June 30, 1999.
Total deposits were $860,723 at June 30, 1999, or 3% lower than year-end
1998. The decrease in deposits was primarily in other time deposits which
decreased $27,457. This decrease was attributed to the previously mentioned
decrease in broker deposits as well as the promotional time deposit , a portion
of which was not renewed in 1999. Noninterest bearing demand deposits increased
$1,450 but were offset by the decrease in interest bearing demand deposits of
$1,685. Savings deposits increased $4,609. At June 30, 1999, the percentage of
total deposits for each category were noninterest-bearing deposits, 14%;
interest-bearing demand deposits, 11%; savings accounts (including money market
accounts), 34%; and other time deposits, 41%.
In the second quarter of 1999, Pinnacle paid off its notes payable with
the proceeds from the sale of equity securities. At December 31, 1998, the
balance was $20,750.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $103,922 at June 30, 1999 and
$117,376 at December 31, 1998. The ratio of equity to assets was 10.3% and 10.2%
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 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, 1999, 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% $39,436 8.59% $84,663 $45,227
Risk-based Capital:
Tier One 4.00 20,991 16.13 84,663 63,672
Total (Tier Two) 8.00 41,983 17.38 91,228 49,245
</TABLE>
At December 31, 1998, Pinnacle's total risk-based capital ratio was
16.36%.
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.
15
<PAGE>
Book value per share was $14.04 at June 30, 1999 compared to $15.73 at
December 31, 1998. Dividends amounting to $0.50 per share were paid in the first
six months of 1999. Tangible book value (stockholders' equity less goodwill) was
$11.52 at June 30, 1999 compared to $12.97 at December 31, 1998.
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, 1999, cash flows
were generated primarily from the net decrease in securities of $145,510. Cash
flow uses and needs include a $14,810 increase in loans, a $24,496 decrease in
deposits, a $20,750 net reduction in notes payable, an $81,620 reduction in
short-term borrowings, $1,621 for the purchase and retirement of common stock,
and $3,715 to pay dividends. Pinnacle's net cash position decreased $3,554, with
the decrease primarily in cash and due from banks.
Pinnacle's subsidiary banks have a relatively stable base of deposits
and any increased loan demand can be sufficiently funded without a material
change in its balance sheet.
At June 30, 1999, Pinnacle had no outstanding advances on its line of
credit with an unaffiliated bank. The proceeds of the sale of equity securities
were used to retire the debt.
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 1998.
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, 1999,
bank subsidiaries could have declared approximately $2,037 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 except the merger with Old Kent.
YEAR 2000
The paragraphs of this section constitute a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
(Pub. L. No. 105-271). Pinnacle faces risks associated with the Year 2000 date
change as it relates to the readiness of its major data processing provider,
other critical vendor suppliers, and its large commercial customers.
Pinnacle's Year 2000 task force has continued its oversight utilizing an
approach outlined by the Federal Financial Institution Examination Council
(FFIEC), supplemented by correspondence guidance from its primary regulators and
internal auditors. Pinnacle continues to meet all deadlines recommended by the
FFIEC. Proxy testing has been performed by Pinnacle's major data processor and
Pinnacle has participated directly in certain of the proxy tests. No problems
were noted in the proxy testing which could significantly disrupt processing for
customers and backroom operations at Pinnacle.
16
<PAGE>
Contingency planning and testing continues for any issues noted with
significant vendors. Pinnacle cannot guarantee that computer failure of certain
vendors (utilities and phone companies) would not disrupt Pinnacle's operations.
The severity of the disruption would depend on the nature and duration of that
vendor's failure. Costs cannot be estimated at this time on what the effect on
the financial position of Pinnacle would be if there were a significant utility
disruption or failure.
Pinnacle continues to assess its large commercial customers as to their
Year 2000 readiness. 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 loan losses or its financial position. Liquidity availability and
requirements are being assessed and monitored on an ongoing basis in keeping
with the safe and sound management of the subsidiary banks.
If the merger of Pinnacle and Old Kent is completed in the expected time
frame, Pinnacle's data processing will be converted to the Old Kent system prior
to year-end 1999. According to disclosure by Old Kent, as of June 30, 1999, Old
Kent was fully compliant on all applications. "Mission critical" applications
have been fully tested without failure. Pinnacle will work with Old Kent to
integrate their Year 2000 programs and believes both Pinnacle and Old Kent are
taking reasonable steps to address and remediate Year 2000 issues. However,
neither Pinnacle nor Old Kent can make any representation that all of its
systems, especially those of significant third parties, will be Year 2000
compliant or that it will not be adversely affected by Year 2000 issues.
FORWARD-LOOKING INFORMATION
Statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations relate to Pinnacle's expectations
as to future events regarding such items as the adequacy of the allowance for
loan losses, changes in economic conditions including interest rates,
management's ability to manage interest rate, liquidity and credit risks, impact
on operations and credit losses as it relates to the Year 2000 issue and issues
relating to the merger into Old Kent. Such statements are not statements of
historical fact, but are forward-looking statements. Assessments concerning Year
2000 readiness are based, in part, on information provided by vendors and others
and have not necessarily been independently verified. Pinnacle believes the
assumptions on which these forward-looking statements are founded are
reasonable, based on management's knowledge of its business and operations.
There is no assurance the assumptions will prove to have been correct.
17
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------------------- ---------------------------------
(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 $157 $2 5.10 % $202 $5 4.95 %
Taxable securities 377,853 5,207 5.51 407,433 11,057 5.43
Nontaxable securities 16,617 515 12.40 16,778 1,041 12.41
Loans 556,870 10,876 7.81 552,231 21,796 7.89
------------------------------- ---------------------------------
Total interest-earning assets 951,497 16,600 6.98 976,644 33,899 6.94
Noninterest-earning assets:
Cash and due from banks 28,028 27,696
Allowance for loan losses (7,130) (7,117)
Other assets 65,538 65,059
------------- --------------
Total assets $1,037,933 $1,062,282
============= ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits $95,945 $441 1.84 % $96,320 $870 1.81 %
Savings deposits 242,312 1,580 2.61 241,002 3,144 2.61
Money market deposits 50,361 432 3.43 49,127 831 3.38
Other time deposits 359,111 4,508 5.02 369,624 9,464 5.12
Short-term borrowings 37,989 491 5.17 54,314 1,373 5.06
Notes payable 19,849 296 5.97 21,356 611 5.72
------------------------------- ---------------------------------
Total interest-bearing liabilities 805,567 7,748 3.85 831,743 16,293 3.92
Noninterest-bearing liabilities:
Demand deposits 117,287 115,408
Other liabilities 10,402 10,464
Stockholders' equity 104,677 104,667
------------- --------------
Total liabilities and stockholers' equity $1,037,933 $1,062,282
============= ==============
Net interest income and margin $8,852 3.72 % $17,606 3.61 %
================== ===================
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1999. The fully taxable
equivalent adjustment to interest income for the three and six months ended June
30, 1999 was $183 and $373, 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.
18
<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.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Stockholders of Pinnacle Banc Group, Inc. held
August 10, 1999, the Agreement and Plan of Merger dated as of March 18, 1999
("Merger Agreement") between Pinnacle, Old Kent, and OKFC Merger Corporation, a
wholly-owned subsidiary of Old Kent, was ratified. Votes in favor of the Merger
Agreement totaled 6,042,688, or 81.67%, of the total outstanding shares. Votes
against the Merger Agreement totaled 46,915, or 0.63%, of the total outstanding
shares. Abstentions totaled 38,357, or 0.52%, of the total outstanding shares.
The merger has received all necessary regulatory approval and is
expected to close September 3, 1999.
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>
1 (20) Report furnished to securities
holders.
Second quarter report.
27 (27) Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
20
<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: August 10, 1999 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
21
<PAGE>
August 2, 1999
Dear Shareholder:
Pinnacle Banc Group, Inc. reported net income of $2,073,000, or $0.28 per
diluted share, for the second quarter of 1999, compared to net income of
$3,279,000, or $0.44 per share, earned in the second quarter of 1998. The 36%
decrease in per share earnings was primarily the result of expenses related
to Pinnacle's pending merger. On March 19, 1999, Pinnacle announced a
definitive agreement for the merger of Pinnacle into Old Kent Financial
Corporation.
Net income for the first six months of 1999 totaled $4,094,000, or $0.55 per
share, compared to $7,129,000, or $0.95 per share, earned in the first half
of 1998, a 42% per share decrease. Earnings for the first half of 1999 were
likewise affected by expenses related to the pending merger. Total assets at
June 30, 1999 were $1.005 billion, similar to the year ago quarter-end. Total
loans amounted to $556 million, a 9% increase, and total deposits were $861
million, 2% lower than the comparable quarter. Stockholders' equity was $104
million at June 30.
Excluding the effect of items related to the merger announcement, earnings
for the second quarter of 1999 would have increased approximately 7% over the
comparable quarter of the previous year. Net interest income increased 8% as
the result of a 20 basis point increase in the net interest margin coupled
with a 3% increase in average earning assets. Other operating expense
increased 48% as a result of expenses related to the proposed merger. Without
these items, total operating expenses would have declined approximately 2%
from the amount recorded in the second quarter of 1998.
Net gains on the sale of securities were $5.0 million in the second quarter
of 1999 compared with $2.3 million recorded in the same period of 1998. The
net gains recorded in the second three months of 1999 were exclusively
related to the sale of equity securities as part of Pinnacle's equity
investment program in other financial institutions. This portfolio was
substantially liquidated during the second quarter with proceeds used to
retire corporate debt.
Non-performing assets totaled $5,618,000 at June 30, 1999, a decrease of
$317,000, or 5%, from the amount at the previous year end. Net charge-offs
were $186,000, or 0.03% of average loans, for the second quarter of 1999. The
allowance for loan losses was $6,993,000, or 1.26% of loans at quarter end.
Non-performing assets at June 30, 1999 were 1.01% of total loans plus other
real estate owned, and amounted to 0.56% of total assets.
The definitive agreement for the merger of Pinnacle into Old Kent calls for
the shareholders of Pinnacle to receive a fixed exchange ratio of 0.75285
shares of Old Kent common stock for each Pinnacle share held. The exchange
ratio has been adjusted to give effect to a 5% Old Kent stock dividend
payable July 19, 1999, to Old Kent's shareholders of record on June 29, 1999.
The merger is subject to the customary approvals by Pinnacle shareholders and
by regulatory authorities. A Special Meeting of Pinnacle Shareholders has
been set for August 10. The transaction is expected to be consummated on
September 3, 1999.
At the Board of Directors' meeting on July 20, 1999, the Board declared a
dividend of $0.25 per share payable on August 12 to shareholders of record as
of August 2.
Very truly yours,
/s/ JOHN J. GLEASON, JR.
John J. Gleason, Jr.
Vice Chairman and
Chief Executive Officer
<PAGE>
PINNACLE BANC GROUP, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 YEAR TO DATE
------------------------------------ ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $8,669 $7,990 $17,233 $15,902
Provision for loan losses 0 0 0 0
Net securities gains 5,024 2,278 7,606 5,176
Non-interest income 2,136 2,182 4,120 4,455
Non-interest expense 11,152 7,546 19,785 14,861
Provision for income taxes 2,604 1,625 5,080 3,543
Net income 2,073 3,279 4,094 7,129
BALANCE SHEET (END OF PERIOD)
Total assets $1,005,354 $1,029,951
Loans 556,174 509,591
Portfolio funds 364,816 427,268
Deposits 860,723 875,530
Debt 0 15,900
Stockholders' equity 103,922 116,312
PER SHARE DATA
Earnings per share $ 0.28 $ 0.44 $0.55 $0.95
Book value 14.04 15.49 14.04 15.49
Dividends 0.25 0.23 0.50 0.46
Cash earnings per share 0.36 0.52 0.71 1.11
Tangible book value 11.42 12.58 11.42 12.58
RATIOS
Return on average equity 7.9 % 13.2 % 7.8 % 14.4 %
Return on average assets 0.80 1.29 0.77 1.41
Net interest margin 3.72 3.52 3.61 3.53
Non-performing assets / total assets 0.56 0.71 0.56 0.71
MARKET DATA
Stock price range (DURING THE QUARTER):
High $34.00 $37.00
Low 28.75 32.00
Close 31.81 33.25
Annual dividend rate 1.00 0.92
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,868
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 364,791
<INVESTMENTS-CARRYING> 364,791
<INVESTMENTS-MARKET> 0
<LOANS> 556,174
<ALLOWANCE> 6,993
<TOTAL-ASSETS> 1,005,354
<DEPOSITS> 860,723
<SHORT-TERM> 29,625
<LIABILITIES-OTHER> 11,084
<LONG-TERM> 0
0
0
<COMMON> 23,123
<OTHER-SE> 80,799
<TOTAL-LIABILITIES-AND-EQUITY> 1,005,354
<INTEREST-LOAN> 21,777
<INTEREST-INVEST> 11,744
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 33,526
<INTEREST-DEPOSIT> 14,309
<INTEREST-EXPENSE> 16,293
<INTEREST-INCOME-NET> 17,233
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 7,606
<EXPENSE-OTHER> 19,785
<INCOME-PRETAX> 9,174
<INCOME-PRE-EXTRAORDINARY> 9,174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,094
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 3.61
<LOANS-NON> 2,471
<LOANS-PAST> 2,400
<LOANS-TROUBLED> 480
<LOANS-PROBLEM> 6,756
<ALLOWANCE-OPEN> 6,935
<CHARGE-OFFS> 303
<RECOVERIES> 361
<ALLOWANCE-CLOSE> 6,993
<ALLOWANCE-DOMESTIC> 2,376
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,617
</TABLE>
