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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________
Commission file Number 0-18283
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3190818
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 YORK ROAD, SUITE 306, OAK BROOK, ILLINOIS 60523
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 574-3550
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $3.12 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 11, 1999, was approximately $116,075,403.
As of March 11, 1999, the registrant had 7,399,343 shares outstanding of common
stock, $3.12 par value.
Parts of the 1998 Annual Report to Stockholders have been incorporated by
reference into Part II of the Form 10-K.
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FORM 10-K TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 4
Item 3. Legal Proceedings........................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......................... 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 5
Item 6. Selected Financial Data..................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................. 6
Item 8. Financial Statements and Supplementary Data................................. 6
Item 9. Disagreements on Accounting and Financial Disclosures....................... 6
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 6
Item 11. Executive Compensation....................................................... 8
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 14
Item 13. Certain Relationships and Related Transactions............................... 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 16
SIGNATURES.............................................................................. 24
</TABLE>
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PART I
ITEM 1. BUSINESS
Pinnacle Banc Group, Inc. (the "Corporation") 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. The Corporation's shareholders will receive 5.4 million shares of Old
Kent stock, using an exchange ratio of 0.717. The Corporation has terminated
the remainder of its 1999 stock repurchase program announced on January 20,
1999. As of March 19, 1999, the Corporation had repurchased 60,400 shares
under that program.
The merger is subject to the customary approvals by the Corporation's
shareholders and by the regulatory authorities and is expected to be completed
during the third quarter of 1999.
The Corporation is a multi-bank holding company registered under the Bank
Holding Company Act and is engaged in the business of banking through the
ownership of subsidiary banks. At December 31, 1998 the Corporation had total
consolidated assets of $1,146,065,000, total loans of $541,356,000, total
deposits of $883,806,000, and total stockholders' equity of $117,376,000. The
Corporation's principal office is 2215 York Road, Suite 306, Oak Brook, Illinois
60523. The Corporation has sixteen banking locations in the metropolitan areas
of Chicago and Quad-Cities, Illinois.
The Corporation, formerly First Cicero Banc Corporation ("FCBC"), was organized
under the laws of the State of Illinois on August 24, 1979 for the purpose of
acquiring the First National Bank of Cicero (the "Cicero Bank"). On April 30,
1988, the Corporation merged (the "Merger") with First Harvey Banc Corporation
("FHBC"), parent company of First National Bank in Harvey (the "Harvey Bank"),
and LaGrange Park Banc Corporation ("LPBC"), parent company of Bank of LaGrange
Park (the "LaGrange Park Bank"). FHBC and LPBC were affiliated with FCBC through
common ownership. In connection with the Merger, the name of the Corporation was
changed to Pinnacle Banc Group, Inc.
Since the date of the merger, SBH Corp., parent company of Bank of Silvis (the
"Silvis Bank"), was merged into the Corporation on September 29, 1989. The
Berwyn National Bank (the "Berwyn Bank") was purchased on February 1, 1992. The
Henry County Bank was purchased on March 27, 1992. Batavia Financial
Corporation, parent company of Batavia Savings Bank, F.S.B., was merged into
Pinnacle on December 31, 1992. In 1996, Batavia Savings Bank, F.S.B. changed its
name to Pinnacle Bank, F.S.B. ("FSB"). In April, 1997, FSB was merged into
Pinnacle Bank.
On December 7, 1992, the Silvis Bank merged with the Henry County Bank with the
resultant bank named Pinnacle Bank of the Quad-Cities ("Quad-Cities Bank"). On
July 9, 1993, the Cicero Bank, Harvey Bank and Berwyn Bank were merged with and
into the LaGrange Park Bank with the resultant bank named the Pinnacle Bank. On
January 6, 1995, Acorn Financial Corp ("AFC") and its subsidiary bank, Suburban
Trust & Savings Bank ("STSB") were purchased. AFC was liquidated into the
Corporation and concurrent with the liquidation, STSB was merged into Pinnacle
Bank. On September 30, 1996, Financial Security Corporation ("FinSec") and its
subsidiary thrift, Security Federal Savings and Loan Association of Chicago
("SF"), were purchased. FinSec was liquidated into the Corporation and SF was a
separate subsidiary until it was merged into Pinnacle Bank on January 31, 1997.
The Corporation owns 100% of the common stock of Pinnacle Bank and Pinnacle Bank
of the Quad-Cities.
The Corporation is a legal entity separate and distinct from its subsidiary
banks. The major sources of the Corporation's revenues are dividends from its
subsidiary banks and gains on sales of its equity securities.
SUBSIDIARY BANKS
Pinnacle Bank and Quad-Cities Bank are full service commercial banks
encompassing most of the usual functions of commercial and savings banking
including commercial, consumer, and real estate lending; installment credit
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lending; collections; safe deposit operations; and other services tailored for
individual customer needs. The banks also offer a full range of deposit services
to individuals and businesses which include demand, savings and time deposits,
as well as providing trust services to the customers. Pinnacle Bank provides
nondeposit-based products, including mutual funds and annuities through
affiliation with an independent broker.
The Pinnacle Bank, a state banking corporation organized under the laws of
Illinois, was formed on July 9, 1993 through the merger of the Cicero Bank,
Harvey Bank and Berwyn Bank with and into the LaGrange Park Bank. The Cicero
Bank was originally organized in 1921, the Harvey Bank in 1937, the Berwyn Bank
in 1937 and the LaGrange Park Bank in 1962. The Bank's main office is located in
Cicero, Illinois, with full service branches in Harvey, Berwyn, Oak Park,
LaGrange Park, Westmont, Elburn, Batavia, and Chicago (West Town), Warrenville
and limited service facilities in Cicero, Niles and North Riverside. At December
31, 1998, the Bank had total assets of $969 million.
The Quad-Cities Bank was organized as a state banking corporation with the name
Bank of Silvis under the laws of the State of Illinois in 1950. On December 7,
1992, The Henry County Bank, organized as a state banking corporation under the
laws of the State of Illinois in 1968, was merged with and into Bank of Silvis
and the name of the merged entity was changed to Pinnacle Bank of the
Quad-Cities. The Bank's main office is located in Silvis, Illinois, with a full
service branch located in Colona (formerly Green Rock), Illinois. Each community
is part of the Quad-Cities area of Illinois. In the second quarter of 1998, a
full service branch opened in Moline, Illinois. As of December 31, 1998, the
Bank had total assets of $129 million.
COMPETITION
Intense competition exists in all aspects of business in which the Corporation
and its subsidiary banks are presently engaged, not only with other commercial
banks and trust companies but also with thrifts, finance companies, personal
loan companies, credit unions, leasing companies, money market mutual funds,
investment firms, mortgage bankers, and other financial institutions serving the
metropolitan areas of Chicago and the Quad-Cities.
Commercial and savings banks compete on the basis of price, including interest
rates paid on deposits and charged on loans, convenience and quality of service.
This competition includes banks which are many times larger than a banking
subsidiary, including banks in the primary marketing areas of each subsidiary
bank which have become affiliated through parent holding companies owning
significantly larger banking institutions. Each subsidiary bank is encountering
increased competition from non-bank financial institutions. Thrift deposits
constitute a substantial portion of all financial institutions' deposits in
Illinois. Thrifts are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies each
are significant factors in the consumer loan market. Insurance companies,
investment firms and retailers are all significant competitors for various types
of business. Many of the competitors of the subsidiary banks are larger and have
greater resources than the subsidiary banks.
EMPLOYEES
At December 31, 1998, the Corporation and its subsidiary banks employed 385
persons on a full-time equivalent basis.
SUPERVISION AND REGULATION
GENERAL. At the present time, various bills have been introduced in
the United States Congress and the Illinois state legislature which could result
in additional regulation of the business of the Corporation and any banks which
are now or hereafter become affiliated with the Corporation. Future bills could
also be introduced which could significantly affect the banking industry. It
cannot be predicted whether any such legislation will be adopted or how such
adoption would affect the business of the Corporation or any banks so
affiliated.
The following references to applicable statutes and regulations are brief
summaries thereof which do not purport to be complete and which are qualified in
their entirety by reference to such statutes and regulations.
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BANK HOLDING COMPANY. As a bank holding company, the Corporation is
subject to the supervision of the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). Bank holding companies are
required to file with the Federal Reserve Board an annual report and such
additional information as the Federal Reserve Board may require. The Federal
Reserve Board also makes periodic examinations of bank holding companies and
their subsidiaries. The Corporation is required to obtain the prior approval of
the Federal Reserve Board before it could acquire all or substantially all of
the assets of any bank, or acquire ownership or control of any voting shares of
any bank other than a subsidiary bank of the Corporation, if, after such
acquisition, it would own or control more than 5% of the voting shares of such
bank. The BHC Act does not permit the Federal Reserve Board to approve the
acquisition by the Holding Company of any voting shares of, or all or
substantially all of the assets of, any bank located outside of the State of
Illinois, unless such acquisition is specifically authorized by the laws of the
state in which such bank is located.
The BHC Act limits the activities which may be engaged in by any bank holding
company and its subsidiaries to certain specified activities, including those
activities which the Federal Reserve Board may find by order or regulation, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Subsidiary banks of a bank holding company (such as the bank subsidiaries of the
Corporation) are subject to certain restrictions imposed by the Federal Reserve
Act on any extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities thereof, and on
the taking of such stock or securities as collateral for loans to any borrower.
BANKS. The operations of Pinnacle Bank and Quad-Cities Bank are
subject to federal and state statutes and regulations applicable to banks
chartered under the banking laws of the State of Illinois and to regulation by
the Federal Deposit Insurance Corporation ("FDIC"). Pinnacle Bank is a member of
the Federal Home Loan Bank of Chicago.
The Federal Reserve System, the FDIC and the State of Illinois Office of Banks
and Real Estate regularly examine, where applicable, such areas as reserves,
loans, investments, management practices and other aspects of the banks'
operations. These examinations are designed for the protection of the banks'
depositors and not for its stockholders. In addition to these regular
examinations, the banks must furnish periodic reports to the regulatory
authorities containing a full and accurate statement of its affairs. As members
of the FDIC, the banks' deposits are insured as provided by law. Effective
January 1, 1993, a risk-based deposit insurance assessment program was placed
into effect by the FDIC. Insurance premiums are to be determined based on the
level of a bank's capital and supervisory evaluation. As of the current date,
each of the Corporation's subsidiary banks were in the lowest premium assessment
category.
Federal and state banking laws and regulations govern or restrict, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the loans a bank makes and the
collateral it takes, the activities of a bank with respect to mergers and
consolidations, and the establishment of branches. Each banking regulatory
authority has the authority to prevent a bank from engaging in an unsafe or an
unsound practice in conducting its business. The payment of dividends, depending
upon the financial condition of a bank, could be deemed such a practice.
As subsidiary banks of a bank holding company, the subsidiary banks are subject
to certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the Corporation or any of its other subsidiaries, on investments in
the stock or other securities of the Corporation or any of its subsidiaries, and
on taking such stock or securities as collateral for loans. Federal statutes and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal stockholders of its
parent holding company and to related interests of such principal stockholders.
In addition, such legislation and regulations may affect the terms upon which
any person becoming a principal stockholder of a holding company may obtain
credit from banks with which the subsidiary bank maintains a correspondent
relationship.
Furthermore, Federal statutes prohibit acquisition of "control" of a bank or
bank holding company without prior notice to certain Federal bank regulators.
"Control" is defined in certain cases as acquisition of as little as 5% of the
outstanding shares.
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In 1991, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
was enacted into law. FDICIA provides for, among other things, the
recapitalization of the FDIC Insurance Fund; enhanced federal supervision of
depository institutions, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions; the adoption of
safety and soundness standards by the Federal banking regulators, on matters
such as loan underwriting and documentation, interest rate risk exposure and
compensation and other employee benefits; the establishment of risk-based
deposit insurance premiums; liberalization of the qualified thrift lender test;
greater restrictions on transactions with affiliates; mandated consumer
protection disclosures with respect to deposit accounts; and expanded reporting
requirements including statements by management regarding internal controls and
regulatory compliance.
GOVERNMENT MONETARY POLICIES
The earnings of banks and bank holding companies are affected by the policies of
regulatory authorities including the Federal Reserve Board which regulates the
money supply. Among the methods employed by the Federal Reserve Board are open
market operations in U. S. Government securities, changes in the discount rate
on member bank borrowings, and changes in reserve requirements against member
bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial and savings banks in the past and are
expected to continue to do so in the future.
FINANCIAL INFORMATION
For financial information regarding the Corporation, see ITEM 8, FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA, and ITEM 14, EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
ITEM 2. PROPERTIES
The corporate offices of the Corporation are located at 2215 York Road, Suite
306, Oak Brook, Illinois 60523. These offices, consisting of approximately 2,000
square feet, have been leased by the Corporation until 2002.
Pinnacle Bank owns its main banking office located at 6000 West Cermak Road,
Cicero, Illinois 60804. The main office consists of approximately 41,500 square
feet.
Pinnacle Bank has nine other full service banking offices. The Harvey Banking
Center is located at 174 East 154th Street, Harvey, Illinois 60426 with an
adjacent drive-in facility and parking lot. The main building consists of
approximately 33,000 square feet. The Berwyn Banking Center is located at 7112
West Cermak Road, Berwyn, Illinois 60402. The building consists of approximately
15,000 square feet. The Oak Park Banking Center, containing approximately 21,000
square feet, is located at 840 South Oak Park Avenue, Oak Park, Illinois 60304.
The Westmont Banking Center contains approximately 23,000 square feet and is
located at 640 Pasquinelli Drive, Westmont, Illinois 60559. The Batavia Banking
Center consists of 8,640 square feet and is located at 165 West Wilson Street,
Batavia, Illinois 60510. The Elburn Banking Center consists of approximately
2,400 square feet and is located at 415 South Main Street, Elburn, Illinois
60119. The Chicago (West Town) Banking Center consists of approximately 20,000
square feet and is located at 1209 North Milwaukee Avenue, Chicago, Illinois
60622. The Warrenville Banking Center, which opened January 5, 1998, consists of
approximately 4,500 square feet and is located at 3601 Winfield Road,
Warrenville, Illinois 60555. All aforementioned buildings are owned by Pinnacle
Bank. The LaGrange Park Banking Center is located in a leased office at Oak and
Sherwood Streets, LaGrange Park, Illinois 60525. Five years remain on the term
of the lease. The office consists of approximately 11,500 square feet.
Pinnacle Bank has three limited service banking facilities. An owned facility
containing approximately 2,500 square feet is located at 2500 South Cicero
Avenue, Cicero, Illinois 60804. This facility, with certain expanded services,
was constructed in 1995. A leased facility containing approximately 2,000 square
feet is located at 7373
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West 25th Street, North Riverside, Illinois 60546. Nine years remain on the term
of the lease. A limited service leased banking facility containing approximately
900 square feet is located at 5697 West Touhy Avenue, Niles, Illinois 60714.
This lease expires in less than one year with the ability to exercise an option
for an additional five years.
Pinnacle Bank has a lease, expiring in 2008, on approximately 26,000 square feet
of office space located at 1144 Lake Street, Oak Park, Illinois 60301. The space
is utilized as an operations center housing all operating departments of
Pinnacle Bank. The move to the leased office space was completed during the
second quarter of 1998.
Pinnacle Bank of the Quad-Cities owns it main banking office located at 1100
First Avenue, Silvis, Illinois 61282. The main office consists of approximately
10,600 square feet. Pinnacle Bank of the Quad-Cities has a full service branch
office located at 107 First Street, Colona, Illinois 61241, which consists of
approximately 4,000 square feet. In the second quarter of 1998, Pinnacle Bank of
the Quad-Cities opened a full service branch office in Moline, Illinois, which
consists of approximately 3,700 square feet.
Each of the subsidiary banks has sufficient space for current banking needs as
well as any foreseeable expansion.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the subsidiary banks are subject to other pending and
threatened legal actions which arise in the normal course of business. In the
opinion of management, based upon the consultation of legal counsel, the
disposition of all outstanding matters will not have a material adverse effect
on the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Corporation is traded in the over-the-counter market and
is quoted on the National Association of Securities Dealers Automated Quotation
System (NASDAQ) on the National Market System with the ticker symbol "PINN".
The following table sets forth the high and low sales prices of the
Corporation's common stock by quarter as reported by NASDAQ.
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1998 1997
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CASH CASH
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
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1st $35.50 $26.25 $0.23 $23.50 $18.67 $0.22
2nd 37.00 32.00 0.23 21.75 19.50 0.22
3rd 34.13 24.50 0.23 24.50 21.00 0.22
4th 30.25 24.00 0.23 29.38 24.25 0.22
</TABLE>
In 1998, the Corporation purchased 47,780 shares of its common stock at market
prices in privately negotiated and market transactions. In 1997, the Corporation
purchased 173,436 shares of its common stock at market prices in privately
negotiated and market transactions as part of its announced stock repurchase
program.
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NUMBER OF SHAREHOLDERS
As of March 11, 1999, the Corporation had approximately 550 shareholders of
record. In addition, the Corporation believes that it has approximately 2,900
additional beneficial shareholders who hold shares in street name.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation is incorporated herein by reference
to the 1998 Annual Report to Stockholders included as Exhibit 13. The
information required is contained on page 26 of Exhibit 13, under the title
"Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference to the 1998 Annual Report to
Stockholders included as Exhibit 13. The information is contained on pages 27
through 42 of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is contained on pages 40 through 42
of the 1998 Annual Report to Stockholders included as Exhibit 13 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the 1998 Annual Report to Stockholders included as Exhibit 13. The
information is contained as follows:
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PAGE OF
EXHIBIT 13
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Consolidated Balance Sheets............................... 4
Consolidated Statements of Income......................... 5
Consolidated Statements of Comprehensive Income........... 6
Consolidated Statements of Changes in
Stockholders' Equity.................................... 6
Consolidated Statements of Cash Flows..................... 7
Notes to Consolidated Financial Statements................ 8
Report of Independent Public Accountants
Arthur Andersen LLP..................................... 25
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ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following listing of each director and executive officer of the Corporation
contains information including the Director's age, original date elected as a
director of the Corporation, and current positions with the Corporation or its
two subsidiary banks, Pinnacle Bank ("PB") and Pinnacle Bank of the Quad-Cities
("PBQC"). Information is also
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included regarding principal occupation for the last five years. None of the
directors currently serves as a Director of any other company with a class of
publicly traded equity securities.
An asterisk (*) denotes that the individual is an executive officer of the
Corporation.
RICHARD W. BURKE*, 65, 1979; is Secretary of the Corporation. He is Chairman and
a Director of the law firm of Burke, Warren, MacKay & Serritella, P.C., Chicago,
Illinois.
MARK P. BURNS, 63, 1983; is Vice Chairman of PB. He previously was the President
of the Corporation through year-end 1995.
WILLIAM J. FINN, JR., 70, 1983; is President of Finn Insurance Agency, Inc.,
North Riverside, Illinois, insurance brokers. He is a Director of PB.
SAMUEL M. GILMAN, 78, 1990; is a Partner in the law firm of Coyle, Gilman &
Stengel, Rock Island, Illinois. He is a Director of PBQC.
ALBERT GIUSFREDI, 70, 1988; is President of Headly Manufacturing Co., Cicero,
Illinois, a custom metal stamping job shop.
JOHN J. GLEASON*, 67, 1979; is Chairman of the Board and a Director of PB. He
also is President of Gleason & Associates, Inc., Oak Brook, Illinois, a bank
consulting firm. He previously was the Chief Executive Officer of the
Corporation through year-end 1995.
JOHN J. GLEASON, JR.*, 43, 1983; is Vice Chairman and Chief Executive Officer of
the Corporation. He is Chairman of the Board of PB.
WILLIAM P. GLEASON*, 37, 1995; is President of the Corporation. He is a Director
and President of PB and a Director and Vice Chairman of PBQC. He previously was
Executive Vice President and Treasurer of the Corporation through year-end 1995.
JAMES L. GREENE, 64, 1983; is a Director of PB. He is President of Jim Greene
Associates, Inc., Decatur, Georgia, a private investment company.
DONALD G. KING, 73, 1983; is a Director of PB. He formerly was Chairman of the
Board of First National Bank in Harvey which was merged into PB in 1993.
JAMES A. MADDOCK, 64, 1988; is President of Maddock Industries, Inc., Chicago,
Illinois, a mechanical engineering firm.
JAMES J. MCDONOUGH, 65, 1988; is President of McDonough Associates, Inc.,
Chicago, Illinois, engineers/architects.
WILLIAM C. NICKELS, 78, 1988; is Chairman of Replogle Globes, Inc., Broadview,
Illinois, a manufacturer of geographical globes.
JOHN E. O'NEILL, 64, 1995; is President of F. C. Pilgrim & Company, Oak Park,
Illinois, a real estate and insurance brokerage firm.
JAMES R. PHILLIP, JR., 46, 1988; is President of Phillip's Flowers and Gifts,
Westmont, Illinois, florists.
KENNETH C. WHITENER, JR.*, 48, 1983; is Executive Vice President and Chief
Investment Officer of the Corporation and of each of the two subsidiary banks.
He is a Director of PB.
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John J. Gleason is the father of John J. Gleason, Jr. and William P. Gleason.
John E. O'Neill is the father-in-law of John J. Gleason, Jr.
The Corporation's Board of Directors meets on a quarterly basis, and five
meetings were held during the last fiscal year. All of the Directors of the
Corporation, with the exception of Messrs. Nickels and Phillip, attended at
least three-fourths of the meetings of the Board and Committees of which they
were members during the past year.
The Board has audit and compensation committees. The Board does not have a
nominating committee. Committee members are designated at the annual
Organizational Meeting of the Corporation. The individuals listed below have
served as members of these committees since the last Annual Meeting. The Audit
Committee, which met four times in 1998, consists of Messrs. Burke, Finn, Jr.,
Gilman, Giusfredi, King, Maddock, McDonough, Nickels, O'Neill, and Phillip, Jr.
Mr. Finn, Jr. serves as Chairman. The committee meets on a quarterly basis with
the Corporation's internal auditor and reviews the scope and results of audits
and meets on an annual basis with representatives of the Corporation's
independent public accountants. The Compensation Committee, which met one time
in 1998, consists of Messrs. Burke, Finn, Jr., Gilman, Giusfredi, Greene, King,
Maddock, McDonough, Nickels, O'Neill and Phillip, Jr. Mr. Burke serves as
Chairman. The committee meets on an annual, and as needed basis, to determine
salaries, bonuses and other compensation for the Corporation officers and
principal officers of subsidiary banks.
EXECUTIVE OFFICERS (WHO ARE NOT DIRECTORS):
The following individuals are Executive Officers of the Corporation, but are not
currently Directors of the Corporation.
GLENN M. MAZADE*, 42; is Executive Vice President and Chief Credit Officer of
the Corporation and PB. He is a Director of PB.
SARA J. MIKUTA*, 42; is Chief Financial Officer and Treasurer of the Corporation
and PB. Prior to 1994, Ms. Mikuta was the Senior Vice President and Controller
at the Oak Brook Bank, Oak Brook, Illinois.
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table presented below provides for each of the last
three fiscal years the compensation for each executive officer of the
Corporation whose total salary and bonus exceeded $100,000 in 1998.
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LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- --------------------- ---------
NUMBER
RESTRICTED OF
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION(1)
- -------------------------------------------------------------------------------- ----------------------- -------- ---------------
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John J. Gleason...................... 1998 $200,000 $60,000 -0- -0- -0- -0- $8,000
Chairman of the Board 1997 200,000 75,000 -0- -0- -0- -0- 8,000
1996 200,000 25,000 -0- -0- -0- -0- 7,500
John J. Gleason, Jr.................. 1998 $270,000 $70,000 -0- -0- 12,500 -0- $8,000
Director, Vice Chairman and 1997 250,000 75,000 -0- -0- 37,500 -0- 8,000
Chief Executive Officer 1996 235,000 50,000 -0- -0- -0- -0- 7,500
William P. Gleason................... 1998 $170,000 $60,000 -0- -0- 10,000 -0- $8,275
Director and President 1997 150,000 60,000 -0- -0- 30,000 -0- 7,500
1996 120,000 35,000 -0- -0- -0- -0- 6,450
Kenneth C. Whitener, Jr.............. 1998 $145,000 $35,000 -0- -0- -0- -0- $8,700
Director, Executive Vice 1997 140,000 40,000 -0- -0- -0- -0- 8,399
President and Chief 1996 140,000 15,000 -0- -0- -0- -0- 8,400
Investment Officer
Glenn M. Mazade...................... 1998 $126,000 $25,000 -0- -0- 2,500 -0- $7,050
Executive Vice President and 1997 117,000 17,000 -0- -0- 7,500 -0- 6,600
Chief Credit Officer 1996 97,000 12,000 -0- -0- -0- -0- 5,375
</TABLE>
-----------------------------------------------------------------------------
(NOTE: SAR's are Stock Appreciation Rights; LTIP is a Long-Term Incentive Plan.)
(1) Represents an amount contributed to the individual's account in
the Corporation's Profit Sharing Plan. The Profit Sharing Plan is a trusteed,
tax-qualified plan which covers substantially all employees of the Corporation
and its subsidiary banks who have completed age and service requirements. Annual
profit sharing contributions are made to the Plan by the Corporation or the
subsidiary banks in accordance with resolutions adopted annually by the Boards
of Directors of the Corporation and each of the subsidiary banks. A 401(k)
savings plan is offered as part of the profit sharing program. A matching
contribution equal to a percentage, as determined by the Board of Directors on
an annual basis, of the amount of the employee's contribution is made by he
Corporation or its subsidiary banks to the 401(k) savings plan.
INCENTIVE STOCK OPTION PLAN
The Corporation has an incentive stock option plan under which officers and
employees of the Corporation and the subsidiary banks may be granted stock
options by a committee of the Corporation's Board of Directors. The incentive
stock option plan is designed so that options granted thereunder may be treated
as "incentive stock options" as defined in Section 422 of the Internal Revenue
Code of 1986, as amended.
The current plan, the 1990 Incentive Stock Option Plan ("1990 Plan"), was
adopted in April, 1990. Under the provisions of the 1990 Plan, incentive stock
options must be granted at not less than the fair market value of the
Corporation's common stock on the date of the grant. No options granted under
the 1990 Plan may be exercised after the expiration of ten years from the date
of the grant. Options are non-transferable except in the case of death and may
be exercised only while the optionee is employed by the Corporation or a
subsidiary bank or within 30 days after termination of employment, with certain
exceptions in the event of death or disability. No options may be granted to any
employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock unless the grant is for a period of no more
than five years and the purchase price of the shares covered by the option is
not less than 110% of its fair market value on the date the option is granted. A
total of
9
<PAGE>
369,999 shares have been authorized for issuance under the plan. At December 31,
1998, total shares subject to option under the 1990 Plan were 118,000.
The following table provides information regarding individual grants of stock
options during 1998 to each of the executive officers named in the Summary
Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- -------------------------------------------------------------------------------------------- -------------------------------
% OF TOTAL
OPTIONS/SARS
GRANTED TO
OPTIONS/SARS EMPLOYEES EXERCISE OR EXPIRATION DATE
NAME GRANTED IN 1998 BASE PRICE 5% 10%
- ---------------------------- ------------ ------------- ------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John J. Gleason............. -0- -0- % $ -0- - $ -0- $ -0-
John J. Gleason, Jr......... 12,500 (1) 35 31.35 12/21/03 62,800 181,869
William P. Gleason.......... 10,000 (2) 28 31.35 12/21/03 50,240 145,495
Glenn M. Mazade............. 2,500 7 28.50 12/21/03 19,685 43,499
Kenneth C. Whitener, Jr..... -0- -0- -0- - -0- -0-
--------------------------------------------
</TABLE>
(1) Mr. J. Gleason, Jr.'s option contains the following provision:
3,189 shares exercisable at any time from December 21, 1998
through the expiration date; 3,189 shares are exercisable at
any time from December 21, 1999 through the expiration date;
3,189 shares are exercisable at any time from December 21,
2000 through the expiration date; and 2,933 shares are
exercisable at any time from December 21, 2001 through the
expiration date. All options are exercisable upon a change in
control.
(2) Mr. W. Gleason's option contains the following provision:
3,189 shares exercisable at any time from December 21, 1998
through the expiration date; 3,189 shares are exercisable at
any time from December 21, 1999 through the expiration date;
3,189 shares are exercisable at any time from December 21,
2000 through the expiration date; and 433 shares are
exercisable from December 21, 2001 through the expiration
date. All options are exercisable upon a change in control.
The following table provides information concerning the financial value of
outstanding and unexercised options at December 31, 1998 for each of the
executive officers named in the Summary Compensation Table. No incentive stock
options were exercised by these executive officers during 1998.
10
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT
AT FY-END FY-END
-------------------- ----------------------
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(3) UNEXERCISABLE
------------------------------------- --------------- ----------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
John J. Gleason.................... -0- -0- -0- $ -0-
John J. Gleason, Jr................ -0- -0- 12,927 (1) 68,494 (1)
37,073 (2) 194,644 (2)
William P. Gleason................. -0- -0- 12,927(1) 68,494 (1)
27,073 (2) 142,016 (2)
Kenneth C. Whitener, Jr............ -0- -0- -0- -0-
Glenn M. Mazade.................... -0- -0- 10,000 (1) 73,748 (1)
-0- -0-
</TABLE>
--------------------------
(1) Exercisable.
(2) Unexercisable.
(3) All options are exercisable upon a change in control.
COMPENSATION OF DIRECTORS
Directors of the Corporation, having a primary occupation other than with the
Corporation or its subsidiary banks, receive an annual retainer of $2,500 and a
fee of $500 per meeting attended. Directors attending separate committee
meetings involving audit and compensation receive a fee of $100 per meeting
attended.
EMPLOYMENT AGREEMENTS
The Corporation has entered into Employment Agreements ("Agreements") in regard
to a change of control in The Corporation or all of its subsidiaries with John
J. Gleason, Jr., Vice Chairman and Chief Executive Officer; William P. Gleason,
President; and Glenn M. Mazade, Executive Vice President and Chief Credit
Officer. The Agreements became effective January 21, 1997 upon approval of the
Board of Directors of the Corporation and will continue until terminated upon
thirty (30) days prior written notice by either the Corporation or the
executive. The Agreements provide for employment in the present position or
other senior executive capacity as shall be mutually agreed upon by the
Corporation and the executive. The Agreements also provide for base salary and
incentive compensation as shall be determined from time to time by the Board of
Directors and for participation in all plans and other benefits generally
accorded to employees of the Corporation.
If the executive's employment is terminated by the executive, by the
Corporation, or by the Corporation's successor company within one year of a
change in control, as defined, the executive will be entitled to immediate
receipt from the Corporation of a lump sum payment equal to one dollar less than
the sum of three times the base compensation then payable to the executive plus
three times the average incentive compensation paid to the executive during the
three previous fiscal years of the Corporation plus three times the value of the
contributions that have been made or credited by the Corporation for the benefit
of the executive under all employee retirement plans maintained by the
Corporation for the completed fiscal year of the Corporation immediately
preceding the termination. In addition, the Corporation will continue to provide
coverage for the executive under the health program maintained by the
Corporation for a period of twelve months following termination of the
executive's employment. If such a change in control and termination would have
taken place on December 31, 1998, the amounts payable to John J. Gleason, Jr.,
William P. Gleason and Glenn M. Mazade would have been approximately $1,028,000,
$689,000 and $452,000,
11
<PAGE>
respectively. In the event of a termination payment, the executive agrees that,
except with the express prior written consent of the Corporation, for a period
of one year after the termination of the executive's employment with the
Corporation, he will not directly or indirectly compete with the business of the
Corporation within a ten mile radius of the main office of the Corporation and
any branch office of the Corporation existing at the time of termination.
A change of control is defined in the Agreement as (1) the consummation of the
acquisition or acquisitions by any person or affiliated group, other than any
individual holding 10% or greater of the outstanding voting securities of the
Corporation on January 21, 1997, so that the person or group holds beneficial
ownership of fifty-one percent or more of the combined voting power of the then
outstanding voting securities of the Corporation; (2) approval of the
Corporation's stockholders of a merger, consolidation or other transaction
involving the Corporation in which the persons who are stockholders on the date
the transaction is approved, do not, on the first day following such transaction
own, directly or indirectly, more than 67% of the combined voting power of the
then outstanding securities; (3) a complete liquidation or dissolution or an
agreement for the sale or other disposition of all or substantially all of the
assets of the Corporation or its subsidiaries; or (4) a sale by the Corporation
of all of the stock of all banking subsidiaries of the Corporation and their
affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors of the
Corporation during the last fiscal year were Messrs. Burke, Finn, Jr., Gilman,
Giusfredi, Greene, King, Maddock, McDonough, Nickels, O'Neill and Phillip, Jr.
Mr. Burke is Chairman and a Director of a law firm which provides legal services
to the Corporation as disclosed in the section entitled "Certain Relationships,
Related Transactions and Other Information Regarding Management".
REPORT ON EXECUTIVE COMPENSATION BY THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee views the compensation package offered to executive
officers as consisting of three primary components; base salary, incentive
bonus, and longer term compensation. Each of these components is considered in
achieving the committee's objectives of (1) providing a competitive compensation
package in order to attract and retain a high quality management team; (2)
rewarding individual performance and contributions to the overall performance of
the Corporation; and (3) structuring incentives in order to align management's
goals with maximization of shareholder value.
Base salaries are set consistent with salaries published for comparable
positions in banking industry publications. Primary emphasis is placed on
organizations of a similar size located in a metropolitan area. Comparison is
also made with similarly sized publicly traded banking companies. Base salary
changes are dictated by changes in responsibility such as a promotion and
economic factors such as inflation.
Incentive bonuses are determined strictly based on the performance of the
individual executive officer and that individual's contribution to the overall
profitability of the Corporation during the fiscal year. The incentive bonus
determination is zero based with previous payment history bearing no weight in
the current year's determination. The determination of incentive bonus payments
are subjective in nature and are not the product of calculations of
pre-determined formulas.
Longer term compensation consists of incentive stock options. These options are
awarded based on the individual's contribution to the overall financial
performance of the Corporation and the committee's assessment of potential for
appreciation in common stock value in relation to the base salary of the
executive. Incentive stock options are awarded in order to emphasize the
importance of maximizing shareholder value and to encourage the ownership of the
Corporation's common stock by management.
The Chief Executive Officer's ("CEO") compensation is determined by overall
corporate performance. Corporate performance is measured primarily by the return
on average equity and additionally by the return on average assets.
12
<PAGE>
The performance of the Corporation's common stock price is also considered in
the determination of the CEO's compensation. The Committee recognizes, however,
that factors other than CEO performance may dictate changes in market price such
as general market conditions and, in particular to the Corporation, the thinly
traded nature of the Corporation's stock. The Committee also considers any
specific corporate objectives for the CEO such as the Corporation's stated
objective that calls for the utilization of its equity base through acquisitions
and repurchases of its common stock.
The CEO received a base salary increase of 8% for the 1998 fiscal year. The
increase was based on guidelines set for annual increases for all the
Corporation's officers and employees and published statistics for total base
salaries and percentage increases for CEO's of similarly sized financial
institutions. The CEO's incentive bonus was determined based on the following
factors for 1998. Net income for 1998 resulted in a return on average equity of
14.4% and a return on average assets of 1.43% for the year, each exceeding the
Corporation's profit plan. the Corporation's year end common stock price was
approximately the same as the previous fiscal year. Also, from a financial
perspective, the Corporation continued its stock repurchase program which
enhanced earnings per share and the dividend was increased 5% in fiscal 1998. In
addition to financial performance, the Compensation Committee also considered
the following factors. The Corporation's equity portfolio provided a significant
component of earnings. Expansion was undertaken through the development of two
new banking centers. Marketing efforts continued to be enhanced, personnel was
upgraded in a number of areas and nonperforming assets continued to show
improvement. Incentive stock options amounting to 12,500 shares were awarded to
the CEO to provide an opportunity for value on a longer term perspective with
such potential for appreciation tied directly to shareholder value.
While overall corporate performance is also considered in determining
compensation for other executive officers, primary consideration is given to
performance of the specific areas of responsibility of each of these
individuals. These specific areas include corporate objectives regarding
acquisitions, performance of banking subsidiaries, loan portfolio performance
including the quality of assets, regulatory compliance, management of the
securities portfolio and other specific responsibilities. The Committee took
each of these factors into consideration in determining bonuses for each
executive officer other than the CEO for the previous year.
The Compensation Committee did award incentive stock options to certain
executive officers during fiscal 1998 in order to continue to emphasize the
importance of shareholder value.
PERFORMANCE GRAPH
The following graph provides a comparison of the total return among the
Corporation's common stock, NASDAQ Stocks (U.S.) and NASDAQ Bank Stocks. The
graph assumes that $100 was invested in each category on January 1, 1994. The
Corporation's index is based on the assumption that dividends received on the
Corporation's common stock are reinvested into shares of the Corporation's
common stock.
13
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG PINNACLE BANC GROUP, INC. COMMON STOCK,
NASDAQ STOCKS (U.S.) AND NASDAQ BANK STOCKS
<TABLE>
<CAPTION>
PINNACLE NASDAQ NASDAQ
COMMON STOCK STOCKS (U.S.) BANK STOCKS
<S> <C> <C> <C>
1/1/94 $100.0 $100.0 $100.0
12/31/94 $84.8 $97.8 $99.6
12/31/95 $98.4 $138.3 $148.4
12/31/96 $90.5 $170.0 $195.9
12/31/97 $144.9 $208.6 $328.0
12/31/98 $146.7 $293.3 $324.9
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons beneficially own as of March 11, 1999, directly or
indirectly, more than 5% of the outstanding common stock, $3.12 par value, of
the Corporation.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------------------------------------------------------------
<S> <C> <C>
John J. Gleason....................... 1,192,453 (1) 16.1%
2215 York Road, Suite 306
Oak Brook, Illinois 60523
Kenneth C. Whitener, Jr............... 405,082 5.5
2215 York Road, Suite 306
Oak Brook, Illinois 60523
</TABLE>
---------------------------------------------
(1) Includes 592,470 shares owned by Gleason & Associates, Inc., of
which Mr. J. Gleason is President and controlling stockholder. Also includes
283,335 shares held by his wife and a child who reside with Mr. J. Gleason, to
which shares Mr. J. Gleason disclaims beneficial ownership.
14
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth with respect to each Director, and executive
officer (denoted by an asterisk) of the Corporation, the amount of common shares
beneficially owned and the percentage of such class of shares as of March 11,
1999:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS:
Richard W. Burke*.......................................... 67,196 (1) 0.9%
Mark P. Burns.............................................. 45,018 (2) 0.6
William J. Finn, Jr........................................ 129,531 (3) 1.8
Samuel M. Gilman........................................... 42,840 0.6
Albert Giusfredi........................................... 105,679 1.4
John J. Gleason*........................................... 1,192,453 (4) 16.1
John J. Gleason, Jr.*...................................... 219,624 (5) 3.0
William P. Gleason*........................................ 137,537 (6) 1.9
James L. Greene............................................ 240,176 (7) 3.2
Donald G. King............................................. 215,680 2.9
James A. Maddock........................................... 101,950 (8) 1.4
James J. McDonough......................................... 79,825 (9) 1.1
William C. Nickels......................................... 94,785 (10) 1.3
John E. O'Neill............................................ 30,705 0.4
James R. Phillip, Jr....................................... 78,164 (11) 1.1
Kenneth C. Whitener, Jr.*.................................. 405,082 5.5
EXECUTIVE OFFICERS
(WHO ARE NOT DIRECTORS):
Glenn M. Mazade*........................................... 13,949 (12) 0.2
Sara J. Mikuta*............................................ 3,810 (13) 0.1
All Directors and executive officers
as a group (18 in total)................................. 3,204,004 43.3%
</TABLE>
(1) Includes 38,335 shares owned by Mr. Burke's wife, to which shares Mr.
Burke disclaims beneficial ownership.
(2) Includes 9,750 shares held by Pinnacle Bank as Custodian.
(3) Includes 17,780 shares held by Mr. Finn, Jr.'s wife, to which shares Mr.
Finn, Jr. disclaims beneficial ownership.
(4) Includes 592,470 shares owned by Gleason & Associates, Inc., of which Mr.
J. Gleason is President and controlling stockholder. Also includes 283,335
shares held by his wife and child who reside with Mr. J. Gleason, to which
shares Mr. J. Gleason disclaims beneficial ownership.
(5) Includes 50,000 shares which Mr. J. Gleason, Jr. has the right to acquire
upon exercise of stock options, and 28,080 shares held by his wife and children,
to which shares Mr. J. Gleason, Jr. disclaims beneficial ownership.
(6) Includes 40,000 shares which Mr. W. Gleason has the right to acquire upon
exercise of stock options, and 45,114 shares held by his wife and children, to
which shares Mr. W. Gleason disclaims beneficial ownership.
15
<PAGE>
(7) Includes 18,664 shares held by Mr. Greene's wife and 8,880 shares held by
Mr. Greene's wife as custodian, to which shares Mr. Greene disclaims beneficial
ownership. Also includes 103,471 shares owned by Jim Greene Associates, Inc. Mr.
Greene is President and controlling stockholder of Jim Greene Associates, Inc.
(8) Includes 77,403 shares owned by Maddock Industries, Inc. including its
profit sharing plan. Mr. Maddock is President and controlling stockholder of
Maddock Industries, Inc. Also includes 1,042 shares held by Mr. Maddock's wife
as custodian, to which shares Mr. Maddock disclaims beneficial ownership.
(9) Includes 19,931 shares held by a trust of which Mr. McDonough is the
trustee.
(10) All shares are owned by a company of which Mr. Nickels is a controlling
shareholder.
(11) Includes 24,753 shares held by a company of which Mr. Phillip, Jr. is a
controlling shareholder and 5,931 shares held by his wife and children, to which
shares Mr. Phillip, Jr. disclaims beneficial ownership.
(12) Includes 10,000 shares which Mr. Mazade has the right to acquire upon
exercise of stock options.
(13) Includes 3,750 shares which Ms. Mikuta has the right to acquire upon
exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Corporation and its subsidiary banks are customers
of the banks and have had transactions with such banks in the ordinary course of
business and are expected to do so in the future. Such transactions have been
and will continue to be on the same terms as those prevailing at the time for
comparable transactions with other customers. Total loans outstanding to
Directors and executive officers of the Corporation and its subsidiary banks
totaled $11,283,000 at December 31, 1998. These loans were made by the
subsidiary banks in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. Management is of the opinion that these
loans did not involve more than a normal risk of collectibility or other
unfavorable features.
Richard W. Burke, a Director and Secretary of the Corporation, is Chairman and a
Director of the law firm Burke, Warren, MacKay & Serritella, P.C. which provides
legal services to the Corporation and its subsidiary banks. Fees for these
services totaled $225,000 in 1998.
Section 16 of the Securities Exchange Act requires the Corporation's directors,
executive officers or beneficial owners of more than ten percent (10%) of any
class of equity securities of the Corporation ("Insiders") to file with the
Securities and Exchange Commission and the Corporation's reports of ownership of
the Corporation's securities. Based solely upon a review of reports furnished to
the Corporation by Insiders, all Section 16 reporting requirements were met by
Insiders during 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-K.
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT /
DESIGNATION NO.
UNDER ITEM 601 OF
REGULATION S-K EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
(2) Plan of Acquisition, reorganization, arrangement,
liquidation or succession. The Agreement and Plan
of Merger, dated as of March 18, 1999, by and
between Old Kent Financial Corporation and Pinnacle
Banc Group, Inc. and the Stock Option Agreement,
dated as of March 18, 1999, by and between Old Kent
Financial Corporation and Pinnacle Banc Group, Inc.
were previously filed as Exhibit 2.1 and Exhibit
2.2 to Old Kent Financial Corporation's Form 8K
Current Report filed on March 22, 1999 and is
herein incorporated by reference.
(3) Articles of Incorporation and By-laws. This Exhibit
was filed on Form SE on March 18, 1996 and is
incorporated herein by reference.
(4) Instruments defining the rights of Security Holders
Including Debentures. The portions of the
Corporation's Articles of Incorporation and By-laws
defining the rights of holders of the Corporation's
common stock are included as part of the Exhibit filed
on Form SE on March 18, 1996 and is incorporated
herein by reference.
(10) (a) Material Contracts. The Pinnacle Incentive Stock
Option Plan originally adopted in 1981 ("Prior Plan")
and form of Deferred Compensation agreement entered
into with Pinnacle Directors and Officers and related
Trust Agreement. These items were filed as Exhibit 10
to the Corporation's Form S-1 Registration Statement
No. 33-19608 which became effective March 18, 1988 and
are hereby incorporated by reference. The 1990
Pinnacle Incentive Stock Option Plan ("1990 Plan")
adopted by the Corporation's shareholders on April 24,
1990 was included as Exhibit 3 to the Corporation's
Form 10-K for the fiscal year ended December 31, 1990
and is incorporated herein by reference. (b)
Employment Contracts. These items were filed as
Exhibit 10 to the Corporation's Form 10-Q filed May 8,
1997 and are incorporated herein by reference.
(11) Statement Re Computation of Per Share Earnings.
Footnote 10, Notes to the Consolidated Financial
Statements, is included in the 1998 Annual Report to
Stockholders and is herein incorporated by reference.
(13) Annual Report to Security Holders. The Corporation is
including, as an Exhibit, its 1998 Annual Report to
Stockholders. Those parts of the Annual Report not
specifically incorporated by reference elsewhere
herein are not deemed to be part of this filing.
(21) Subsidiaries of the Registrant. The information is
included in ITEM 1, BUSINESS on page 1.
(27) Financial Data Schedule.
</TABLE>
FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules not included in ITEM 8, FINANCIAL DATA AND
SUPPLEMENTARY DATA are included on the following pages as part of this item in
accordance with Guide 3, Statistical Disclosure by Bank Holding Companies.
REPORTS ON FORM 8-K
None.
17
<PAGE>
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
ANALYSIS OF NET INTEREST INCOME
Information required in this table, including the daily average balance
outstanding for the major categories of interest bearing assets and interest
bearing liabilities, and the average interest rate earned or paid thereon, is
incorporated herein by reference to the 1998 Annual Report to Stockholders
included as Exhibit 13. The information required is contained in Table 1,
"Analysis of Net Interest Income" on page 29 of Exhibit 13, within the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL
Information required in this table is incorporated herein by reference to the
1998 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 2, "Analysis of Volume/Rate Variance" on page 30
of Exhibit 13, within the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ANALYSIS OF INTEREST RATE SENSITIVITY
Information regarding the interest rate sensitivity position of the Corporation
is incorporated herein by reference to the 1998 Annual Report to Stockholders
included as Exhibit 13. This information is discussed under the subsection
"Market Risk" on pages 40 through 42 of Exhibit 13, within the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
II. INVESTMENT PORTFOLIO
The following table presents the book value of securities in thousands at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
U. S. Treasury and U. S. Government agencies $412,272 $355,925 $373,072
State and municipal ........................ 19,441 22,242 23,450
Mortgage-backed securities and floating rate
collateralized mortgage obligations ...... 40,562 4,615 5,943
Corporate and other equity securities ...... 47,962 51,452 32,093
----------------------------------
Total securities ......................... $520,237 $434,234 $434,558
----------------------------------
----------------------------------
</TABLE>
The following table shows the maturities of securities in thousands at December
31, 1998 and weighted average fully taxable equivalent yields:
18
<PAGE>
<TABLE>
<CAPTION>
U. S. TREASURY MORTGAGE-BACKED
AND STATE SECURITIES AND FLOATING
FEDERAL AGENCY AND RATE COLLATERALIZED
SECURITIES MUNICIPAL MORTGAGE OBLIGATIONS
-------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
One year or less............................... $104,192 5.15% $ 1,591 12.18% $ 0 0.00%
One year to five years......................... 308,080 5.63 9,753 13.03 0 0.00
Five to ten years.............................. 0 0.00 6,448 12.50 0 0.00
Over ten years................................. 0 0.00 1,649 14.53 0 0.00
No fixed maturity.............................. 0 0.00 0 0.00 40,562 7.15
--------------------- ------------------ -------------------
$412,272 5.50% $19,441 12.91% $40,562 7.15%
--------------------- ------------------ -------------------
--------------------- ------------------ -------------------
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
AND OTHER
EQUITY SECURITIES TOTAL
-------------------- -------------------
<S> <C> <C> <C> <C>
One year or less......................... $ 0 0.00% $105,783 5.25%
One year to five years................... 0 0.00 317,833 5.84
Five years to ten years.................. 0 0.00 6,448 12.50
Over ten years........................... 0 0.00 1,649 14.53
No fixed maturity........................ 47,962 4.65 88,524 5.92
-------------------- -------------------
$47,962 4.65% $520,237 5.97%
-------------------- -------------------
-------------------- -------------------
</TABLE>
Securities included in the category of no fixed maturity are mortgage-backed
securities and floating rate collateralized mortgage obligations, due to their
ability to prepay, as well as equity securities.
The average tax-equivalent yield by maturity includes the weighted average
yields on tax-exempt obligations which have been computed on a fully taxable
equivalent basis assuming a tax rate of 34% and the average tax equivalent yield
on the equity portfolio assumes a 70% dividend received deduction for December
31, 1998.
III. LOAN PORTFOLIO
The following table sets forth the outstanding loans, in thousands, at the
following dates:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and other $146,588 $111,990 $111,454 $ 83,940 $ 68,788
Consumer ........... 69,250 62,294 54,535 49,464 38,982
Real estate:
Residential ...... 279,418 291,578 307,217 135,085 119,520
Commercial ....... 46,695 45,107 52,628 42,073 22,220
-------------------------------------------------------------
Total gross loans $541,951 510,969 525,834 310,562 249,510
Unearned income .... 595 762 765 962 1,106
-------------------------------------------------------------
Net loans ........ $541,356 $510,207 $525,069 $309,600 $248,404
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
The following table sets forth the maturity distribution of the following
categories of loans at December 31, 1998 in thousands.
19
<PAGE>
<TABLE>
<CAPTION>
REMAINING MATURITY
---------------------------------------------------------
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and other............ $ 89,432 $ 50,809 $ 6,347 $ 146,588
Real estate:
Residential................ 16,939 82,346 180,133 279,418
Commercial................. 7,988 30,369 8,338 46,695
---------------------------------------------------------
$114,359 $163,524 $194,818 $ 472,701
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
Of the loans listed above in the maturity schedule, a total of $358,342 are due
after one year; $310,213 of these loans have predetermined interest rates and
$48,129 of these loans have floating interest rates.
COLLATERAL AND APPRAISAL GUIDELINES
Subsidiary banks of the Corporation make loans which are collateralized by
different types of assets. A collateral guideline manual is maintained by each
bank which details collateral requirements for any collateralized loan which a
bank may make. The loan operations area has responsibility for monitoring all
compliance with collateral requirements. Collateral requirements for the most
commonly funded loans include an 85% - 95% (depending on maturity) loan-to-value
ratio for loans secured by U. S. Government securities, 70% for NYSE traded
stock, 65% for AMEX and 50% for all other common stocks, with the exception of
control stocks which are not acceptable as collateral. Commercial loans for
working capital can have a maximum loan-to-value ratio of 80% against eligible
accounts if secured by receivables, a maximum of 50% if secured by inventory and
a maximum of 80% if secured by equipment. Real estate loans can have a maximum
loan-to-value ratio of 80% unless private mortgage insurance is provided for
advances over 80%. Commercial real estate loans typically are funded at a lower
loan-to value ratio and require the personal guarantee of the borrower(s). Home
equity loans require a loan-to-value ratio of 80% of the appraised value less
any debt.
Loans made by subsidiary banks of the Corporation which are collateralized by
real estate require an appraisal prior to funding of the loan. These loans are
re-appraised when management believes that the financial condition or resources
of the borrower have deteriorated or when the collectibility of the loan is in
question. Loans collateralized by real estate are not necessarily re-appraised
on an annual or quarterly basis by policy; however, all loans secured by real
estate, are made in the local market area served by the Corporation's
subsidiaries and each of these areas is closely monitored by management for
economic changes. Certain acquisitions, especially the FinSec acquisition, have
added loans to Pinnacle's loan portfolio which are not necessarily made in
Pinnacle's local market area. See "Loan Concentrations" and "Risk Elements" for
further discussion regarding the impact of this acquisition. A new appraisal is
required for any loan which undergoes foreclosure or is transferred into other
real estate owned. Updated appraisals on other real estate owned are completed
as required by regulatory authorities, or if management believes a material
change in the value of a property has taken place.
The current loan policies in effect for collateral and appraisals are similar
and consistent with the policies in place in prior years.
20
<PAGE>
RISK ELEMENTS
NON-ACCRUAL, PAST DUE, AND RESTRUCTURED LOANS. The following table
represents information regarding the aggregate amount of non-accrual, past due,
and restructured loans in thousands:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans........................... $3,507 $4,392 $7,441 $4,791 $ 748
Past due 90 days or more and
still accruing............................ 1,775 1,064 633 2,293 552
Restructured loans.......................... 483 1,223 1,330 931 0
--------------------------------------------------
$5,765 $6,679 $9,404 $8,015 $1,300
--------------------------------------------------
--------------------------------------------------
Other real estate owned..................... $ 169 $442 $939 $284 $2,416
</TABLE>
A discussion regarding the non-performing assets listed above is contained
within the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the subsection "Provision for Loan
Losses" on pages 30 through 32 of the Corporation's 1998 Annual Report to
Stockholders included as Exhibit 13.
LOAN CONCENTRATIONS. Loan concentrations are defined as amounts loaned
to a multiple number of borrowers engaged in similar activities, which would
cause them to be similarly impacted by economic or other conditions. Although
the Corporation has a diversified loan portfolio, a substantial natural
geographic concentration of credit risk exists within the Corporation's defined
customer market areas with the exception of loans acquired from the acquisition
of SF. Included in the SF loan portfolio are certain purchased and participated
loans outside Pinnacle's defined customer markets. These loans totaled
approximately $39,256,000, at December 31, 1998, or approximately 7% of the
Corporation's loan portfolio. These loans are located in the following areas:
4.72% in California and 1.34% in the Midwest (excluding the Chicago Metropolitan
area). Certain of these areas, particularly California, are experiencing adverse
economic conditions, which has resulted in increased past due non-accrual loans.
All remaining loans are in the geographic market areas including the Chicago
metropolitan area and the Quad-Cities metropolitan area of Illinois. Management
believes that the portfolio is well diversified and, to a large extent, secured
without undue concentrations in any specific risk area.
POTENTIAL PROBLEM LOANS. Currently, there are no known problem loans
which have not already been identified by Pinnacle's system of review of the
credit quality of the loan portfolio. This process, which is detailed in the
following Section IV, "Summary of Loan Loss Experience", includes an independent
credit review system as well as an internal process in which management reports
to the Board of Directors via a report ("Watch List") which includes other
potential problem loans identified by management prior to the independent credit
review process or below the scope of the independent review. The process of both
independent and internal credit review was incorporated at SF and the
integration of the process actually began prior to the acquisition as part of
Pinnacle's due diligence.
The Watch List includes credits which are rated by management and the
independent review process as "5" or worse. A credit rating of "5" would
indicate that the loan is considered a "special mention" loan by regulatory
examiners. Currently, approximately $3,980,000 of loans in Pinnacle's portfolio
are classified as a "5" and included in the Watch List, but are not considered
non-performing by management. These, as discussed further, are monitored monthly
by both management and the Board of Directors of each subsidiary bank.
IMPAIRED LOANS. Loans considered impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", includes non-accrual loans
greater than $100,000, restructured loans, and loans classified as
21
<PAGE>
at least doubtful under the Corporation's credit risk classification system. All
of the Corporation's impaired loans are included in the non-performing category.
NON-ACCRUAL LOAN POLICY. The Corporation follows banking regulatory
guidelines with respect to classifying loans on a non-accrual basis. Loans are
placed on non-accrual when the loan becomes past due over 90 days with no
intervening activity or when the collection in full of interest and principal is
doubtful. Thereafter, no interest is taken into income unless received in cash
or until such time as the borrower demonstrates the ability to pay interest and
principal.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Information required in this table is incorporated herein by reference to the
1998 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 3, "Analysis of the Allowance for Loan Losses" on
page 32 of Exhibit 13, within the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Except for any reserves which would be required under SFAS No. 114 ,"Accounting
by Creditors for Impairment of a Loan", the subsidiary banks do not allocate the
allowance for loan losses by specific loan categories. The Corporation's
subsidiary banks have not allocated any specific reserves for loans considered
impaired under SFAS No. 114. However, bank disclosure guidelines issued by the
Securities and Exchange Commission request management to allocate the total
allowance for loan losses into certain categories. Accordingly, management has
allocated the allowance for loan losses by loan category based on several
factors, including the risk rating assigned via the independent loan review; a
risk rating assigned to watch list credits which have not yet been rated by loan
review or are below the threshold of the loan review; growth in the loan
portfolio; and historical charge-off experience for loans which are not rated.
This process results in the specific allocation of the reserve included in the
following table. The remaining unallocated portion provides for the inherent
loss component in the loan portfolio which has not yet been specifically
identified. The resulting allocation is not necessarily indicative of both the
identified and inherent losses not yet identified in the portfolio as of each
reporting date.
The percent of loans in each category to total loans and the allocation of the
allowance for loan losses based on the above allocation method at December 31 of
each year, in thousands, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and other..... $1,685 27.1% $1,328 21.9% $2,293 21.1%
Consumer................. 153 12.7 115 12.1 244 10.4
Real estate.............. 1,150 60.2 1,207 66.0 1,564 68.5
Unallocated.............. 3,947 0.0 4,870 0.0 4,263 0.0
-----------------------------------------------------------------------------------------------
$6,935 100.0% $7,520 100.0% $8,364 100.0%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
LOAN CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and other................... $1,366 27.1% $1,051 27.7%
Consumer............................... 36 15.7 147 15.4
Real estate............................ 858 57.2 826 56.9
Unallocated............................ 3,763 0.0 2,205 0.0
-------------------------------------------------------------------
$6,023 100.0% $4,229 100.0%
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
V. DEPOSITS
Reference is made to (I.) Distribution of Assets, Liabilities and Stockholders'
Equity for data regarding average daily deposits and rates paid thereon for the
years ended December 31, 1998, 1997 and 1996. The aggregate amount of
certificates of deposit, in denominations of $100,000 or more, by maturity, as
of December 31, 1998 are shown below, in thousands.
<TABLE>
<S> <C>
Three months or less.................................. $30,139
Over three months through six months.................. 13,939
Over six months through twelve months................. 12,368
Over twelve months.................................... 6,647
--------
Total............................................ $63,093
--------
--------
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios for years
ended December 31, 1998, 1997, and 1996. The return on average assets and the
return on average stockholders' equity is calculated by dividing net income for
the period by average assets or average stockholders' equity, respectively. The
dividend pay out ratio is calculated by dividing total dividends paid by net
income.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Return on average assets.............................. 1.43% 1.43% 0.82%
Return on average stockholders' equity................ 14.41 15.36 9.02
Dividend pay out ratio................................ 47.05 46.14 79.12
Average stockholders' equity to average assets........ 9.90 9.28 9.05
</TABLE>
VII. SHORT-TERM BORROWINGS
Information required in this table is incorporated herein by reference to the
1998 Annual Report to Stockholders included as Exhibit 13. The information
required is contained in Table 6, "Short-term Borrowings and FHLB Advances" on
page 38 of Exhibit 13, within the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on March 24, 1999.
PINNACLE BANC GROUP, INC.
By: /S/ JOHN J. GLEASON By: /S/ WILLIAM P. GLEASON
------------------------------ -------------------------------
John J. Gleason William P. Gleason
Chairman President
By: /S/ JOHN J. GLEASON, JR. By: /S/ SARA J. MIKUTA
------------------------------ -------------------------------
John J. Gleason, Jr. Sara J. Mikuta
Vice Chairman and Chief Executive Chief Financial Officer and
Officer Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following Directors on behalf of the registrant on
March 24, 1999.
/S/ RICHARD W. BURKE /S/ JAMES L. GREENE
- ------------------------------ ----------------------------------
Richard W. Burke James L. Greene
/S/ MARK P. BURNS
- ------------------------------ ----------------------------------
Mark P. Burns Donald G. King
/S/ WILLIAM J. FINN, JR. /S/ JAMES A. MADDOCK
- ------------------------------ ----------------------------------
William J. Finn, Jr. James A. Maddock
/S/ SAMUEL M. GILMAN
- ------------------------------ ----------------------------------
Samuel M. Gilman James J. McDonough
/S/ WILLIAM C.NICKELS
- ------------------------------ ----------------------------------
Albert Giusfredi William C. Nickels
/S/ JOHN J. GLEASON /S/ JOHN E. O'NEILL
- ------------------------------ ----------------------------------
John J. Gleason John E. O'Neill
/S/ JOHN J. GLEASON, JR. /S/ JAMES R. PHILLIP, JR.
- ------------------------------ ----------------------------------
John J. Gleason, Jr. James R. Phillip, Jr.
/S/ WILLIAM P. GLEASON /S/ KENNETH C. WHITENER, JR.
- ------------------------------ ----------------------------------
William P. Gleason Kenneth C. Whitener, Jr.
24
<PAGE>
-----------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
EXHIBITS
TO
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-------------------------------
PINNACLE BANC GROUP, INC.
(Exact name of registrant as specified in its charter)
-----------------------------------------------------------------------
<PAGE>
EXHIBIT 13 - ANNUAL REPORT TO SECURITY HOLDERS.
<PAGE>
ANNUAL REPORT
1998
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
FINANCIAL HIGHLIGHTS
PINNACLE BANC GROUP, INC.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Percent
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 Change
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year:
Net income..................................... $ 14,681 $ 14,429 2%
Return on average equity....................... 14.4% 15.4%
Return on average assets....................... 1.43 1.43
Per Share:
Net income..................................... $ 1.95 $ 1.91 2%
Book value..................................... 15.73 15.39 2
Dividends...................................... 0.92 0.88 5
At Year End:
Total assets................................... $1,146,065 $1,034,811 11%
Loans.......................................... 541,356 510,207 6
Portfolio funds................................ 520,838 437,262 19
Deposits....................................... 883,806 846,469 4
Notes payable.................................. 20,750 20,000 4
Stockholders' equity........................... 117,376 115,458 2
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................................................... 2
Consolidated Financial Statements................................................ 4
Report of Independent Public Accountants......................................... 25
Selected Financial Data.......................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 27
Board of Directors, Executive Officers, Bank and Banking Center Presidents, and
Department Heads............................................................... 43
Shareholder Information.......................................................... 44
Corporate Information............................................................ 45
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholder:
Each year this letter gives me an opportunity to communicate my views on the
year recently completed. Each annual letter includes a recap of financial
performance, a summary of the accomplishments for the year, as well as a thing
or two that could have been done better. This opportunity also allows me to
reemphasize the objectives set out for Pinnacle along with the challenges we
face for the future.
If 1998 could be summarized in one phrase, it would be a year of record earnings
and internally generated growth. While a new level of earnings is not new,
internal growth is a new phenomenon. Pinnacle has historically grown through
acquisitions, but even though that door was closed in 1998, increases in loans,
deposits and accounts per household were achieved through a directed marketing
approach coupled with the opening of new branches.
FINANCIAL SCORECARD
Net income for 1998 totaled $14.7 million, or $1.95 per diluted share. On a per
share basis, this represented a 2% increase over the $14.4 million, or $1.91 per
share, earned in 1997. Earnings for 1998 translated into a return on average
equity of 14.4% and a return on average assets of 1.43%.
As has been the case in previous years, earnings performance continued to be
positively impacted by the securities portfolio. In 1998, net gains on the sale
of equity securities was a major contributor to the earnings statement as
management took opportunities during the year to reallocate Pinnacle's
investments in other banking companies. Improvements in the area of fee income
were made resulting in an 8% increase over the previous year. On the negative
side, Pinnacle's net interest margin remained under pressure due to a sharp
decline in interest rates with net interest income declining 3%. Operating
expense was up 7% as dollars spent on advertising and new facilities exceeded
the previous year's expenditures.
Total assets at December 31, 1998 were $1.1 billion, up 11% from the previous
year end. Total loans amounted to $541 million, a 6% increase, and total year
end deposits were $884 million, up 4%. Stockholders' equity was $117 million at
year end, an increase of 2%. Credit quality remained strong with non-performing
assets totaling only 0.52% of total assets.
Pinnacle's common share price of $28.50 at December 31, 1998 was approximately
the same as the previous year end close of $29.00 per share. While a static
share price is disappointing in light of the strong increase in the Dow Jones
and S & P Indexes during 1998, in fact, the performance for a number of bank
stock indexes mirrored Pinnacle's results. For example, the NASDAQ Bank Stock
Index declined 12% during the year.
FORWARD MOMENTUM
The best successes are those that not only are important at a point in time, in
this case 1998, but additionally, provide momentum for the future. Each of the
following items noted provided not only an impact on the current year, but set
the table for opportunities for future success.
Pinnacle's most significant accomplishment in 1998 was the fact that growth was
generated internally for the first time in a number of years. Historically,
Pinnacle's growth has come through acquisitions. However, despite the absence of
this alternative in 1998, increases in loans, deposits and accounts per
household were generated. The loan portfolio increased 6% with significant
growth on the commercial side, coupled with improvements in consumer lending.
This increase was achieved despite a continued run off in out-of-area loans
purchased by previously acquired institutions and significant prepayments on
mortgage loans. Deposits were up 4% and accounts per household, a bank industry
barometer of performance, increased on a year-to-year comparable basis.
These successes were the product of enhanced marketing efforts including
television commercials, direct mail, better use of Pinnacle's customer data
base, and an upgrade of the employee incentive program for referrals
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
and sales. Programs during the year focused on the PinnPoint account which
includes home banking and free checking, home equity loans and specific emphasis
to commercial customers including trust services. Additional banking locations
aided the growth opportunities. New branches were opened in Warrenville and
Moline during the year, and a new drive-up facility at the Wicker Park office
provided much needed convenience at the near northwest office.
The year also included the opening of Pinnacle's Operations Center in Oak Park
during May. The center houses approximately one-quarter of Pinnacle's staff and
provides back room support to each of the banking locations allowing the
employees resident in these branches to focus first and foremost on customer
service and development.
A summary of accomplishments for the year would be incomplete without the
mention of the continued contribution of Pinnacle's equity portfolio. This
portfolio, which consists of investments in other financial institutions, was a
major contributor to the earnings statement in 1998. Notwithstanding the fact
that a significant amount of net gains on sales found their way to the bottom
line during 1998, the portfolio contained unrealized appreciation of $8.6
million at December 31, with a total portfolio of $45 million.
While there are a number of items to be proud of each year, there are always a
few disappointments. The failure to complete an acquisition during 1998 would
fall into this category. A number of highly publicized transactions followed by
an erratic market for bank stocks opened the gap between buyers' and sellers'
expectations. Pinnacle needs ongoing external growth to supplement internally
generated growth to remain successful, but acquisitions for the sake of
acquisitions without proper pricing, are not worth the risk.
OBJECTIVE AND CHALLENGES
Our objective continues to focus on enhancing shareholder value. A financial
services company with earnings results consistently above peer group is our
goal. Effective management of equity and earnings growth are the keys. Growth
through acquisitions and by continued development of new and existing customer
opportunities is our primary tool. Capital management will also be enhanced by
share repurchases and dividend policy. A 9% increase in the dividend was
announced in January, 1999, marking the eleventh consecutive annual increase.
To say that the future for Pinnacle, and the banking industry in general, will
be challenging is a huge understatement. External competition from financial
service providers and larger banking companies, the rapid change in business
processes, and the technological dollars required present significant
challenges. Add the low interest rate environment and the accompanying squeeze
on net interest margins and it is evident that plenty of work lies ahead.
Despite these challenges, we believe that Pinnacle can continue to compete in
this environment by providing convenient, competitively priced products and
quality service. We feel that we made great strides in 1998 in making a very
good company better. At the same time, we recognize the challenges that lie
ahead.
We thank you for your support as shareholders and wish to assure you that
enhancement of shareholder value remains our primary objective.
Sincerely,
[/S/ JOHN J. GLEASON, JR.]
John J. Gleason, Jr.
Vice Chairman and
Chief Executive Officer
- --------------------------------------------------------------------------------
3
<PAGE>
Consolidated BALANCE SHEETS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
at December 31
----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks................................... $ 30,922 $ 31,103
Federal funds sold........................................ 500 2,800
----------------------
Total cash and cash equivalents......................... 31,422 33,903
Interest-bearing deposits................................. 101 228
Securities--Available for sale (Note 3)................... 520,237 434,234
(Amortized cost of $501,889 in 1998 and $409,123 in
1997)
Loans (Note 4)............................................ 541,356 510,207
Less: Allowance for loan losses (Note 5).................. (6,935) (7,520)
----------------------
Net loans............................................... 534,421 502,687
Premises and equipment (Note 6)........................... 20,917 18,451
Goodwill and other intangibles (Note 2)................... 20,660 23,076
Other assets.............................................. 18,307 22,232
----------------------
Total................................................... $1,146,065 $1,034,811
----------------------
Liabilities:
Demand deposits:
Noninterest-bearing..................................... $ 115,809 $ 104,644
Interest-bearing........................................ 100,676 96,092
Savings deposits.......................................... 286,220 281,737
Other time deposits....................................... 381,101 363,996
----------------------
Total deposits.......................................... 883,806 846,469
Short-term borrowings and FHLB advances (Note 8).......... 111,245 38,525
Notes payable (Note 8).................................... 20,750 20,000
Other liabilities......................................... 12,888 14,359
----------------------
Total liabilities....................................... 1,028,689 919,353
----------------------
Commitments and Contingencies (Notes 14 & 15)
Stockholders' equity (Notes 10, 11 and 16):
Preferred stock........................................... --0-- --0--
1,000 shares authorized, none issued
Common stock, $3.125 par.................................. 23,312 23,449
20,000,000 shares authorized; shares issued and
outstanding (1998: 7,459,743; 1997: 7,503,773)
Additional paid-in capital................................ 38,638 38,578
Retained earnings......................................... 43,407 36,856
Accumulated other comprehensive income.................... 12,019 16,575
----------------------
Total stockholders' equity.............................. 117,376 115,458
----------------------
Total................................................... $1,146,065 $1,034,811
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
4
<PAGE>
Consolidated STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
December 31
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans................................................................... $ 42,213 $ 42,928 $ 31,143
Securities:
Taxable............................................................... 23,089 24,154 23,133
Tax-exempt............................................................ 1,390 1,520 1,746
Interest-bearing deposits, Federal funds sold and other................. 281 65 252
-------------------------------
Interest income....................................................... 66,973 68,667 56,274
-------------------------------
Interest Expense:
Deposits:
Interest-bearing demand............................................... 1,766 1,806 1,841
Savings............................................................... 8,473 8,715 8,085
Other time............................................................ 21,560 21,169 16,719
Short-term borrowings and FHLB advances................................. 1,366 1,766 728
Notes payable........................................................... 1,368 1,853 1,745
-------------------------------
Interest expense...................................................... 34,533 35,309 29,118
-------------------------------
Net Interest Income....................................................... 32,440 33,358 27,156
Provision for loan losses (Note 5)...................................... --0-- --0-- --0--
-------------------------------
Net interest income after provision for loan losses................... 32,440 33,358 27,156
-------------------------------
Other Income:
Other income (Note 17).................................................. 6,189 8,436 7,562
Net securities gains.................................................... 12,755 8,340 159
-------------------------------
Other income.......................................................... 18,944 16,776 7,721
-------------------------------
Other Expense:
Salaries, profit sharing and other employee benefits (Note 9)........... 14,870 14,131 12,678
Occupancy (Note 6)...................................................... 3,076 2,815 2,674
Amortization of goodwill and other intangibles (Note 2)................. 2,416 2,394 2,033
Other expense (Note 17)................................................. 9,732 8,873 8,315
-------------------------------
Other expense......................................................... 30,094 28,213 25,700
-------------------------------
Income before income taxes................................................ 21,290 21,921 9,177
Provision for income taxes (Note 7)..................................... 6,609 7,492 2,050
-------------------------------
Net income............................................................ $ 14,681 $ 14,429 $ 7,127
-------------------------------
Earnings per share (Note 10):
Basic................................................................. $1.96 $1.91 $1.05
Diluted............................................................... 1.95 1.91 1.04
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
5
<PAGE>
Consolidated STATEMENTS OF COMPREHENSIVE INCOME
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
December 31
----------------------------------
(IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income.................................................. $ 14,681 $ 14,429 $ 7,127
Other Comprehensive income, net of tax......................
Unrealized gains on securities:
Unrealized gains (losses) on securities................. 5,852 22,821 2,686
Less: reclassification adjustment for (gains) losses
included in net income................................. (12,755) (8,340) (159)
----------------------------------
Net unrealized gains on securities...................... (6,903) 14,481 2,527
Income tax provision (benefit) related to items of other
comprehensive income...................................... (2,347) 4,954 859
----------------------------------
Other comprehensive income, net of tax...................... (4,556) 9,527 1,668
Comprehensive Income........................................ $ 10,125 $ 23,956 $ 8,795
</TABLE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
(IN THOUSANDS, EXCEPT PER SHARE DATA) Stock Capital Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995....................... $ 20,505 $ 17,899 $ 33,505 $ 7,052 $ 78,961
Net income..................................... 7,127 7,127
Dividends paid--$0.83 per share................ (5,639) (5,639)
Purchase and retirement of common stock........ (740) (4,057) (4,797)
Exercise of stock options...................... 29 103 132
Correction of deferred tax valuation allowance
(Note 7)...................................... 1,049 (1,672) (623)
Issuance of common stock for acquisition (Note
2)............................................ 4,017 19,978 23,995
Unrealized gain on securities available for
sale, net of tax
(Notes 1 and 3)............................... 1,668 1,668
---------------------------------------------------------------
Balance, December 31, 1996....................... $ 23,811 $ 37,980 $ 31,985 $ 7,048 $ 100,824
Net income..................................... 14,429 14,429
Dividends paid--$0.88 per share................ (6,657) (6,657)
Purchase and retirement of common stock........ (543) (2,901) (3,444)
Exercise of stock options...................... 181 598 779
Unrealized gain (loss) on securities available
for sale, net of tax (Notes 1 and 3).......... 9,527 9,527
---------------------------------------------------------------
Balance, December 31, 1997....................... $ 23,449 $ 38,578 $ 36,856 $ 16,575 $ 115,458
Net income..................................... 14,681 14,681
Dividends paid--$0.92 per share................ (6,907) (6,907)
Purchase and retirement of common stock........ (149) (1,223) (1,372)
Exercise of stock options...................... 12 60 72
Unrealized gain (loss) on securities available
for sale, net of tax (Notes 1 and 3).......... (4,556) (4,556)
---------------------------------------------------------------
Balance, December 31, 1998....................... $ 23,312 $ 38,638 $ 43,407 $ 12,019 $ 117,376
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
6
<PAGE>
Consolidated STATEMENTS OF CASH FLOWS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31
-------------------------------
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 14,681 $ 14,429 $ 7,127
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation.................................................. 1,865 1,698 1,619
Amortization of goodwill and other intangibles................ 2,416 2,394 2,033
Amortization of purchase accounting adjustments............... 147 (69) 175
Provision for loan losses..................................... --0-- --0-- --0--
Premium amortization.......................................... 222 286 649
Discount accretion............................................ (1,567) (1,301) (6,894)
Increase (decrease) in deferred loan fees..................... (55) (88) 264
Gain on sales of securities................................... (12,755) (8,340) (159)
Decrease (increase) in interest receivable.................... 588 4,078 (8,108)
Deferred income taxes......................................... 687 502 (311)
Decrease in other assets...................................... 3,336 1,617 20,018
Increase (decrease) in other liabilities...................... 196 280 (7,699)
Other, net.................................................... (192) 79 (1,222)
-------------------------------
Total adjustments........................................... (5,112) 1,136 365
Net cash provided by operating activities................... 9,569 15,565 7,492
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note 1)....... --0-- --0-- (19,050)
Proceeds from sales of securities available for sale.............. 783,000 1,575,182 1,112,527
Purchases of securities available for sale........................ (863,085) (1,552,282) (1,101,715)
Proceeds from maturities and paydowns of securities............... 1,246 1,025 10,048
Net decrease in interest-bearing deposits......................... 127 3,197 31,990
Net loan principal (advanced) collected........................... (31,456) 14,106 (39,836)
Premises and equipment, net....................................... (4,482) (2,780) (2,638)
-------------------------------
Net cash provided by (used for) investing activities........ (114,650) 38,448 (8,674)
Cash flows from financing activities:
Net increase (decrease) in total deposits......................... 37,337 (31,083) (21,817)
Net increase in short-term borrowings............................. 72,720 10,000 2,825
Proceeds from notes payable....................................... 23,825 21,600 24,500
Principal reductions of notes payable............................. (23,075) (34,400) (12,300)
Issuance of common stock.......................................... 72 779 132
Purchase and retirement of common stock........................... (1,372) (3,444) (4,797)
Dividends paid.................................................... (6,907) (6,657) (5,639)
-------------------------------
Net cash provided by (used for) financing activities........ 102,600 (43,205) (17,096)
Net increase (decrease) in cash and cash equivalents................ (2,481) 10,808 (18,278)
Cash and cash equivalents at beginning of year...................... 33,903 23,095 41,373
-------------------------------
Cash and cash equivalents at end of year............................ $ 31,422 $ 33,903 $ 23,095
-------------------------------
Cash paid during year for:
Interest.......................................................... $ 33,834 $ 35,527 $ 29,221
Income taxes...................................................... 5,792 6,506 1,525
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
7
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
ALL DOLLARS IN THE FOLLOWING FOOTNOTES ARE IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS.
ACCOUNTING POLICIES: (1)
The consolidated financial statements of the Pinnacle Banc Group, Inc.
(the "Corporation" or "Pinnacle") and Subsidiaries have been prepared in
conformity with generally accepted accounting principles and reporting practices
prescribed for the banking and thrift industry. The Corporation is a multi-bank
holding company registered under the Bank Holding Company Act and is engaged in
the business of banking through the ownership of subsidiary banks. A description
of the significant accounting policies follows:
CONSOLIDATION - (A)
The consolidated financial statements of the Corporation and
Subsidiaries include the accounts of the Corporation and its subsidiaries,
Pinnacle Bank ("PB") and Pinnacle Bank of the Quad-Cities ("PBQC"). Significant
inter-company accounts and transactions have been eliminated in the preparation
of these statements.
STATEMENTS OF CASH FLOWS - (B)
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and Federal funds sold. Generally,
Federal funds are sold for one-day periods.
i.) In the consolidated statements of cash flows, acquisitions by the
Corporation are recorded as net cash from investing activities and, accordingly,
cash flows are net of the impact of the acquisitions discussed below. In 1996,
Financial Security ("FinSec") and its subsidiary, Security Federal ("SF"), were
purchased for a combination of stock and cash. The cash portion of the
acquisition price was $20,140; the non-cash portion of the acquisition consisted
of 1,285,413 (adjusted for stock split, see Footnote 10) shares valued at
$23,995. At the date of purchase, the balance sheet of FinSec included cash and
cash equivalents of $1,090, resulting in a net cash position of $19,050.
ii.) In the statements of cash flows for the parent company only (Note 18),
acquisitions by the Corporation are recorded as net cash from investing
activities in the amount of the cash paid for the acquisitions net of cash
acquired. In 1996, the amount was $6,022 for the acquisition of FinSec.
SECURITIES - (C)
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" addresses the
accounting and reporting of investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Securities
are to be classified in three categories: held-to-maturity securities, trading
securities and available-for-sale securities.
Upon adoption of SFAS No. 115, all securities held by Pinnacle were
classified as available-for-sale. As a result, securities are carried on the
balance sheet at fair value, with corresponding (after tax) adjustments included
in stockholders' equity.
Premium and discount on securities are included in interest income on
securities over the period from acquisition to maturity or earlier call date
using the level-yield method. The specific identification method is used to
record gains and losses on securities transactions.
LOANS - (D)
Loans are stated net of unearned income. Loan origination and
commitment fees and certain direct loan origination costs are deferred and the
net amount amortized as an adjustment of the related loan's yield. The
Corporation generally amortizes these amounts over the contractual life of the
related loans.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118, "Accounting for Creditors for Impairment of a Loan--Income
Recognition and Disclosure" address the accounting for loans when it is probable
that all principal and interest amounts due on a loan will not be collected in
accordance with its contractual terms (i.e. "impaired loans"). Pursuant to SFAS
No. 114, to the extent the recorded investment of an impaired loan exceeds the
present value of the loan's expected future cash flows or other measures of
value, a valuation allowance is established for the difference. The
corresponding allocation or charge will be to either the allowance for loan
losses or to the provision for loan losses, respectively, depending on the
adequacy of the overall allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES - (E)
The allowance for loan losses is determined by management based on
factors such as past loan loss experience, evaluation of known and inherent
losses in the loan portfolio, prevailing economic conditions, and other factors
and
- --------------------------------------------------------------------------------
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
estimates which are subject to change over time. Management adjusts the
allowance for loan losses by recording a provision for loan losses in an amount
sufficient to maintain the allowance at a level commensurate with the risks in
the loan portfolio. Loans are charged-off when deemed to be uncollectible by
management.
PREMISES AND EQUIPMENT - (F)
Premises and equipment are stated at cost less accumulated
depreciation. For financial reporting purposes, depreciation is computed using a
combination of the straight-line and accelerated methods over the estimated
useful lives of the assets.
OTHER REAL ESTATE - (G)
Other real estate, included in other assets, includes property
acquired through foreclosure or deed in lieu of foreclosure. Other real estate
is carried at the lower of cost or fair value. Losses arising at the time of
acquisition of property in full or partial satisfaction of loans are recorded as
loan losses. Subsequent losses on the property are charged to other expenses.
Income received on the property is recorded as an offset to expenses.
INCOME TAXES - (H)
The consolidated Federal income tax return of the Corporation includes
the accounts of each subsidiary bank. Under the terms of a tax-sharing agreement
with the Corporation, each subsidiary bank is required to pay to the Corporation
the Federal income tax liability computed as if the subsidiary bank were to file
a separate income tax return. In the event of a separate bank net operating
loss, the Corporation shall remit to each subsidiary bank the appropriate amount
of each refund. The tax-sharing agreement also includes a provision that the
Corporation will indemnify each subsidiary bank against all tax liabilities for
any taxable year in which the subsidiary bank joins with the Corporation in
filing a consolidated return.
SFAS No. 109, "Accounting for Income Taxes", requires an asset and
liability approach for accounting for income taxes. Its objective is to
recognize the amount of taxes payable or refundable for the current year, and
deferred tax assets and liabilities for the future tax consequences for items
that have been recognized in the Corporation's financial statements or tax
returns. The measurement of tax assets and liabilities is based on enacted tax
laws. Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based on available evidence.
(I)
NEW ACCOUNTING PRONOUNCEMENTS -
COMPREHENSIVE INCOME
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement is effective for fiscal years beginning after December
15, 1997 with earlier application permitted. This statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. The object of the statement is to report a measure
of all changes in equity of an enterprise that results from transactions and
other economic events of the period other than transactions with owners. Items
included in comprehensive income include revenues, gains and losses that under
generally accepted accounting principles are directly charged to equity.
Examples include foreign currency transactions, 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.
SEGMENT INFORMATION
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement is effective
for fiscal years beginning after December 15, 1997. This statement requires an
enterprise to present segment information using the management approach. The
management approach requires segment information to be reported based on how
management organizes segments within a company for making operating decisions
and assessing performance. The Corporation adopted this statement effective for
the fiscal year ended December 31, 1998. See Footnote 19.
TRANSFERS OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In 1996, FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and Statement
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS Statement
No. 125". The statement addresses the parameters in which the transfers of
assets and extinguishment of liabilities are considered a sale and removed from
the balance sheet or recorded
- --------------------------------------------------------------------------------
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
as secured borrowings. This statement affects the Corporation through certain
financial instruments such as loan participations or repurchase agreements and
whether the Corporation has relinquished total control over the transfer of
assets or extinguishment of liabilities. The effective date of the standard was
for fiscal years beginning after December 31, 1996. The Corporation adopted SFAS
No. 125 and SFAS No. 127 on January 1, 1997 and there was no significant effect
on its consolidated financial position or results of operations.
EARNINGS PER SHARE
In March, 1997, the FASB issued SFAS No. 128, "Earnings per Share".
The new statement was effective for financial statements for periods ending
after December 15, 1997 and superseded Accounting Principles Board Opinion 15.
SFAS No. 128 replaces primary earnings per share ("EPS") with basic EPS. Basic
EPS is computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for any potentially dilutive
securities is included. Diluted EPS replaces fully diluted EPS and includes the
effects of stock options. In using the treasury stock method to compute dilution
for options, the average share price for the period is used, rather than the
more dilutive greater of the average share price or end-of-period share price
required by the previous standard. Pinnacle adopted SFAS No. 128 on December 31,
1997 and, accordingly, all prior EPS data presented has been restated. See also
Footnote 10.
ESTIMATES (J)
In preparing the consolidated financial statements, management made
estimates and assumptions that affect the amounts reported therein and the
disclosures provided. These estimates and assumptions may change and future
results could differ from those estimates and assumptions.
ACQUISITIONS: (2)
Effective September 30, 1996, Pinnacle completed the acquisition of FinSec
and its subsidiary, SF. The total purchase price was $44,756, common shares
issued were 1,285,413 (adjusted for stock split) valued at $23,995, and the
remainder was paid in cash. Funds utilized to pay for the cash portion of the
acquisition were obtained from funds on hand at Financial Security, a dividend
from SF, and borrowed from an unaffiliated bank.
At the date of the purchase, FinSec was liquidated and SF remained a
separate subsidiary of Pinnacle until January 31, 1997 at which time SF was
merged with and into PB. As of the date of the purchase, FinSec had total assets
of approximately $250,000. Goodwill, based on management's estimates of fair
value of assets acquired and liabilities assumed, approximated $8,200 which is
being amortized on a straight-line basis over fifteen years. Certain adjustments
to goodwill relating to the FinSec acquisition were made in 1997 upon receipt of
final appraisal numbers. The adjustments were not material to the financial
statements.
This transaction is being accounted for using the purchase method of
accounting and, accordingly, the excess of the aggregate purchase price over the
fair value of the net assets acquired consisted of goodwill. Because the
acquisition occurred at September 30, 1996, the income effect of SF is included
in Pinnacle's results of operations for the last three months of 1996.
The following unaudited results of operations reflect the acquisition of
FinSec as if the acquisition had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
1996
<S> <C>
---------
Net interest income................ $ 32,285
Net income......................... 4,201
Net income per share (adjusted for
stock split)...................... 0.53
</TABLE>
At December 31, 1998 and 1997, the Corporation had goodwill of $19,552 and
$21,627, respectively. Goodwill is stated net of accumulated amortization of
$23,286 and $21,211 at December 31, 1998 and 1997, respectively. Goodwill
represents the excess of the aggregate purchase price paid over the fair value
of the net assets received in the purchase of Bank of LaGrange Park in 1980,
First National Bank in Harvey in 1982, Bank of Silvis in 1989, Berwyn National
Bank and The Henry County Bank in 1991, Batavia Savings Bank in 1992, Acorn
Financial Corp in 1995, and FinSec in 1996. Goodwill is being amortized on
straight line and accelerated methods over periods of 10 years to 20 years.
Amortization of goodwill amounted to $2,075 in 1998, $2,053 in 1997 and $1,692
in 1996.
Other intangibles consist of a deposit base intangible totaling $1,108 and
$1,449 as of December 31, 1998 and 1997, respectively, which was allocated to
values associated with the acquired deposits of the Berwyn branch of Olympic
Federal Savings Association. Other intangibles are stated net of accumulated
amortization of $2,301 and $1,960 at December 31, 1998 and 1997, respectively.
Amortization of the deposit base intangible,
- --------------------------------------------------------------------------------
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
which is being amortized over an estimated 10-year life, amounted to $341 in
1998, 1997, and 1996.
(3)
SECURITIES:
The amortized cost and the estimated fair value of the Corporation's
securities as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S. Government agencies........................... $ 405,056 $ 7,218 $ 2 $ 412,272
Mortgage-backed securities........................................... 39,680 8 92 39,596
Floating rate collateralized mortgage obligations.................... 964 2 --0-- 966
State and municipal.................................................. 16,851 2,591 1 19,441
--------------------------------------------------
Total debt securities.............................................. 462,551 9,819 95 472,275
Corporate and other equity securities................................ 39,338 9,740 1,116 47,962
--------------------------------------------------
Total securities................................................... $ 501,889 $ 19,559 $ 1,211 $ 520,237
<CAPTION>
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S. Government agencies........................... $ 355,904 $ 208 $ 187 $ 355,925
Mortgage-backed securities........................................... 2,384 11 57 2,338
Floating rate collateralized mortgage obligations.................... 2,279 5 7 2,277
State and municipal.................................................. 19,426 3,003 187 22,242
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total debt securities.............................................. 379,993 3,227 438 382,782
Corporate and other equity securities................................ 29,130 22,325 3 51,452
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Total securities................................................... $ 409,123 $ 25,552 $ 441 $ 434,234
<CAPTION>
--------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1998 and 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 105,750 $ 105,782 $ 3,097 $ 3,056
Due after one year through five years... 309,639 317,833 361,897 362,640
Due after five years through ten
years................................. 5,331 6,448 8,080 9,563
Due after ten years..................... 1,187 1,650 2,256 2,908
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
$ 421,907 $ 431,713 $ 375,330 $ 378,167
Mortgage-backed securities.............. 39,680 39,596 2,384 2,338
Floating rate collateralized mortgage
obligations........................... 964 966 2,279 2,277
<CAPTION>
------------------------ ------------------------
<S> <C> <C> <C> <C>
Total debt securities................. $ 462,551 $ 472,275 $ 379,993 $ 382,782
<CAPTION>
------------------------ ------------------------
</TABLE>
------------------------
Proceeds from sales of debt securities during 1998 were $751,927. Gross
gains of $2,890 and gross losses of $1,642 were realized on those sales.
Proceeds from sales of debt securities during 1997 were $1,557,505. Gross gains
of $6,693 and gross losses of $1,195 were realized on those sales.
At December 31, 1998 and 1997, securities carried at approximately
$136,626 and $36,200,
- --------------------------------------------------------------------------------
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
respectively, were pledged to secure public and trust deposits, securities sold
under agreement to repurchase, and for other purposes as required or permitted
by law.
The mortgage-backed securities are direct obligations of U. S. Government
agencies and the floating rate collateralized mortgage obligations are primarily
secured by obligations of U. S. Government agencies. In the opinion of
management, there were no material securities held at either December 31, 1998
or 1997, which constituted an unusual credit risk for the Corporation.
LOANS: (4)
The composition of loans included in the accompanying consolidated balance
sheets is as follows:
<TABLE>
<CAPTION>
December 31
--------------------
<S> <C> <C>
1998 1997
<CAPTION>
--------------------
<S> <C> <C>
Commercial and other................ $ 146,588 $ 111,990
Real estate--
Residential....................... 279,418 291,578
Commercial and construction....... 46,695 45,107
Consumer............................ 69,250 62,294
--------------------
Gross loans....................... 541,951 510,969
Less--Unearned income............... 595 762
--------------------
Loans, net of unearned income..... $ 541,356 $ 510,207
--------------------
</TABLE>
The balance of impaired loans at December 31, 1998, was $2,695 while the
average balance for the year was $3,422. Impaired loans secured by real estate
totaled $1,915 and commercial loans totaled $780. The balance of impaired loans
at December 31, 1997 was $3,723, while the average balance for the year was
$5,240. No portion of the allowance for loan losses was allocated to the
impaired loans at December 31, 1998 and 1997. Interest income recognized on
impaired loans was approximately $221 in 1998 and $625 in 1997.
Loan concentrations are defined as amounts loaned to a multiple number of
borrowers engaged in similar activities, which would cause them to be similarly
impacted by economic or other conditions. Although the Corporation has a
diversified loan portfolio, a substantial natural geographic concentration of
credit risk exists within the Corporation's defined customer market areas with
the exception of loans acquired from the acquisition of SF. Included in SF loan
portfolio are certain purchased and participated loans outside the Corporation's
defined customer markets. These loans totaled approximately $39,256, or 7.3%, of
the total loan portfolio of the Corporation and are in the following areas:
4.72% in California; and 1.34% in the Midwest (excluding the Chicago
metropolitan area). All remaining loans are in the geographic market areas
including the Chicago metropolitan area and the Quad-Cities metropolitan area of
Illinois and Iowa.
ALLOWANCE FOR LOAN LOSSES: (5)
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Beginning balance............ $ 7,520 $ 8,364 $ 6,023
Balance acquired (Note 2).... --0-- --0-- 2,982
Loans charged off............ (917) (1,377) (839)
Recoveries on loans.......... 332 533 198
Provision for loan losses.... --0-- --0-- --0--
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Ending balance............. $ 6,935 $ 7,520 $ 8,364
<CAPTION>
-------------------------------
</TABLE>
PREMISES AND EQUIPMENT: (6)
A summary of premises and equipment is detailed below:
<TABLE>
<CAPTION>
December 31
--------------------
<S> <C> <C>
1998 1997
<CAPTION>
--------------------
<S> <C> <C>
Land.................................. $ 3,672 $ 2,820
Buildings and improvements............ 15,994 15,272
Leasehold improvements................ 1,114 474
Furniture and equipment............... 10,346 8,741
<CAPTION>
--------------------
<S> <C> <C>
Total............................... 31,126 27,307
Accumulated depreciation.............. (10,209) (8,856)
<CAPTION>
--------------------
<S> <C> <C>
Premises and equipment................ $ 20,917 $ 18,451
<CAPTION>
--------------------
</TABLE>
Depreciation expense for the year ended December 31, 1998, 1997, and 1996
was $1,865, $1,698, and $1,619, respectively.
The Corporation leases office space for its corporate headquarters under
an agreement expiring in the year 2002, leases its banking premises in LaGrange
Park under an agreement expiring in the year 2003, leases its banking facility
in North Riverside under an agreement expiring in the year 2007, leases its
banking facility in Niles under an agreement expiring in 2000, and leases space
for PB Operations Center. The PB Operations Center lease expires in 2008, with a
five-year termination
- --------------------------------------------------------------------------------
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
clause. Future minimum lease payments on these operating leases at December 31,
1998, are as follows:
<TABLE>
<CAPTION>
Future Minimum
Year Lease Payments
<S> <C>
- --------------------------------------------------
1999............................. $ 514
2000............................. 504
2001............................. 511
Later years...................... 2,706
<CAPTION>
---------------
<S> <C>
Total minimum payments
required....................... $ 4,235
<CAPTION>
---------------
</TABLE>
Rental expenses for leases, included in the consolidated statements of
income as occupancy expenses, amounted to $457 in 1998, $233 in 1997, and $177
in 1996. The North Riverside and LaGrange Park leases are subject to periodic
adjustment based on changes in the U.S. Department of Labor Consumer Price Index
and deposit growth, respectively.
The Corporation's aggregate future minimum net rentals to be received
under non-cancelable leases from third party tenants for its locations in Oak
Park and Westmont are as follows:
<TABLE>
<CAPTION>
Future Minimum
Year Net Lease Rentals
<S> <C>
- ----------------------------------------------------
1999............................. $ 43
2000............................. 10
2001............................. 9
Later years...................... 8
<CAPTION>
-----------------
<S> <C>
Total minimum payments
required....................... $ 70
<CAPTION>
-----------------
</TABLE>
The Corporation also receives reimbursement from its tenants for certain
occupancy expenses including, taxes, insurance, and operating expenses, as
defined in the lease agreement. Rental income and expense reimbursement,
included as an offset to occupancy expenses, amounted to $176 in 1998, $151 in
1997, and $157 in 1996.
INCOME TAXES: (7)
The provision for income taxes in the consolidated statements of income is
composed of the following:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Federal:
Current..................... $ 5,922 $ 6,990 $ 2,361
Deferred.................... 367 461 (311)
State:
Deferred.................... 320 41 --0--
-------------------------------
Provision for income
taxes.................... $ 6,609 $ 7,492 $ 2,050
-------------------------------
</TABLE>
The provision for taxes on security gains was $4,337 in 1998, $2,836 in
1997, and $54 in 1996.
The following table reconciles the provision for income taxes with the
amounts computed at the applicable statutory Federal income tax rate of 34% for
each period, except 1998 and 1997 where the taxable income in excess of $10
million is taxed at 35%.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
-------------------------------
Tax provision at Federal
statutory rate............. $ 7,351 $ 7,572 $ 3,121
Tax-exempt income........... (587) (600) (690)
Amortization of purchase
accounting assets and
goodwill and other
intangibles................ 833 808 619
Dividend received
deduction.................. (282) (194) (207)
Other, net.................. (706) (94) (793)
-------------------------------
Provision for income
taxes...................... $ 6,609 $ 7,492 $ 2,050
-------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The components of and changes in the net deferred tax asset were as
follows:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
<S> <C> <C>
--------------------
Deferred tax assets:
Allowance for loan losses......... $ 2,441 $ 2,557
Deferred compensation............. 590 633
Other reserves.................... 50 208
State tax operating loss
carryforward..................... 2,022 2,255
Federal regular tax operating loss
carryforward..................... 0 1,170
Alternative minimum tax credit
carryforward..................... 0 207
Other............................. 193 268
--------------------
Gross deferred tax assets......... 5,296 7,298
Valuation allowance............... (1,404) (1,404)
--------------------
Gross deferred tax assets, net of
valuation allowance.............. 3,892 5,894
--------------------
Deferred tax liabilities:
Partnership interests............. 3 810
Depreciation...................... 226 221
Purchase accounting adjustments... 477 605
Other............................. 397 433
Unrealized gain on securities..... 6,329 8,536
--------------------
Gross deferred tax
liabilities.................... 7,432 10,605
--------------------
Net deferred tax asset
(liability)...................... $ (3,540) $ (4,711)
--------------------
</TABLE>
A valuation allowance is provided when the realization potential of a
portion of the deferred tax asset cannot be determined to be more likely than
not. A valuation allowance of $1,049 had been set up against the parent company
only Federal net operating loss carryforward in 1993, when the Corporation
adopted the provisions of SFAS No. 109. In reviewing its 1996 tax planning
strategies relating to the parent company only Federal net operating loss
carryforward, a portion which expires in 1999, the Corporation recognized that
it did not need that specific valuation allowance because of the effect of the
market value adjustment related to SFAS No. 115 on the parent company equity
portfolio. A correcting entry was made in 1996 to reverse the valuation
allowance and record the SFAS No. 115 adjustment. At the time of the correction,
the adjustment to equity (including the SFAS No. 115 adjustment) was less than
1% of equity. Management reviewed the effect of this adjustment on prior period
financial statements and determined it was immaterial to those financial
statements due to the amount of the adjustment and because any correcting entry
would have had no impact on the income or earnings per share of the Corporation.
No restatement of prior periods was made. The valuation allowance at December
31, 1998 and 1997 relates solely to the 1997, 1996 and 1995 state net operating
loss carryforward. Also included in the net deferred tax asset (liability) is
the tax effect of the unrealized gain on securities which is not recorded
through the provision for taxes, but directly to Stockholders' Equity.
The net operating loss carryforward, for Federal purposes, as of December
31, 1997 related to the parent company and was utilized in 1998. At December 31,
1998 and 1997, the State net operating loss carryforward amounted to $38,229 and
$42,686 which expires, if unused, in the years 2010 through 2013.
BORROWINGS, FHLB ADVANCES AND(8)
NOTES PAYABLE:
Included in short-term borrowings are Federal Home Loan advances with the
following maturities and rates:
<TABLE>
<CAPTION>
Amount Rate Maturity
<S> <C> <C>
- ----------------------------
$2,500 7.44% 5/6/99
</TABLE>
The Corporation maintains qualifying collateral against these advances
including its Federal Home Loan Bank Stock and 1 - 4 Family residential
mortgages.
The Corporation has financed acquisitions, purchases of equity securities
and short-term cash requirements of the parent company with an unaffiliated
bank. At December 31, 1998, the notes payable totaled $20,750 of a $35,000 line
of credit. All of the outstandings were tied to LIBOR-type rates. Total
outstandings were $20,000 at December 31, 1997.
The notes payable mature on October 31, 1999 and are secured by stock of
the Corporation's subsidiary banks.
(9)
RETIREMENT AND INCENTIVE PLANS:
The Corporation maintains a trusteed, profit-sharing plan covering
substantially all employees who have met age and service requirements. Annual
contributions are made in accordance with a resolution passed by the Boards of
Directors of the Corporation and each subsidiary bank and amounted to $499 for
1998, $434 for 1997, and $424 for 1996.
The Corporation also maintains a 401(k) savings plan that allows eligible
employees to defer a percentage of their salary, which the Corporation will
match up to 4% of the employee's compensation at the rate of 25% of the
employee's contribution. The Corporation's contribution to this plan amounted to
$63 in 1998, $55 in 1997 and $61 in 1996.
- --------------------------------------------------------------------------------
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation and each subsidiary bank maintain profit incentive plans
which are available to certain key executives. Distributions are based on the
performance levels of the Corporation and each subsidiary bank, and are subject
to the Board of Directors' approval.
(10)
CAPITAL STOCK AND EARNINGS PER
SHARE:
On January 21, 1997, the Board of Directors of the Corporation approved a
3-for-2 stock split payable February 10, 1997 to stockholders of record on
February 3, 1997. The stock split has been recorded retroactively for
consolidated financial statement purposes by adjusting the par value of the
Corporation's common stock and the number of shares outstanding. Disclosures
regarding earnings per share and stock options have been adjusted accordingly
for all periods presented.
As of December 31, 1997, Pinnacle adopted SFAS No. 128, "Earnings per
Share". Basic earnings per share were computed by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted
earnings per share were determined on the assumptions that stock options
outstanding were converted on January 1 of each applicable year. The following
table shows the computation of shares outstanding for calculating earnings per
share.
<TABLE>
<CAPTION>
For the year ended December 31
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- --------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common
stockholders........................... $14,681 7,505,749 $1.96 $14,429 7,540,505 $1.91 $7,127 6,810,215 $1.05
------ ------ ------
Common stock equivalents:
Stock option outstanding.............. 118,000 86,250 65,250
Treasury stock method................. (89,496) (76,463) (46,233)
---------- ---------- ----------
Net................................... 28,504 9,787 19,017
---------- ---------- ----------
Diluted Earnings Per Share
Income available to common stockholders
plus assumed conversions............... $14,681 7,534,253 $1.95 $14,429 7,550,292 $1.91 $7,127 6,829,232 $1.04
<CAPTION>
--------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
STOCK OPTION PLAN: (11)
In April, 1990, the shareholders approved the 1990 Incentive Stock Option
Plan ("1990 Plan"). The 1990 Plan covers key employees of the Corporation and
requires that all options be issued at an option price at least equal to the
fair market value per share of the Corporation's common stock on the date
granted. No options may be granted to any individual who owns more than 10% of
the Corporation's common stock unless the grant is at a purchase price of 110%
of the option's fair market value on the date of grant. Under the 1990 Plan, the
aggregate number of shares which could be issued under options are 369,999
shares.
The following table summarizes stock option transactions for 1998, 1997,
and 1996 giving effect to stock splits. At December 31, 1998, 118,000 option
shares under the 1990 Plan were outstanding. At December 31, 1997, 86,250 option
shares under the 1990 Plan were outstanding.
<TABLE>
<CAPTION>
Weighted
Number of Average Price
Shares Per Share
<S> <C> <C>
--------------------------
Outstanding at December 31,
1995.......................... 70,749 $ 13.91
Options granted.............. 3,750 21.33
Options exercised............ (9,249) 14.43
--------------------------
Outstanding at December 31,
1996.......................... 65,250 $ 14.28
Options granted.............. 75,000 20.00
Options exercised............ (54,000) 23.42
--------------------------
Outstanding at December 31,
1997.......................... 86,250 $ 20.28
Options granted.............. 35,500 30.31
Options exercised............ (3,750) 19.09
--------------------------
Outstanding at December 31,
1998.......................... 118,000 $ 23.33
--------------------------
</TABLE>
The range of options exercisable and dates exercisable at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Number Exercise Exercise Expiration
of Shares Price Date Date
<S> <C> <C> <C>
- ----------------------------------------------
3,750 $ 19.09 Immediate 1/17/00
3,750 21.33 Immediate 1/23/01
7,500 18.67 Immediate 1/21/02
19,476 20.53 Immediate 1/21/02
9,738 20.53 1/21/99 1/21/02
9,738 20.53 1/21/00 1/21/02
28,548 20.53 1/21/01 1/21/02
12,067 28.50 Immediate 12/21/03
933 28.50 12/21/99 12/21/03
6,378 31.35 Immediate 12/21/03
6,378 31.35 12/21/99 12/21/03
6,378 31.35 12/21/00 12/21/03
3,366 31.35 12/21/01 12/21/03
- -----------
118,000
- -----------
</TABLE>
All options are exercisable immediately upon a change in control.
The Corporation accounts for its stock option plan under Accounting
Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense has been recognized for stock
options granted. SFAS 123 prescribes a fair value based method for determining
compensation expense under stock option plans, but allows corporations to use
APB No. 25 if they provide pro forma information compiled under the new
standard. Had compensation cost been computed using the methodology contained in
SFAS No. 123, net income would have been reduced by the following for options
issued in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
--------------------
Net Income:
As reported........ $ 14,681 $ 14,429
As adjusted........ 14,529 14,249
Diluted Earnings Per
Share:
As reported........ $ 1.95 $ 1.91
As adjusted........ 1.93 1.89
</TABLE>
The fair value of the options granted during 1998 is estimated to be $7.03
for those exercisable at $28.50 and $6.15 for those exercisable at $31.35. These
were estimated using the Black-Scholes option value model with the following
assumptions for 1998: a dividend yield of 3.23%; a risk-free interest rate of
4.71%; volatility of 32.46%; and an expected average life of four years. The
fair value of the options granted in 1997 were $4.14 for those exercisable at
$18.67 and $3.43 for those exercisable at $20.53 with the following assumptions:
a dividend yield of 4.51%; a risk-free interest rate of 6.33%; volatility of
33.59%; and an average life of three years.
RELATED-PARTY TRANSACTIONS: (12)
Analysis of loans made to directors and executive officers of the
Corporation and subsidiaries is as follows:
<TABLE>
<S> <C>
Balance, December 31,
1997..................... $ 7,644
Additions................. 5,918
Collections............... (2,279)
---------
Balance, December 31,
1998..................... $ 11,283
---------
</TABLE>
Directors of the Corporation and subsidiaries were customers of and had
transactions with the subsidiaries in the ordinary course of business during the
period presented above and additional transactions may be expected in the
future. In management's opinion, all outstanding loans, commitments and deposit
relationships included in such transactions were made on substantially the
- --------------------------------------------------------------------------------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others, and did not involve more than a
normal risk of collectibility or other unfavorable features.
One director of the Corporation is a partner in a law firm that provides
various legal services to the Corporation and its subsidiary banks. Fees for
these services were $225 in 1998, $268 in 1997, and $229 in 1996.
CONTINGENCIES: (13)
The Corporation and the subsidiary banks are subject to pending and
threatened legal actions which arise in the normal course of business. In the
opinion of management, based upon consultation of legal counsel, the disposition
of all outstanding matters will not have a materially adverse effect on the
consolidated financial position and results of operations.
SF has sold two parcels of foreclosed real estate in California, whereby
the City of Los Angeles funds the sale through the issuance of bonds, but the
seller has full recourse liability until the bonds are repaid. There is a
contingent liability of $644 related to sales under this program.
(14)
DISCLOSURES ABOUT ESTIMATED FAIR
VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires the disclosure of the fair value of financial instruments for which it
is practicable to estimate that value, and the disclosure of the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
(A)
CASH AND DUE FROM BANKS, FEDERAL
FUNDS SOLD AND INTEREST BEARING DEPOSITS -
For these short-term instruments, the carrying value approximates fair
value because these instruments are short-term in nature and do not present
unanticipated credit concerns.
SECURITIES - (B)
For debt securities and equity securities available for sale, fair values
are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
instruments.
LOANS - (C)
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Corporation's and the industry's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions.
Fair value for significant impaired loans is based on estimated cash flows
which are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit, cash flows, and discount
rates are judgmentally determined using available market information and
specific borrower information.
DEPOSIT LIABILITIES - (D)
The fair value of deposits with no stated maturity, such as non-interest
bearing deposits, savings, and NOW accounts, and money market and checking
accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
(E)
SHORT TERM BORROWINGS AND NOTES
PAYABLE -
Rates currently available to the Corporation and Subsidiaries for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
OFF-BALANCE SHEET FINANCIAL (F)
INSTRUMENTS -
The fair value of unrecognized financial instruments including commitments
to extend credit, standby letters of credit and financial guarantees are
insignificant and, therefore, not presented.
- --------------------------------------------------------------------------------
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1998
--------------------
Estimated
Carrying Fair
Value Value
<S> <C> <C>
--------------------
Financial assets:
Cash and due from banks,
Federal funds sold and
interest-bearing deposits.... $ 31,523 $ 31,523
Securities.................... 520,237 520,237
Loans, net.................... 534,421 540,930
Financial liabilities:
Deposits...................... (883,806) (878,042)
Short-term borrowings......... (111,245) (111,245)
Notes payable................. (20,750) (20,750)
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------
Estimated
Carrying Fair
Value Value
<S> <C> <C>
--------------------
Financial assets:
Cash and due from banks,
Federal funds sold and
interest-bearing deposits.... $ 34,131 $ 34,131
Securities.................... 434,234 434,234
Loans, net.................... 502,687 508,952
Financial liabilities:
Deposits...................... (846,469) (840,104)
Short-term borrowings......... (38,525) (38,525)
Notes payable................. (20,000) (20,000)
</TABLE>
LIMITATIONS - (G)
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no actively traded market exists for a significant
portion of the Corporation's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgments and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments. The disclosures do not address the value of the
Corporation's other types of recognized and unrecognized assets and liabilities
or the value of anticipated future business. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in many
of the estimates.
FINANCIAL INSTRUMENTS WITH (15)
OFF-BALANCE SHEET RISK:
The Corporation has, through its subsidiary banks, financial instruments
with off-balance sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated financial
statements. The contract amounts of those instruments reflect the extent of
involvement the subsidiary banks have in particular classes of financial
instruments. The Corporation is not using any derivative products for hedging or
other purposes.
The subsidiary banks' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. Each subsidiary bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. At December 31, 1998 and 1997, the
subsidiary banks had the following financial instruments with off-balance-sheet
risk:
<TABLE>
<CAPTION>
Contract Amount
--------------------
1998 1997
<S> <C> <C>
--------------------
Commitments to extend credit....... $ 82,355 $ 89,243
Standby letters of credit and
financial guarantees written...... 4,888 3,642
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each subsidiary bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by each subsidiary bank upon extension of credit
is based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
- --------------------------------------------------------------------------------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
Standby letters of credit and financial guarantees written are conditional
commitments issued by the subsidiary banks to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private financing arrangements for a period of less than two years.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Each subsidiary bank
holds collateral supporting those commitments for which collateral is deemed
necessary.
REGULATORY REQUIREMENTS: (16)
The subsidiary banks are subject to Federal and state laws which restrict
the payment of dividends to the Corporation. Based on these restrictions, at
January 1, 1999, the subsidiary banks could have declared approximately $1,501
in dividends without requesting approval of the applicable Federal or state
regulatory agency.
Based on the types and amounts of deposits received, banks are required to
maintain non-interest bearing cash balances in accordance with Federal Reserve
Bank reserve requirements. At December 31, 1998 and 1997, the non-interest
bearing cash balances maintained to meet reserve requirements were $9,891 and
$13,632, respectively.
The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by the Federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain minimum amounts and ratios
of total and Tier 1 capital to risk weighted assets and Tier 1 leverage capital
to average assets. If banks do not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could have a direct
material effect on a bank's financial statements. Management believes, as of
December 31, 1998, that the Corporation and its subsidiary banks meet all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Board categorized the Corporation and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the institution's categories. To be categorized as well
capitalized, banks must maintain minimum total risk-based, Tier 1 based and Tier
1 leverage ratios as set forth below.
- --------------------------------------------------------------------------------
19
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The following table presents selected capital information for the
Corporation (Consolidated) and significant subsidiaries as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
Minimum Requirements Prompt Corrective
Actual Action Provisions
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998 Amount Ratio Amount Ratio Amount Ratio
<CAPTION>
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
Tier One Capital................................... $ 84,697 15.13% $ 22,398 4% $ 33,596 6%
Total (Tier Two) Capital........................... 91,632 16.36 44,795 8 55,994 10
Leverage Capital................................... 84,697 7.53 45,016 4 56,270 5
PINNACLE BANK:
Tier One Capital................................... 60,115 12.96 18,560 4 27,840 6
Total (Tier Two) Capital........................... 65,920 14.21 37,119 8 46,399 10
Leverage Capital................................... 60,115 6.46 37,226 4 46,533 5
PBQC:
Tier One Capital................................... 7,655 13.18 2,323 4 3,485 6
Total (Tier Two) Capital........................... 8,367 14.41 4,647 8 5,808 10
Leverage Capital................................... 7,655 6.00 5,103 4 6,379 5
DECEMBER 31, 1997
CONSOLIDATED:
Tier One Capital................................... $ 75,807 15.71% $ 19,928 4% $ 28,947 6%
Total (Tier Two) Capital........................... 81,859 16.97 38,596 8 48,245 10
Leverage Capital................................... 75,807 7.49 40,469 4 50,587 5
PINNACLE BANK:
Tier One Capital................................... 60,922 14.96 16,293 4 24,440 6
Total (Tier Two) Capital........................... 66,037 16.21 32,587 8 40,734 10
Leverage Capital................................... 60,922 7.21 33,808 4 42,260 5
PBQC:
Tier One Capital................................... 7,649 15.73 1,945 4 2,918 6
Total (Tier Two) Capital........................... 8,257 16.98 3,891 8 4,863 10
Leverage Capital................................... 7,649 6.53 4,682 4 5,853 5
</TABLE>
------------------------
(17)
OTHER INCOME AND OTHER EXPENSE:
The following is the detail of the "Other income" and "Other expense"
lines on the Consolidated Statements of Income for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
-------------------------------
Other income:
Banking services............ $ 3,379 $ 3,230 $ 3,016
Trust services.............. 2,904 2,549 2,283
Income (loss) in Purchased
Mortgage Servicing
Rights..................... (2,341) 518 173
Other income................ 2,247 2,139 2,090
-------------------------------
Total..................... $ 6,189 $ 8,436 $ 7,562
-------------------------------
Other expense:
Advertising and customer
relations.................. $ 1,069 $ 723 $ 614
Equipment expense........... 1,824 1,772 1,647
FDIC insurance premium...... 238 257 1,044
Data processing............. 1,439 1,387 1,150
Other expense............... 5,162 4,734 3,860
-------------------------------
Total..................... $ 9,732 $ 8,873 $ 8,315
-------------------------------
</TABLE>
PARENT COMPANY STATEMENTS: (18)
Presented on the following pages are the balance sheets, statements of
income and statements of cash flows for the Parent Company.
- --------------------------------------------------------------------------------
20
<PAGE>
Notes to Consolidated Financial Statements
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
BALANCE SHEETS
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
at December 31
--------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- -------------------------------------------------------------------------------------------------------
Assets:
Cash in subsidiary banks....................................................... $ 1,444 $ 61
Investment in subsidiary banks................................................. 93,546 91,891
Goodwill and purchase accounting adjustments................................... 1,642 2,162
Securities..................................................................... 44,974 48,217
(amortized cost: 1998--$36,349
1997--$25,895)
Other assets................................................................... 1,795 815
--------------------
Total........................................................................ $ 143,401 $ 143,146
--------------------
Liabilities and stockholders' equity:
Notes payable.................................................................. $ 20,750 $ 20,000
Accrued income taxes........................................................... 4,143 6,623
Other liabilities.............................................................. 1,132 1,065
Stockholders' equity........................................................... 117,376 115,458
--------------------
Total........................................................................ $ 143,401 $ 143,146
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF INCOME
PINNACLE BANC GROUP, INC. (Parent only)
<TABLE>
<CAPTION>
For the year ended
December 31
-------------------------------
(IN THOUSANDS) 1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiary banks.......................................... $ 10,881 $ 12,534 $ 8,653
Dividend and interest income............................................. 1,113 807 831
Net securities gains..................................................... 11,527 2,842 --0--
Other income............................................................. 40 29 252
-------------------------------
Total.................................................................. 23,561 16,212 9,736
Expenses:
Interest on notes payable................................................ 1,368 1,853 1,745
Employee compensation and benefits....................................... 690 701 608
Amortization of goodwill................................................. 409 409 409
Other expenses........................................................... 661 334 643
-------------------------------
Total.................................................................. 3,128 3,297 3,405
Income before income taxes and undistributed earnings of subsidiary
banks.................................................................... 20,433 12,915 6,331
Provision (benefit) for income taxes..................................... 2,945 334 (1,050)
Equity in undistributed earnings of subsidiary banks..................... (2,807) 1,848 (254)
-------------------------------
Net income................................................................. $ 14,681 $ 14,429 $ 7,127
-------------------------------
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
PINNACLE BANC GROUP, INC. (Parent Only)
<TABLE>
<CAPTION>
For the year ended
December 31
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income............................................................... $ 14,681 $ 14,429 $ 7,127
Adjustments to reconcile net income to net cash provided by operating
activities:
Excess of equity in undistributed earnings of subsidiaries (over) under
dividends received................................................... 2,807 (1,848) 254
Amortization of goodwill............................................... 409 409 409
Gain on sales of securities............................................ (11,527) (2,842) --0--
(Increase) decrease in other assets.................................... (965) (191) 275
Increase (decrease) in other liabilities and accrued income taxes...... 2,262 (329) 2,457
Other, net............................................................. 118 286 176
-------------------------------
Total adjustments.................................................... (6,896) (4,515) 3,571
Net cash provided by operating activities............................ 7,785 9,914 10,698
Cash flows from investing activities:
Cash portion of acquisitions, net of cash acquired (Note 1).............. --0-- --0-- (6,022)
Purchases of securities.................................................. (24,712) (15,723) (8,930)
Proceeds from sales of securities........................................ 25,785 12,242 1,862
Proceeds from maturities and paydowns of securities...................... --0-- --0-- 500
Premises and equipment, net.............................................. (18) --0-- --0--
-------------------------------
Net cash provided by (used for) investing activities................. 1,055 (3,481) (12,590)
Cash flows from financing activities:
Stock redemption--Subsidiary bank........................................ --0-- 15,737 --0--
Proceeds from notes payable.............................................. 23,825 21,600 24,500
Principal reductions of notes payable.................................... (23,075) (34,400) (12,300)
Issuance of common stock................................................. 72 779 132
Purchase and retirement of common stock.................................. (1,372) (3,444) (4,797)
Dividends paid........................................................... (6,907) (6,657) (5,639)
-------------------------------
Net cash provided by (used for) financing activities................. (7,457) (6,385) 1,896
Net increase in cash and cash equivalents.................................. 1,383 48 4
Cash and cash equivalents at beginning of year............................. 61 13 9
-------------------------------
Cash and cash equivalents at end of year................................... $ 1,444 $ 61 $ 13
-------------------------------
Cash paid during year for:
Interest................................................................. $ 1,347 $ 1,969 $ 1,385
Income taxes............................................................. 5,792 6,506 1,525
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
SEGMENT REPORTING: (19)
As of December 31, 1998, the Corporation 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.
The Corporation's banking subsidiaries consist of two operating segments: PB and
PBQC. 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.
The following tables show segment information for the years ended December 31,
1998, 1997, and 1996.
<TABLE>
<CAPTION>
For the year ended December 31, 1998
----------------------------------------------
Banking Parent Inter-segment
Subsidiaries Company Eliminations Consolidated
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 65,899 $ 9,187 $ (8,113) $ 66,973
Interest expense........................................ 33,204 1,368 (39) 34,533
Provision for loan loss................................. --0-- --0-- --0-- --0--
----------------------------------------------
Net interest income................................... 32,695 7,819 (8,074) 32,440
Other income:
Other income.......................................... 6,201 40 (52) 6,189
Net securities gains.................................. 1,228 11,527 --0-- 12,755
----------------------------------------------
7,429 11,567 (52) 18,944
Other expense:
Amortization of goodwill.............................. 2,007 409 --0-- 2,416
Depreciation.......................................... 1,862 3 --0-- 1,865
Other expense......................................... 24,517 1,348 (52) 25,813
----------------------------------------------
28,386 1,760 (52) 30,094
Income before income taxes.............................. 11,738 17,626 (8,074) 21,290
Provision for income taxes............................ 3,664 2,945 --0-- 6,609
----------------------------------------------
Net income.............................................. $ 8,074 $ 14,681 $ (8,074) $ 14,681
----------------------------------------------
Segment assets.......................................... $1,097,658 $ 143,401 $ (94,994) $1,146,065
Expenditures to acquire long-lived assets............... (4,464) (18) --0-- (4,482)
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------------------
Banking Parent Inter-segment
Subsidiaries Company Eliminations Consolidated
------------------------------------------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 68,299 $ 15,189 $ (14,821) $ 68,667
Interest expense........................................ 33,895 1,853 (439) 35,309
Provision for loan loss................................. --0-- --0-- --0-- --0--
------------------------------------------------
Net interest income................................... 34,404 13,336 (14,382) 33,358
Other income:
Other income.......................................... 8,457 29 (50) 8,436
Net securities gains.................................. 5,498 2,842 --0-- 8,340
------------------------------------------------
13,955 2,871 (50) 16,776
Other expense:
Amortization of goodwill.............................. 1,985 409 --0-- 2,394
Depreciation.......................................... 1,698 --0-- --0-- 1,698
Other expense......................................... 23,136 1,035 (50) 24,121
------------------------------------------------
26,819 1,444 (50) 28,213
Income before income taxes.............................. 21,540 14,763 (14,382) 21,921
Provision for income taxes............................ 7,158 334 --0-- 7,492
------------------------------------------------
Net income.............................................. $ 14,382 $ 14,429 $ (14,382) $ 14,429
------------------------------------------------
Segment assets.......................................... $ 983,630 $ 143,146 $ (91,965) $1,034,811
Expenditures to acquire long-lived assets............... (2,780) --0-- --0-- (2,780)
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996
----------------------------------------------
Banking Parent Inter-segment
Subsidiaries Company Eliminations Consolidated
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 55,821 $ 9,230 $ (8,777) $ 56,274
Interest expense........................................ 27,751 1,745 (378) 29,118
Provision for loan loss................................. --0-- --0-- --0-- --0--
----------------------------------------------
Net interest income................................... 28,070 7,485 (8,399) 27,156
Other income:
Other income.......................................... 7,469 252 (159) 7,562
Net securities gains.................................. 159 --0-- --0-- 159
----------------------------------------------
7,628 252 (159) 7,721
Other expense:
Amortization of goodwill.............................. 1,624 409 --0-- 2,033
Depreciation.......................................... 1,619 --0-- --0-- 1,619
Other expense......................................... 20,956 1,251 (159) 22,048
----------------------------------------------
24,199 1,660 (159) 25,700
Income before income taxes.............................. 11,499 6,077 (8,399) 9,177
Provision for income taxes............................ 3,100 (1,050) --0-- 2,050
----------------------------------------------
Net income.............................................. $ 8,399 $ 7,127 $ (8,399) $ 7,127
----------------------------------------------
Segment assets.......................................... $1,037,655 $ 137,507 $(126,786) $1,048,376
Expenditures to acquire long-lived assets............... (2,638) --0-- --0-- (2,638)
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Stockholders and the Board of Directors of Pinnacle Banc Group, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle Banc
Group, Inc. (an Illinois Corporation) and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Banc Group,
Inc. and Subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN, LLP
Chicago, Illinois
January 15, 1999
- --------------------------------------------------------------------------------
25
<PAGE>
Selected Financial Data
PINNACLE BANC GROUP, INC and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Condensed Statement of Income:
Interest income.................................... $ 66,973 $ 68,667 $ 56,274 $ 53,297 $ 42,920
Interest expense................................... 34,533 35,309 29,118 25,739 16,640
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income.............................. 32,440 33,358 27,156 27,558 26,280
Provision for loan losses.......................... --0-- --0-- --0-- --0-- 900
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after provision for loan
losses.......................................... 32,440 33,358 27,156 27,558 25,380
Other income....................................... 6,189 8,436 7,562 7,225 5,461
Net securities gains (losses)...................... 12,755 8,340 159 4,731 (9,845)
Other expense...................................... 30,094 28,213 25,700 23,882 21,060
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes....................... 21,290 21,921 9,177 15,632 (64)
Income tax provision (benefit)..................... 6,609 7,492 2,050 3,139 (2,319)
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income......................................... $ 14,681 $ 14,429 $ 7,127 $ 12,493 $ 2,255
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Common Share Data:
Earnings Per Share
Basic.......................................... $ 1.96 $ 1.91 $ 1.05 $ 1.89 $ 0.34
Diluted........................................ 1.95 1.91 1.04 1.89 0.34
Book value....................................... 15.73 15.39 13.23 12.03 10.41
Dividends paid................................... 0.92 0.88 0.83 0.77 0.72
Average Common Shares Outstanding
Basic.......................................... 7,506 7,541 6,810 6,604 6,647
Diluted........................................ 7,534 7,550 6,829 6,627 6,685
At End of Year:
Total assets..................................... $1,146,065 $1,034,811 $1,048,376 $ 818,697 $ 684,892
Loans............................................ 541,356 510,207 525,069 309,600 248,404
Portfolio funds.................................. 520,838 437,262 439,332 443,755 389,316
Deposits......................................... 883,806 846,469 877,552 712,805 599,879
Notes payable.................................... 20,750 20,000 32,800 20,600 5,400
Stockholders' equity............................. 117,376 115,458 100,824 78,961 68,836
Selected Financial Ratios:
Return on average assets......................... 1.43% 1.43% 0.82% 1.55% 0.32%
Return on average equity......................... 14.41 15.36 9.02 18.09 3.35
Net interest margin.............................. 3.52 3.69 3.51 3.90 4.28
Dividend payout.................................. 47.05 46.14 79.12 40.89 213.70
Average equity to average assets................. 9.90 9.28 9.05 8.55 9.61
Allowance for loan losses to year-end loans...... 1.28 1.47 1.59 1.95 1.70
Net charge-offs to average loans................. 0.11 0.16 0.17 0.05 0.09
Nonperforming assets to year-end assets.......... 0.52 0.69 0.99 1.01 0.54
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
NET INCOME
1998 COMPARED TO 1997
NET INCOME
Consolidated net income was $14,681,000, or $1.95 per diluted share in 1998, an
increase from the $14,429,000, or $1.91 per diluted share, earned in 1997. The
return on average assets was 1.43% for 1998 and 1997. For each year, the return
on average equity was 14.4% and 15.4%, respectively. Return on average assets
and equity for each year, calculated including the effects of SFAS No. 115,
would not be materially different.
Net income for 1998 included pre-tax securities gains of $12,755,000 compared to
pre-tax gains in 1997 of $8,340,000. The net gains in 1998 consisted of gains of
$1.2 million from the sales of U. S. Treasury securities as part of Pinnacle's
term portfolio program and gains of $11.5 million recorded on the sales of
equity securities as part of Pinnacle's equity investment program in other
financial institutions.
Net income for 1998 included a $2.3 million pre-tax charge to earnings to set up
a valuation reserve to reflect a decline in the value of Pinnacle's investment
in a limited partnership which owns purchased mortgage servicing rights
("PMSR's"). The decrease in value resulted from the general decline in interest
rates on mortgage loans and an acceleration in the amount of prepayments on the
underlying mortgages.
Net interest income decreased 3% in 1998 compared with 1997. A decline in the
net interest margin of 17 basis points to 3.52% for 1998 was partially offset by
a 2% increase in average earning assets. Lower yields earned on taxable
securities was the primary contributory to the lower net interest margin. Other
income, absent the PMSR's, was up 8%. Other operating expense increased 7%
primarily as the result of higher costs associated with the opening of two new
banking offices, a new drive-up facility, the PB operations center, and
increased marketing and advertising costs.
NET INTEREST INCOME
The primary component of Pinnacle's consolidated earnings is net interest
income, or the difference between interest income on earning assets and interest
paid on supporting liabilities. The net interest margin is net interest income
expressed as a percentage of average earning assets. Pinnacle's earning assets
consist of loans, securities, interest-bearing deposits at banks and Federal
funds sold. Supporting liabilities primarily consist of deposits, short-term
borrowings and notes payable. A portion of Pinnacle's interest income is earned
on tax-exempt investments such as state and municipal bonds. In an effort to
state this tax-exempt income and its resultant yields on a basis comparable to
all other taxable investments, an adjustment is made to analyze this income on a
tax-equivalent basis.
Pinnacle's average earning assets were $942,976,000 in 1998, or 2% higher than
the previous year. The increase in average earning assets was in taxable
securities. The net interest margin decreased to 3.52% in 1998 compared to 3.69%
in 1997. The decline was the result of the decrease in yields earned on taxable
securities as well as the decrease in yields earned on loans. These declines
were offset by the decrease in all categories on interest-bearing liabilities,
with the largest decreases in rates paid on savings deposits, short-term
borrowings, and the notes payable. Net interest income on a fully-taxable
equivalent basis was $33,206,000, or 3% lower than a year ago.
The yield earned on total earning assets was 7.18% in 1998 compared to 7.49% in
1997. The decline resulted from the decreased level of yields earned on taxable
securities. The average rate on taxable securities decreased 49 basis points
while the average balance increased approximately $15 million. The increase was
due to a purchase of a FNMA discount note in the last quarter of 1998, with a
cost of $101 million. The purchase was funded with a repurchase agreement of
approximately the same amount. The decline in the yield on taxable securities
was a result of the decrease in the rate earned on these securities carried in
1998 compared to those carried a year ago. The yield earned on loans decreased
12 basis points while the average balance decreased slightly, or $1.5 million.
The decreased yield earned on loans was due to several factors including the
general decrease in mortgage rates which occurred in 1998 and the drop in the
prime rate which decreased 50 basis points in the last quarter of 1998. In 1998,
the makeup of the loan portfolio changed slightly. While real estate loans are
the majority of Pinnacle's loans, commercial and consumer loans increased to 37%
of the average portfolio, compared to 33% in 1997. Commercial loan yields for
1998 decreased 30 basis points to 8.43% primarily due to the drop in prime rate.
The average balance increased $12 million in 1998. Consumer loan yields for 1998
decreased 13 basis points to 8.66%, with the decrease attributable to the drop
in rates tied to prime on home equity loans, which make up 42% of the consumer
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
portfolio. The average balance in consumer loans increased $6 million. While
commercial and consumer rates dropped in 1998, those loan categories earned
greater returns than the real estate portfolio. In 1998, the rate earned on real
estate loans decreased 19 basis points to 7.74%; a much lower yield than both
consumer and commercial loans. The average balance of real estate mortgages
declined $18.5 million, with the decrease in purchased participation loans of
$10 million acquired from Security Federal in 1996 and the decrease in
multi-family loans of $9 million, also primarily related to the portfolio at
Security Federal. Absent this decrease, the real estate portfolio remained
relatively flat, although approximately $70 million new loans were made in 1998
to replace loans which paid off or were refinanced due to the low mortgage rate
environment.
The average cost of interest-bearing liabilities decreased 7 basis points to
4.28% in 1998 from 4.35% in 1997. The average rate paid on interest-bearing
demand deposits decreased 12 basis points, the average rate paid on savings
deposits decreased 2 basis points. These deposit categories are considered core
deposit categories and are less susceptible to disintermediation if the rate
changes. As a result of the decrease in the prime rate and general government
bond rates, Pinnacle's management adjusted rates paid on these accounts as well
as the base money market rate paid to customers. The rates paid on money market
accounts increased 6 basis points to 3.53%. Pinnacle has a significant number of
money market customer accounts over a defined balance which are offered a higher
tiered level of interest rates. The average rate paid on other time deposits
decreased 4 basis points to 5.60% from 5.64% of a year ago. Rates paid on other
time deposits have dropped significantly in the latter half of 1998. Certain
higher-than-market rate deposits, which were in the portfolio at SF, have been
maturing in the last twelve months. Pinnacle offered a highly competitive rate,
14-month time deposit that was implemented in the first quarter of 1998 in
conjunction with the opening of a new Chicago-area branch and a marketing
campaign. This promotion, which negates some of the impact of the higher rate
maturing deposits, brought in $39 million, of which two-thirds were new
deposits. In June, 1998, this same promotion was implemented in conjunction with
the opening of a new branch in Moline, Illinois. This promotion brought in
approximately $7 million in deposits of which approximately half were new
customers. As these certificates start to mature in the first quarter of 1999,
management anticipates a new promotion deposit certificate will be utilized to
retain the deposits; and will offer a highly competitive rate in its
marketplace. The average balance in savings deposits decreased $6.3 million as
customers switched their funds to higher rate time deposits early in 1998.
Average balances in savings deposits have remained relatively flat throughout
the year.
The average rate paid on short-term borrowings decreased 48 basis points to
5.53%, while the average balance decreased $4.7 million. Increases or decreases
in the average balance in this category fluctuates due to the subsidiary bank's
daily liquidity needs, such as loan growth and maturity of time deposits and
purchase of securities. The average balance in Pinnacle's notes payable
decreased $5.7 million due to a stock redemption by Pinnacle Bank in July, 1997,
proceeds of which were used to pay down a portion of the notes payable. The
rates paid on notes payable decreased 41 basis points as the indices to which
these notes payable are tied were lower in 1998 than in 1997.
Interest expense for 1998 decreased $776,000 compared to 1997. The decrease in
average rates paid was primarily responsible for the decrease.
A detailed Analysis of Net Interest Income for the three years ended December
31, 1998, 1997, and 1996 is included in Table 1. An Analysis of the Volume/Rate
Variance for the last three years is found in Table 2.
- --------------------------------------------------------------------------------
28
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
TABLE 1. ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest
----------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Interest-bearing deposits and
Federal funds sold.......... $ 5,509 $ 281 5.10% $ 1,746 $ 65 3.72% $ 5,344 $ 252
Taxable securities............ 406,095 23,089 5.69 390,847 24,154 6.18 399,903 23,133
Nontaxable securities......... 17,171 2,106 12.26 19,814 2,303 11.62 21,928 2,645
Loans......................... 514,201 42,263 8.22 515,697 43,000 8.34 374,647 31,235
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-earning
assets..................... 942,976 67,739 7.18 928,104 69,522 7.49 801,822 57,265
Noninterest-earning assets:
Cash and due from banks....... 26,685 26,194 24,486
Allowance for loan losses..... (7,259) (7,989) (6,750)
Other assets.................. 66,139 66,204 53,369
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets................ $1,028,541 $1,012,513 $ 872,927
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits..................... $ 93,106 $ 1,766 1.90% $ 89,306 $ 1,806 2.02% $ 88,897 $ 1,841
Savings deposits.............. 237,714 6,850 2.88 244,055 7,084 2.90 217,175 6,451
Money market deposits......... 45,978 1,623 3.53 46,976 1,631 3.47 47,497 1,634
Other time deposits........... 385,029 21,560 5.60 375,616 21,169 5.64 302,128 16,719
Short-term borrowings......... 24,712 1,366 5.53 29,380 1,766 6.01 12,092 728
Notes payable................. 20,503 1,368 6.67 26,175 1,853 7.08 24,500 1,745
<CAPTION>
-------------------------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing
liabilities................ 807,042 34,533 4.28 811,508 35,309 4.35 692,289 29,118
Noninterest-bearing liabilities:
Demand deposits............... 110,321 99,315 93,901
Other liabilities............. 9,367 7,746 7,756
Stockholders' equity.......... 101,811 93,944 78,981
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total liabilities and
stockholders' equity....... $1,028,541 $1,012,513 $ 872,927
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income and margin.... $ 33,206 3.52% $ 34,213 3.69% $ 28,147
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
Rate
Assets:
Interest-earning assets:
Interest-bearing deposits and
Federal funds sold.......... 4.72%
Taxable securities............ 5.78
Nontaxable securities......... 12.06
Loans......................... 8.34
<S> <C>
Total interest-earning
assets..................... 7.14
Noninterest-earning assets:
Cash and due from banks.......
Allowance for loan losses.....
Other assets..................
<S> <C>
Total assets................
<S> <C>
Liabilities and stockholders
equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits..................... 2.07%
Savings deposits.............. 2.97
Money market deposits......... 3.44
Other time deposits........... 5.53
Short-term borrowings......... 6.02
Notes payable................. 7.12
<S> <C>
Total interest-bearing
liabilities................ 4.21
Noninterest-bearing liabilities:
Demand deposits...............
Other liabilities.............
Stockholders' equity..........
<S> <C>
Total liabilities and
stockholders' equity.......
<S> <C>
Net interest income and margin.... 3.51%
- ----------------------------------
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based on a Federal income tax rate of 34% for each year. The fully taxable
equivalent adjustments to interest income for the year ended December 31, 1998,
1997 and 1996 were, in thousands, $766, $855 and $991, respectively. The average
balance of non-accrual loans is included in the total loans category in each
year. The average balances do not include the effect of SFAS No. 115.
- --------------------------------------------------------------------------------
29
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
TABLE 2. ANALYSIS OF VOLUME / RATE VARIANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 versus 1997 1997 versus 1996
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change due to Change due to
-------------------- Total -------------------- Total
Volume Rate Change Volume Rate Change
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits at banks and Federal funds
sold................................................... $ 140 $ 76 $ 216 $ (170) $ (17) $ (187)
Taxable securities...................................... 942 (2,007) (1,065) (524) 1,545 1,021
Nontaxable securities................................... (307) 110 (197) (255) (87) (342)
Loans................................................... (125) (612) (737) 11,760 5 11,765
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest income................................. 650 (2,433) (1,783) 10,811 1,446 12,257
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest paid on:
Interest-bearing demand deposits........................ 77 (117) (40) 8 (43) (35)
Savings deposits........................................ (184) (50) (234) 798 (165) 633
Money market deposits................................... (35) 27 (8) (18) 15 (3)
Other time deposits..................................... 531 (140) 391 4,067 383 4,450
Short-term borrowings................................... (281) (119) (400) 1,041 (3) 1,038
Notes payable........................................... (402) (83) (485) 119 (11) 108
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest expense................................ (294) (482) (776) 6,015 176 6,191
<CAPTION>
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....................................... $ 944 $ (1,951) $ (1,007) $ 4,796 $ 1,270 $ 6,066
<CAPTION>
------------------------------- -------------------------------
</TABLE>
The change due to volume is calculated by multiplying the change in volume by
the prior year's rate. The change due to rate is calculated by multiplying the
change in rate by the prior year's volume. The change attributable to both
volume and rate has been allocated to the rate column.
------------------------------
PROVISION FOR LOAN LOSSES
Management records a provision for loan losses in an amount sufficient to
maintain the allowance for loan losses at a level commensurate with the risks in
the loan portfolio. The allowance for loan losses is adjusted through charges to
current income based on factors such as past loan loss experience, management's
evaluation of potential losses in the loan portfolio, and prevailing economic
conditions.
Management's system of review of the loan portfolio, preparation of the
reviewable record and the attendant determination of the adequacy of the
allowance for loan losses is made up of a number of factors. The most
significant part of the system is the independent credit review function which
reviews all commercial credits including commercial real estate credits, in
excess of $250,000 on a bi-annual basis at a minimum, with problem credits
reviewed more often as necessary. An informed, judgmental determination is made
of the risk associated with loans which have received low grades under the
credit review function. This estimated risk as well as any valuation allowances
related to impaired loans are taken into account in determining the allowance
for loan losses. In addition, the allowance includes additional reserves for
coverage of unidentified risks which exist at the reporting date.
In addition to the credit review system, on a quarterly basis an internal report
provides an analysis of the adequacy of the allowance for management and the
Board of Directors. This analysis focuses on allocations based on loan review
ratings and historical charge-off and recovery data. Management also reviews the
status of all watch list credits on a monthly basis. The process and the amount
of the allowance and of the provision have also been subject to the review of
external auditors and banking regulatory authorities, for reasonableness of the
methodology.
There has been no provision for loan losses in both 1998 and 1997. Pinnacle had
net charge-offs of $585,000, or 0.11%, of average loans in 1998 compared to
$844,000, or 0.16%, of average loans in 1997. The ratio of the allowance for
loan losses to total loans was 1.28% at December 31, 1998 compared to 1.47% of a
year ago. While Pinnacle's ratio of allowance for loan losses to total loans has
decreased from a year ago, management has made
- --------------------------------------------------------------------------------
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
no provision for loan losses for the past two years and believes the allowance
for loan losses is adequate, but not excessive, due to the following factors.
First, a significant portion of Pinnacle's problem loans originated from the
acquisitions of FinSec and Acorn Financial Corp. As part of each merger
agreement, additional provisions were made to each of these financial
institution's allowance for loan losses prior to the acquisition to cover any
loss related to problem loans which were designated during Pinnacle's due
diligence. Second, a significant portion of its loan portfolio is in residential
real estate, particularly the loans acquired in the FinSec acquisition, and the
majority of the loans in this category are within the loan policy guidelines of
loan to value ratio of 80%. Third, the total ratio of non-performing loans to
total loans declined during 1998 to 1.06% at December 31, 1998 from 1.31% at
year-end 1997. Finally, the loan review process by management is operating
effectively. While there has been no provision for loan losses for 1998 and
1997, management continues to monitor the adequacy of its allowance for loan
losses by the above process as well as comparing to its peer group data.
Pinnacle's allowance for loan losses to total loans remains below its peer group
ratio of 1.48% and its coverage of non-performing loans (allowance divided by
non-performing loans) is 120% compared to the peer group ratio of 259%. (Source:
September, 1998, Bank Holding Company Performance Report; Consolidated Assets
between $1 billion and $3 billion.) These ratios are reviewed in conjunction
with the mix of the peer portfolio, type and level of charge-offs and are
monitored on an ongoing basis for significant changes. Table 3 provides data
regarding the analysis of the allowance for loan losses.
At December 31, 1998, total non-performing loans, defined as non-accrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $5,765,000 compared with $6,679,000 of a year ago. The decrease in
non-performing loans resulted from the refinancing of a restructured loan to
terms and conditions in line with current loan requirements, as well as the
reduction of non-accrual loans resulting from payoffs as opposed to charging off
those loans. Loans considered impaired under SFAS No. 114 and disclosed in the
Notes to the Financial Statements are included in the non-performing category.
These included non-accrual loans greater than $100,000, restructured loans, and
loans classified as at least doubtful under Pinnacle's credit risk
classification system.
Pinnacle's watch list includes credits which may be potential problem loans, but
are not currently considered non-performing loans. Credits which are rated by
management and the independent review process as "5" or worse are considered
potential problem loans and would indicate the loan is considered a "special
mention" by regulatory examiners. At December 31, 1998, potential problem loans
not included in non-performing loans totaled $3,980,000.
In addition, Pinnacle held $169,000 classified as other real estate owned
("OREO") at December 31, 1998. Other real estate includes property acquired
through foreclosure. These assets are carried at the lower of fair value less
estimated cost to sell or cost. Losses arising at the time of acquisition of
property in full or partial satisfaction of loans are recorded as loan losses.
Subsequent losses or expenses on the property are charged to other expenses.
Income received on property is recorded as an offset to expense. During 1998,
substantially all property carried at December 31, 1997 was sold with no
significant impact on the results of operations.
Total non-performing assets were $5,934,000, or 1.10% of total loans plus other
real estate owned at December 31, 1998. Total non-performing assets were 0.52%
of total assets at year end. Table 4 provides data regarding non-performing
assets.
- --------------------------------------------------------------------------------
31
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
TABLE 3. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
1998 1997 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding..................... $ 514,201 $ 515,697 $ 374,647 $ 309,818 $ 248,000
-----------------------------------------------------
Total loans at year end....................... $ 541,356 $ 510,207 $ 525,069 $ 309,600 $ 248,404
-----------------------------------------------------
Allowance for loan losses at beginning of
year........................................ $ 7,520 $ 8,364 $ 6,023 $ 4,229 $ 3,547
Balance acquired.............................. --0-- --0-- 2,982 1,945 --0--
Loans charged off:
Commercial and other........................ 602 769 365 257 186
Consumer.................................... 233 132 125 115 78
Real estate................................. 82 476 349 --0-- 42
-----------------------------------------------------
Total..................................... 917 1,377 839 372 306
-----------------------------------------------------
Recoveries of loans previously charged off:
Commercial and other........................ 259 81 138 168 14
Consumer.................................... 73 63 48 53 65
Real estate................................. --0-- 389 12 --0-- 9
-----------------------------------------------------
Total..................................... 332 533 198 221 88
-----------------------------------------------------
Net loans charged off......................... 585 844 641 151 218
-----------------------------------------------------
Provision charged to expense.................. --0-- --0-- --0-- --0-- 900
-----------------------------------------------------
Allowance for loan losses at end of year...... $ 6,935 $ 7,520 $ 8,364 $ 6,023 $ 4,229
-----------------------------------------------------
</TABLE>
TABLE 4. NON-PERFORMING ASSETS
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
Non-accrual............................................... $ 3,507 $ 4,392 $ 7,441 $ 4,791 $ 748
Past due 90 days or more and still accruing............... 1,775 1,064 633 2,293 552
Restructured.............................................. 483 1,223 1,330 931 --0--
-----------------------------------------------------
Non-performing loans.................................... 5,765 6,679 9,404 8,015 1,300
-----------------------------------------------------
Other real estate owned................................... 169 442 939 284 2,416
-----------------------------------------------------
Non-performing assets................................... $ 5,934 $ 7,121 $ 10,343 $ 8,299 $ 3,716
-----------------------------------------------------
Ratios:
Non-performing loans/total loans........................ 1.06% 1.31% 1.79% 2.59% 0.52%
Non-performing assets/total assets...................... 0.52 0.69 0.99 1.01 0.54
Net charge-offs/average loans........................... 0.11 0.16 0.17 0.05 0.09
Allowance for loan losses/total loans................... 1.28 1.47 1.59 1.95 1.70
Allowance for loan losses/non-performing loans.......... 120.29 112.59 88.94 75.15 325.28
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
NET SECURITIES GAINS
In 1998, net securities gains were a significant factor in the earnings. On a
pre-tax basis, net securities gains were $12,755,000 compared to $8,340,000 in
1997. The net gains realized in 1998 consisted of gross gains of $15,725,000 and
gross losses of $2,970,000.
The net gains in 1998 consisted of gains of approximately $1.2 million in
Pinnacle's U. S. Government securities portfolio, and gains of approximately
$11.5 million of equity securities as part of Pinnacle's equity investment
program in other financial institutions. The net gains in 1997 consisted of
gains of approximately $5.5 million in Pinnacle's U. S. Government securities
portfolio, and gains of approximately $2.8 million in equity securities.
In prior years, Pinnacle has made decisions to sell its U. S. Government
portfolio, take applicable gains and losses and reinvest in acceptable
maturities when the slope of the yield curve and the reinvestment rate were
acceptable in terms of managing Pinnacle's interest rate risk. Management has
always viewed the gains recorded on the U. S. Government security term portfolio
program as closely related to its net interest income as opposed to one-time
security gains or losses. Accordingly, since implementation of the slope
program, the yield on Pinnacle's U. S. Government portfolio has outperformed the
U. S. Treasury yield by 27 basis points and by including the gain on sale of
these securities, by 126 basis points. In 1998, the program outperformed the
index by 35 basis points and including the gain in 1998, by 71 basis points.
Because of the relative flatness of the yield curve in 1997 and 1998, management
reviewed other methods of enhancing the yield of the term portfolio and in May,
1997, began utilizing a reverse repurchase and repurchase agreement program
whereby approximately $325 million was loaned to an unaffiliated broker and
collateralized in return by similar securities. These transactions involved the
utilization of three-year Treasuries and met the accounting requirements of
netting assets and liabilities on the balance sheet. Additional yields earned on
this program approximated 36 basis points in 1998. In November, 1998, Pinnacle
utilized a repurchase agreement with this unaffiliated broker to purchase a FNMA
discount note. Both the note and repurchase agreement mature in February, 1999,
and management anticipates a net spread of 27 basis points on this transaction.
The repurchase agreement is secured by U. S. Treasuries and is included in
short-term borrowings and FHLB advances on the Consolidated Balance Sheets.
Security sales were taken in the equity investment portfolio to reallocate
portfolio funds based on management's assessment of the financial performance of
certain issues as well as market conditions as it related to those issues.
OTHER NON-INTEREST INCOME
The major components of Pinnacle's other non-interest income consist of service
charges on deposit accounts, other banking income, income (loss) on PMSR's, and
trust fees. Fees on banking services and other income were $5,626,000 for 1998
compared to $5,369,000 in 1997. The increase was primarily related to the
increase in deposit service charges of $148,000, ATM service charges of $72,000
and income on the debit card usage of $68,000.
Through the acquisition of SF, Pinnacle acquired an investment in a limited
partnership which invests in PMSR's. This investment is carried at lower of cost
or market and income is booked on the equity method. In 1998, the value of this
investment was below cost as a market valuation reserve of $2.3 million was
recorded to reflect the decline in the market value of the PMSR's. Total
investment in this asset amounted to $6,676,000, net of the reserve, at year-end
1998 and is included in other assets in the Consolidated Balance Sheets. Income
earned on the investment in 1997 was $518,000.
Trust fees increased to $2,904,000, or 14% from 1997. The increase in trust fees
relates to increased trust business of $44 million in 1998. Assets under
management at year end amounted to $345 million, or 8% above the total one year
earlier.
NON-INTEREST EXPENSE
Non-interest expense totaled $30,094,000, an increase of 7% of a year ago.
Employee compensation increased 5% with the majority of the increase relating to
normal overall raises as well as the addition of staff in the commercial
lending, marketing and training areas of Pinnacle's banks. The opening of the
new branches also contributed to the increase. Occupancy expense increased 9%,
primarily attributable to the new branches and the opening of the PB operations
center in 1998. Other expense increased 10%, with advertising and marketing
contributing to 39% of the increase.
- --------------------------------------------------------------------------------
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Pinnacle embarked on four major media campaigns in 1998 and portions of its
advertising budgets were allocated to the opening of the new branches. Expenses
relating to other real estate owned increased $366,000 due to added market
writedowns of distressed properties held and sold in this category in 1998.
INCOME TAXES
Pinnacle's Federal and State income tax return is prepared on a consolidated
basis including the accounts of its subsidiaries. The Federal tax provision for
1998 was $6,289,000 compared to $7,451,000 of a year ago. Included in the
provision for 1998 taxes was the benefit of utilization of an AMT tax credit
carryforward not included in previous years. There was a deferred provision for
state income taxes in 1998 of $320,000, as Pinnacle continued to realize a
portion of the state tax net operating loss carryforward recognized in 1994. See
Note 7 to the consolidated Financial Statements for additional detail on the
provision for taxes.
NET INCOME
1997 COMPARED TO 1996
NET INCOME
Consolidated net income was $14,429,000, or $1.91 per diluted share in 1997, an
increase from the $7,127,000, or $1.04 per diluted share, earned in 1996. The
return on average assets was 1.43% for 1997 and 0.82% for 1996. For each year,
the return on average equity was 15.4% and 9%, respectively. Return on average
assets and equity for each year, calculated including the effects of SFAS No.
115, would not be materially different.
Net income for 1997 included pre-tax securities gains of $8,340,000 compared to
pre-tax gains in 1996 of $159,000. The net gains in 1997 consisted of gains of
$5.5 million from the sales of U. S. Treasury securities as part of Pinnacle's
term portfolio program and gains of $2.8 million recorded on the sales of equity
securities as part of Pinnacle's equity investment program in other financial
institutions.
Net interest income increased 23% in 1997 compared to the previous year. The
increase was the result of a 16% rise in average earning assets. The increased
level of earning assets was the result of the acquisition of FinSec completed at
the end of the third quarter of 1996.
Other income increased 12% while other expense increased 10% on a year-to-year
basis. The increases in these categories were primarily attributable to the
acquisition completed in September, 1996.
NET INTEREST INCOME
Pinnacle's average earning assets were $928,104,000 in 1997, or 16% higher than
the previous year. The increase in average earning assets was due to the
acquisition. The net interest margin increased 18 basis points to 3.69% in 1997
compared to 3.51% in 1996. The increase is the result of the increase in yields
earned on taxable securities as well as the increase in the percent of average
loans (a higher yielding category) to average earning assets to 56% in 1997 from
47% in 1996. These increases were slightly offset by the increase in deposit
costs of 13 basis points. Net interest income on a fully-taxable equivalent
basis was $34,213,000, or 22% higher than a year ago.
The yield earned on total earning assets was 7.49% in 1997 compared to 7.14% in
1996. The increase resulted from the increased level of yields earned on taxable
securities. The average rate on taxable securities increased 40 basis points
while the average balance decreased approximately $9 million. The effect of the
acquisition of FinSec is evident in the effect loans had on interest income.
While the yield on loans remained flat at 8.34%, the increase in average loans
outstanding of $141 million added approximately $12 million to net interest
income. The yield earned on interest-bearing deposits decreased to 3.72% due to
continued maturity of interest-bearing certificates. The yield on non-taxable
securities decreased 44 basis points as high-yielding zero coupon municipals
were called and paid down. Total interest income, on a fully taxable equivalent
basis, increased $12,257,000.
The average cost of interest-bearing liabilities increased 14 basis points to
4.35% in 1997 from 4.21% in 1996. The average rate paid on interest-bearing
demand deposits decreased slightly by 5 basis points to 2.02% while the rate
paid on savings deposits decreased 7 basis points. These deposit categories are
considered core deposit categories and are less susceptible to market and rate
changes. The interest rate paid on money market deposits increased slightly to
3.47%, indicating Pinnacle has maintained a level amount of high money market
customer balances which are offered a third level of interest rates tied to a
Treasury index. The average rate paid on other
- --------------------------------------------------------------------------------
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
time deposits has increased 11 basis points primarily due to the acquisition.
Certain of SF time deposits were brokered deposits and higher "special rate"
deposits which matured throughout 1997 and were not renewed. Average balances of
other time deposits for SF decreased $32 million. Average balances in savings
deposits have increased on a year-to-year basis due to the acquisition, but are
also lower on a fourth quarter-to-fourth quarter comparison, decreasing $12
million as customers continue to move their money to higher paying time deposits
or mutual funds. On the positive side, both interest-bearing and
noninterest-bearing deposits increased $4 million on a fourth quarter-to-fourth
quarter basis. Pinnacle continues to monitor the needs of its current customer
base as well as its potential customer base, and in the fourth quarter began
marketing a "suite" of deposit products, which included a free checking account,
and will continue to market this and other deposit products to meet its
customer's needs. Interest expense paid on all deposits increased $5,045,000.
The average balance in short-term borrowings increased $17 million. The increase
related to the acquisition which included fixed-term advances from the Federal
Home Loan Bank, which was included in balances for the entire year, as well as
the liquidity needs of funding other time deposit maturities. The average rate
on these borrowings remained flat; however, the increase in average balances
resulted in increased interest expense of $1,038,000. The interest rate paid on
notes payable dropped slightly to 7.08% as the indices to which these are tied
remained relatively flat throughout the year. Average notes payable balances
slightly increased.
Interest expense for 1997 has increased $6,191,000 compared to 1996. An increase
in the average interest-bearing liabilities of $119 million has primarily added
to the increase.
PROVISION FOR LOAN LOSSES
There has been no provision for loan losses in both 1997 and 1996. Pinnacle had
net charge-offs of $844,000, or 0.16%, of average loans compared to $641,000, or
0.17%, of average loans in 1996. The ratio of the allowance for loan losses to
total loans was 1.47% at December 31, 1997 compared to 1.59% of a year ago. At
December 31, 1997 total non-performing loans, defined as non-accrual loans;
loans past due greater than 90 days and still accruing; and restructured loans,
were $6,679,000 compared with $9,404,000 of a year ago. The decrease in
non-performing loans is significant in that a majority of the reduction in these
loans from year-end 1996, or 69% of the decrease, resulted in payments and
payoffs of non-performing loans as opposed to charging off the loans. Loans
considered impaired under SFAS No. 114 and disclosed in the Notes to the
Financial Statements are included in the non-performing category. These included
non-accrual loans greater than $100,000, restructured loans, and loans
classified as at least doubtful under Pinnacle's credit risk classification
system.
In addition, Pinnacle held $442,000 classified as other real estate owned
("OREO") at December 31, 1997. Other real estate includes property acquired
through foreclosure. These assets are carried at the lower of fair value less
estimated cost to sell or cost. Losses arising at the time of acquisition of
property in full or partial satisfaction of loans are recorded as loan losses.
Subsequent losses or expenses on the property are charged to other expenses.
Income received on property is recorded as an offset to expense. During 1997,
all property carried at December 31, 1996 was sold with no significant impact on
the results of operations.
Total non-performing assets were $7,121,000, or 1.39% of total loans plus other
real estate owned at December 31, 1997. Non-performing assets were 0.69% of
total assets at year end.
NET SECURITIES GAINS
In 1997, net securities gains were a significant factor in the earnings. On a
pre-tax basis, net securities gains were $8,340,000 compared to $159,000 in
1996. The net gains realized in 1997 consisted of gross gains of $9,527,000 and
gross losses of $1,187,000.
The net gains in 1997 consisted of gains of approximately $5.5 million in
Pinnacle's U. S. Government securities portfolio, and gains of approximately
$2.8 million of equity securities as part of Pinnacle's equity investment
program in other financial institutions. The gains in 1996 related to Pinnacle's
U. S. Government securities portfolio as well as the sale of an equity security
and sale of securities acquired through the purchase of Acorn Financial Corp in
1995.
OTHER NON-INTEREST INCOME
Fees on banking services and other income were $5,887,000 for 1997 compared to
$5,279,000 in 1996. The increase was due primarily to the
- --------------------------------------------------------------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
acquisition. Trust services increased 12% due primarily to the increase in
market value of assets under management, to which a significant amount of fee
income is tied. Assets under management at year end amounted to $320,000,000, or
19% above the total one year earlier. The increase in the amount of assets under
management was also primarily a result of the increase in market value of assets
under management.
NON-INTEREST EXPENSE
Non-interest expense totaled $28,213,000, an increase of 10% of a year ago.
Employee compensation and benefits increased 11% with the majority of the
increase due to the full year of compensation for employees from the 1996
acquisition. Occupancy expense increased 5% primarily due to the acquisition.
Other expense increased 7%, primarily due to the acquisition which included
increased goodwill amortization, increased data processing expenses and
consulting expenses which were paid to former SF employees.
INCOME TAXES
Due to the higher level of pre-tax income, there was an increase in the Federal
tax provision to $7,451,000 compared to $2,050,000 of a year ago. There was a
small deferred provision for state income taxes in 1997 as Pinnacle realized a
portion of the state tax net operating loss carryforward recognized in 1994. See
Note 7 to the Consolidated Financial Statements for additional detail on the
provision for taxes.
CASH EARNINGS
Pinnacle's acquisitions have been made with both the issuance of shares of
common stock and cash or cash only and, as a result, the purchase method of
accounting was utilized. This method created goodwill, which is the difference
between the fair value of assets purchased and the underlying historical cost of
the assets purchased. Pinnacle's goodwill is being amortized as a non-cash
reduction of net income over time periods from ten to twenty years. If these
acquisitions had met stringent accounting rules and no cash had been exchanged,
the pooling of interest method of accounting would have been used. There would
be no goodwill created and no reduction in net income as a result of the
amortization of that goodwill. By computing cash earnings and related ratios,
analysts and peer financial institutions have been equalizing the difference
these two accounting methods have on bank earnings and earnings per share. The
following table outlines Pinnacle's cash earnings and related ratios.
<TABLE>
<CAPTION>
For the year ended
December 31
(IN THOUSANDS; EXCEPT -------------------------------
PER SHARE DATA) 1998 1997 1996
<S> <C> <C> <C>
-------------------------------
Net income, as
reported............. $ 14,681 $ 14,429 $ 7,127
Goodwill
amortization......... 2,416 2,394 2,033
-------------------------------
Cash net income....... $ 17,097 $ 16,823 $ 9,160
-------------------------------
Cash EPS:
Basic............... $ 2.28 $ 2.23 $ 1.35
Diluted............. 2.27 2.23 1.34
Cash ROA:
Average assets...... $1,028,541 $1,012,513 $ 872,927
Average goodwill.... 21,916 24,237 20,445
-------------------------------
Average tangible
assets............. $1,006,625 $ 988,276 $ 852,482
-------------------------------
Cash ROA.............. 1.70% 1.70% 1.07%
Cash ROE:
Average equity...... $ 101,811 $ 93,944 $ 78,981
Average goodwill.... 21,916 24,237 20,445
-------------------------------
Average tangible
equity............. $ 79,895 $ 69,707 $ 58,536
-------------------------------
Cash ROE.............. 21.40% 24.13% 15.65%
</TABLE>
BALANCE SHEET
Total assets were $1,146,065,000 at December 31, 1998, or 11% higher than total
assets of $1,034,811,000 at year-end 1997.
SECURITIES
Total securities were $520,237,000 at December 31, 1998. All securities are
available for sale and carried at fair value with corresponding valuation
adjustments included in stockholders' equity. Securities consisted of U. S.
Government securities of $412,273,000; mortgage-backed and collateralized
mortgage-backed securities of $40,562,000; state and municipal bonds totaling
$19,440,000 and corporate and other securities of $47,962,000. In the latter
part of 1998, Pinnacle invested approximately $101 million in a FNMA discount
note funded by a repurchase agreement of the same amount and Pinnacle invested
approximately $38 million in a FHLMC collateralized mortgage obligation, funded
partially by the sale of a portion of Pinnacle's U. S. Government term
portfolio. State and municipal bonds decreased $2.8 million from maturities and
calls. Corporate and other securities decreased $3.5 million. In 1998, Pinnacle
purchased $24.7 million in new equity issues as part of its equity investment
program in other financial institutions and sold certain issues with a cost of
$14.3 million. The
- --------------------------------------------------------------------------------
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
unrealized gain on the equity portfolio decreased from $22.3 million to $8.6
million, primarily as the result of the sales of certain issues. A detailed
analysis of securities, including unrealized gains and losses as well as
maturity schedules is contained in Note 3 to the Consolidated Financial
Statements.
Currently, Pinnacle is not using any derivative products for hedging or other
purposes.
LOANS
Total loans were $541,356,000 at December 31, 1998, an increase of 6%, or $31.1
million, from a year ago. The increase in loans was primarily in commercial
loans, which increased 31% or $34.5 million. Consumer loans increased 11%, or
$6.9 million. These increases were offset by the decrease in real estate loans
(excluding commercial real estate and construction) of $12.2 million. This
decrease was a result of the continued paydowns in purchased participation
loans. Absent the effect of the paydown in purchased loans, total loans
increased 9%. The loan to asset ratio was 47%, down from a year ago of 49%; and
still substantially below peer of 61%. Management's goal continues to be growth
in the loan portfolio.
At December 31, 1998, Pinnacle's mix of loans consisted of 60% in real estate
loans, 27% in commercial loans and the remainder in consumer loans. The mix
shifted slightly to greater commercial loans in 1998. See Note 4 in the Notes to
Consolidated Financial Statements for a detailed analysis of loans by
composition and geographic mix.
DEPOSITS
Total deposits were $883,806,000 at December 31, 1998 or 4% higher than year-end
1997. Table 5 provides an analysis of deposits by category for the past three
years.
The increase in deposits was primarily in other time deposits under $100,000
which increased $22 million. As previously mentioned, a promotion corresponding
with the opening of the two new banking centers in 1998 brought in significant
new time deposit money. Noninterest-bearing demand deposits increased 11% from
added emphasis on sales and the introduction of a "suite" of products
surrounding a noninterest-bearing deposit account. Interest-bearing demand
deposits increased 5%, money market deposits increased 10%, and savings deposits
increased slightly. The opening of the new branches and a concerted sales effort
by the banks contributed to the successful increase in deposit accounts.
Pinnacle's deposit base continues to be made up of a high amount of low cost
core deposits in comparison with peer group institutions.
TABLE 5. PERCENTAGE OF TOTAL DEPOSITS BY CATEGORY
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Amount Pct. Amount Pct. Amount Pct.
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
Demand:
Noninterest-bearing...................... $ 115,809 13.1% $ 104,644 12.4% $ 101,127 11.5%
Interest-bearing......................... 100,676 11.4 96,092 11.4 88,489 10.1
Savings.................................... 239,355 27.1 239,061 28.2 249,918 28.5
Money market............................... 46,865 5.3 42,677 5.0 47,481 5.4
Other time less than $100,000.............. 318,008 36.0 295,940 35.0 315,597 36.0
Other time greater than $100,000........... 63,093 7.1 68,055 8.0 74,940 8.5
-------------------------------------------------------------------
Total deposits............................. $ 883,806 100% $ 846,469 100% $ 877,552 100%
-------------------------------------------------------------------
</TABLE>
------------------------
GOODWILL
Goodwill and other intangibles amounted to $20,660,000, or 18% of stockholders'
equity, at December 31, 1998. Goodwill and other intangibles relate to premiums
paid in Pinnacle's acquisitions and goodwill amortization on a year-to-year
basis decreases earnings per share by approximately $0.32 per share.
DEFERRED INCOME TAXES
The primary components of Pinnacle's net deferred tax asset at December 31, 1998
are differences between the book and tax bases of securities and other assets,
allowance for loan losses, purchase accounting adjustments, deferred
compensation and deferred loan fees. A detailed analysis of the components of
the deferred tax assets is contained in Note 7 to the Consolidated Financial
- --------------------------------------------------------------------------------
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Statements. At December 31, 1998, Pinnacle had, for state tax purposes, a net
operating loss carryforward of $38,229,000 which expires, if unused, in the
years 2010 through 2013.
SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase
("repos") and FHLB advances constitute all of Pinnacle's short-term borrowings.
These short-term borrowings are not subject to FDIC deposit insurance premiums
or reserve requirements.
Short-term borrowings and FHLB advances increased to $111,245,000 at December
31, 1998 from $38,525,000 of a year ago. The increase in short-term borrowings
was primarily due to the previously mentioned repurchase agreement which was
utilized to fund the purchase of a FNMA discount note. Table 6 highlights
short-term borrowings and FHLB advances for the prior three years.
TABLE 6. SHORT-TERM BORROWINGS AND FHLB ADVANCES
(AT DECEMBER 31; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
-------------------------------
Amount Outstanding:
At year end....................................................... $ 111,245 $ 38,525 $ 28,525
Average during year............................................... 24,712 29,380 12,092
Maximum month end................................................. 117,945 49,781 45,950
Average Interest Rate:
At year end....................................................... 4.94% 7.27% 6.79%
During year....................................................... 5.53 6.01 6.02
</TABLE>
------------------------
NOTES PAYABLE
Pinnacle had $20,750,000 outstanding in notes payable at December 31, 1998,
compared to $20,000,000 at December 31, 1997. The debt has been used during the
year for operating needs as well as the purchase of equity securities at the
parent company level. Pinnacle has a line of credit of $35,000,000 at an
unaffiliated bank which is secured by the stock of subsidiary banks.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $117,376,000 at December 31, 1998 up
2% from $115,458,000 at December 31, 1997. The ratio of equity to assets was
10.24% and 11.16% at each year end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital requirements
for bank holding companies. Pinnacle must have a Leverage Capital Ratio with a
minimum level of Tier One capital to total assets of 4.00%. Tier One capital
consists of common stock, additional paid-in capital and retained earnings, and
is exclusive of Pinnacle's allowance for loan losses, goodwill and other
intangibles, and unrealized gain on securities available for sale, net of tax.
In addition, the Board has issued Risk-Based Capital Guidelines with a minimum
standard of Tier One regulatory capital to risk weighted assets of 4.00%, and
Total (Tier One plus Tier Two) regulatory capital to risk weighted assets of
8.00%. Tier Two capital consists of Pinnacle's allowance for loan losses up to a
maximum of 1.25% of risk weighted assets. The structure of Pinnacle's balance
sheet results in a Risk-Based Capital Ratio significantly in excess of the
guidelines. At December 31, 1998, and December 31, 1997, Pinnacle's total
risk-based capital ratio was 16.36% and 16.97%, respectively, assuming the
deduction of all goodwill and other intangibles in compliance with the
guidelines. Each of Pinnacle's subsidiary banks must meet similar minimum
capital requirements as prescribed by Federal and state banking regulatory
authorities. At December 31, 1998, Pinnacle and each of its subsidiary banks was
in compliance with the current capital guidelines. For a detailed analysis of
regulatory capital ratios, see Note 16 to the Consolidated Financial Statements.
This footnote includes capital ratios for Pinnacle and its subsidiaries.
- --------------------------------------------------------------------------------
38
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Book value per share was $15.73 at December 31, 1998 compared to $15.39 at
December 31, 1997. Tangible book value (stockholders' equity less goodwill) was
$12.97 compared to $12.31 of a year ago. During 1998, Pinnacle repurchased
47,780 shares of its common stock at market prices in privately negotiated and
market transactions as part of its announced stock repurchase program. Dividends
amounting to $0.92 per share were paid in 1998.
LIQUIDITY
As is characteristic of the banking industry, Pinnacle's indicators of liquidity
are principally its deposit base, loan and securities portfolios. On a short
term basis, adjustments are made in these categories based on deposit
fluctuations and loan demand. Longer term, liquidity is determined by growth
objectives, rate pricing policies and the ability to borrow debt or raise
equity. In general, Pinnacle is able to meet deposit withdrawals and to fund
loan demand through earnings and the maturity or sale of securities. Pinnacle
would also be able to respond to short term cash flow needs through short term
borrowings. On a longer term basis, Pinnacle has the ability to incur debt or to
raise equity through the sale of preferred or common stock.
Pinnacle's cash flows are comprised of three general types. Cash flows from
operating activities are primarily Pinnacle's net income. Cash flows from
investing activities consist of loans made to and collected from customers; and
purchases, 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
1998, cash flows were primarily generated from a $37,337,000 increase in
deposits, a $72,720,000 increase in short-term borrowings and $9,569,000 from
earnings. Cash flow uses and needs included a net increase in securities of
$78,839,000, advances of net loan principal of $31,456,000, purchases of
premises and equipment of $4,482,000, and dividend payments and repurchases of
common stock of $8,279,000. Pinnacle's net cash position decreased $2,481,000
with the majority of the decrease in Federal funds sold.
Pinnacle's subsidiary banks have a relatively stable base of deposits and any
increased loan demand can be sufficiently funded without a material change in
its balance sheet. Pinnacle's corporate strategy includes acquisitions. These
acquisitions are funded with both debt and issuance of stock. Reductions of debt
would be made from Pinnacle's earnings. At December 31, 1998, Pinnacle had a
secured line of credit of $35,000,000 with an unaffiliated bank, whereby
$20,750,000 had been drawn.
Regulatory requirements exist which influence Pinnacle's liquidity and cash flow
needs. These requirements include the maintenance of satisfactory capital ratios
on a consolidated and subsidiary bank basis, restrictions on the amount of
dividends which a subsidiary bank may pay and reserve requirements with the
Federal Reserve Bank. Based on these restrictions, at January 1, 1999, bank
subsidiaries could have declared approximately $1,501,000 in dividends without
requesting approval of the applicable Federal or State regulatory agency. In
addition, Pinnacle has made loan commitments which could result in increased
cash flow requirements for loans. Management is of the opinion that these
regulatory requirements and loan commitments will not have a significant impact
on the liquidity of Pinnacle. Management is not aware of any known trends,
events or uncertainties that will have, or that are reasonably likely to have, a
material effect on Pinnacle.
Management had no significant commitments for capital expenditures at December
31, 1998.
YEAR 2000 READINESS DISCLOSURE
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, consisting of senior management and key
department managers, is charged with the Year 2000 project oversight. The task
force utilized an approach outlined by the Federal Financial Institution
Examination Council (FFIEC), supplemented by correspondence guidance from its
primary regulators and internal auditors. All deadlines recommended by the FFIEC
have been met by Pinnacle's task force. The task force meets at least quarterly
and is in constant communication with its major data processor and addresses
issues relating to Year 2000 compliance on an ongoing basis. The task force
chairman reports quarterly to each Bank's board and the parent company's board.
- --------------------------------------------------------------------------------
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Currently, Pinnacle has completed its testing strategies and plans and has
received test strategies and plans from its critical vendors. Pinnacle's main
data processing provider began testing in a proxy environment during August,
1998. Year 2000 Renovated software from Pinnacle's major data processor was
installed and tested in October, 1998. Pinnacle currently utilizes this software
with no processing issues. Testing on that software for future dates will
continue through March, 1999. The contingency plan has been prepared and
submitted to the regulators for comment and changes. The contingency planning
will be tested and continually monitored and updated to ensure uninterrupted
customer services and backroom processing.
Pinnacle has received and reviewed correspondence from significant vendors,
particularly the Federal Reserve Bank, and all necessary testing for interfaces
with these vendors has been completed or will be completed by March 31, 1999.
While Pinnacle has received correspondence from and evaluated plans from certain
vendors, such as utilities and phone companies, it cannot guarantee that
computer failure of these vendors would not disrupt Pinnacle's operations. The
severity of the disruption would depend on the nature and duration of that
vendor's failure.
Pinnacle has incurred costs related to assessment of, and preliminary efforts in
connection with, the Year 2000 program and remediation plan. Costs incurred by
Pinnacle's major data processor, at this time, are not being passed on to its
customers. The impact of any costs incurred has not been material to the
financial position of Pinnacle and total costs incurred, and expected to be
incurred, are estimated to be less than $0.01 per share on Pinnacle's diluted
earnings per share. Additionally, although Pinnacle's major data processor has
met all deadlines for their Year 2000 readiness plan and management is confident
it will continue to do so, Pinnacle cannot estimate the effect or impact of what
the failure of its processing system would have on the financial position of
Pinnacle. Furthermore, 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 has assessed its large commercial customers as to their Year 2000
readiness and ability to manage their relationship with Pinnacle's banking
subsidiaries. Ongoing monitoring is being done on a case by case basis, based on
the initial assessment. Currently, it is unknown what impact a high risk
customer's inability to repay its bank obligations will have on the adequacy of
Pinnacle's allowance for 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.
Pinnacle believes it is taking reasonable steps to address and remediate Year
2000 issues, especially as they relate to critical vendors. However, Pinnacle
can make no 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.
MARKET RISK
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument. Market risk sensitive instruments
include derivative financial instruments and other financial instruments which
generally are disclosed under Footnote 14 in the Notes to Financial Statements
"Disclosure about Estimated Fair Value of Financial Instruments". Market risk in
a financial institution is broken into four categories: interest rate risk;
foreign exchange rate risk; commodity price risk; and equity price risk. At
Pinnacle, market risk is interest rate risk with a certain portion of equity
price risk as it relates to its equity portfolio at the parent company. No other
market risk exposures currently relate to Pinnacle.
INTEREST RATE RISK
Interest rate risk is the exposure of a company's current or future earnings and
capital to interest rate changes. Interest rate risk has many components
including repricing risk, basis risk, yield curve risk, option risk, and price
risk. Repricing risk results from timing differences between rate changes or
cash flows from the underlying assets and liabilities such as long-term fixed
rate securities funded by variable rate deposits. Basis risk results from weak
correlation between coupon rate changes of assets and liabilities such as prime
based loans changing by 25 basis points and LIBOR based deposits changing by 50
basis points. Yield curve risk results from changes in the slope of the yield
curve. Option risk results when a financial instrument's cash flow timing or
amount can change as a result of market interest rate changes such as prepayment
risk in mortgage loans when interest rates drop and refinancing of mortgages are
prevalent. Price risk results from
- --------------------------------------------------------------------------------
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
changes in value of marked-to-market financial instruments when interest rates
change, such as held-for-sale loan portfolios.
Pinnacle measures the effect of interest rate risk on both pro forma earnings
for the current and future fiscal year and the present value equity of its
subsidiary banks using simulation analysis. Measurement includes exposure to
immediate, parallel shifts in interest rates of 200 basis points, plus and
minus, and is monitored within a specified and Board approved range. Critical to
the measurement is the assumptions made by management as to calculating its pro
forma earnings and present value equity. These assumptions include the
following:
VOLUME ASSUMPTIONS The current balance sheet reflects most recent decisions
made with respect to current events and does not project future growth or
changes. This establishes the base case from which all percentage changes are
calculated.
PREPAYMENT SPEEDS Market consensus speeds described as the average PSA
assumptions calculated from reporting primary dealers are used.
REPLACEMENT RATE The current "offered" rates are utilized for loans and
deposits. The current market rate is utilized for securities.
REINVESTMENT TERM Assumptions are used based on policy limits of the
asset/liability policy and are reviewed annually.
MARKET RATE Historical information is used to determine how the coupon rate of
specific balance sheet categories change as interest rates change.
CHARACTERISTICS OF NON-MATURITY DEPOSITS Includes statistics regarding the
distribution of its non-maturity deposit accounts and is determined through
analysis conducted through subsidiary banks' data processing systems.
The following sensitivity analysis highlights the results of the simulation as
of December 31, 1998, for 1999 pro forma net interest income, as well as change
in present value equity for Pinnacle's subsidiary banks. The risk limits set for
the subsidiary banks are plus or minus 20% for change in pro forma net interest
income and 15% for change in present value equity. All results are within
guidelines set by management policy.
Actual results may vary depending on specific events transpiring in future
periods.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
-200 +200 -200 +200
Basis Base Basis Basis Base Basis
Points Scenario Points Points Scenario Points
--------- --------- --------- --------- --------- ---------
Next 12 months
Net interest income.................... $ 35,629 $ 34,025 $ 31,242 $ 35,478 $ 32,550 $ 29,951
% Change............................... 4.71% -- (8.18)% 9.00% -- (7.98)%
Present Value Equity................... 155,670 159,887 152,985 169,676 163,757 153,544
% Change............................... (2.64)% -- (4.32)% 3.61% -- (6.24)%
</TABLE>
------------------------
PARENT COMPANY MARKET RISK
At the parent company level, most of the market risk centers on its equity
portfolio in other financial institutions' stock. At December 31, 1998, equity
securities recorded at fair value of $45 million, with unrealized appreciation
of $8.6 million, have exposure to price risk. This risk is estimated as the
potential loss in fair value resulting from a 20% adverse change in prices
quoted by stock exchanges and amounts to $8.9 million. This price risk does not
have a direct effect on the net income of Pinnacle, although would reduce any
gains which may be taken on the sale of certain equity securities in the future.
Debt at the holding company level is subject to interest rate risk as its credit
lines are tied to both LIBOR and prime rates. Credit lines tied to these indices
are at the discretion of management and can be adjusted as these rates change.
Currently, the total notes payable outstanding at year end is tied to LIBOR-type
indices. If these indices rates increased 200 basis points, interest expense
would have increased by approximately $450,000 on a pre-tax basis. The actual
results could vary as management has the ability to adjust its level of
borrowings and indices tied to LIBOR and prime.
- --------------------------------------------------------------------------------
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MANAGEMENT OF MARKET RISK
This analysis is performed at least quarterly, and in the event projected pro
forma earnings or present value equity fall outside stated guidelines,
management will take steps to adjust the maturity structure of its balance sheet
to bring the variability of earnings or present value equity into compliance
with stated guidelines. These changes would normally be made through the
purchase and sale of debt securities. All securities owned by Pinnacle are
available for sale and the proceeds from the sale of debt securities could be
reinvested in an alternative maturity range in order to respond to a change in
interest rates. Currently, Pinnacle is not using any derivative products for
hedging or other purposes; however, if necessary, consideration would be given
to utilization of these products to manage interest rate risk.
FORWARD-LOOKING INFORMATION
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations relate to Pinnacle's expectations as to
future events relating to such items as the adequacy of the allowance for loan
losses, changes in economic conditions including interest rates, management's
ability to manage interest rate, liquidity and credit risks, impact on
operations and credit losses as its relates to the Year 2000 issue. Such
statements are not statements of historical fact and are forward-looking
statements. Pinnacle believes the assumptions on which these statements are
founded are reasonable, based on management's knowledge of its business and
operations; however, there is no assurance the assumptions will prove to have
been correct.
QUARTERLY DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
Three Months Ended Three Months Ended
------------------------------------------ ------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------ ------------------------------------------
Net interest income....... $7,912 $7,990 $8,150 $8,388 $8,093 $8,374 $8,462 $8,429
Provision for loan
losses.................. --0-- --0-- --0-- --0-- --0-- --0-- --0-- --0--
------------------------------------------ ------------------------------------------
Net interest income after
provision for loan
losses.................. $7,912 $7,990 $8,150 $8,388 $8,093 $8,374 $8,462 $8,429
Net income................ $3,850 $3,279 $4,435 $3,117 $2,739 $3,444 $4,663 $3,583
------------------------------------------ ------------------------------------------
Diluted earnings per share
(adjusted for stock
split).................. $0.51 $0.44 $0.58 $0.42 $0.36 $0.46 $0.61 $0.48
------------------------------------------ ------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
BOARD OF DIRECTORS, EXECUTIVE OFFICERS, BANK AND BANKING CENTER
PRESIDENTS, AND DEPARTMENT HEADS
- ----------------------------------------------------------------------
BOARD OF DIRECTORS
Richard W. Burke,PARTNER, BURKE, WARREN, MACKAY & SERRITELLA, P.C.
Mark P. Burns,VICE CHAIRMAN OF PINNACLE BANK
William J. Finn, Jr.,PRESIDENT, FINN INSURANCE AGENCY, INC.
Samuel M. Gilman,PARTNER, COYLE, GILMAN & STENGEL
Albert Giusfredi,PRESIDENT, HEADLY MANUFACTURING CO.
John J. Gleason,CHAIRMAN
John J. Gleason, Jr.,VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
William P. Gleason,PRESIDENT
James L. Greene,PRESIDENT, JIM GREENE ASSOCIATES, INC.
Donald G. King,FORMER CHAIRMAN, FIRST NATIONAL BANK IN HARVEY
James A. Maddock,PRESIDENT, MADDOCK INDUSTRIES
James J. McDonough,PRESIDENT, MCDONOUGH ASSOCIATES
William C. Nickels,CHAIRMAN, REPLOGLE GLOBES, INC.
John E. O'Neill,PRESIDENT, F.C. PILGRIM & COMPANY
James R. Phillip, Jr.,PRESIDENT, PHILLIP'S FLOWERS AND GIFTS
Kenneth C. Whitener, Jr.,EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
EXECUTIVE OFFICERS
John J. Gleason,CHAIRMAN
John J. Gleason, Jr.,VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
William P. Gleason,PRESIDENT
Kenneth C. Whitener, Jr.,EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
Richard W. Burke,SECRETARY
Glenn M. Mazade,CHIEF CREDIT OFFICER
Sara J. Mikuta,CHIEF FINANCIAL OFFICER AND TREASURER
BANK AND BANKING CENTER PRESIDENTS
William P. Gleason,PINNACLE BANK
Robert J. Boucek,LAGRANGE PARK BANKING CENTER
Larry R. Clark,PINNACLE BANK OF THE QUAD-CITIES
Charles B. Hall,BATAVIA/ELBURN/WARRENVILLE/WESTMONT BANKING CENTERS
Dennis J. Irvin,HARVEY BANKING CENTER
Richard G. Pogvara,OAK PARK BANKING CENTER
William A. Spoo,BERWYN/CICERO/NILES/NORTH RIVERSIDE/WICKER PARK BANKING CENTERS
DEPARTMENT HEADS
Keith J. Gottschalk,DIRECTOR OF OPERATIONS
Richard M. Kennedy,DIRECTOR OF LOAN OPERATIONS AND CASH MANAGEMENT
Michael J. Kidney,DIRECTOR OF REGULATORY COMPLIANCE
Joanna L. Kmiec,DIRECTOR OF MARKETING AND TRAINING
Glenn M. Mazade,CHIEF CREDIT OFFICER
Giles M. McCarthy,HEAD OF RETAIL LENDING DEPARTMENT
Denise Medema,DIRECTOR OF HUMAN RESOURCES
Sara J. Mikuta,CHIEF FINANCIAL OFFICER AND TREASURER
Jeffrey T. Osterman,DIRECTOR OF INVESTMENT PRODUCTS
John W. Pindiak,HEAD OF TRUST DEPARTMENT
Ronald J. Rous,DIRECTOR OF DEPOSIT SERVICES AND CASHIER
Kenneth C. Whitener, Jr.,CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
43
<PAGE>
SHAREHOLDER INFORMATION
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
MARKET PRICE AND The Corporation's common stock is quoted on the National Market of
DIVIDENDS the National Association of Securities Dealers Automated Quotation
System (NASDAQ). The Corporation's ticker symbol is "PINN" and
newspaper listings use the abbreviations "PinBG" and
"PinnaclBcGp". The following table sets forth the high and low
sales price by quarter as reported by NASDAQ. All per share
amounts have been adjusted to give effect for the 3-for-2 stock
split effective February 10, 1997.
</TABLE>
<TABLE>
<CAPTION>
1998
- ----------------------------------------------
<S> <C> <C> <C>
Cash
Quarter High Low Dividends
<CAPTION>
- ----------------------------------------------
<S> <C> <C> <C>
First $ 35.50 $ 26.25 $ 0.23
Second 37.00 32.00 0.23
Third 34.13 24.50 0.23
Fourth 30.25 24.00 0.23
<CAPTION>
1997
- ----------------------------------------------
Cash
Quarter High Low Dividends
- ----------------------------------------------
<S> <C> <C> <C>
First $ 23.50 $ 18.67 $ 0.22
Second 21.75 19.50 0.22
Third 24.50 21.00 0.22
Fourth 29.38 24.25 0.22
</TABLE>
<TABLE>
<S> <C>
MARKET MAKERS Principal market makers are: ABN-AMRO Chicago Corporation; Howe
Barnes Investments, Inc.; J. J. B. Hilliard, W. L. Lyons, Inc.;
McDonald Investments Inc.; and Sandler O'Neill & Partners.
STOCK TRANSFER AGENT The Transfer Agent for the Corporation's common stock is Harris
Trust and Savings Bank, Shareholder Communications Team, P. O. Box
A3504, Chicago, Illinois 60690-3504, (312) 461-3309.
FORM 10-K Form 10-K Annual Report filed with the Securities and Exchange
Commission can be obtained by written request to the Vice Chairman
of the Corporation.
NOTICE OF MEETING A meeting of Shareholders of Pinnacle Banc Group, Inc. will be
held at the Drake Oak Brook Plaza Office Building, Lower Level
Conference Center, 2215 York Road, Oak Brook, Illinois on Tuesday,
April 20, 1999 at 3:00 p.m.
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
PINNACLE BANC GROUP, INC.
Corporate Headquarters
2215 York Road, Suite 306
Oak Brook, Illinois 60523
[LOGO] (630) 574-3550
</TABLE>
SUBSIDIARY BANKS:
<TABLE>
<S> <C>
PINNACLE BANK NILES BANKING CENTER
CICERO BANKING CENTER 5697 Touhy Avenue
6000 West Cermak Road Niles, Illinois 60714
Cicero, Illinois 60804 (847) 647-8555
and OAK PARK BANKING CENTER
2500 South Cicero Avenue 840 South Oak Park Avenue
Cicero, Illinois 60804 Oak Park, Illinois 60304
(708) 780-5000 (708) 848-6700
BATAVIA BANKING CENTER WARRENVILLE BANKING CENTER
165 West Wilson Street 3601 Winfield Road
Batavia, Illinois 60510 Warrenville, Illinois 60555
(630) 879-5300 (630) 393-4300
BERWYN BANKING CENTER WESTMONT BANKING CENTER
7112 West Cermak Road 640 Pasquinelli Drive
Berwyn, Illinois 60402 Westmont, Illinois 60559
and (630) 654-2800
7373 West 25th Street WICKER PARK BANKING CENTER
North Riverside, Illinois 60546 1209 North Milwaukee Avenue
(708) 788-4700 Chicago, Illinois 60622
ELBURN BANKING CENTER (773) 227-7020
415 South Main Street PINNACLE BANK OF THE QUAD-CITIES
Elburn, Illinois 60119 SILVIS BANKING CENTER
(630) 365-9292 1100 First Avenue
HARVEY BANKING CENTER Silvis, Illinois 61282
174 East 154th Street (309) 752-1200
Harvey, Illinois 60426 COLONA BANKING CENTER
(708) 333-2010 107 First Street
LAGRANGE PARK BANKING CENTER Colona, Illinois 61241
Oak Avenue at Sherwood Road (309 792-3384
LaGrange Park, Illinois 60525 MOLINE BANKING CENTER
(708) 579-2000 3600 70th Street
Moline, Illinois 61265
(309) 796-1000
</TABLE>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,922
<INT-BEARING-DEPOSITS> 101
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 520,237
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 541,356
<ALLOWANCE> 6,935
<TOTAL-ASSETS> 1,146,065
<DEPOSITS> 883,806
<SHORT-TERM> 111,245
<LIABILITIES-OTHER> 12,888
<LONG-TERM> 20,750
0
0
<COMMON> 23,312
<OTHER-SE> 94,064
<TOTAL-LIABILITIES-AND-EQUITY> 1,146,065
<INTEREST-LOAN> 42,213
<INTEREST-INVEST> 24,479
<INTEREST-OTHER> 281
<INTEREST-TOTAL> 66,973
<INTEREST-DEPOSIT> 31,799
<INTEREST-EXPENSE> 34,533
<INTEREST-INCOME-NET> 32,440
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 12,755
<EXPENSE-OTHER> 30,094
<INCOME-PRETAX> 21,290
<INCOME-PRE-EXTRAORDINARY> 21,290
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,681
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.95
<YIELD-ACTUAL> 3.52
<LOANS-NON> 3,507
<LOANS-PAST> 1,775
<LOANS-TROUBLED> 483
<LOANS-PROBLEM> 3,980
<ALLOWANCE-OPEN> 7,520
<CHARGE-OFFS> 917
<RECOVERIES> 332
<ALLOWANCE-CLOSE> 6,935
<ALLOWANCE-DOMESTIC> 2,988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,947
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