<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _________________
Commission File Number: 0-18283
PINNACLE BANC GROUP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3190818
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2215 York Road, Suite 306, Oak Brook, Illinois 60523
----------------------------------------------------
(Address of principal executive offices)
(630) 574-3550
---------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: As of April 30, 1999, the registrant
had 7,399,343 shares outstanding
of common stock, $3.12 par value.
- -------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Presented on the following pages are the unaudited consolidated
balance sheets of Pinnacle Banc Group, Inc. and subsidiaries ("Pinnacle") for
March 31, 1999 and December 31, 1998, and the related unaudited consolidated
statements of income, comprehensive income and cash flows for the three month
periods ended March 31, 1999 and 1998.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for a complete financial statement. In the opinion of management,
all adjustments, such as estimated provisions for profit sharing and bonus
arrangements normally determined at year end, considered necessary for a fair
presentation have been included.
Substantially all disclosure has been omitted since it would
substantially duplicate the disclosure contained in the latest audited
financial statements of Pinnacle contained in the 1998 Annual Report to
Shareholders.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 DECEMBER 31
----------- -----------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash and due from banks . . . . . . . . . . . . . . $ 25,513 $ 30,922
Federal funds sold . . . . . . . . . . . . . . . . . 0 500
----------- -----------
Total cash and cash equivalents . . . . . . . . 25,513 31,422
Interest-bearing deposits . . . . . . . . . . . . . 76 101
Securities:
Available for sale . . . . . . . . . . . . . . . 410,987 520,237
(amortized cost:
3/31/99 - $403,311
12/31/98 - $501,889)
Loans, net of unearned discount . . . . . . . . . . 550,938 541,356
Less: Allowance for loan losses . . . . . . . . (7,179) (6,935)
----------- -----------
Net loans . . . . . . . . . . . . . . . . . . . 543,759 534,421
Premises and equipment . . . . . . . . . . . . . . 21,367 20,917
Goodwill . . . . . . . . . . . . . . . . . . . . . 20,057 20,660
Other assets . . . . . . . . . . . . . . . . . . . 22,886 18,307
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 1,044,645 $ 1,146,065
----------- -----------
----------- -----------
LIABILITIES:
Demand deposits:
Noninterest-bearing . . . . . . . . . . . . . . $ 114,167 $ 115,809
Interest-bearing . . . . . . . . . . . . . . . . 94,651 100,676
Savings deposits . . . . . . . . . . . . . . . . . 290,149 286,220
Other time deposits . . . . . . . . . . . . . . . . 373,041 381,101
----------- -----------
Total deposits . . . . . . . . . . . . . . . . . 872,008 883,806
Short-term borrowings . . . . . . . . . . . . . . . 28,625 111,245
Notes payable . . . . . . . . . . . . . . . . . . . 24,250 20,750
Other liabilities . . . . . . . . . . . . . . . . . 10,834 12,888
----------- -----------
Total liabilities . . . . . . . . . . . . . . . 935,717 1,028,689
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $3.125 par . . . . . . . . . . . . . 23,123 23,312
20,000,000 shares authorized;
shares issued and outstanding:
3/31/99 - 7,399,343
12/31/98 - 7,459,743
Additional paid-in capital . . . . . . . . . . . . 38,638 38,638
Retained earnings . . . . . . . . . . . . . . . . . 42,131 43,407
Unrealized gains in securities available for sale. . 5,036 12,019
----------- -----------
Total stockholders' equity . . . . . . . . . . . 108,928 117,376
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 1,044,645 $ 1,146,065
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED MARCH 31
------------------------
1999 1998
------------------------
<S> <C> <C>
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . $ 10,910 $ 10,341
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . 5,850 5,607
Tax exempt . . . . . . . . . . . . . . . . . . . . 346 360
Interest-bearing deposits, Federal funds sold and other 3 52
------------------------
Interest income . . . . . . . . . . . . . . . . . . 17,109 16,360
------------------------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand . . . . . . . . . . . . . . 429 438
Savings . . . . . . . . . . . . . . . . . . . . . . 1,963 2,080
Other time . . . . . . . . . . . . . . . . . . . . 4,956 5,313
Short-term borrowings . . . . . . . . . . . . . . . . 882 282
Notes payable . . . . . . . . . . . . . . . . . . . . 315 335
------------------------
Interest expense . . . . . . . . . . . . . . . . . 8,545 8,448
------------------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . 8,564 7,912
Provision for loan losses . . . . . . . . . . . . . 0 0
------------------------
Net interest income after provision
for loan losses . . . . . . . . . . . . . . . 8,564 7,912
------------------------
OTHER INCOME:
Banking services and other . . . . . . . . . . . . . . 1,299 1,592
Trust services . . . . . . . . . . . . . . . . . . . . 685 681
Net securities gains . . . . . . . . . . . . . . . . . 2,582 2,897
------------------------
Other income . . . . . . . . . . . . . . . . . . . 4,566 5,170
------------------------
OTHER EXPENSE:
Salaries, profit sharing and other employee benefits . 3,901 3,563
Occupancy . . . . . . . . . . . . . . . . . . . . . . 854 703
Amortization of goodwill and other intangible . . . . 603 604
Other operating expenses . . . . . . . . . . . . . . . 3,275 2,444
------------------------
Other expense . . . . . . . . . . . . . . . . . . . 8,633 7,314
------------------------
Income before income taxes . . . . . . . . . . . . . . . 4,497 5,768
Provision for income taxes . . . . . . . . . . . . . . 2,476 1,918
------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 2,021 $ 3,850
------------------------
------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (NOTE 2):
BASIC . . . . . . . . . . . . . . . . . . . . . . . . 7,424,574 7,507,190
DILUTED . . . . . . . . . . . . . . . . . . . . . . . 7,443,129 7,538,566
EARNINGS PER SHARE:
BASIC . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.51
DILUTED . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.51
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.23
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
(IN THOUSANDS) ENDED MARCH 31
------------------------
1999 1998
-------- --------
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,021 $ 3,850
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities . . . . . . . . . (8,000) 1,595
Less: reclassification adjustment for gains (losses)
included in net income . . . . . . . . . . . . . . . . (2,582) (2,897)
-------- --------
Net unrealized gains (losses) on securities . . . . . . . (10,582) (1,302)
Income tax expense (benefit) related to unrealized
gains (losses) on securities . . . . . . . . . . . . . (3,598) 443
-------- --------
Other comprehensive income (loss), net of tax . . . . . . . . (6,984) (859)
-------- --------
COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . ($ 4,963) $ 2,991
-------- --------
-------- --------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED MARCH 31
-----------------------------
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,021 $ 3,850
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 463 480
Amortization of goodwill and other intangibles . . . . . 603 604
Amortization of purchase accounting adjustments . . . . . 40 37
Discount accretion . . . . . . . . . . . . . . . . . . . (895) (229)
Premium amortization . . . . . . . . . . . . . . . . . . 82 100
Provision for loan losses . . . . . . . . . . . . . . . . 0 0
Gain on sale of securities . . . . . . . . . . . . . . . (2,582) (2,897)
Decrease (increase) in interest receivable . . . . . . . (3,528) 742
Decrease in interest payable . . . . . . . . . . . . . . (980) (244)
Increase in other assets . . . . . . . . . . . . . . . . (1,124) (1,738)
Increase in other liabilities . . . . . . . . . . . . . . 2,526 1,888
Other, net . . . . . . . . . . . . . . . . . . . . . . . 55 30
--------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . (5,340) (1,227)
Net cash provided by (used for) operating activities . . (3,319) 2,623
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities . . . . . . . . . . . . . . 53,525 355,768
Proceeds from maturities and paydowns of securities . . . . 102,191 320
Purchase of securities . . . . . . . . . . . . . . . . . . . (53,657) (354,279)
Net decrease in interest-bearing deposits . . . . . . . . . 24 86
Net loan principal collected (advanced) . . . . . . . . . . (9,314) 1,877
Premises and equipment expenditures . . . . . . . . . . . . (954) (991)
--------- ----------
Net cash provided by investing activities . . . . . . . . 91,815 2,781
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits . . . . . . . . . (11,799) 24,904
Net decrease in short-term borrowings . . . . . . . . . . . (82,620) (31,350)
Proceeds from notes payable . . . . . . . . . . . . . . . . 4,400 5,675
Principal reductions of notes payable . . . . . . . . . . . (900) (3,900)
Issuance of common stock . . . . . . . . . . . . . . . . . . 0 72
Purchase and retirement of common stock . . . . . . . . . . (1,621) 0
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (1,865) (1,727)
--------- ----------
Net cash used for financing activities . . . . . . . . . (94,405) (6,326)
Net decrease in cash and cash equivalents . . . . . . . . . (5,909) (922)
Cash and cash equivalents at beginning of period . . . . . . 31,422 33,903
--------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $ 25,513 $ 32,981
--------- ----------
--------- ----------
CASH PAID DURING PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,525 $ 8,692
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 900 0
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
NOTE 1: MERGER
Pinnacle has entered into a definitive agreement of merger with Old
Kent Financial Corporation ("Old Kent") of Grand Rapids, Michigan. The merger
is intended to be structured as a pooling-of-interests for accounting
purposes and as a tax-free exchange of shares. Pinnacle's shareholders will
receive 5.4 million shares of Old Kent stock, using an exchange ratio of
0.717. The merger is subject to the customary approvals by Pinnacle's
shareholders and by the regulatory authorities and is expected to be
completed during the third quarter of 1999.
NOTE 2: EARNINGS PER SHARE
The following table shows the computation of shares outstanding for
calculating earnings per share for the three months ended March 31, 1999 and
1998 under Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share":
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
------------------------------
1999 1998
---------- ---------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Average common shares outstanding 7,424,574 7,507,190
COMMON STOCK EQUIVALENTS:
Stock options outstanding 118,000 82,500
Treasury stock method (99,445) (51,124)
---------- ----------
Net 18,555 31,376
---------- ----------
DILUTED EARNINGS PER SHARE 7,443,129 7,538,566
---------- ----------
---------- ----------
</TABLE>
NOTE 3: SEGMENT REPORTING
As of December 31, 1998, Pinnacle adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This statement
requires an enterprise to present segment information using the management
approach. This approach requires segment information to be reported based on
how management organizes segments within a company for making operating
decisions and assessing performance.
Pinnacle's banking subsidiaries consist of two operating segments:
Pinnacle Bank and Pinnacle Bank of the Quad-Cities. These segments meet the
six criteria, as defined in SFAS No. 131, for aggregating similar segments.
Management considers the nature of the products and services and geographic
location in determining reportable segments. The Corporation measures segment
information using the same accounting policies that it uses in the
preparation of consolidated financial statements.
The banking subsidiaries' interest revenue is derived from interest
on loans, investment securities and interest-bearing deposits. The parent
company's interest revenue is derived from interest on investment securities
and equity and dividends from the banking subsidiaries. Transactions between
the reportable segments are recorded on the reportable segments' financial
statements and significant inter-segment accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. The
inter-segment eliminations include revenues and dividends from the banking
subsidiaries and certain interest income for bank accounts of the parent
company held at the banking subsidiaries.
7
<PAGE>
The following tables show segment information for the three months
ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------
BANKING PARENT INTER-SEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 16,768 $ 1,683 $ (1,342) $ 17,109
Interest expense 8,234 315 (4) 8,545
Provision for loan loss 0 0 0 0
-------------------------------------------------------------------------
NET INTEREST INCOME 8,534 1,368 (1,338) 8,564
OTHER INCOME
Other income 1,987 26 (29) 1,984
Net securities gains 814 1,768 0 2,582
-------------------------------------------------------------------------
2,801 1,794 (29) 4,566
OTHER EXPENSE
Amortization of goodwill 501 102 0 603
Depreciation 462 1 0 463
Other expense 6,469 1,127 (29) 7,567
-------------------------------------------------------------------------
7,432 1,230 (29) 8,633
INCOME BEFORE INCOME TAXES 3,903 1,932 (1,338) 4,497
Provision for income taxes 2,565 (89) 0 2,476
-------------------------------------------------------------------------
NET INCOME $ 1,338 $ 2,021 $ (1,338) $ 2,021
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEGMENT ASSETS $ 999,645 $ 135,660 $ (90,660) $1,044,645
EXPENDITURES FOR SEGMENT ASSETS 954 0 0 954
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------
BANKING PARENT INTER-SEGMENT
SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 16,132 $ 4,395 $ (4,167) $ 16,360
Interest expense 8,131 335 (18) 8,448
Provision for loan loss 0 0 0 0
-------------------------------------------------------------------------
NET INTEREST INCOME 8,001 4,060 (4,149) 7,912
OTHER INCOME
Other income 2,263 23 (13) 2,273
Net securities gains 2,889 8 0 2,897
-------------------------------------------------------------------------
5,152 31 (13) 5,170
OTHER EXPENSE
Amortization of goodwill 502 102 0 604
Depreciation 479 0 0 479
Other expense 5,928 316 (13) 6,231
-------------------------------------------------------------------------
6,909 418 (13) 7,314
INCOME BEFORE INCOME TAXES 6,244 3,673 (4,149) 5,768
Provision for income taxes 2,095 (177) 0 1,918
-------------------------------------------------------------------------
NET INCOME $ 4,149 $ 3,850 $ (4,149) $ 3,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEGMENT ASSETS $ 976,626 $ 146,398 $ (90,190) $1,032,834
EXPENDITURES FOR SEGMENT ASSETS 991 0 0 991
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
NET INCOME - THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Consolidated net income was $2,021, or $0.27 per share, on a diluted
basis for the three months ended March 31, 1999 (the "first quarter"), a per
share decrease of 47% from the $3,850, or $0.51 per share, earned in the
first three months of 1998. The annualized return on average assets was 0.74%
for the first three months of 1999 and 1.54% for the first three months of
1998. For each period, the return on average equity was 7.7% and 15.5%,
respectively. Return on average assets and equity for the same periods,
calculated using the effects of SFAS No. 115, would not be materially
different.
The primary factor for lower earnings was primarily the result of
expenses related to Pinnacle's pending merger. On March 19, 1999, Pinnacle
announced a definitive agreement for the merger of Pinnacle into Old Kent.
Excluding the effect of expenses related to the pending merger, earnings for
the first quarter of 1999 were approximately the same as the comparable
quarter of 1998. Net interest income increased 8% as the result of a 9%
increase in average earning assets, slightly impacted by a 4 basis point
decline in the net interest margin to 3.49%. Other income declined 13% with a
lower level of ancillary income, including a 1998 gain on a sale of fixed
assets, contributing to the decrease. Other operating expense increased 18%
as a result of the effect of expenses related to the proposed merger,
including legal, accounting and investment banking fees. Without these items,
other expense increased approximately 6%.
NET INTEREST INCOME
The primary component of Pinnacle's consolidated earnings is net
interest income, or the difference between interest income on earning assets
and interest paid on supporting liabilities. The net interest margin is net
interest income expressed as a percentage of average earning assets.
Pinnacle's earning assets consist of loans, securities, interest-bearing
deposits at financial institutions and Federal funds sold. Supporting
liabilities primarily consist of deposits, short-term borrowings and
Pinnacle's notes payable. A portion of Pinnacle's interest income is earned
on tax exempt investments such as state and municipal bonds. In an effort to
state this tax exempt income and its resultant yields on a basis comparable
to all other taxable investments, an adjustment is made to analyze this
income on a taxable equivalent basis.
During the first three months of 1999, Pinnacle's average earning
assets were $1,002,071 compared to $918,136 from a year ago. The net interest
margin for the first three months of 1999 was 3.49%, down from 3.53% of the
same period a year ago. Net interest income on a fully taxable equivalent
basis was $8,754 for the first three months of 1999, or 8% higher than the
comparable period in 1998. Actual net interest income increased 8% as a
result of the increase in earning assets.
The yield earned on total earning assets was 6.91% for the first
three months of 1999 compared to 7.21% for the same period of 1998. The rate
earned on interest-bearing deposits and Federal funds sold decreased 35 basis
points. The rate earned on taxable securities decreased 39 basis points. Both
rate drops were due primarily to the general decline in rates in the
marketplace on a year to year basis. Offsetting the decrease in the rate
earned on taxable securities was the increase of $46,562 in average volume.
This increase was due to the purchase in the last quarter of 1998 of an
agency-backed CMO and a FNMA discount note. The yield earned on nontaxable
securities increased 21 basis points and the average volume decreased 5%. The
rate earned on loans decreased 21 basis points, offset by the increase in
average loan volume of $42,128. The increase in average loans was primarily
due to the increase in commercial loans which increased 33%, or $37,850.
Consumer loans increased 11%, or $7,045. Real estate loans, however,
decreased 1%, or $2,767. Rates generally dropped in all categories of loans,
with the largest decrease on a quarter-to-quarter basis being commercial and
consumer. A large portion of those loans are tied to prime which dropped 50
basis points from the first quarter of 1998.
The average cost of interest-bearing liabilities decreased 30 basis
points to 3.98% from 4.28% paid in the first three months of 1998. The
average rate paid on interest-bearing demand deposits decreased 11 basis
points
9
<PAGE>
while rates paid on savings deposits decreased 27 basis points and rates paid
on money market deposits decreased 12 basis points. These drops were made as
a result of management's decision to lower rates on certain products as
general market rates declined. The largest decrease was in rates paid on
other time deposits, which decreased 39 basis points. Average volume on
interest-bearing demand deposits increased $3,878 and the average volume in
savings deposits increased slightly, or less than 1%. Money market deposits
increased $4,791. Other time deposits remained relatively stable, increasing
$748. In the first quarter of 1998, coinciding with the opening of a new
branch, a 14-month higher rate time deposit was offered. This promotion
brought in approximately $39 million in new deposits. These deposits began
maturing in the first quarter of 1999 and run-off to date has approximated $7
million. Pinnacle anticipates that the average balance in time deposits,
particularly this category, will continue to decrease in the second quarter
of 1999, those reducing the average balance in this category.
Rates paid on short-term borrowings decreased 118 basis points,
while the average balance increased $52,506. The increase in the average
balance related to a repurchase agreement used to fund the purchase of a FNMA
discount note in the last quarter of 1998, as well as funding the significant
growth in the loan portfolio. The average rate paid on Pinnacle's notes
payable decreased 147 basis points due to the decrease in the underlying
rates to which the notes payable were tied. The average balance increased
$3,619.
A detailed Analysis of Net Interest Income for the three month
periods ended March 31, 1999 and 1998 is included on Page 16.
PROVISION FOR LOAN LOSSES
Management records a provision for loan losses in an amount
sufficient to maintain the allowance for loan losses at a level commensurate
with the risks in the loan portfolio. The allowance for loan losses is
adjusted through charges to current income based on factors such as past loan
loss experience, management's evaluation of known potential losses in the
loan portfolio, and prevailing economic conditions.
There was no provision for loan losses in the first three months of
1999, as well as no provision for the first three months of 1998. Pinnacle
had net recoveries of $244 in the first three months of 1999 compared to net
charge-offs of $382 in 1998. Pinnacle did not record a provision for loan
losses due to several factors, including the level of allowance for possible
loan losses to total loans; management's assessment of the overall adequacy
of the allowance for loan losses as well as the high level of real estate
secured loans within the portfolio. Insignificant losses have been recorded
on real estate secured loans in the last three years.
Total nonperforming assets totaled $4,962, down $972 from a total of
$5,934 at December 31, 1998. Nonperforming assets consisted of $2,019 in
nonaccrual loans, $2,163 in loans past due greater than 90 days and still
accruing, $482 in restructured loans, and $298 in other real estate owned.
The investment in impaired loans at quarter end includes all nonaccrual loans
over $100 and restructured loans. All are included in the above
non-performing asset numbers.
Pinnacle maintains a system of review of the credit quality of the
loan portfolio, including the use of an independent credit review system as
well as an internal "Watch List" to identify potential problem loans.
Currently, there are approximately $4,491 in potential problem loans which
are identified through that review process that are not considered
nonperforming and are not included in totals above.
NON-INTEREST INCOME AND EXPENSE
The major components of Pinnacle's non-interest income consist of
service charges on deposit accounts and other banking income, trust fees and
net gains or losses on the sale of securities. Fees on banking services and
other income decreased $293, primarily due to decreased service charge
income. Trust fees increased 1% on a period-to-period basis. Total trust
assets under management amounted to $371,000, or a 12% increase of a year ago.
Net gains on the sale of securities, on a pre-tax basis, were $2,582
in the first three months of 1999 compared to net gains of $2,897, in the
same period of 1998. Sales of Pinnacle's U. S. Government securities
portfolio accounted for $814 of the total gain and $1,768 related to sales in
the equity investment portfolio.
10
<PAGE>
Security sales relating to Pinnacle's U. S. Government securities
portfolio are made as part of Pinnacle's disciplined portfolio funds
management system. The timing of these sales and the determination of the
acceptable maturity for the reinvestment of the proceeds is made dependent on
the slope of the yield curve and management's assessment of the acceptable
interest rate risk for Pinnacle.
Management has always viewed the gains recorded on this program as
closely related to its net interest income as opposed to one-time security
gains or losses. Accordingly, since implementation of the program, the yield
on Pinnacle's U. S. Government portfolio has outperformed the U. S. Treasury
yield by 24 basis points and by including the net gains since inception of
the program, the total yield is 118 basis points higher than the same Index.
Management continues to enhance the yield of the portfolio with interest
income received through the use of a master repurchase agreement where
approximately $50 million of the term portfolio was loaned to an unaffiliated
broker and collateralized in return by similar securities.
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.
Non-interest expense increased 18% for the first three months of 1999
compared to the same period last year, with expenses related to the pending
merger contributing significantly to the increase. Employee compensation and
benefits increased 9% with the majority of the increase resulting from normal
raises as well as a higher number of lending personnel at certain of
Pinnacle's banking centers. Occupancy expense increased 21%, primarily due to
the opening of two new banking centers and a new operations center in the
first and second quarter of 1998. Other operating expenses increased 34%,
with all, or $880, of the increase relating to merger expenses, including
investment banker fees and accounting and legal related services. Absent the
effect of these expenses, other operating expenses would have declined 2%.
INCOME TAXES
Pinnacle's Federal income tax return is prepared on a consolidated
basis including the accounts of its subsidiary banks. The provision for
income taxes was $2,476 for the first three months of 1999 compared with
$1,918 for the first three months of 1998. An additional valuation allowance
was established against certain deferred state tax assets. In reviewing
Pinnacle's tax situation as it relates to its $38 million state tax
carryforward and the pending merger, it was determined that valuation
allowance was necessary for $617 of the carryforward which had been
recognized and recorded as a deferred tax asset in 1994. This valuation
reserve, along with any other tax valuation reserve, is continually reviewed
by management to determine if the realization potential of certain tax assets
are more likely than not.
CASH EARNINGS PER SHARE
All of Pinnacle's acquisitions have been made with both the issuance
of stock and cash or cash only and, as a result, the purchase method of
accounting was utilized. This method creates goodwill or the difference
between the fair value of assets purchased and the historical cost of those
assets. Goodwill is being amortized as a non-cash reduction of net income
over time periods from 10 to 20 years. If pooling of interest method of
accounting had been used, no goodwill would have been created and no
reduction in net income would have been made for the amortization. The
following outlines Pinnacle's cash earnings, earnings per share and related
ratios for the quarter ended March 31, 1999 and 1998:
11
<PAGE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income............................... $ 2,021 $ 3,850
Goodwill amortization.................... 603 604
---------- ----------
Cash net income.......................... $ 2,624 $ 4,454
---------- ----------
---------- ----------
Cash EPS - diluted....................... $ 0.35 $ 0.59
CASH ROA:
Average assets........................... $1,086,902 $1,002,752
Average goodwill......................... 20,414 22,794
---------- ----------
Average tangible assets.................. $1,066,488 $ 979,958
---------- ----------
---------- ----------
Cash ROA................................. 0.98% 1.82%
CASH ROE:
Average equity........................... $ 104,657 $ 99,149
Average goodwill......................... 20,414 22,794
---------- ----------
Average tangible equity.................. $ 84,243 $ 76,355
---------- ----------
---------- ----------
Cash ROE................................. 12.5% 23.3%
</TABLE>
BALANCE SHEET
Total consolidated assets were $1,044,645 at March 31, 1999, or a 9%
drop from year-end 1998.
Total securities were $410,987 at March 31, 1999 and consisted of U.
S. Government securities amounting to $306,207, mortgage-backed securities
and CMO's of $39,946, state and municipal bonds of $19,419, and corporate and
other securities of $45,415. The total securities outstanding at March 31,
1999, was down 21% from year-end 1998. Included in year-end 1998 balances was
a FNMA discount note which was purchased in the fourth quarter of 1998
leveraged with a repurchase agreement. Both instruments matured in February,
1999.
U. S. Government securities amounted to $306,207, or 29% of assets at
March 31, 1999. The average maturity of these securities was approximately 32
months. Certain U. S. Government securities are part of Pinnacle's term
taxable securities strategy which has been designed to manage Pinnacle's
interest rate risk and to take advantage of the slope in the yield curve. The
decision to undertake intermittent sales of these securities is based on
management's assessment of economic conditions. For example, management will
undertake sales of securities based on the slope of the yield curve and its
determination that the reinvestment of the proceeds into a longer or shorter
term security is an acceptable alternative given management's assessment of
interest rate risk. At March 31, 1999, U. S. Government securities had gross
unrealized gains of $3,104 and gross unrealized losses of $(510).
Other securities held by Pinnacle, amounting to $104,780 at March 31,
1999, consisted of mortgage-backed, CMO's, state and municipal, and corporate
and equity securities. At quarter end, these securities had gross unrealized
gains of $7,588 and gross unrealized losses of $(2,506) on a pre-tax basis.
At quarter end, the equity portfolio of the parent company had appreciation
of $3,102. Currently, Pinnacle is not using derivative products for hedging
or other purposes.
12
<PAGE>
Loans are Pinnacle's most significant balance sheet asset. Total
loans amounted to $550,938 at March 31, 1999, up 2% from year-end 1998. Total
loans increased $9,582, with the majority of the growth in the commercial
loan portfolio which increased $10 million. At March 31, 1999, 28% of the
loans were commercial, real estate loans amounted to 59%, and installment
loans were 13% of the portfolio. Pinnacle's loan to asset ratio was 53% at
March 31, 1999.
Goodwill and other intangibles amounted to $20,057, or 18% of
stockholders' equity, at March 31, 1999.
Total deposits were $872,008 at March 31, 1999, or 1% lower than
year-end 1998. The decrease in deposits was primarily in other time deposits
of $8,060. In the first quarter of 1998, Pinnacle promoted a 14-month time
deposit as part of its marketing plan and coinciding with the opening of a
new branch. These time deposits began maturing in the first quarter of 1999.
To date, the decrease in this category of other time deposits has been
approximately $7 million. At March 31, 1999, the percentage of total deposits
for each category were: Noninterest-bearing deposits, 13%; interest-bearing
demand deposits, 11%; savings accounts (including money market accounts),
33%; and other time deposits, 43%.
CAPITAL RESOURCES
Total stockholders' equity of Pinnacle was $108,928 at March 31, 1999
and $117,376 at December 31, 1998. The ratio of equity to assets was 10.4%
and 10.2% at each period end, respectively.
The Federal Reserve Board ("Board") regulations prescribe capital
requirements for bank holding companies. Pinnacle must have a Leverage
Capital Ratio with a minimum level of Tier One capital to total assets of
3.00%. Tier One capital consists of common stock, additional paid-in capital,
retained earnings and is exclusive of Pinnacle's allowance for loan losses,
goodwill and other intangibles, and unrealized gains (losses) on securities
available for sale. In addition, the Board has issued Risk-Based Capital
Guidelines with a minimum standard of total regulatory capital to risk
weighted assets of 8.00%. The structure of Pinnacle's balance sheet results
in a Risk-Based Capital Ratio significantly in excess of the guidelines.
The following table provides an analysis of the minimum capital
requirements (as defined), ratios and the excess over the minimum which
Pinnacle holds as capital as of March 31, 1999 (in thousands, except
percentages).
<TABLE>
<CAPTION>
MINIMUM MINIMUM EXCESS
REQUIRED REQUIRED ACTUAL ACTUAL OVER
RATIO AMOUNT RATIO AMOUNT MINIMUM
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Leverage Capital 4.00% $40,984 8.18% $83,835 $42,851
Risk-based Capital:
Tier One 4.00 22,057 15.20 83,835 61,778
Total (Tier Two) 8.00 44,114 16.45 90,731 46,617
</TABLE>
At December 31, 1998, Pinnacle's total risk-based capital ratio was
16.36%.
In addition, each of Pinnacle's subsidiary banks must meet similar
minimum capital requirements as prescribed by Federal and state banking
regulatory authorities. At March 31, 1999, Pinnacle and each of its
subsidiary banks were in compliance with the current capital guidelines and
are considered "well-capitalized" under regulatory standards.
Book value per share was $14.72 at March 31, 1999 compared to $15.73
at December 31, 1998. Dividends amounting to $0.25 per share were paid in the
first three months of 1999. Tangible book value (stockholders' equity less
goodwill) was $12.01 at March 31, 1999 compared to $12.97 at December 31,
1998.
13
<PAGE>
LIQUIDITY AND MARKET RISK
As is characteristic of the banking industry, Pinnacle's indicators
of liquidity are principally its deposit base, loan and investment
portfolios. On a short term basis, adjustments are made in these categories
based on deposit fluctuations and loan demand. Longer term, liquidity is
determined by growth objectives, rate pricing policies and the ability to
borrow debt or raise equity. In general, Pinnacle is able to meet deposit
withdrawals and to fund loan demand through earnings and the maturity or sale
of securities. Pinnacle would also be able to respond to short term cash flow
needs through short term borrowings. On a longer term basis, Pinnacle has the
ability to incur debt or to raise equity through the sale of preferred or
common stock.
Pinnacle's cash flows are comprised of three general types. Cash
flows from operating activities are primarily Pinnacle's net income. Cash
flows from investing activities consist of loans made to and collected from
customers; and purchases, sales and maturities of securities available for
sale. Cash flows from financing activities are determined by Pinnacle's
deposit base and from Pinnacle's ability to borrow and repay debt and issue
or repurchase stock. For the three months ended March 31, 1999, cash flows
were generated from a $102,059 decrease in securities and a $3,500 increase
in notes payable. Cash flow uses and needs included a net increase in loans
of $9,314; a net decrease in deposits of $11,799; a decrease in short-term
borrowings of $82,620; $1,865 to pay dividends; and $954 net fixed asset
expenditures. Pinnacle's net cash position decreased $5,909 with Federal
funds decreasing $500 and cash and due from banks decreasing $5,409.
Pinnacle's subsidiary banks have a relatively stable base of deposits
and flexible short-term borrowing arrangements and any increased loan demand
can be sufficiently funded without a material change in its balance sheet.
Reductions of debt would be made from Pinnacle's earnings or sale of equity
investment securities.
Market risk at Pinnacle consists primarily of interest rate risk and,
to some extent, market price risk. No significant changes have occurred at
Pinnacle in the interest rate or market price risk, except as noted in the
decrease in the unrealized gain on available-for-sale securities from
year-end 1998.
At March 31, 1999, Pinnacle had a line of credit of $35,000 with an
unaffiliated bank from which $24,250 had been drawn. The outstanding balance
relates to acquisitions, equity purchases and other corporate needs, and is
secured by the stock of Pinnacle's subsidiary banks.
Regulatory requirements exist which influence Pinnacle's liquidity
and cash flow needs. These requirements include the maintenance of
satisfactory capital ratios on a consolidated and subsidiary bank basis,
restrictions on the amount of dividends which a subsidiary bank may pay and
reserve requirements with the Federal Reserve Bank. Based on these
restrictions, at April 1, 1999, bank subsidiaries could have declared
approximately $1,894 in dividends without requesting approval of the
applicable Federal or State regulatory agency. In addition, Pinnacle has made
loan commitments which could result in increased cash flow requirements for
loans. Management is of the opinion that these regulatory requirements and
loan commitments will not have a significant impact on the liquidity of
Pinnacle. Management is not aware of any known trends, events or
uncertainties that will have, or that are reasonably likely to have, a
material effect on Pinnacle except the merger with Old Kent.
YEAR 2000
The paragraphs of this section constitute a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure
Act (Pub. L. No. 105-271). Pinnacle faces risks associated with the Year 2000
date change as it relates to the readiness of its major data processing
provider, other critical vendor suppliers, and its large commercial customers.
Pinnacle's Year 2000 task force has continued its oversight utilizing
an approach outlined by the Federal Financial Institution Examination Council
(FFIEC), supplemented by correspondence guidance from its primary regulators
and internal auditors. Pinnacle continues to meet all deadlines recommended
by the FFIEC. Proxy testing has been performed by Pinnacle's major data
processor and Pinnacle has participated directly in certain of the proxy
tests. No problems were noted in the proxy testing which could significantly
disrupt processing for customers and backroom operations at Pinnacle.
14
<PAGE>
Contingency planning and testing continues for any issues noted with
significant vendors. Pinnacle cannot guarantee that computer failure of
certain vendors (utilities and phone companies) would not disrupt Pinnacle's
operations. The severity of the disruption would depend on the nature and
duration of that vendor's failure. Costs cannot be estimated at this time on
what the effect on the financial position of Pinnacle would be if there were
a significant utility disruption or failure.
Pinnacle continues to assess its large commercial customers as to
their Year 2000 readiness. It is unknown what impact a high risk customer's
inability to repay its bank obligations will have on the adequacy of
Pinnacle's allowance for loan losses or its financial position. Liquidity
availability and requirements are being assessed and monitored on an ongoing
basis in keeping with the safe and sound management of the subsidiary banks.
If the merger of Pinnacle and Old Kent is completed in the expected
time frame, Pinnacle's data processing will be converted to the Old Kent
system prior to year-end 1999. According to disclosure by Old Kent, as of
December 31, 1998, Old Kent was fully compliant on all mission critical
computer systems and 75% compliant on non-critical applications. Old Kent
management expects to be fully compliant on non-critical applications by
mid-year 1999. Pinnacle will work with Old Kent to integrate their Year 2000
programs and believes both Pinnacle and Old Kent are taking reasonable steps
to address and remediate Year 2000 issues. However, neither Pinnacle nor Old
Kent can make any representation that all of its systems, especially those of
significant third parties, will be Year 2000 compliant or that it will not be
adversely affected by Year 2000 issues.
FORWARD-LOOKING INFORMATION
Statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations relate to Pinnacle's
expectations as to future events regarding such items as the adequacy of the
allowance for loan losses, changes in economic conditions including interest
rates, management's ability to manage interest rate, liquidity and credit
risks, impact on operations and credit losses as it relates to the Year 2000
issue and issues relating to the merger into Old Kent. Such statements are
not statements of historical fact, but are forward-looking statements.
Assessments concerning Year 2000 readiness are based, in part, on information
provided by vendors and others and have not necessarily been independently
verified. Pinnacle believes the assumptions on which these forward-looking
statements are founded are reasonable, based on management's knowledge of its
business and operations. There is no assurance the assumptions will prove to
have been correct.
15
<PAGE>
ANALYSIS OF NET INTEREST INCOME
PINNACLE BANC GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
(DOLLARS IN THOUSANDS) MARCH 31, 1999 MARCH 31, 1998
------------------------------- ------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing deposits and
Federal funds sold . . . . . . . . . . . . . $ 248 $ 3 4.84% $ 4,086 $ 52 5.19%
Taxable securities . . . . . . . . . . . . . . 437,342 5,850 5.35 390,780 5,607 5.74
Nontaxable securities . . . . . . . . . . . . . 16,941 526 12.42 17,858 545 12.21
Loans . . . . . . . . . . . . . . . . . . . . 547,540 10,920 7.98 505,412 10,354 8.19
------------------------------- ------------------------------------
Total interest-earning assets . . . . . . . 1,002,071 17,299 6.91 918,136 16,558 7.21
Noninterest-earning assets:
Cash and due from banks . . . . . . . . . . . 27,360 26,840
Allowance for loan losses . . . . . . . . . . (7,104) (7,506)
Other assets . . . . . . . . . . . . . . . . . 64,575 65,282
----------- -------------
Total assets . . . . . . . . . . . . . . . . $ 1,086,902 $ 1,002,752
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits . . . . . . . $ 96,699 $ 430 1.78% $ 92,821 $ 438 1.89%
Savings deposits . . . . . . . . . . . . . . . 239,677 1,564 2.61 237,420 1,708 2.88
Money market deposits . . . . . . . . . . . . 47,879 399 3.33 43,088 372 3.45
Other time deposits . . . . . . . . . . . . . 380,254 4,956 5.21 379,506 5,313 5.60
Short-term borrowings . . . . . . . . . . . . 70,820 882 4.98 18,314 282 6.16
Notes payable . . . . . . . . . . . . . . . . 22,880 314 5.49 19,261 335 6.96
------------------------------- ------------------------------------
Total interest-bearing liabilities . . . . 858,209 8,545 3.98 790,410 8,448 4.28
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . 113,508 103,618
Other liabilities . . . . . . . . . . . . . . 10,528 9,575
Stockholders' equity . . . . . . . . . . . . . 104,657 99,149
----------- -------------
Total liabilities and
stockholders' equity . . . . . . . . . . $ 1,086,902 $ 1,002,752
----------- -------------
----------- -------------
Net interest income and margin . . . . . . . . . . . $ 8,754 3.49% $ 8,110 3.53%
-------------------- -------------------
-------------------- -------------------
</TABLE>
Interest income is adjusted to taxable equivalents for the tax-exempt assets
based upon a Federal income tax rate of 34% for 1999 and 1998. The fully taxable
equivalent adjustment to interest income for the three months ended March 31,
1999 and 1998 were $190 and $198, respectively. The average balance on
nonaccrual loans is included in the total loans category. The average balances
do not include the effect of SFAS No. 115.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-Q.
<TABLE>
<CAPTION>
Exhibit / Description No.
Under Item 601 of Exhibit
Regulation S-K Description
------------------------- ---------------------------------------
<S> <C>
20 Report furnished to securities holders.
First Quarter Report.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be singed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE BANC GROUP, INC.
Dated: May 3, 1999 By: /s/ John J. Gleason, Jr.
------------------------
John J. Gleason, Jr.
Director, Vice Chairman and
Chief Executive Officer
By: /s/ Sara J. Mikuta
-------------------
Sara J. Mikuta
Chief Financial Officer
and Treasurer
18
<PAGE>
---------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
EXHIBITS
TO
FORM 10-Q
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 20. REPORT FURNISHED TO SECURITIES HOLDERS.
<PAGE>
May 12, 1999
Dear Shareholder:
Pinnacle Banc Group, Inc. reported net income of $2,021,000, or $0.27 per
diluted share for the first quarter of 1999, compared to net income of
$3,850,000, or $0.51 per share earned in the first quarter of 1998, a per
share decrease of 47%. The decrease in earnings was primarily the result of
expenses related to Pinnacle's pending merger. On March 19, 1999, Pinnacle
announced a definitive agreement for the merger of Pinnacle into Old Kent
Financial Corporation.
Total assets at March 31, 1999 were $1.045 billion, up 1% from the same
quarter end of one year ago. Total loans amounted to $551 million, an 8%
increase, and total deposits were $872 million, approximately the same level
as one year earlier. Stockholders' equity was $109 million at March 31.
Excluding the effect of expenses related to the merger announcement, earnings
for the first quarter of 1999 were approximately the same as the comparable
quarter of the previous year. Net interest income increased 8% as the result
of a 9% increase in average earning assets, which was partially offset by a 4
basis point decline in the net interest margin to 3.49% for the first three
months of 1999. Other operating income declined 7% with a lower level of fees
on banking services contributing to the decrease. Other operating expense
increased 18% as a result of the effect of expenses related to the proposed
merger which included legal, accounting and investment banking fees. Without
these items, other expense increased approximately 6%. Pinnacle's tax
provision for the quarter was significantly higher than the comparable period
of the previous year. Pinnacle established a valuation allowance associated
with certain deferred state tax assets which may not be realized.
Net gains recorded on the sale of securities were $2,582,000 in the first
quarter of 1999, down 11% from the same period of 1998. The net gains
recorded included $1.8 million of gains recorded on the sale of equity
securities as part of Pinnacle's equity investment program in other financial
institutions, and $800,000 in gains booked on the sale of U.S. Treasury
securities as part of Pinnacle's term portfolio program. At March 31, 1999,
Pinnacle had $3.1 million in unrealized appreciation in the equity portfolio
and $2.6 million of unrealized appreciation in the term portfolio.
Non-performing assets totaled $4,962,000 at March 31, 1999, a decrease of
$972,000, or 16% from the amount at the previous year end. The allowance for
loan losses was $7,179,000, or 1.30% of loans at quarter end. Non-performing
assets at March 31, 1999 were 0.90% of total loans plus other real estate
owned, and amounted to 0.47% of total assets.
The definitive agreement for the merger of Pinnacle into Old Kent calls for
the shareholders of Pinnacle to receive a fixed exchange ratio of 0.717
shares of Old Kent common stock for each Pinnacle share held. The merger is
subject to the customary approvals by Pinnacle shareholders and by regulatory
authorities. The transaction is expected to be consummated in the third
quarter of 1999.
At the Board of Directors' meeting on April 20, 1999, the Board declared a
dividend of $0.25 per share payable on May 13 to shareholders of record as of
May 3.
Very truly yours,
/s/ JOHN J. GLEASON, JR.
John J. Gleason, Jr.
Vice Chairman and
Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
PINNACLE BANC GROUP, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
QUARTER ENDED MARCH 31
--------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 % CHANGE
---------- ---------- ---------
<S> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 8,564 $ 7,912 8%
Provision for loan losses 0 0 0
Net securities gains 2,582 2,897 (11)
Non-interest income 1,984 2,273 (13)
Non-interest expense 8,633 7,314 18
Provision for income taxes 2,476 1,918 29
Net income 2,021 3,850 (48)
BALANCE SHEET (END OF PERIOD)
Total assets $1,044,645 $1,032,834 1
Loans 550,938 508,083 8
Portfolio funds 411,063 441,556 (7)
Deposits 872,007 871,448 0
Debt 24,250 21,775 11
Stockholders' equity 108,928 116,794 (7)
PER SHARE DATA
Earnings per share - diluted $ 0.27 $ 0.51 (47)
Book value 14.72 15.56 (5)
Dividends 0.25 0.23 9
Cash earnings per share 0.35 0.59 (41)
Tangible book value 12.01 12.56 (4)
RATIOS
Return on average equity 7.7% 15.5%
Return on average assets 0.74 1.54
Net interest margin 3.49 3.53
Non-performing assets / total assets 0.47 0.69
MARKET DATA
Stock price range (DURING THE QUARTER) :
High $ 29.94 $ 35.50
Low 26.75 26.25
Close 29.25 34.31 (15)
Annual dividend rate 1.00 0.92 9
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,513
<INT-BEARING-DEPOSITS> 76
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 410,987
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 410,987
<LOANS> 550,938
<ALLOWANCE> 7,179
<TOTAL-ASSETS> 1,044,645
<DEPOSITS> 872,008
<SHORT-TERM> 28,625
<LIABILITIES-OTHER> 10,834
<LONG-TERM> 24,250
0
0
<COMMON> 23,123
<OTHER-SE> 85,805
<TOTAL-LIABILITIES-AND-EQUITY> 1,044,645
<INTEREST-LOAN> 10,910
<INTEREST-INVEST> 6,196
<INTEREST-OTHER> 3
<INTEREST-TOTAL> 17,109
<INTEREST-DEPOSIT> 7,348
<INTEREST-EXPENSE> 8,545
<INTEREST-INCOME-NET> 8,564
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,582
<EXPENSE-OTHER> 8,633
<INCOME-PRETAX> 4,497
<INCOME-PRE-EXTRAORDINARY> 2,021
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,021
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 3.49
<LOANS-NON> 2,019
<LOANS-PAST> 2,163
<LOANS-TROUBLED> 482
<LOANS-PROBLEM> 4,491
<ALLOWANCE-OPEN> 6,935
<CHARGE-OFFS> 76
<RECOVERIES> 320
<ALLOWANCE-CLOSE> 7,179
<ALLOWANCE-DOMESTIC> 2,934
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,245
</TABLE>
