Edgar Filing: PINNACLE BANKSHARES CORP

For the quarterly period ended September 30, 2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to

Commission File Number: 000-23909

PINNACLE BANKSHARES CORPORATION

(Exact name of small business issuer as specified in its charter)

VIRGINIA

54-1832714

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

622 Broad Street

Altavista, Virginia 24517

(Address of principal executive offices)

(434) 369-3000

(Issuer’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨

At October 12, 2004, 1,457,406 shares of Pinnacle Bankshares Corporation’s common stock, $3 par value, were outstanding.

Transitional small business disclosure format: Yes ¨ No x.

PINNACLE BANKSHARES CORPORATION

FORM 10-QSB

September 30, 2004

INDEX


			Page Number
Part I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003		3

	Consolidated Statements of Income for the three months ended September 30, 2004 and 2003		4

	Consolidated Statements of Income for the nine months ended September 30, 2004 and 2003		5

	Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2004		6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003		7

	Notes to Consolidated Financial Statements		8-13

	Item 2.	Management’s Discussion and Analysis or Plan of Operation	14-20

	Item 3.	Controls and Procedures	21

Part II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	22

	Item 6.	Exhibits	22

SIGNATURES			23

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars)


	September 30, 2004		December 31, 2003
	(Unaudited)
Assets
Cash and cash equivalents (note 2):
Cash and due from banks	$	4,737	$	3,967
Federal funds sold		5,711		9,799

Total cash and cash equivalents		10,448		13,766

Securities (note 3):
Available-for-sale, at fair value		27,415		27,289
Held-to-maturity, at amortized cost		8,539		9,819
Federal Reserve Bank stock, at cost		75		75
Federal Home Loan Bank stock, at cost		571		598
Mortgage loans held for sale (note 8)		—		53
Loans, net (note 4)		156,701		147,883
Bank premises and equipment, net		5,704		4,270
Accrued income receivable		974		908
Other assets		1,997		1,683

Total assets		212,424	$	206,344

Liabilities and Stockholders’ Equity

Liabilities:
Deposits:
Demand	$	20,073	$	16,688
Savings and NOW accounts		60,331		62,648
Time		108,911		104,529

Total deposits		189,315		183,865

Note payable to Federal Home Loan Bank		325		400
Accrued interest payable		430		407
Other liabilities		235		237

Total liabilities		190,305		184,909

Stockholders’ equity:
Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,457,406 shares in 2004 and 1,455,708 in 2003		4,372		4,372
Capital surplus		562		562
Retained earnings		16,720		15,807
Accumulated other comprehensive income		465		694

Total stockholders’ equity		22,119		21,435

Total liabilities and stockholders’ equity	$	212,424	$	206,344

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars, except for per share amounts)


	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003
Interest income:
Interest and fees on loans	$	2,290	$	2,265
Interest on securities:
U.S. Treasury		—		—
U.S. Government agencies		127		123
Corporate		128		142
States and political subdivisions (taxable)		75		71
States and political subdivisions (tax exempt)		112		117
Other		5		6
Interest on federal funds sold		24		33

Total interest income		2,761		2,757

Interest expense:
Interest on deposits:
Savings and NOW accounts		81		155
Time - under $100,000		593		661
Time - $100,000 and over		171		178
Other interest expense		7		7

Total interest expense		852		1,001

Net interest income		1,909		1,756

Provision for loan losses		40		105

Net interest income after provision for loan losses		1,869		1,651

Noninterest income:
Service charges on deposit accounts		332		311
Net realized gain on securities		30		—
Fees on sales of mortgage loans		66		172
Commissions and fees		44		56
Other operating income		120		202

Total noninterest income		592		741

Noninterest expense:
Salaries and employee benefits		992		990
Occupancy expense		91		88
Furniture and equipment		163		179
Office supplies and printing		69		51
Other operating expenses		502		452

Total noninterest expense		1,817		1,760

Income before income tax expense		644		632

Income tax expense		185		177

Net income	$	459	$	455

Net income per share (note 5):
Basic	$	0.31	$	0.31
Diluted	$	0.31	$	0.31

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars, except for per share amounts)


	Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Interest income:
Interest and fees on loans	$	6,622	$	6,713
Interest on securities:
U.S. Treasury		—		27
U.S. Government agencies		376		465
Corporate		390		412
States and political subdivisions (taxable)		231		235
States and political subdivisions (tax exempt)		338		365
Other		18		22
Interest on federal funds sold		80		117

Total interest income		8,055		8,356

Interest expense:
Interest on deposits:
Savings and NOW accounts		255		437
Time - under $100,000		1,764		2,030
Time - $100,000 and over		494		550
Other interest expense		17		21

Total interest expense		2,530		3,038

Net interest income		5,525		5,318

Provision for loan losses		203		362

Net interest income after provision for loan losses		5,322		4,956
Noninterest income:
Service charges on deposit accounts		959		990
Net realized gain on securities		30		—
Fees on sales of mortgage loans		233		431
Commissions and fees		137		141
Other operating income		368		418

Total noninterest income		1,727		1,980

Noninterest expense:
Salaries and employee benefits		2,884		2,824
Occupancy expense		259		253
Furniture and equipment		440		468
Office supplies and printing		138		139
Other operating expenses		1,376		1,411

Total noninterest expense		5,097		5,095

Income before income tax expense		1,952		1,841

Income tax expense		558		515

Net income	$	1,394	$	1,326

Net income per share (note 5):
Basic	$	0.96	$	0.91
Diluted	$	0.95	$	0.90

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2004

(Unaudited)

(In thousands, except share and per share data)


	Common Stock			Capital Surplus	Retained Earnings		Accumulated Other Comprehensive Income		Total
	Shares	Par Value		Capital Surplus	Retained Earnings		Accumulated Other Comprehensive Income		Total
Balances, December 31, 2003	1,457,406	$	4,372	562	15,807		694		21,435
Net income	—		—	—	1,394		—		1,394
Change in net unrealized gains on available-for-sale securities, net of deferred income tax benefit of $118	—		—	—	—		(229	)	(229	)
Cash dividends declared by Bankshares ($0.33 per share)	—		—	—	(481	)	—		(481	)

Balances, September 30, 2004	1,457,406	$	4,372	562	16,720		465		22,119

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)


	Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003
Cash flows from operating activities:
Net income	$	1,394		$	1,326

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of bank premises and equipment		294			286
Amortization of intangible assets		9			9
Accretion (Amortization) of unearned fees, net		40			(43	)
Net amortization of premiums and discounts on securities		(11	)		83
Realized gain on securities		30			—
Provision for loan losses		203			362
Originations of mortgage loans held for sale		(1,604	)		(8,523	)
Sales of mortgage loans held for sale		1,657			8,470
Net decrease (increase) in:
Accrued income receivable		(66	)		106
Other assets		(192	)		287
Net increase (decrease) in:
Accrued interest payable		23			117
Other liabilities		(2	)		195

Net cash provided by operating activities		1,775			2,675

Cash flows from investing activities:
Purchases of available-for-sale securities		(3,462	)		(4,330	)
Purchases of held-to-maturity securities		(301	)		—
Proceeds from maturities and calls of held-to-maturity securities		1,578			4,956
Proceeds from paydowns and maturities of held-to-maturity mortgage-backed securities		—			4
Proceeds from maturities and calls of available-for-sale securities		945			1,920
Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities		2,028			4,775
Purchase (sale) of Federal Home Loan Bank stock		27			(33	)
Collections on loan participations		1,459			1,252
Net increase in loans made to customers		(10,608	)		(16,865	)
Recoveries on loans charged off		75			118
Purchases of bank premises and equipment		(1,728	)		(563	)

Net cash used in investing activities		(9,987	)		(8,766	)

Cash flows from financing activities:
Net increase in demand, savings and NOW deposits		1,068			3,251
Net increase in time deposits		4,382			3,408
Repayments of note payable to Federal Home Loan Bank		(75	)		(75	)
Proceeds from issuance of common stock		—			71
Cash dividends paid		(481	)		(479	)

Net cash provided by financing activities		4,894			6,176

Net decrease in cash and cash equivalents		(3,318	)		85

Cash and cash equivalents, beginning of period		13,766			19,963

Cash and cash equivalents, end of period	$	10,448		$	20,048

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2004 (Unaudited)

(In thousands, except share and per share data)

(1) General

The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary, The First National Bank of Altavista (the “Bank”), (collectively the “Company”). All material intercompany accounts and transactions have been eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America and to general banking industry practices. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature, necessary to present fairly the financial position as of September 30, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003.

These interim period consolidated financial statements and financial information should be read in conjunction with the consolidated financial statements and notes thereto included in Pinnacle Bankshares Corporation’s 2003 Annual Report to Shareholders and additional information supplied in the 2003 Form 10-KSB.

The results of operations for the interim period ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.

The Company has a single reportable segment for purposes of segment reporting.

(2) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits, and federal funds sold.

(3) Securities

The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities at September 30, 2004, are shown in the table below. As of September 30, 2004, securities with amortized costs of $4,470 and fair values of $4,649 were pledged as collateral for public deposits.


Available-for-Sale:	Amortized Costs		Gross Unrealized Gains	Gross Unrealized Losses	Fair Values
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	3,607	56	—	3,663
Obligations of states and political subdivisions		7,298	285	17	7,566
Mortgage-backed securities- Government		6,672	153	17	6,808
Corporate Issues		9,084	244	—	9,328
Other securities		50	—	—	50

Totals	$	26,711	738	34	27,415


Held-to-Maturity:	Amortized Costs		Gross Unrealized Gains	Gross Unrealized Losses	Fair Values
Obligations of states and political subdivisions		8,539	368	14	8,893

Totals	$	8,539	368	14	8,893

(4) Allowance for Loan Losses

Changes in the allowance for loan losses for the nine months ended September 30, 2004 and 2003 are as follows:


	2004			2003
Balance at January 1,	$	1,528		$	1,298
Provision for loan losses		204			362
Loans charged off		(158	)		(300	)
Recoveries		75			118

Balance at September 30,	$	1,649		$	1,478

(5) Net Income Per Share

Basic net income per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods indicated:


Three Months Ended September 30, 2004	Net Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	459	1,457,406	$	0.31

Effect of dilutive stock options		—	15,857

Diluted net income per share	$	459	1,473,263	$	0.31


Three Months Ended September 30, 2003
Basic net income per share	$	455	1,456,760	$	0.31

Effect of dilutive stock options		—	14,867

Diluted net income per share	$	455	1,471,627	$	0.31


Nine Months Ended September 30, 2004	Net Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	1,394	1,457,406	$	0.96

Effect of dilutive stock options		—	15,767

Diluted net income per share	$	1,394	1,473,173	$	0.95


Nine Months Ended September 30, 2003
Basic net income per share	$	1,326	1,454,897	$	0.91

Effect of dilutive stock options		—	13,380

Diluted net income per share	$	1,326	1,468,277	$	0.90

(6) Comprehensive Income

The following table presents comprehensive income for the interim periods indicated below:


	Three Months Ended
	September 30, 2004			September 30, 2003
Net income	$	459		$	455
Change in net unrealized gains (losses) on available-for sale securities, net of deferred income taxes		220			(348	)

Total comprehensive income	$	679		$	107


	Nine Months Ended
	September 30, 2004			September 30, 2003
Net income	$	1,394		$	1,326
Change in net unrealized gains (losses) on available-for sale securities, net of deferred income taxes		(229	)		(132	)

Total comprehensive income	$	1,165		$	1,194

7) Stock Options

The Company has two incentive stock option plans. The 1997 Incentive Stock Plan (the “1997 Plan”), pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees, was effective as of May 1, 1997. The 1997 Plan authorizes grants of options to purchase up to 50,000 shares of the Company’s authorized, but unissued common stock. Accordingly, 50,000 shares of authorized, but unissued common stock are reserved for use in the 1997 Plan. All stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. At September 30, 2004, there were 5,000 shares available for grant under the 1997 Plan.

The 2004 Incentive Stock Plan (the “2004 Plan”), pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees, was approved by shareholders on April 13, 2004 and

became effective as of May 1, 2004. The 2004 Plan authorizes grants of options to purchase up to 100,000 shares of the Company’s authorized, but unissued common stock. Accordingly, 100,000 shares of authorized, but unissued common stock are reserved for use in the 2004 Plan. All stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant.

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.

No compensation cost has been recognized for the Company’s stock options in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company’s net income, basic net income per share and diluted net income per share would have decreased to the pro forma amounts for the interim periods indicated below:


	Three Months Ended
	September 30, 2004			September 30, 2003
Net income, as reported	$	459		$	455
Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects		(2	)		(2	)

Pro forma net income	$	457		$	453

Basic net income per share:
As reported	$	0.31		$	0.31
Pro forma		0.31			0.31
Diluted net income per share:
As reported	$	0.31		$	0.31
Pro forma		0.31			0.31


	Nine Months Ended
	September 30, 2004			September 30, 2003
Net income, as reported	$	1,394		$	1,326
Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects		(6	)		(6	)

Pro forma net income	$	1,388		$	1,320

Basic net income per share:
As reported	$	0.96		$	0.91
Pro forma		0.96			0.91

Diluted net income per share:
As reported	$	0.95		$	0.90
Pro forma		0.95			0.90

(9) Subsequent Declaration of Cash Dividend

On October 12, 2004 the Board of Directors declared a quarterly cash dividend in the amount of $0.12 per common share payable to shareholders of record as of October 22, 2004.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (Amounts in 000’s)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The following discussion is qualified in its entirety by the more detailed information and the unaudited consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-QSB. In addition to the historical information contained herein, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will” or similar expressions. Although we believe our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results, performance or achievements could differ materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements contained herein, and you should not place undue reliance on such statements, which reflect our position as of the date of this report.

THE COMPANY

Pinnacle Bankshares Corporation, a Virginia corporation (“Bankshares”), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares is headquartered in Altavista, Virginia, and conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, The First National Bank of Altavista (the “Bank”). Bankshares exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish.

The following discussion supplements and provides information about the major components of the results of operations and financial

condition, liquidity and capital resources of Bankshares and its subsidiary (collectively the “Company”). This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes.

OVERVIEW

Total assets at September 30, 2004 were $212,424, up 2.95% from $206,344 at December 31, 2003. The principal components of the Company’s assets at the end of the period were $35,954 in securities and $156,701 in net loans. During the nine months ended September 30, 2004, net loans increased 5.96% or $8,818 from $147,883 at December 31, 2003. The Company’s lending activities are a principal source of its income. Also during the nine months, securities decreased 3.11% or $1,154 from December 31, 2003.

Total liabilities at September 30, 2004 were $190,305, up 2.92% from $184,909 at December 31, 2003, primarily as a result of an increase in demand deposits from December 31, 2003 of $3,385 or 20.28% and an increase in time deposits from December 31, 2003 of $4,382 or 4.19%. Savings and NOW accounts decreased by $2,317 or 3.70% from December 31, 2003 to September 30, 2004. The Company’s deposits are provided by individuals and businesses located within the communities the Company serves.

Total stockholders’ equity at September 30, 2004 was $22,119, including $16,720 in retained earnings and $465 of accumulated other comprehensive income, which represents net unrealized gains on available-for-sale securities. At December 31, 2003, total stockholders’ equity was $21,435.

The Company had net income of $1,394 for the nine months ended September 30, 2004, compared with net income of $1,326 for the comparable period in 2003, an increase of 5.13%. The Company had net income of $459 for the three months ended September 30, 2004, compared with net income of $455 for the comparable period in 2003, an increase of 0.88%. The increase in net income for the nine month period was primarily attributable to higher other operating expenses incurred in 2003 than in 2004 and a decrease in the provision for loan losses of $159. Net income for the third quarter of 2004 when compared to the third quarter of 2003 was affected by an 8.71% increase in net interest income, a 61.90% decrease in provision for loan losses, a 20.11% decrease in non-interest income and a 3.24% increase in non-interest expense. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.

Profitability as measured by the Company’s return on average assets (ROA) was 0.88% for the nine months ended September 30, 2004,

compared to 0.87% for the same period of 2003. Another key indicator of performance, the return on average equity (ROE) for the nine months ended September 30, 2004 was 8.55%, compared to 8.48% for the nine months ended September 30, 2003.

NET INTEREST INCOME

Net interest income represents the principal source of earnings for the Company. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities and borrowings, as well as their respective rates and yields, have a significant impact on the level of net interest income.

Net interest income was $5,525 for the nine months ended September 30, 2004 and is attributable to interest income from loans and securities exceeding the cost associated with interest incurred on deposits. Net interest income was $1,909 for the three months ended September 30, 2004. The net interest margin increased to 3.85% for the nine months ended September 30, 2004, from 3.83% for the nine months ended September 30, 2003. The slight increase in net interest margin is due primarily to the upward repricing of the adjustable rate credits in the bank’s loan portfolio due to three prime rate increases in the third quarter of 2004 totaling 0.75%. Deposit interest rates in the third quarter were also repriced. However the rate increases in the loan portfolio exceeded the rate increases in the deposit portfolio; hence, the increase in the margin. Should interest rates continue to rise in the remainder of 2004, management expects the net interest margin to continue to improve due to the level of adjustable rate credits in the bank’s loan portfolio.

Interest income on loans and securities decreased 3.60% for the nine months ended September 30, 2004 and increased 0.15% three months ended September 30, 2004 compared to the same periods of 2003 due to the loans repricing and being originated at lower interest rates in the first and second quarter of 2004 and higher yielding securities maturing and being replaced by lower yielding ones in 2004 as a result of the overall lower interest rate environment. When comparing the third quarter of 2004 with the third quarter of 2003, interest income on loans and securities showed little change.

Interest and fees from loans was $6,622 for the nine months ended September 30, 2004, down from $6,713 at September 30, 2003. Interest and fees from loans was $2,290 for the three months ended September 30, 2004, up from $2,265 at September 30, 2003. Interest from securities and fed funds sold was $1,433 for the nine months ended September 30, 2004, down from $1,643 at September 30, 2003. Interest from securities was $471 for the three months ended September 30, 2004, down from $492 at September 30,2003.

Interest expense decreased 16.72% and 14.89% for the nine and three months ended September 30, 2004, respectively, compared to the same periods of 2003 due to the impact of repricing of deposit liabilities at lower interest rates.

NON-INTEREST INCOME

Non-interest income decreased $253 or 12.78% for the nine months ended September 30, 2004 compared to the same period of 2003. Non-interest income decreased $149 or 20.11% when comparing the three months ended September 30, 2004 to the same period of 2003. The Company’s principal sources of non-interest income are service charges and fees on deposit accounts, particularly transaction accounts, and fees on sales of mortgage loans. The decreases from 2003 were primarily due to a 45.94% decrease in fees on sales of mortgage loans as a result of a decrease in loan production during the first nine months of 2004. Also contributing to the decrease was a 3.13% decrease in service charges on deposits. The decline in service charges is largely because overdraft privilege fees, although continuing to perform well, have not remained at the 2003 levels when the overdraft privilege program was first introduced.

NON-INTEREST EXPENSE

Non-interest expense increased $2 or 0.04%, for the nine months ended September 30, 2004 compared to the same period of 2003. Non-interest expense increased $57 or 3.24% for the three months ended September 30, 2004 compared to the same period of 2003. The slight increase in non-interest expense when comparing the nine month periods is primarily attributable to the conservative $60 increase, or 2.12% growth, in the Company’s personnel expenses, a $28 decrease in furniture and equipment expenses due to lower repair costs in 2004 and a $35 or 2.48% decrease in other operating expenses as a result of a consulting expense of $82 related to improving efficiencies within the Company and expenses and loss associated with the sale of land totaling approximately $38 incurred in the second quarter of 2003. The $57 increase for the three months ended September 30, 2004 when compared with the same period of 2003 was due mainly to a 35.29% increase in office supply expenses and a 11.06% increase in other operating expenses. The supply and other operating expenses occurred mainly due to the opening of the bank’s new branch located in Forest, Virginia on August 16, 2004.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

The provision for loan losses expense was $203 in the first nine months of 2004 in recognition of management’s estimate of risks inherent with lending activities. Among other factors, management considers the Company’s historical loss experience, the size and

composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and current and anticipated economic conditions in making its estimate of risk. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance. The allowance for loan losses was $1,649 as of September 30, 2004, representing approximately 1.04% of loans receivable. Management believes the allowance was adequate as of September 30, 2004 to provide for loan losses inherent in the Company’s loan portfolio. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision as deemed appropriate.

NON-PERFORMING ASSETS AND IMPAIRED LOANS

Non-performing assets, which consist of nonaccrual loans and foreclosed properties, were $438 at September 30, 2004 and $260 at December 31, 2003. There were no foreclosed properties as of September 30, 2004 or December 31, 2003. Nonaccrual loans were $438 at September 30, 2004 and $260 at December 31, 2003. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. Impaired loans equaled nonaccrual loans at September 30, 2004 and December 31, 2003.

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. The Company’s liquidity is provided by cash and due from banks, federal funds sold, investments available for sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Company’s ability to obtain deposits and purchase funds at favorable rates also affects it liquidity. As a result of the Company’s management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes that the Bank maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet customers’ credit needs. The Company’s ratio of liquid assets to deposits and short-term borrowings was 20.24% as of September 30, 2004 compared to 22.33% as of December 31, 2003. Additional sources of liquidity available to the Company include its capacity to borrow additional funds through correspondent banks. The Company derives cash flows from its operating, investing, and financing activities. Cash flows of the Company are primarily used to fund loans and securities and are provided by the deposits and borrowings of the Company.

CAPITAL

The Company’s financial position at September 30, 2004 reflects liquidity and capital levels currently adequate to fund anticipated future business expansion. Capital ratios are well above required regulatory minimums for a well-capitalized institution. The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s capital is reviewed by management regularly. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

Stockholders’ equity reached $22,119 at September 30, 2004 compared to $21,435 at December 31, 2003. At September 30, 2004, the Company’s leverage ratio (Tier I capital divided by quarterly average assets) was 9.94% compared to 9.79% at December 31, 2003. Each of these ratios exceeded the required minimum leverage ratio of 4%.

OFF-BALANCE SHEET ARRANGEMENTS

There were no material changes in the Company’s off-balance sheet arrangements and commitments from the information provided in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003. The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of September 30, 2004 equaled $187. Other commitments include commitments to extend credit. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of September 30, 2004, the Company had unused loan commitments of $44,033, including $38,031 in unused commitments with an original maturity exceeding one year.

CRITICAL ACCOUNTING POLICIES

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an

impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses could be required. Further information regarding the estimates used in determining the allowance for loan losses is contained in the discussions on “Allowance and Provision for Loan Losses” on page 17 herein and “Loans and Allowance for Loan Losses” on page 28 of the Company’s 2003 Annual Report to Shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

As of October 12, 2004, there are no new accounting standards that are expected to be applicable to the Company’s financial position, operating results or financial statement disclosures.

Item 3. CONTROLS AND PROCEDURES

Pursuant to provisions of the Securities Exchange Act of 1934, Robert H. Gilliam, Jr., President and Chief Executive Officer, and Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer, of the Company are responsible for establishing and maintaining disclosure controls and procedures for the Company. They have designed disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to the Company, is made known to them by others within the Company, particularly during the periods when the Company’s quarterly and annual reports are being prepared. They have evaluated the effectiveness of the Company’s disclosure controls and procedures, and based on their evaluation, concluded that the Company’s disclosure controls and procedures were operating effectively as of the end of the period covered by this report.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

The Company’s management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of the Company’s assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There was no change in the Company’s internal control over financial reporting or control of assets during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting or control over its assets.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In the normal course of business, the Company is involved in various legal proceedings. Management believes that the ultimate resolution of any current proceedings will not have a material adverse effect on the Company’s financial position, liquidity or results of operations.

Item 6. EXHIBITS


Exhibit Number		Description
3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Appendix I to registrant’s amended registration statement on Form S-4 (File No. 333-20399) filed on January 30, 1997)

3.2		Bylaws (incorporated by reference to Exhibit 3(ii) to registrant’s registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)

10.1		1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrant’s registration statement on Form S-8 filed September 14, 1998)

10.2		Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 12, 1998 (incorported by reference to Exhibit 10.2 to registrant’s annual report on Form 10-KSB filed March 25, 2003)

10.3		VBA Director’s Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (incorporated by reference to Exhibit 10.3 to registrant’s annual report on Form 10-KSB filed March 25, 2003)

10.4		Pinnacle Bankshares Corporation 2004 Incentive Stock Plan(incorporated by reference to Exhibit 10.4 to registrant’s quarterly report on Form 10-QSB filed May 10, 2004)

31.1		CEO Certification Pursuant to Rule 13a-14(a)

31.2		CFO Certification Pursuant to Rule 13a-14(a)

32.1		CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PINNACLE BANKSHARES CORPORATION
		(Registrant)

NOVEMBER 12, 2004		/s/ Robert H. Gilliam, Jr.
Date		Robert H. Gilliam, Jr., President and
		Chief Executive Officer
		(principal executive officer)

NOVEMBER 12, 2004		/s/ Bryan M. Lemley
Date		Bryan M. Lemley, Secretary,
		Treasurer and Chief Financial Officer
		(principal financial & accounting officer)

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