UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
| ¨ | 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: 000-23909
PINNACLE BANKSHARES CORPORATION
(Exact name of registrant 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)(Zip Code)
(434) 369-3000
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At April 30, 2007, 1,484,589 shares of Pinnacle Bankshares Corporation’s common stock, $3 par value, were outstanding.
PINNACLE BANKSHARES CORPORATION
FORM 10-Q
March 31, 2007
INDEX
| Page Number | ||||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7–11 | ||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11–18 | |||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
19–20 | |||
| 21 | ||||
| 22 | ||||
| 22-23 | ||||
| SIGNATURES | 24 | |||
2
PART I — FINANCIAL INFORMATION
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
| March 31, 2007 |
December 31, 2006 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Cash and cash equivalents (note 2): |
||||||||
| Cash and due from banks |
$ | 4,497 | $ | 5,948 | ||||
| Federal funds sold |
12,286 | 8,638 | ||||||
| Total cash and cash equivalents |
16,783 | 14,586 | ||||||
| Securities (note 3): |
||||||||
| Available-for-sale, at fair value |
19,043 | 19,221 | ||||||
| Held-to-maturity, at amortized cost |
5,140 | 5,645 | ||||||
| Federal Reserve Bank stock, at cost |
75 | 75 | ||||||
| Federal Home Loan Bank stock, at cost |
481 | 481 | ||||||
| Loans, net (note 4) |
217,454 | 207,861 | ||||||
| Bank premises and equipment, net |
5,251 | 5,264 | ||||||
| Accrued income receivable |
1,234 | 1,250 | ||||||
| Other assets |
1,748 | 2,038 | ||||||
| Total assets |
$ | 267,209 | $ | 256,421 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Liabilities: |
||||||||
| Deposits: |
||||||||
| Demand |
$ | 26,349 | $ | 23,631 | ||||
| Savings and NOW accounts |
73,901 | 69,798 | ||||||
| Time |
140,880 | 137,388 | ||||||
| Total deposits |
241,130 | 230,817 | ||||||
| Note payable to Federal Home Loan Bank |
75 | 100 | ||||||
| Accrued interest payable |
791 | 764 | ||||||
| Other liabilities |
223 | 248 | ||||||
| Total liabilities |
242,219 | 231,929 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,472,589 shares at March 31, 2007 and 1,459,589 at December 31, 2006 |
4,418 | 4,379 | ||||||
| Capital surplus |
699 | 605 | ||||||
| Retained earnings |
20,320 | 19,972 | ||||||
| Accumulated other comprehensive income (loss) |
(447 | ) | (464 | ) | ||||
| Total stockholders’ equity |
24,990 | 24,492 | ||||||
| Total liabilities and stockholders’ equity |
$ | 267,209 | $ | 256,421 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands of dollars, except for per share amounts)
| Three Months March 31, 2007 |
Three Months March 31, 2006 | |||||
| Interest income: |
||||||
| Interest and fees on loans |
$ | 3,947 | $ | 3,115 | ||
| Interest on securities: |
||||||
| U.S. Government agencies |
112 | 115 | ||||
| Corporate |
39 | 74 | ||||
| States and political subdivisions (taxable) |
61 | 70 | ||||
| States and political subdivisions (tax exempt) |
66 | 75 | ||||
| Other |
8 | 8 | ||||
| Interest on federal funds sold |
110 | 121 | ||||
| Total interest income |
4,343 | 3,578 | ||||
| Interest expense: |
||||||
| Interest on deposits: |
||||||
| Savings and NOW accounts |
343 | 195 | ||||
| Time—under $100,000 |
1,215 | 926 | ||||
| Time—$100,000 and over |
371 | 288 | ||||
| Other interest expense |
1 | 3 | ||||
| Total interest expense |
1,930 | 1,412 | ||||
| Net interest income |
2,413 | 2,166 | ||||
| Provision for loan losses |
73 | 65 | ||||
| Net interest income after provision for loan losses |
2,340 | 2,101 | ||||
| Noninterest income: |
||||||
| Service charges on deposit accounts |
336 | 296 | ||||
| Fees on sales of mortgage loans |
41 | 45 | ||||
| Commissions and fees |
88 | 82 | ||||
| Other operating income |
142 | 138 | ||||
| Total noninterest income |
607 | 561 | ||||
| Noninterest expense: |
||||||
| Salaries and employee benefits |
1,207 | 1,094 | ||||
| Occupancy expense |
117 | 96 | ||||
| Furniture and equipment |
239 | 189 | ||||
| Office supplies and printing |
66 | 45 | ||||
| Other operating expenses |
487 | 399 | ||||
| Total noninterest expense |
2,116 | 1,823 | ||||
| Income before income tax expense |
831 | 839 | ||||
| Income tax expense |
263 | 263 | ||||
| Net income |
$ | 568 | $ | 576 | ||
| Basic net Income per share (note 5) |
$ | 0.39 | $ | 0.39 | ||
| Diluted net income per share (note 5) |
$ | 0.38 | $ | 0.39 | ||
See accompanying notes to unaudited consolidated financial statements.
4
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2007 and 2006
(Unaudited)
(Amounts in thousands of dollars, except share and per share data)
| Common Stock | Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income (loss) |
Total | ||||||||||||||||
| Shares | Par Value | |||||||||||||||||||
| Balances, December 31, 2005 |
1,458,706 | $ | 4,376 | $ | 577 | $ | 18,362 | $ | (103 | ) | $ | 23,212 | ||||||||
| Net income |
— | — | — | 576 | — | 576 | ||||||||||||||
| Change in net unrealized losses on available-for-sale securities, net of deferred income tax benefit of $34 |
— | — | — | — | (66 | ) | (66 | ) | ||||||||||||
| Cash dividends declared by Bankshares ($0.13 per share) |
— | — | — | (190 | ) | — | (190 | ) | ||||||||||||
| Issuance of common stock |
232 | 1 | 5 | — | — | 6 | ||||||||||||||
| Accrual of stock option vesting |
— | — | 2 | — | — | 2 | ||||||||||||||
| Balances, March 31, 2006 |
1,458,938 | $ | 4,377 | $ | 584 | $ | 18,748 | $ | (169 | ) | $ | 23,540 | ||||||||
| Common Stock | Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income (loss) |
Total | ||||||||||||||||
| Shares | Par Value | |||||||||||||||||||
| Balances, December 31, 2006 |
1,459,589 | $ | 4,379 | $ | 605 | $ | 19,972 | $ | (464 | ) | $ | 24,492 | ||||||||
| Net income |
— | — | — | 568 | — | 568 | ||||||||||||||
| Change in net unrealized losses on available-for-sale securities, net of deferred income tax expense of $8 |
— | — | — | — | 17 | 17 | ||||||||||||||
| Cash dividends declared by Bankshares ($0.15 per share) |
— | — | — | (220 | ) | — | (220 | ) | ||||||||||||
| Issuance of common stock |
13,000 | 39 | 91 | — | — | 130 | ||||||||||||||
| Accrual of stock option vesting |
— | — | 3 | — | — | 3 | ||||||||||||||
| Balances, March 31, 2007 |
1,472,589 | $ | 4,418 | $ | 699 | $ | 20,320 | $ | (447 | ) | $ | 24,990 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
5
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands of dollars)
| Three Months March 31, 2007 |
Three Months March 31, 2006 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 568 | $ | 576 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation of bank premises and equipment |
99 | 104 | ||||||
| Amortization of intangible assets |
— | 3 | ||||||
| Accretion of unearned fees, net |
(2 | ) | (27 | ) | ||||
| Net amortization of premiums and discounts on securities |
8 | 1 | ||||||
| Provision for loan losses |
73 | 65 | ||||||
| Originations of mortgage loans held for sale |
(2,520 | ) | (2,033 | ) | ||||
| Sales of mortgage loans held for sale |
2,520 | 1,899 | ||||||
| Net decrease (increase) in: |
||||||||
| Accrued income receivable |
16 | 69 | ||||||
| Other assets |
300 | 125 | ||||||
| Net increase (decrease) in: |
||||||||
| Accrued interest payable |
27 | 34 | ||||||
| Other liabilities |
(25 | ) | 42 | |||||
| Net cash provided by operating activities |
1,064 | 858 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchases of available-for-sale securities |
— | (2,003 | ) | |||||
| Proceeds from maturities and calls of held-to-maturity securities |
505 | 1,140 | ||||||
| Proceeds from maturities and calls of available-for-sale securities |
— | 2,060 | ||||||
| Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities |
194 | 279 | ||||||
| Purchase of Federal Home Loan Bank stock |
— | (27 | ) | |||||
| Collections on loan participations |
168 | 92 | ||||||
| Net increase in loans made to customers |
(9,908 | ) | (5,565 | ) | ||||
| Recoveries on loans charged off |
59 | 41 | ||||||
| Purchases of bank premises and equipment |
(86 | ) | (71 | ) | ||||
| Net cash used in investing activities |
(9,068 | ) | (4,054 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net increase in demand, savings and NOW deposits |
6,821 | 4,443 | ||||||
| Net increase in time deposits |
3,492 | 351 | ||||||
| Repayments of note payable to Federal Home Loan Bank |
(25 | ) | (25 | ) | ||||
| Proceeds from issuance of common stock |
130 | 6 | ||||||
| Accrual of stock option vesting |
3 | 2 | ||||||
| Cash dividends paid |
(220 | ) | (190 | ) | ||||
| Net cash provided by financing activities |
10,201 | 4,587 | ||||||
| Net increase in cash and cash equivalents |
2,197 | 1,391 | ||||||
| Cash and cash equivalents, beginning of period |
14,586 | 13,814 | ||||||
| Cash and cash equivalents, end of period |
$ | 16,783 | $ | 15,205 | ||||
See accompanying notes to unaudited consolidated financial statements.
6
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2007(Unaudited)
(In thousands of dollars, 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 March 31, 2007 and the results of operations and cash flows for the three-month periods ended March 31, 2007 and 2006.
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 2006 Annual Report to Shareholders and additional information supplied in the 2006 Annual report on Form 10-K.
The results of operations for the interim period ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.
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 March 31, 2007 and
7
December 31, 2006, are shown in the table below. As of March 31, 2007, securities with amortized costs of $2,962 and fair values of $2,962 were pledged as collateral for public deposits.
| March 31, 2007 | |||||||||||
| Available-for-Sale: |
Amortized Costs |
Gross Unrealized |
Gross Unrealized |
Fair Values | |||||||
| Obligations of U.S.government corporations and agencies |
$ | 4,881 | 4 | (38 | ) | $ | 4,847 | ||||
| Obligations of states and political subdivisions |
6,034 | 71 | (71 | ) | 6,034 | ||||||
| Mortgage-backed securities-government |
4,713 | 29 | (85 | ) | 4,657 | ||||||
| Corporate issues |
3,501 | — | (46 | ) | 3,455 | ||||||
| Other securities |
50 | — | — | 50 | |||||||
| Totals |
$ | 19,179 | 104 | (240 | ) | $ | 19,043 | ||||
| Held-to-Maturity: |
Amortized Costs |
Gross Unrealized |
Gross Unrealized |
Fair Values | |||||||
| Obligations of states and political subdivisions |
$ | 5,140 | 62 | (35 | ) | $ | 5,167 | ||||
| December 31, 2006 | |||||||||||
| Available-for-Sale: |
Amortized Costs |
Gross Unrealized |
Gross Unrealized |
Fair Values | |||||||
| Obligations of U.S.government corporations and agencies |
$ | 4,889 | 1 | (47 | ) | $ | 4,843 | ||||
| Obligations of states and political subdivisions |
6,033 | 74 | (82 | ) | 6,025 | ||||||
| Mortgage-backed securities-government |
4,908 | 27 | (83 | ) | 4,852 | ||||||
| Corporate issues |
3,502 | — | (51 | ) | 3,451 | ||||||
| Other securities |
50 | — | — | 50 | |||||||
| Totals |
$ | 19,382 | 102 | (263 | ) | $ | 19,221 | ||||
| Held-to-Maturity: |
Amortized Costs |
Gross Unrealized |
Gross Unrealized |
Fair Values | |||||||
| Obligations of states and political subdivisions |
$ | 5,645 | 70 | (42 | ) | $ | 5,673 | ||||
| (4) | Allowance for Loan Losses |
Activity in the allowance for loan losses for the three months ended March 31, 2007 and 2006, and for the year ended December 31, 2006 are as follows:
8
| March 31, 2007 |
December 31, 2006 |
March 31, 2006 |
||||||||||
| Balance at January 1, |
$ | 1,770 | $ | 1,508 | $ | 1,508 | ||||||
| Provision for loan losses |
73 | 339 | 65 | |||||||||
| Loans charged off |
(83 | ) | (206 | ) | (79 | ) | ||||||
| Recoveries |
59 | 129 | 41 | |||||||||
| Balance at end of period, |
$ | 1,819 | $ | 1,770 | $ | 1,535 | ||||||
| (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:
| Net Income (Numerator) |
Shares (Denominator) |
Per Share Amount | ||||||
| Three Months Ended March 31, 2007 |
||||||||
| Basic net income per share |
$ | 568 | 1,465,699 | $ | 0.39 | |||
| Effect of dilutive stock options |
— | 17,566 | ||||||
| Diluted net income per share |
$ | 568 | 1,483,265 | $ | 0.38 | |||
| Three Months Ended March 31, 2006 |
||||||||
| Basic net income per share |
$ | 576 | 1,458,799 | $ | 0.39 | |||
| Effect of dilutive stock options |
— | 19,342 | ||||||
| Diluted net income per share |
$ | 576 | 1,478,141 | $ | 0.39 | |||
| (6) | Comprehensive Income |
The following table presents comprehensive income for the interim periods indicated below:
| Three Months Ended | |||||||
| March 31, 2007 | March 31, 2006 | ||||||
| Net income |
$ | 568 | $ | 576 | |||
| Change in net unrealized gains on available-for sale securities, net of deferred income taxes |
17 | (66 | ) | ||||
| Total comprehensive income |
$ | 585 | $ | 510 | |||
9
| (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, became 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 were 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. The options expire ten years from the date of grant. At March 31, 2007, there were 3,200 shares available for grant under the 1997 Plan. A summary of stock option information follows ($ in thousands, except per share amounts):
| Number of Shares |
Range of Per |
Weighted- Aggregate |
Aggregate Option Price | ||||||||
| Outstanding at December 31, 2006 |
42,500 | $ | 10.00-14.75 | $ | 11.78 | $ | 501 | ||||
| Outstanding at March 31, 2007 |
29,500 | $ | 10.00-14.75 | $ | 12.56 | $ | 371 | ||||
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 were 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 options expire ten years from the date of grant. At March 31, 2007, no options had been granted under the 2004 Plan and all 100,000 shares were available for grant under the 2004 Plan.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method and, accordingly, did not restate the consolidated statements of operations for periods prior to January 1, 2006. This pronouncement amended SFAS No. 123, Accounting for Stock-Based Compensation, and superseded Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under SFAS No. 123(R), the Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense in the consolidated statements of income over the service period that the awards are expected to vest. The stock based compensation expensed during the quarter was $3 and is included in salaries and employee benefits.
10
| (8) | Subsequent Declaration of Cash Dividend |
On April 10, 2007 the Board of Directors declared a quarterly cash dividend in the amount of $0.15 per common share payable to shareholders of record as of April 20, 2007.
| (9) | Recently Adopted Accounting Pronouncements |
During the first quarter of 2007, the Company adopted the following accounting pronouncements: SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140, SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, and 132(R) and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. The adoption of these accounting pronouncements did not have a material impact on the Company’s consolidated results of operations or consolidated financial position.
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands of dollars, except as otherwise indicated) |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The following discussion is qualified in its entirety by the more detailed information in the unaudited consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-Q. 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-
11
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 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 AND RESULTS OF OPERATIONS
Total assets at March 31, 2007 were $267,209 up 4.21% from $256,421 at December 31, 2006. The principal components of the Company’s assets at the end of the period were $217,454 in net loans and $24,183 in securities. During the three-month period ended March 31, 2007, net loans increased 4.62% or $9,593 from $207,861 at December 31, 2006. The Company’s lending activities are a principal source of its income. Also during the three-month period, securities decreased 2.75% or $683 from December 31, 2006.
12
Total liabilities at March 31, 2007 were $242,219, up 4.44% from $231,929 at December 31, 2006, as a result of an increase in demand deposits of $2,718 or 11.50%, an increase in savings and NOW accounts of $4,103 or 5.88%, and an increase in time deposits of $3,492 or 2.54% from December 31, 2006. The Company’s deposits are provided by individuals and businesses located within the communities the Company serves.
Total stockholders’ equity at March 31, 2007 was $24,990 including $20,320 in retained earnings and $447 of accumulated other comprehensive losses net of the related deferred tax benefit, which represents net unrealized losses on available-for-sale securities and the underfunded status of the Company’s defined benefit postretirement plan. At December 31, 2006, total stockholders’ equity was $24,492.
The Company had net income of $568 for the three months ended March 31, 2007, compared with net income of $576 for the comparable period in 2006, a decrease of 1.39%. This decrease in net income was primarily due to a $293 increase in noninterest expense.
Profitability as measured by the Company’s return on average assets (ROA) was 0.88% for the three months ended March 31, 2007, down from 0.98% for the same period of 2006. Another key indicator of performance, the return on average equity (ROE), for the three months ended March 31, 2007 was 9.18%, down from 9.86% for the three months ended March 31, 2006.
The results of operations for the three-month period ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.
NET INTEREST INCOME
Net interest income represents the principal source of earnings for the Company. Changes in the amounts and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.
Net interest income was $2,413 for the three months ended March 31, 2007 compared to $2,166 for the three months ended March 31, 2006 and is attributable to interest income from loans and securities exceeding the cost associated with interest paid on
13
deposits. The net interest margin increased to 4.00% for the three months ended March 31, 2007, from 3.99% for the three months ended March 31, 2006. Loan yield growth has exceeded the growth in the rate paid for deposits in the past year.
Interest income on loans and securities increased 21.38% in the first quarter of 2007 compared to the first quarter of 2006 as net loan volume increased by $30,982 since March 31, 2006 and yield on loans and securities increased by 62 basis points in the same time period. Interest and fees on loans was $3,947 for the three-month period ended March 31, 2007, up from $3,115 for the same period in 2006.
Total interest expense increased 36.69% in the first quarter of 2007 compared to the first quarter of 2006 due to the impact of the upward repricing of deposit liabilities and a $27,090 growth in deposits in the past twelve months.
NONINTEREST INCOME
Noninterest income increased $46 or 8.20% for the three-month period ended March 31, 2007 compared to the same period of 2006. The Company’s principal sources of noninterest income are service charges and fees on deposit accounts, particularly transaction accounts, and fees on sales of mortgage loans. The increase from 2006 was due mainly to a $40,000 or 13.51% increase in service charges attributable to overdraft charges on deposit accounts.
NONINTEREST EXPENSE
Noninterest expense increased $293 or 16.07% for the three-month period ended March 31, 2007 compared to the same period of 2006. The increase in noninterest expense is attributed primarily to the effect of overall growth of the Company on personnel expenses and fixed asset costs.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Company expensed a provision for loan losses of $73 in the first three months of 2007 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.
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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 $1,819 as of March 31, 2007, representing approximately 0.84% of total loans outstanding. Management believes the allowance was adequate as of March 31, 2007 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 $114 at March 31, 2007 and $518 at March 31, 2006. No foreclosed properties were held as of March 31, 2007 and December 31, 2006. Non-accrual loans were $114 at March 31, 2007 and $255 at December 31, 2006. 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. A loan is considered an impaired loan when, based on the then current information and facts, it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans equaled nonaccrual loans at March 31, 2007.
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 its 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 15.06% as of March 31, 2007 and 14.89% as of December 31, 2006. Additional sources of liquidity available to the Company include its capacity to borrow additional funds through correspondent banks. The Company has an established federal funds line with a regional correspondent bank of $12,495 that had no outstanding balance as of March 31, 2007 and an established line with the FHLB that had $75 outstanding under a total line of $34,737 as of March 31, 2007. The Company derives cash flows from its operating, investing,
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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.
CONTRACTUAL OBLIGATIONS
There were no material changes in the Company’s contractual obligations from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
CAPITAL
The Company believes that its financial position at March 31, 2007 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 $24,990 at March 31, 2007 compared to $24,492 at December 31, 2006. At March 31, 2007, the Company’s leverage ratio (Tier I capital divided by quarterly average assets) was 9.54% compared to 9.80% at December 31, 2006. 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-K for the year ended December 31, 2006. 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 March 31, 2007 equaled $1,980. 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 March 31, 2007, the Company had unused loan commitments of $72,031, including $61,854 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
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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 15 herein and “Loans and Allowance for Loan Losses” on page 34 of the Company’s 2006 Annual Report to Shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this new standard to have a material effect on the Company’s consolidated results of operations or consolidated financial position.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 and its impact on the Company are discussed in Note 1(k) of the Notes to Consolidated Financial Statements in the Company’s 2006 Annual Report to Shareholders.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. SFAS 159 permits entities to elect to measure eligible financial instruments at fair value. An entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of this standard will be effective for the Company’s 2008 fiscal year. Management is currently evaluating the impact of the provisions of SFAS 159.
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As of May 11, 2007, there are no other new accounting standards issued, but not yet adopted by the Company, which are expected to be applicable to the Company’s financial position, operating results or financial statement disclosures.
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| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
MARKET RISK MANAGEMENT
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. If the Bank is to achieve its financial goals, it must effectively manage this risk.
The primary market risk for a bank is interest rate risk and its impact on net interest income. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period as a result of scheduled maturities and repayment and contractual interest rate changes.
The Bank’s Asset/Liability Management Committee and the Investment Committee are primarily responsible for establishing strategies to monitor and control liquidity and interest rate risk. The primary goal for managing interest rate volatility is to maximize net interest income while ensuring liquidity and managing interest rate risk within established guidelines. The Bank uses static gap analysis, earnings simulation analysis and economic value of equity (net present value estimation) to monitor interest rate risk. Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk measures have limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap which measures aggregate repricing is less utilized since it does not effectively measure the earnings impact on the Company and is not addressed here. However, earnings simulation and economic value models that more effectively measure the earnings impact and are utilized by management on a regular basis are explained below.
EARNINGS SIMULATION ANALYSIS
Management uses earnings simulation analysis to measure interest rate sensitivity and its impact on future earnings. The simulation uses current balance sheet volumes, growth, repricings, changes in mix of assets and liabilities, prepayments and average rate paid and earned assumptions to project income under multiple interest rate scenarios.
The following table represents the interest rate sensitivity on net income for the Company using different rate scenarios as of December 31, 2006.
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| Change in Prime Rate |
% Change in Net Income | ||
| +300 basis points |
+15 | % | |
| +200 basis points |
+10 | % | |
| +100 basis points |
+5 | % | |
| Level |
0 | ||
| -100 basis points |
-8 | % | |
| -200 basis points |
-17 | % | |
| -300 basis points |
-26 | % |
ECONOMIC VALUE OF EQUITY SIMULATION
Economic value of equity simulation is used to calculate the estimated fair value of assets and liabilities in different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value of equity simulation as in the earnings simulation.
The following chart reflects the change in the economic value of equity by using December 31, 2006 data, over different rate environments with a one-year horizon.
| Change in Prime Rate |
Change in Economic Value of Equity | ||
| (dollars in thousands) | |||
| +300 basis points |
-$ | 2,561 | |
| +200 basis points |
-$ | 1,600 | |
| +100 basis points |
-$ | 749 | |
| Level |
0 | ||
| -100 basis points |
$ | 885 | |
| -200 basis points |
$ | 1,656 | |
| -300 basis points |
$ | 2,445 | |
There have been no material changes in quantitative and qualitative market risk since this information was developed using December 31, 2006 data.
The Bank cannot predict future interest rates or their exact effect on net interest income. Certain limitations are inherent in any analysis. There is no guarantee that the risk management and balance sheet strategies management employs will be effective in periods of rapid rate movements. Furthermore, these analyses do not reflect actions management might take in response to or in anticipation of changes in interest rates.
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| Item 4. | CONTROLS AND PROCEDURES |
The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
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 control over financial reporting 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 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.
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| 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 these 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 26, 2006 (incorporated by reference to Exhibit 10.2 to registrant’s current report on Form 8-K filed June 2, 2006) | |
| 10.3* | VBA Directors’ 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* | 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to registrant’s quarterly report on Form 10-QSB filed on May 10, 2004) | |
| 10.5* | Directors’ Annual Compensation | |
| 10.6* | Base Salaries of Named Executive Officers of the Registrant (incorporated by reference to Exhibit 10.6 to registrant’s annual report on Form 10-K filed March 23, 2007) | |
| 10.7* | Change in Control Agreement between Pinnacle Bankshares Corporation and Bryan M. Lemley, dated May 26, 2006 (incorporated by reference to Exhibit 10.7 to registrant’s current report on Form 8-K filed June 2, 2006) | |
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| 10.8* | Change in Control Agreement between Pinnacle Bankshares Corporation and Carroll E. Shelton, dated May 26, 2006 (incorporated by reference to Exhibit 10.8 to registrant’s current report on Form 8-K filed June 2, 2006) | |
| 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) | |
| * | Denotes management contract |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PINNACLE BANKSHARES CORPORATION | ||
| (Registrant) | ||
| MAY 11, 2007 | /s/ Robert H. Gilliam, Jr. | |
| Date | Robert H. Gilliam, Jr., President and | |
| Chief Executive Officer | ||
| (principal executive officer) | ||
| MAY 11, 2007 | /s/ Bryan M. Lemley | |
| Date | Bryan M. Lemley, Secretary, | |
| Treasurer and Chief Financial Officer | ||
| (principal financial & accounting officer) | ||
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