<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[X] 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 1-12707
------------------------------
PINNACLE BANCSHARES, INC.
-------------------------
(Name of small business issuer in its charter)
Delaware 72-1370314
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 Second Avenue, Jasper, Alabama 35502-1388
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (205) 221-4111.
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- -------------------------------------- -----------------------
Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Check whether the issuer (1) has 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $17,217,504.
The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price ($16.250 per share) at which the Common Stock was sold
on March 19, 1998, was approximately $25,991,664. For purposes of this
calculation, the term "affiliate" refers to all executive officers and directors
of the registrant and all stockholders beneficially owning more than 10% of the
registrant's Common Stock.
As of the close of business on March 19, 1998, 1,787,085 shares of the
registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: YES NO X
--- ---
Documents Incorporated By Reference
Part II:
Annual Report to Stockholders for the year ended December 31, 1997.
Part III:
Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
THE HOLDING COMPANY. Pinnacle Bancshares, Inc. (the "Holding Company")
is a bank holding company incorporated under the laws of the State of Delaware.
The Holding Company is registered under the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). The Holding Company is the holding company
for Pinnacle Bank (the "Bank"), which was chartered by the State of Alabama and
acquired by the Holding Company on January 31, 1997.
The Holding Company's executive offices and the main office of the Bank
are located at 1811 Second Avenue, Jasper, Alabama 35502. The Holding Company's
telephone number is (205) 221-4111.
THE BANK. The Bank is an Alabama-chartered commercial bank with five
offices located in Central and Northwest Alabama. The Bank was originally
chartered as First Federal Savings and Loan Association of Jasper in 1935, and
since that time its accounts have been federally insured. The Bank converted
from a federal stock savings bank to an Alabama-chartered commercial bank on
January 31, 1997 in connection with the holding company reorganization. The Bank
has its main office at 1811 Second Avenue, Jasper, Alabama, and also has a
branch office in Jasper, Alabama, with other branch offices in Sumiton,
Haleyville, and Birmingham, Alabama.
The Bank is primarily engaged in the business of obtaining funds in the
form of savings deposits and investing such funds in mortgage loans on
single-family residential real estate. To a lesser extent the Bank is engaged in
making consumer loans, commercial real estate loans, and other commercial loans.
The principal sources of funds for the Bank's lending activities are
savings deposits, Federal Home Loan Bank ("FHLB") of Atlanta advances, principal
repayments of loans and sales of loans. The Bank's principal sources of income
are interest on loans, servicing and commitment fees, and interest and dividends
on securities. Its principal expenses are interest on savings accounts and
borrowings, and general and administrative expenses.
2
<PAGE> 3
SELECTED FINANCIAL AND OTHER DATA
The following data should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
------------------------
1996 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
Assets............................................ $195,502 $201,949
Loans, net........................................ 129,858 137,676
Interest-bearing deposits in other banks.......... 3,869 4,873
Securities........................................ 48,945 44,423
Loans held for sale............................... 1,429 1,857
Deposits.......................................... 173,407 179,377
Borrowed funds.................................... 3,750 3,640
Stockholders' equity.............................. 15,285 16,781
Number of:
Real estate loans outstanding..................... 4,131 3,994
Savings accounts.................................. 20,708 16,365
Full service offices open......................... 5 5
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1996 1997
(In Thousands)
<S> <C> <C> <C>
OPERATING DATA:
Interest revenue .............................. $14,354 $14,680 $15,858
Interest expense .............................. 8,544 8,443 8,903
------- ------- -------
Net interest income before provision for losses
on loans ................................... 5,810 6,237 6,955
Provision for losses on loans ................. 240 265 400
------- ------- -------
Net interest income after provision for losses
on loans ................................... 5,570 5,972 6,555
Noninterest income ............................ 1,102 1,334 1,359
Noninterest expense ........................... 4,280 5,709 4,663
Income tax expense ............................ 906 613 1,188
------- ------- -------
Net earnings .................................. $ 1,486 $ 984 $ 2,063
======= ======= =======
</TABLE>
3
<PAGE> 4
The following table sets forth certain information relating to the
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if
any, are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1997
---------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............... $ 127,103 $ 11,058 8.7% $ 137,868 $ 12,546 9.1%
Securities available for sale....... 53,141 3,401 6.4% 46,031 2,992 6.5%
Other............................... 4,114 221 5.4% 5,544 320 5.8%
---------- --------- --------- ----------- ---------- ---------
Total............................... 184,358 14,680 8.0% 189,443 15,858 8.4%
Non-interest-earning assets......... 6,088 11,237
---------- -----------
Total assets........................ $ 190,446 $ 200,680
========== ===========
Interest-bearing liabilities:
Deposits............................ $ 166,245 8,146 4.9% $ 177,319 8,696 4.9%
Borrowings.......................... 5,121 297 5.8% 3,658 207 5.7%
---------- --------- --------- ----------- ---------- ---------
Total interest-bearing liabilities:. 171,366 8,443 4.9% 180,977 8,903 4.9%
Non-interest-bearing liabilities.... 3,917 3,416
---------- -----------
Total Liabilities:.................. 175,283 184,393
Equity........................... 15,183 16,287
---------- -----------
Total Liabilities and Equity..... $ 190,446 $ 200,680
========== ===========
Net interest-earning assets......... 12,992 8,466
--------- ----------
Net interest income................. $ 6,237 $ 6,955
========= ==========
Interest rate spread................ 3.1% 3.5%
========= =========
Net interest margin................. 3.4% 3.7%
========= =========
Ratio of average interest-earning
assets to interest-bearing
liabilities......................
107.6% 104.7%
========= =========
</TABLE>
(Continued on following page)
4
<PAGE> 5
LENDING ACTIVITIES
GENERAL. The Bank's net loan portfolio totaled $137.7 million at
December 31, 1997, or 68.2% of its total assets. On that date, $116.0 million,
or 84.3% of total net loans outstanding, consisted of loans secured by mortgages
on single family, two-to-four family, multi-family residential properties, and
commercial real estate loans, while the remainder of the loan portfolio
consisted of savings account, home improvement and other consumer and commercial
loans.
The principal lending activity of the Bank historically has been the
origination of conventional first mortgage single-family loans. The Bank also
makes loans on two-to-four family dwelling units, multi-family dwelling units,
commercial real estate and other improved real estate. The majority of the
Bank's loans have been originated within its primary market area.
Loan demand during the year ended December 31, 1996 exceeded repayments
on loans resulting in an increase in short-term borrowings from the FHLB of
Atlanta of approximately $10.0 million. During the year ended December 31, 1997,
the Bank repaid approximately $110,000 in borrowed funds with the proceeds from
maturing investment securities, increases in savings deposits, and loan
repayments. The Bank funded loan demands with the proceeds from loan repayments,
increases in savings deposits and maturing securities. The Bank borrowed funds
on a short-term basis from the FHLB of Atlanta. However, there were no
short-term borrowings outstanding at December 31, 1997.
During December 1995, the Bank changed classification of its securities
held to maturity to securities available for sale. Accordingly, the Bank had no
securities classified as held to maturity as of December 31, 1997. See Note 1 of
Notes to Consolidated Financial Statements.
The Bank's volume of total loans originated to be retained in the
Bank's loan portfolio totaled approximately $78.5 million during the year ended
December 31, 1996, and $93.4 million during the year ended December 31, 1997.
The Bank directly originates most of its mortgage loans through its existing
branches. These loans have been originated predominantly within the Bank's
geographical lending area of Walker, Jefferson, Shelby, Winston and Fayette
counties, in Alabama. See " -- Loan Solicitation and Processing" and "-- Loan
Originations, Purchases and Sales."
The Bank seeks to improve the interest rate sensitivity of its mortgage
loan portfolio through the origination of adjustable rate loans, which
constituted approximately 53.4% of the single family residential mortgage loans
in the Bank's loan portfolio, and 36.6% of the Bank's net loan portfolio at
December 31, 1997. During the year ended December 31, 1996, the Bank purchased
$2.0 million in adjustable-rate single-family one-to-four family residential
mortgage loans from an affiliate. Most adjustable rate mortgage loans are held
in the Bank's loan portfolio, while most fixed-rate mortgage loans are either
sold as whole-loans to the Federal Home Loan Mortgage Corporation ("FHLMC") or
the Federal National Mortgage Association ("FNMA") or other investors, or
converted into mortgage-backed securities with servicing retained by the Bank.
5
<PAGE> 6
The following table sets forth, in dollar amounts and percentages, the
major categories of the Bank's loans. At December 31, 1997, the Bank had no
concentrations of loans exceeding 10% of gross losses other than as described
below.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1997
------------------ ------------------
$ % $ %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans...... $ 89,969 69.3% $ 94,317 68.5%
Construction loans.............. 27,762 21.4% 30,746 22.3%
Commercial loans................ 12,019 9.3% 14,299 10.4%
Consumer loans.................. 9,701 7.5% 8,845 6.4%
Less --
Loans in process............. 8,198 6.3% 9,083 6.6%
Discounts and other.......... 197 0.2% 214 0.2%
Allowance for loan losses.... 1,198 0.9% 1,234 .9%
-------- ------- -------- -------
Total...................... $129,858 100.0% $137,676 100.0%
======== ======= ======== =======
</TABLE>
RESIDENTIAL LOANS. The primary lending activity of the Bank has been
the granting of conventional mortgage loans to enable borrowers to purchase
existing homes or construct new homes. The Bank's real estate loan portfolio
also includes loans on two-to-four family dwellings, multi-family housing (over
four units), and loans made for the development of unimproved real estate to be
used for residential housing. At December 31, 1997, approximately 91% of the
Bank's total real estate loan portfolio consisted of loans secured by
residential real estate.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions, and underwriting standards established by
the Bank. Mortgage loans made by the Bank are generally long-term loans,
amortized on a monthly basis, with principal and interest due each month. The
initial contractual loan payment period for residential loans typically ranges
from 15 to 30 years. Currently, the Bank offers one-year, adjustable rate loans
based upon the one-year U.S. Treasury Bill rate adjusted to a constant maturity,
with limitations on adjustments of 2% in any one year and 6% over the life of
the loan.
At December 31, 1997, the largest amount loaned by the Bank to one
borrower was $2.8 million which was approximately 17% of the Holding Company's
stockholders' equity.
COMMERCIAL REAL ESTATE AND CONSTRUCTION LOANS. Construction loans on
residential properties are made primarily to individuals. The maximum loan to
value ratio is 80% of either the appraisal or the purchase price, whichever is
lower. Residential construction loans are typically made for periods of six
months. At December 31, 1997, the Bank had $28.2 million outstanding in
residential construction loans, compared with $23.0 million in construction
loans on residential properties outstanding at December 31, 1996.
The Bank has historically originated commercial real estate loans
within its primary market area. The Bank either funded or purchased
participation interests in various large commercial real estate projects, one of
which was outside of its primary market area. See " -- Non-Performing Loans and
Asset Classification" and "Subsidiary Activities." Since 1984, the Bank has
limited its commercial real estate lending activities to smaller commercial real
estate projects located in its primary market area, with the amount loaned
limited to 10% of its net worth. See "-- Nonperforming Loans and Asset
Classification" and "Subsidiary Activities." At December 31, 1997, the Bank had
$23.7 million outstanding in commercial real estate loans, including $2.5
million in commercial construction loans. These loans are typically limited to
owner-occupied financings.
COMMERCIAL BUSINESS LOANS. At December 31, 1997, there were
approximately $14.0 million in commercial loans outstanding. The Bank will
consider making these types of loans in its local market area.
6
<PAGE> 7
CONSUMER LOANS. The Bank makes various types of consumer loans,
including the loans made to depositors on the security of their savings
accounts, personal loans, automobile loans, educational loans and loans for home
improvement or other purposes. At December 31, 1997, the Bank had $8.8 million
outstanding in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a
combination of walk-in customers and real estate brokers.
For additional information on the Bank's lending activities, see Note 3
of Notes to Consolidated Financial Statements.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank has engaged in selling
in the secondary market certain loans it has originated. Such loans sold are
generally fixed-rate, long-term mortgage loans. These sales, the majority of
which do not allow recourse to the Bank, have been made to FHLMC and FNMA, which
purchases residential mortgage loans from federally insured financial
institutions and certain other lenders. Many of the Bank's loans have been
exchanged for FHLMC participation certificates ("PCs") or FNMA mortgage-backed
securities. These PCs or mortgage-backed securities are generally considered to
be a more liquid form of asset and are a more widely accepted form of collateral
than the underlying loans.
The sale of loans in the secondary mortgage market reduces the Bank's
risk that the interest rates it pays will escalate while holding long-term,
fixed-rate loans in its portfolio and allows the Bank to continue to make loans
during periods when savings flows decline or funds are not otherwise available
for lending purposes. In connection with such sales the Bank provides servicing
on the loans (i.e., collection of principal and interest payments) for which it
receives a fee payable monthly of 1/4% to 3/8% per annum of the unpaid balance
of each loan. These loan sales will continue as the Bank attempts to maintain
its loan servicing base. As of December 31, 1997, the Bank was servicing loans
for others aggregating approximately $89.8 million. Servicing income for the
years ended December 31, 1996 and 1997 was approximately $237,000 and $260,000,
respectively.
The Bank is continuously selling loans in the secondary market. During
the years ended December 31, 1996 and 1997, the Bank sold in excess of $31.0
million and $33.0 million, respectively, in whole loans. As of December 31,
1997, the Bank had $1.9 million in commitments outstanding to package or sell
additional loans.
The Bank's loan policy requires that the Bank's loan committee
identify, at the beginning of each quarter, loans which will be held for the
portfolio and loans which will be held for sale. Loans that are designated to be
held for the portfolio may be sold only in unusual circumstances which could not
be reasonably anticipated at the time of their origination or purchase. Loans
held for sale are carried at the lower of cost or market value and are sold as
soon as possible after their origination, as market conditions allow.
LOAN COMMITMENTS. The Bank issues commitments to prospective borrowers
to make loans conditioned upon the occurrence of certain events. Such
commitments are made on specific terms and conditions, and are honored for 60
days from approval with no additional fees required. The Bank charges a
non-refundable commitment fee equal to 1% of the actual amount of committed
funds on all single-family construction loans. The Bank had outstanding
commitments to originate mortgage loans aggregating $18.1 million at December
31, 1997. Of these commitments, $16.2 million were for adjustable rate mortgages
and $1.9 million were for fixed rate mortgages.
Although the Bank originates most fixed-rate loans for resale in the
secondary mortgage market, a certain amount of interest rate risk exists for the
Bank after a loan is closed until a loan is sold.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
which are charged to the borrower for creation of the loan. The Bank accounts
for loan origination fees net of direct costs as a yield adjustment over the
life of the loan. See Note 1 of Notes to Consolidated Financial Statements.
7
<PAGE> 8
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1997 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. The Bank does not have any
loans with no stated schedule of repayments and no stated maturity.
<TABLE>
<CAPTION>
Due After One Through Due After
Due by Five Years After Five Years After
December 31, 1998 December 31, 1997 December 31, 1997 Total
----------------- ----------------- ----------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage ........... $10,302 $26,358 $57,657 $ 94,317
Real estate construction ....... 21,663 -- -- 21,663
Commercial business loans ...... 5,576 4,712 4,011 14,299
Consumer ....................... 2,153 6,441 251 8,845
------- ------- ------- --------
Total ....................... $39,694 $37,511 $61,919 $139,124
======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at December 31, 1997 which have predetermined interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or Adjustable
Predetermined Rates Rates
------------------- -----
(In thousands)
<S> <C> <C>
Real estate mortgage ......... $39,746 $44,269
Commercial business loans .... 2,664 6,059
Consumer ..................... 6,400 292
------- -------
Total ...................... $48,810 $50,620
======= =======
</TABLE>
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans that are 120 days
contractually past due are placed on nonaccrual status and interest income is
reversed. Income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair value less estimated
costs of disposition. Any write-down of the property at foreclosure is charged
to the allowance for loan losses. Future declines in fair value of the asset
less costs of disposition below its carrying amount increases the valuation
allowance account. Future increases in fair value of the asset less costs of
disposition above its carrying amount reduces the valuation allowance account,
but not below zero. Increases or decreases in the valuation allowance account is
charged or credited to income. Costs relating to the development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed.
The recognition of gains and losses on the sale of real estate is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized under
an alternative method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66 -- "Accounting for Sales of Real Estate."
8
<PAGE> 9
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------
1996 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:(1)
Real Estate:
Residential ............................... $1,274 $ 542
Commercial ................................ 664 1,393
Consumer ..................................... 113 97
------ ------
Total ........................................ $2,051 $2,032
====== ======
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential ............................... $ -- $ --
Commercial ................................ -- --
Consumer ..................................... -- --
------ ------
Total ........................................ $ -- $ --
====== ======
Total of nonaccrual and 90 days past
due loans ............................... $2,051 $2,032
====== ======
Percentage of Total Loans .................... 1.58% 1.48%
Percentage of Total Assets ................... 1.05% 1.01%
Other Non-Performing Assets(2) ............... $1,010 $2,140
====== ======
</TABLE>
- -------------------
(1) Nonaccrual status denotes loans on which accrual of interest has been
ceased in accordance with the guidelines discussed above. Payments received
on a nonaccrual loan are either applied to the outstanding principal
balance or recorded as interest income, depending on assessment of the
collectibility of the loan.
(2) Other non-performing assets represent property acquired by the Bank through
foreclosure or repossession. The property is carried at the lower of its
fair value less estimated costs of disposition or the investment balance of
the related loan, whichever is lower.
Management has identified certain loans aggregating approximately $2.0
million at December 31, 1997 (including loans identified in the above table)
which it has determined require special attention due to potential weaknesses.
It is management's opinion that the allowance for loan losses (see below) is
adequate to absorb potential losses related to such loans. Aggressive efforts to
continue to reduce principal, secure additional collateral and improve the
overall payment status of their loans.
During the years ended December 31, 1996 and 1997 gross interest income
of $53,650 and $47,208, respectively, would have been recorded on loans
accounted for on a nonaccrual basis if the loans had been current throughout the
period. The amount of interest income included in current income for these loans
was $28,472 and $52,258 for the years ended December 31, 1996 and 1997,
respectively.
It is management's policy to establish an allowance for estimated
losses on loans and real estate owned based upon prior experience, current
economic conditions in its market area, or when it determines that losses are
expected to be incurred on the ultimate disposition of the underlying
properties. Although management believes that it uses the best information
available to make such determinations, future adjustments to allowances may be
necessary, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the initial
determinations.
9
<PAGE> 10
The following table presents an allocation of the allowance for
possible loan losses by the categories indicated and the percentage that all
loans in the category bear to total loans. This allocation is used by management
to qualify its evaluation of the loan portfolio. Allocations are merely
estimates and are subject to revisions as conditions change.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1996 1997
---------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans............ $ 835 90.6% $ 669 83.7%
Commercial................... 156 9.3% 247 10.1%
Other loans.................. 207 7.5% 318 6.2%
------ ----- ------ -----
Total..................... $1,198 107.4% $1,234 100.0%
====== ===== ====== =====
</TABLE>
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period ....... $1,212 $1,197
------ ------
Loans charged-off:
Consumer .......................... 183 129
Mortgage .......................... 137 298
------ ------
Total charge-offs .................... 320 427
------ ------
Total recoveries ..................... 41 64
------ ------
Net loans charged-off ................ 279 363
------ ------
Provision for possible loan losses ... 265 400
------ ------
Balance at end of period ............. $1,198 $1,234
====== ======
Ratio of net charge-offs to average
loans outstanding during the period .22% .26%
====== ======
</TABLE>
For further information and for an analysis of the Bank's allowances
for loan and real estate losses, see Notes 3 and 5 of Notes to Consolidated
Financial Statements.
INVESTMENT ACTIVITIES
Interest income from cash deposits and securities generally provide the
second largest source of income for the Bank after interest on loans and loan
servicing fees and other fees. At December 31, 1997, the Bank's interest-bearing
deposits and securities portfolio of approximately $44.4 million, excluding
mortgage-backed securities, consisted primarily of interest-bearing bank
deposits, U.S. government and agency obligations, corporate securities, and FHLB
of Atlanta stock.
10
<PAGE> 11
It has generally been the Bank's policy to maintain a liquidity
portfolio in excess of regulatory requirements in order to shorten the
maturities of the Bank's investment portfolio to enable the Bank to better match
its short-term investments and interest rate sensitive savings deposit
liabilities. The Bank also increases its liquidity by selling most of its fixed
rate loans with maturities of greater than 10 years.
On June 30, 1995, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In adopting SFAS No. 115,
securities have been classified as either trading, available for sale or held to
maturity based on management's intent and ability. See Note 1 of Notes to
Consolidated Financial Statements.
The following table sets forth the carrying value of the Bank's
investment securities and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------
1996 1997
------- -------
(In thousands)
<S> <C> <C>
Securities available for sale:
U.S. Treasury securities ............ $13,099 $12,038
U.S. Government and agency securities 7,966 9,017
Corporate securities ................ 1,005 --
FHLB stock .......................... 1,716 1,520
Mortgage-backed securities .......... 24,942 21,641
Other securities .................... 217 207
------- -------
Total .................................. $48,945 $44,423
======= =======
</TABLE>
The following table sets forth the scheduled maturities, amortized
cost, fair values and weighted average yields for the Bank's securities
available for sale at December 31, 1997.
<TABLE>
<CAPTION>
One Year Or Less After One Through Five Years After Five Through Ten Years
-------------------------- ---------------------------- ----------------------------
Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Yield Cost Average Yield Cost Average Yield
--------- ------------- --------- ------------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ....... $10,001 6.1% $ 2,010 6.0% $ -- --%
U.S. government and agency ..... 1,000 6.5 8,019 6.1 -- --
FHLB of Atlanta stock(1) ....... -- -- -- -- -- --
Other securities(2) ............ -- -- -- -- 207 --
Mortgage-backed securities ..... -- -- -- -- 3,229 7.2
------- --- ------- --- ------ ---
Total .......................... $11,001 6.1% $10,029 6.1% $3,436 7.0%
======= === ======= === ====== ===
</TABLE>
<TABLE>
<CAPTION>
After Ten Years
------------------------- Total
Amortized Weighted Amortized Weighted
Cost Average Yield Cost Fair Value Average Yield
--------- ------------- --------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities ....... $ -- --% $12,011 $12,039 6.1%
U.S. government and agency ..... -- -- 9,019 9,017 6.1
FHLB of Atlanta stock(1) ....... 1,520 7.3 1,520 1,520 7.3
Other securities(2) ............ -- -- 207 207 --
Mortgage-backed securities ..... 18,416 7.3 21,645 21,640 7.3
------- --- ------- ------- ---
Total .......................... $19,936 7.3% $44,402 $44,423 6.5%
======= === ======= ======= ===
</TABLE>
(Footnotes on following page)
11
<PAGE> 12
- -----------------
(1) FHLB of Atlanta stock is an equity security. The amount of such stock
held by the Bank is included under "After Ten Years" as the Bank is
required to hold such stock as a FHLB of Atlanta member.
(2) Other securities includes the Bank's investment in First General
Lending Corporation (a 40% owned affiliate), at cost, of $120,820; and
an interest investment in limited partnerships, at cost, of $86,121
whose sole purpose is to hold and operate real estate. The Bank has no
loans to these real estate partnerships. These investments are not
readily marketable.
SUBSIDIARY ACTIVITIES
FIRST GENERAL SERVICE(S) CORPORATION. First General Service(s)
Corporation ("First General") was incorporated in August 1978, for the purpose
of having an ownership interest in Savings and Loan Data Corporation,
Cincinnati, Ohio, which provided on-line computer services to the Bank.
In January 1984, First General established an office at 407-9th Avenue
in Jasper, Alabama. At the same time, four employees from the Bank were
transferred to First General for the purpose of servicing the Bank's loans. The
scope of First General's activities included servicing, auditing and quality
control of all loans originated by the Bank and by First General's 40% owned
subsidiary, First General Lending Corporation. On June 30, 1990, all employees
of First General, and property and equipment relating to loan servicing, were
transferred to the Bank. At December 31, 1997 First General had total equity
investments of $122,519, which included an investment in First General Lending
Corporation of $120,819 and an investment in First General Insurance Agency of
$1,699.
FIRST GENERAL VENTURES CORPORATION. As of December 31, 1997, First
General Ventures Corporation had a total investment in joint ventures of
$86,121. The Bank believes that the market value of these investments is in
excess of the book values. The assets of First General Land Corporation, one of
the Bank's wholly-owned subsidiaries, were transferred to First General Ventures
Corporation. First General Land Corporation was dissolved. As of December 31,
1997, the Bank had no loan commitments and does not presently intend to make
loans to these joint ventures.
FIRST GENERAL LENDING CORPORATION. The Bank, through First General
Service(s) Corporation, also owns 40% of First General Lending Corporation, a
mortgage origination concern with one office located in Birmingham, Alabama. The
remaining 60% of First General Lending Corporation is owned by two individuals
who oversee the company's operations.
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, The Bank derives funds
from loan principal repayments, advances from the FHLB of Atlanta and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short term basis
to compensate for reductions in the availability of other sources of funds. They
may also be used on a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, non-interest bearing
demand deposit accounts, money market accounts, regular savings accounts, term
certificate accounts and retirement savings plans. Deposit account terms vary,
with the principal differences being the minimum balance required, the amount of
time the funds must remain on deposit and the interest rate.
The Bank offers a full range of accounts including: passbook, money
market, checking, individual retirement accounts ("IRAs") and certificate
accounts. The deregulation of various federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and given it more
flexibility to alleviate the risk of net deposit outflows. While the
deregulation of rates payable on deposits has allowed the Bank to be competitive
in the acquisition and retention of funds, it has also resulted in a more
volatile cost of funds.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a weekly basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, and federal regulations.
12
<PAGE> 13
Marketing of the Bank's savings programs takes a number of different
forms. All branch offices are provided with brochures which outline the rates
and features of the Bank's various accounts. The Bank already offers most of the
services provided by other savings and loans. These services include consumer
and commercial loans, limited lines of credit, all types of checking and deposit
accounts, and IRAs.
As of December 31, 1997, the Bank's total deposits were $179.4 million.
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of December 31, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
<S> <C>
Three months or less........................ $ 19,452
Over three through six months............... 4,368
Over six through twelve months.............. 6,370
Over twelve months.......................... 10,832
------------
Total..................................... $ 41,022
============
</TABLE>
The following table sets forth the average balances and average
interest rates based on daily balances for deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1997
----------------------- -----------------------
Average Average Average Average
Deposits Rate Deposits Rate
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits ... $ 3,671 --% $ 5,168 --%
Interest bearing demand deposits ....... 20,897 2.9 23,672 3.1
Savings deposits ....................... 17,852 2.7 16,484 2.7
Time deposits .......................... 123,825 5.7 131,995 5.7
-------- --- -------- ---
Total deposits ...................... $166,245 4.9% $177,319 4.9%
======== === ======== ===
</TABLE>
(Continued on following page)
13
<PAGE> 14
For further information, see Note 6 of Notes to Consolidated Financial
Statements.
BORROWINGS. The Bank relies upon deposits and loan repayments and sales
as its major sources of funds. However, the Bank makes use of FHLB advances to
expand its lending and short-term investment activities and to meet depositor
withdrawals. Advances have been used to supplement deposit flows and are
particularly used when the Bank determines that it can profitably invest the
advances over their term.
The following table sets forth certain information regarding the Bank's
short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-----------------------
1996 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB of Atlanta advances.......................... $ -- $ --
Weighted average rate paid at period end:
FHLB advances..................................... --% --%
Maximum amount of borrowings outstanding at any
month end:
FHLB advances..................................... $10,000 $ --
Approximate average amounts outstanding for period:
FHLB advances..................................... $ 1,510 $ --
Approximate weighted average rate paid during
period(1):
FHLB advances..................................... 5.6% --%
</TABLE>
- ----------------
(1) The approximate weighted average rate paid during the period was
computed by dividing the average amounts outstanding into the related
interest expense for the period.
For further information on the Bank's borrowings, see Note 7 of Notes
to Consolidated Financial Statements.
SELECTED FINANCIAL RATIOS
The following table sets forth selected financial ratios of the Bank
for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Return on Assets (Net Income Divided By
Average Total Assets)(1).................... 0.8% 0.5% 1.0%
Return on Equity (Net Income Divided By
Average Equity)(1)....................... 10.2% 6.5% 12.7%
Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)......... 7.8% 8.0% 8.1%
Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)........................ 65.5% 34.5%
</TABLE>
- ----------------
(1) Ratios have been annualized for the six-month periods ended December
31, 1996 and 1995.
14
<PAGE> 15
LIQUIDITY AND RATE SENSITIVITY
The following table sets forth the maturity distribution of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1997, the Bank's interest rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities), the Bank's cumulative interest
rate sensitivity gap, the ratio of interest-earning assets to interest-bearing
liabilities, and the Bank's cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
Over One Over Five
One Year Through Through Over
or Less Five Years Ten Years Ten Years Total
------- ---------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets: (1)
Loans ....................... $ 39,694 $ 37,510 $ 11,198 $51,655 $140,057
Securities .................. 11,001 10,029 3,436 19,936 44,402
Other assets ................... 4,873 -- -- -- 4,873
--------- -------- -------- ------- --------
Total ..................... $ 55,568 $ 47,539 $ 14,634 $71,591 $189,332
========= ======== ======== ======= ========
Interest-Bearing Liabilities:(2)
Deposits .................... $ 130,992 $ 46,356 $ 2,029 $ -- $179,377
Borrowings .................. 130 625 1,100 1,785 3,640
--------- -------- -------- ------- --------
Total ..................... $ 131,122 $ 46,981 $ 3,129 $ 1,785 $183,017
========= ======== ======== ======= ========
Interest Sensitivity Gap ....... $ (75,554) $ 558 $ 11,505 $69,806 $ 6,315
========= ======== ======== ======= ========
Cumulative Interest Sensitivity
Gap ......................... $ (75,554) $(74,996) $(63,491) $ 6,315 $ 6,315
========= ======== ======== ======= ========
</TABLE>
- ------------------
(1) Fixed-rate loans are distributed based on their contractual maturity
adjusted for projected or anticipated prepayments, and variable rate loans
are distributed based on the interest rate reset date and contractual
maturity adjusted for prepayments. Loan run-off and repricing assumes a
constant prepayment rate based on coupon rate and maturity.
(2) Passbook savings and demand deposits are presented in the earliest
repricing period since amounts in these accounts are subject to withdrawal
on demand. Savings certificates are distributed assuming no withdrawal
prior to maturity.
15
<PAGE> 16
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. The
calculations are based on average month end balances during the respective
periods. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (change in
rate multiplied by the change in volume) have been allocated to the volume and
rate changes based upon the pro-rata amount that rate and volume are to their
total change, before allocation of the rate/volume amount.
<TABLE>
<CAPTION>
Year ended December Year Ended December 31,
1995 vs. 1996 1996 vs. 1997
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ................................ $ 729 $ (35) $ 694 $ 964 $ 524 $ 1,488
Securities ........................... (489) 159 (330) (463) 54 (463)
Other interest-earning assets ........ (76) 38 (38) 82 17 99
----- ----- ----- ----- ----- -------
Total interest earning assets ........ $ 164 $ 162 $ 326 $ 583 $ 595 $ 1,178
===== ===== ===== ===== ===== =======
Interest Expense:
Deposits ............................. $ 372 $ 237 $ 609 $ 543 $ 7 $ 550
Borrowed Funds ....................... (665) (45) (710) (83) (7) (90)
----- ----- ----- ----- ----- -------
Total interest-bearing liabilities ... $(293) $ 192 $(101) $ 460 $ -- $ 460
===== ===== ===== ===== ===== =======
</TABLE>
COMPETITION
The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The Bank's
most direct competition for deposits has historically come from other thrift
institutions and from commercial banks located in its primary market area.
However, in recent years the Bank has had significant competition from money
market mutual funds and other sources which are not subject to federal interest
rate limitations. The Bank's competition for real estate loans comes principally
from other thrift institutions, commercial banks, mortgage banking companies,
insurance companies and other institutional lenders.
The Bank competes for loans through the interest rates and loan fees it
charges and the efficiency and quality of the services it provides borrowers,
real estate brokers, and home builders. It competes for deposits by offering a
wide variety of accounts, convenient branch locations, tax-deferred retirement
programs, and other miscellaneous services.
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
The following is a brief summary of certain statutes, rules and
regulations affecting the Holding Company and the Bank. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.
Bank Holding Company Regulation. The Holding Company is registered as a
bank holding company under the Holding Company Act and, as such, subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System ("FRB"). A bank holding company is required to furnish to the FRB annual
and quarterly reports of its operations and to furnish such additional
information as the FRB may require pursuant to the Holding Company Act. The
Holding Company is also subject to regular examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the
prior approval of the FRB before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
16
<PAGE> 17
The Holding Company Act, as amended by the Riegle-Neal Act, generally
permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law. See "Competition".
Under the Holding Company Act, any company must obtain approval of the
FRB prior to acquiring control of the Holding Company or the Bank. For purposes
of the Holding Company Act, "control" is defined as ownership of more than 25%
of any class of voting securities of the Holding Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Holding Company or
the Bank.
The Change in Bank Control Act and the regulations of the FRB
thereunder require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the FRB before such person or persons may acquire control of the
Holding Company the Bank. The Change in Bank Control Act defines "control" as
the power, directly or indirectly, to vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The non-bank activities of the Holding Company are subject
to these legal and regulatory limitations under the Holding Company Act and the
FRB's regulations thereunder. Notwithstanding the FRB's prior approval of
specific nonbanking activities, the FRB has the power to order a holding company
or its subsidiaries to terminate any activity, or to terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness or stability of any bank subsidiary of
that holding company.
The FRB has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "--Capital Requirements."
The FRB has the power to prohibit dividends by bank holding companies
if their actions constitute unsafe or unsound practices. The FRB has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the FRB's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
Bank Regulation. As an Alabama banking institution, the Bank is subject
to regulation, supervision and regular examination by the Banking Department.
Furthermore, as a state bank that is not a member of the Federal Reserve System
(a "state nonmember bank"), the Bank is subject to regulation, supervision and
regular examination by the FDIC under the applicable provisions of the Federal
Deposit Insurance Act and the FDIC's regulations. The deposits of the Bank are
insured by the FDIC to the maximum extent provided by law (a maximum of $100,000
for each insured depositor). Alabama and federal banking laws and regulations
control, among other things, the Bank's required reserves, investments, loans,
mergers and consolidations, issuance of securities, payment of dividends, and
establishment of branches and other aspects of the Bank's operations.
The Bank is required to pay assessments, based on a percentage of its
insured deposits, to the FDIC for insurance of its deposits by the SAIF. The
FDIC has established a risk-based deposit insurance assessment system for
insured depository institutions, under which insured institutions are assigned
assessment risk classifications based upon capital levels and supervisory
evaluations.
17
<PAGE> 18
In 1995 and 1996, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund (the "BIF"). In order to
recapitalize the SAIF and to address the insurance premium disparity, the
Deposit Funds Insurance Act of 1996 (the "1996 Act") authorized the FDIC to
impose a one-time special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF to the statutorily
designated reserve ratio of 1.25% of insured deposits. In view of the
recapitalization of the SAIF, the FDIC set the effective insurance assessment
rates payable by SAIF-insured institutions for 1997 at $0 to 0.27% of insured
deposits, depending on an individual institution's risk classification. In
addition, SAIF-insured institutions will be required, until December 31, 1999,
to pay assessments to the FDIC at the annual rate of approximately .066% of
insured deposits to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO"), an agency of the federal government established
to recapitalize the predecessor to the SAIF. During this period, BIF member
banks will be assessed for payment of the FICO obligations at the annual rate of
.013% of insured deposits. After December 31, 1999, BIF and SAIF member
institutions will be assessed at the same rate for the FICO obligations.
Under Alabama law, the approval of the Banking Department is required
if the total of all the dividends declared by the Bank in any calendar year
exceeds the Bank's net income as defined for that year combined with its
retained net income for the preceding two calendar years.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies, including the FDIC's capital
adequacy guidelines for state non-member banks. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's and the Company's financial statements. See
"--Capital Requirements."
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the federal bank regulatory agencies to prescribe, by
regulation, non-capital safety and soundness standards for all insured
depository institutions and depository institution holding companies. The FDIC
and the other federal banking agencies have adopted guidelines prescribing
safety and soundness standards pursuant to FDICIA. The safety and soundness
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general the guidelines require, among other things, the maintenance
of appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. In addition, pursuant to FDICIA, the FDIC
and the other banking agencies have proposed guidelines for asset quality and
earnings standards. Under the proposed standards, a bank would be required to
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.
Under joint regulations of the federal banking agencies, including the
FDIC, state nonmember banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators. The
Interagency Guidelines, among other things, call upon depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the loan-to-value limits specified in the Guidelines for the various
types of real estate loans. The Interagency Guidelines state that it may be
appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits. The
aggregate amount of loans in excess of the supervisory loan-to-value limits,
however, should not exceed 100% of total capital and the total of such loans
secured by commercial, agricultural, multifamily and other non-one-to-four
family residential properties should not exceed 30% of total capital.
Supervision, regulation and examination of the Holding Company and the
Bank by the bank regulatory agencies are intended primarily for the protection
of depositors rather than for holders of Holding Company stock or of the Holding
Company as the holder of the stock of the Bank.
18
<PAGE> 19
Capital Requirements. The FRB has established guidelines with respect
to the maintenance of appropriate levels of capital by bank holding companies,
and the FDIC has promulgated substantially similar capital adequacy regulations
for state nonmember banks. These capital regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.
The regulations of the FRB and the FDIC require bank holding companies
and state nonmember banks, respectively, to maintain a minimum leverage ratio of
"Tier 1 capital" (as defined in the risk-based capital guidelines discussed in
the following paragraphs) to total assets of 3.0%. Although setting a minimum
3.0% leverage ratio, the regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1 under the rating
system used by the federal bank regulators, would be permitted to operate at or
near such minimum level of capital. All other bank holding companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. In addition, the FRB has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the FRB and the FDIC require bank
holding companies and state nonmember banks, respectively, to maintain minimum
regulatory capital levels based upon a weighing of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. Core capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less intangible assets, primarily goodwill, with limited
exceptions for mortgage servicing rights and purchased credit card
relationships. Supplementary capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify for Tier 1 and long-term preferred stock with an
original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock. The risk-based capital
regulations assign balance sheet assets and credit equivalent amounts of
off-balance sheet obligations to one of four broad risk categories based
principally on the degree of credit risk associated with the obligor. The assets
and off-balance sheet items in the four risk categories are weighted at 0%, 20%,
50% and 100%. These computations result in the total risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.
Under FDICIA, the federal banking agencies were required to revise
their risk-based capital standards to ensure that such standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities. The FRB, the FDIC and the other banking agencies have
amended the risk-based capital standards to take account of a bank's
concentration of credit risk, the risk of nontraditional activities, and a
bank's exposure to declines in the economic value of its capital resulting from
changes in interest rates. The revised capital guidelines do not, however,
codify a measurement framework for assessing the level of a bank's interest rate
exposure. The FRB, the FDIC and the other banking agencies have adopted a joint
policy statement requiring that banks adopt comprehensive policies and
procedures for managing interest rate risk and setting forth general standards
for such internal policies.
19
<PAGE> 20
The FDIC has issued final regulations that classify insured depository
institutions by capital levels and provide that the applicable agency will take
various prompt corrective actions to resolve the problems of any institution
that fails to satisfy the capital standards. Under such regulations, a
"well-capitalized" bank is one that is not subject to any regulatory order or
directive to meet any specific capital level and that has or exceeds the
following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a leverage ratio of 5%. An "adequately
capitalized" bank is one that does not qualify as "well capitalized" but meets
or exceeds the following capital requirements: a total risk-based capital of 8%,
a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4%
or (ii) 3% if the bank has the highest composite examination rating. A bank not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which the bank's capital levels are below these standards. A bank that fails
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by FDICIA and the regulations of the FDIC.
As of December 31, 1997, the Bank was categorized as "well-capitalized" by the
FDIC.
See Item 6, "Management's Discussion and Analysis or Plan of
Operation," and Note __ of Notes to Consolidated Financial Statements contained
in the Holding Company's Annual Report to Stockholders for the year ended
December 31, 1997 (Exhibit No. 13) which is incorporated herein by reference.
Effects of Governmental Policy. The earnings and business of the
Holding Company and the Bank have been and will be affected by the policies of
various regulatory authorities of the United States, particularly the FRB.
Important functions of the FRB, in addition to those enumerated above, include
the regulation of the supply of money in light of general economic conditions
within the United States. The instruments of monetary policy employed by the FRB
for these purposes influence in various ways the overall level of investments,
loans, other extensions of credit and deposits, and the interest rates paid on
liabilities and received on interest-earning assets.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by the Bank on its deposits
and its other borrowings and the interest received by the Bank on loans extended
to customers and securities held in its investment portfolios comprises the
major portion of the Bank's earnings. The earnings and gross income of the Bank
thus have been and will be subject to the influence of economic conditions
generally, both domestic and foreign, and also to monetary and fiscal policies
of the United States and its agencies, particularly the FRB. The nature and
timing of any future changes in such policies and their impact on the Bank are
not predictable. . EMPLOYEES
As of December 31, 1997, the Holding Company and the Bank had 81
full-time and 17 part-time employees.
The employees are not represented by a collective bargaining agreement.
The Holding Company and the Bank believe their employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name, Age and Position Business Experience
- ---------------------- -------------------
<S> <C>
Robert B. Nolen, Jr., 39 - Mr. Nolen joined the Bank in 1987 as First
President of the Holding Vice President, Chief Financial Officer and
Company and the Bank Treasurer. Effective July 1, 1994, Mr. Nolen
was appointed President and Chief Executive
Officer of the Bank. As President of each of
the Holding Company and Bank, Mr. Nolen is
responsible for ensuring that the overall
operations of the Holding Company and the
Bank are carried out in accordance with the
policies and procedures of the Board of
Directors.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
Mary Jo Gunter, 45 - Ms. Gunter joined the Bank in September 1976
Vice President of the and has served in various lending related
Holding Company and Senior positions within the Bank. She is
Vice President - Banking responsible for branch operations,
Services of the Bank. personnel, loan servicing and other customer
service areas.
</TABLE>
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including all documents incorporated
herein by reference, contains forward-looking statements. Additional written or
oral forward-looking statements may be made by the Holding Company from time to
time in filings with the Securities and Exchange Commission or otherwise. The
words "believe," "expect," "seek," and "intend" and similar expressions identify
forward-looking statements, which speak only as of the date the statement is
made. Such forward-looking statements are within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
are not limited to, projections of income or loss, expenditures, acquisitions,
plans for future operations, financing needs or plans relating to services of
the Holding Company, as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements.
The Holding Company does not undertake, and specifically disclaims, any
obligation to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
ITEM 2. DESCRIPTION OF PROPERTY
The Holding Company's principal executive offices and the Bank's main
office are located at 1811 Second Avenue, Jasper, Alabama. At December 31, 1997,
the Bank maintained four branches in Jasper, Haleyville, Sumiton and Vestavia,
Alabama. The Haleyville branch is leased. The Bank also leases an administrative
office in Jasper, Alabama, which is currently subleased to another financial
institution.
For further information on the Bank's lease commitments, see Note 4 of
Notes to Consolidated Financial Statements.
The total net book value of the Bank's investment in premises and
equipment was $5,800,000 at December 31, 1997. See Note 4 of Notes to
Consolidated Financial Statements for further information.
ITEM 3. LEGAL PROCEEDINGS
On October 27, 1993, a suit was initiated in the Circuit Court for
Walker County, Alabama by one customer who alleged that the Bank improperly
charged his account for insufficient funds. The plaintiff also alleged that he
represented a class composed of both current and past customers of the Bank. The
Bank denied the material allegations of the plaintiff's complaint. Despite the
fact that no discovery had been taken, the Court set the matter for preliminary
injunction, summary judgment, class action certification and other matters on
January 25, 1994. Notwithstanding, on January 28, 1994, the Court ordered that
the suit proceed as a class action but did not rule on the validity and
truthfulness of the allegations in the complaint. The Bank filed a motion for
the Circuit Court Judge to recuse himself, which was refused. Additionally, on
motion of the plaintiff's attorney, the Judge disqualified the Bank's attorneys
from further representation of the Bank in this litigation. The Circuit Court
then entered a Scheduling Order resulting in a trial setting in September 1994.
The Bank appealed the rulings of the Circuit Court to the Alabama Supreme Court.
The Alabama Supreme Court subsequently stayed all orders of the Circuit Court
pending its review of all matters before it. No date has been set for a ruling
by the Supreme Court on the Bank's pending motions. There has been no
substantive change in the status of this lawsuit since June 30, 1994.
21
<PAGE> 22
Three suits are currently pending against the Bank in the Circuit Court
for Walker County, Alabama which involve the sale of credit life insurance -
Rhonda Hood vs. First Federal of Alabama, Patricia Green vs. First Federal of
Alabama, and Dutton vs. First Federal of Alabama. The oldest of these cases,
Dutton, was initiated in 1994 and has never been considered by the Bank to be
material to its business or financial condition. The most recent cases, Hood and
Green, were initiated on January 18, 1996 and January 23, 1996, respectively,
and allege overcharging for credit life insurance, as well as misrepresentations
regarding splitting of the commission or premium between the Bank and the
insurance company with which it dealt. In the event a settlement is not effected
in the Hood and Green cases, the Bank anticipates that each of the plaintiffs
therein will allege that the plaintiff represents a class composed of customers
of the Bank. No amount of compensatory or punitive damages has been claimed in
the Hood and Green cases.
Another suit is currently pending against the Bank in the Circuit Court
for Walker County, Alabama which alleges that the Bank wrongfully took
possession of a foreclosure property prior to foreclosure and converted such
property to its use - White v. First Federal of Alabama. The plaintiff is
seeking both compensatory and punitive damages.
In addition to the litigation noted above, the Bank is from time to
time subject to routine litigation incidental to its business. Such litigation
may include alleged compensatory and punitive damages. In recent years in the
State of Alabama many complaints have been filed which ultimately seek punitive
damage awards in amounts that bear little or no relation to actual damages. In
some of these cases, juries have awarded large punitive damage awards to the
plaintiffs.
Although it is not possible to determine with any certainty at this
point in time the potential exposures related to damages in connection with any
pending litigation against the Bank, it is the opinion of management, based upon
consultation with legal counsel, that the ultimate resolution of all pending
litigation against the Bank will not have a materially adverse effect on the
Bank's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Holding Company
through a solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the section captioned "Market Price and
Dividend Information" in the Bank's Annual Report to Stockholders for the year
ended December 31, 1997 (the "Annual Report"), is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the Annual Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE> 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
For information concerning the Board of Directors of the Holding
Company, the information contained under the section captioned "Proposal I --
Election of Directors" in the Holding Company's definitive proxy statement, to
be filed within 120 days after the end of the fiscal year covered by this Form
(the "Proxy Statement"), is incorporated herein by reference. For information
concerning the executive officers of the Holding Company, see "Item 1. Business
- -- Executive Officers of the Registrant," which is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof" and "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Changes in Control
Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change
of control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1 Certificate of Incorporation - Incorporated by
reference to Exhibit 3.1 to Registrant's Annual
Report on Form 10-KSB for the six months ended
December 31, 1996.
3.2 Bylaws - Incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-KSB for the six
months ended December 31, 1996.
4 Form of Stock Certificate - Incorporated by reference
to Exhibit 4 to Registrant's Annual Report on Form
10-KSB for the six months ended December 31, 1996.
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.1 Employment Agreement between the Registrant and
Robert B. Nolen, Jr. - Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-11495)
10.2 Pinnacle Bank 1996 Stock Option and Incentive Plan -
Incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 (File
No. 333-11495)
13 Annual Report to Stockholders for the year ended
December 31, 1997. Except for the portions of the
Annual Report to Stockholders which are expressly
incorporated herein by reference, such Annual Report
to Stockholders is furnished for the information of
the SEC and is not to be deemed "filed" as part of
this Report.
21 Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule (SEC use only)
</TABLE>
(b) Not applicable.
24
<PAGE> 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE BANCSHARES, INC.
Date: March 31, 1998 By: /s/ Robert B. Nolen, Jr.
------------------------
Robert B. Nolen, Jr., President
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C> <C>
By: /s/ Robert B. Nolen, Jr. By: /s/ James W. Cannon
------------------------------------- ------------------------------
Robert B. Nolen, Jr. James W. Cannon
President and Chief Executive Officer Director
(Principal Executive Officer, Principal
Financial Officer and Principal Accounting
Officer)
Date: March 31, 1998 Date: March 31, 1998
By: /s/ Albert H. Simmons By: /s/ Max W. Perdue
------------------------------------- ------------------------------
Albert H. Simmons Max W. Perdue
Chairman of the Board Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ O. H. Brown By: /s/ Greg Batchelor
------------------------------------- ------------------------------
O. H. Brown Greg Batchelor
Director Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ Sam W. Murphy By: /s/ Melvin R. Kacharos
------------------------------------- ------------------------------
Sam W. Murphy Melvin R. Kacharos
Director Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ J. T. Waggoner
-------------------------------------
J. T. Waggoner
Director
Date: March 31, 1998
</TABLE>
<PAGE> 1
EXHIBIT 13
BALANCE SHEET AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1996 1997
-------- --------
(Dollars in Thousands)
<S> <C> <C>
TOTAL AMOUNT OF:
Assets $195,502 $201,949
Loans, net 129,858 137,676
Interest-bearing deposits in other banks 3,869 4,873
Securities 48,945 44,423
Loans held for sale 1,429 1,857
Deposits 173,407 179,377
Borrowed funds 3,750 3,640
Stockholders' equity 15,285 16,781
NUMBER OF:
Real estate loans outstanding 4,131 3,994
Savings accounts 20,708 16,365
Full-service offices open 5 5
</TABLE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
INTEREST INCOME $14,354 $14,680 $15,858
INTEREST EXPENSE 8,544 8,443 8,903
------- ------- -------
Net interest income before provision for losses on loans 5,810 6,237 6,955
PROVISION FOR LOAN LOSSES 240 265 400
------- ------- -------
Net interest income after provision for losses on loans 5,570 5,972 6,555
NONINTEREST INCOME 1,102 1,334 1,359
NONINTEREST EXPENSE 4,280 5,709 4,663
INCOME TAX EXPENSE 906 613 1,188
------- ------- -------
Net earnings $ 1,486 $ 984 $ 2,063
======= ======= =======
</TABLE>
OTHER DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest rate spread 2.8% 3.1% 3.5%
Yield on average interest earning assets 7.7 8.0 8.4
Return on assets (net earnings divided by average total assets) 0.8 0.5 1.0
Return on equity (net earnings dividend by average equity) 10.2 6.5 12.7
Equity-to-asset ratio (average equity divided by total average assets) 7.8 8.0 8.1
Dividend payout ratio (dividends declared per share divided
by net earnings per share) 43.4 65.5 34.5
</TABLE>
1
<PAGE> 2
YIELDS EARNED AND RATES PAID
The following table sets forth, for the period and the dates indicate, the
weighted average yields earned on interest-bearing assets and the weighted
interest rates paid on interest-bearing liabilities, together with the net-yield
on interest earning assets.
<TABLE>
<CAPTION>
AT
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- ------------
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on loans 8.5% 8.7% 9.1% 8.9%
Weighted average yield on securities
available for sale 6.3 6.4 6.5 6.5
Weighted average yield on all
interest earning assets 7.7 8.0 8.4 8.5
Weighted average rate paid on
deposits 4.8 4.9 4.9 4.9
Weighted average rate paid on
borrowed funds 6.1 5.8 5.7 5.8
Weighted average rate paid on all
interest bearing liabilities 4.9 4.9 4.9 4.9
Interest rate spread (spread between
weighted average rate on all
interest bearing assets and all
interest bearing liabilities) 2.8 3.1 3.5 3.6
Net yield (net interest income as
percentage of interest-earning
assets) 3.1 3.4 3.7
</TABLE>
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONVERSION AND REORGANIZATION
On January 29, 1997, the stockholders of Pinnacle Bank (the "Bank") approved
both the conversion of the Bank from a federal stock savings bank to an
Alabama-chartered commercial bank and the reorganization of the converted Bank
into the holding company form of ownership by approving an Agreement and Plan of
Conversion and Reorganization, pursuant to which the converted Bank became a
wholly-owned commercial bank subsidiary of Pinnacle Bancshares, Inc., a Delaware
corporation (the "Company"), and each outstanding share of common stock of the
Bank was converted into one share of the common stock of the Company. The fiscal
year of the Company and the converted Bank now end on December 31 of each year,
and the accompanying financial data from prior years has been restated to
reflect the fiscal year-end change. See Note 1 of Notes to Consolidated
Financial Statements.
GENERAL
The Company generates revenue primarily from net interest margin derived by
soliciting deposits and borrowings which are used to fund the Company's loan
portfolio, mortgage-backed securities, and investment securities. The Company
also derives revenue from fees and charges on loans and deposit accounts.
Historically, the Company's business strategy has been to engage primarily in
residential lending and retail consumer lending. To enhance growth and achieve
greater portfolio diversification as well as to provide improved interest rate
spread, the Company's strategy has expanded to include active participation in
commercial real estate and other commercial lending activities in its primary
market area of Walker, Winston, Jefferson, and Shelby Counties. Although the
inherent risks associated with geographic concentrations in the Company's loan
portfolio do not appear to have had a significant effect on the Company's
earnings to date, any dramatic fluctuations in the economic conditions in the
Company's market area could have a material effect on the Company's
profitability.
In recent years, the Company has expanded its operations in the Birmingham,
Alabama, metropolitan area. The Company currently intends to establish a new
branch in the Birmingham market in 1998 and to further expand in metropolitan
areas in Alabama as appropriate opportunities become available.
The Company sells most fixed-rate mortgage loans with maturities greater than 10
years to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Corporation ("FNMA") and other investors as whole-loan sales
with loan servicing either retained by the Company or sold to third parties.
This strategy produces service fee income which is recurring noninterest income
and is an integral part of the Company's asset liability management described
below.
During the fiscal year ended December 31, 1995, the Company sold approximately
$1.0 million in U.S. Treasury Securities and approximately $1.0 million in
Corporate Securities. Also during the fiscal year ended December 31, 1995, the
Company used loan repayments and the proceeds from sale of securities to
decrease its borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta by
approximately $8.0 million.
During fiscal year ended December 31, 1996, the Company purchased approximately
$5.0 million in Agency securities and approximately $15.0 million in U.S.
Treasury securities. The Company sold $1.0 million in U.S. Agencies and
approximately $6.0 million in U.S. Treasury securities. Also during the
3
<PAGE> 4
fiscal year ended December 31, 1996, the Company repaid approximately $10.0
million in advances from the FHLB of Atlanta.
ASSET LIABILITY MANAGEMENT
The Securities and Exchange Commission issued final rules in January 1997
governing disclosure requirements for financial instruments, including
derivatives. The final rules require a detailed description of the accounting
policies used for derivatives (see Note 1 of Notes to the Consolidated Financial
Statements), as well as qualitative and quantitative disclosures regarding
market risk exposures.
The Company's primary market risk is its exposure to interest rate changes.
Interest rate risk management strategies are designed to optimize net interest
income while minimizing fluctuations caused by changes in the interest rate
environment. It is through these strategies that the Company seeks to manage the
maturity and repricing characteristics of its balance sheet.
Interest rate risk management is administered through the Company's
Asset/Liability Committee. This committee reviews interest rate risk, liquidity,
capital positions, and discretionary on- and off-balance sheet activity
including interest rate swap agreements. All decisions are made within
established risk management guidelines and strategies.
The modeling techniques used by the Company simulate net interest income and
impact on fair values under various rate scenarios. Important elements of these
techniques include the mix of floating versus fixed rate assets and liabilities,
and the scheduled, as well as expected, repricing and maturing volumes and rates
of the existing balance sheet. Under a scenario simulating a hypothetical 100
basis point rate increase applied to all fixed rate interest earning assets and
interest-bearing liabilities, the Company would expect a net loss in fair value
of the underlying instruments of $1.8 million. This hypothetical loss is not a
precise indicator of future events. Instead, it is a reasonable estimate of the
results anticipated if the assumptions used in the modeling techniques were to
occur.
RESULTS OF OPERATIONS
GENERAL. The Company's net earnings are derived from net interest income, which
is the difference between interest income on loans and securities and interest
expense on deposits and borrowings. In addition, net earnings are affected by
the gain and loss on the sale of loans and securities, loan servicing income,
subsidiary earnings, operating expenses, and income taxes. Although changes in
interest rates necessarily lead to changes in net interest margins, the level
and direction of overall interest rates have had a minimal impact on the
Company's operations to date.
4
<PAGE> 5
NET EARNINGS. The Company reported net earnings of approximately $1.5 million,
$1.0 million, and $2.1 million for fiscal years ended December 31, 1995,
December 31, 1996, and December 31, 1997, respectively. The decrease from the
year ended December 31, 1995 to the year ended December 31, 1996 was due
primarily to the one time special Savings Association Insurance Fund ("SAIF")
assessment of approximately $1.0 million. Without the special assessment the
Company would have reported net income of approximately $1.7 million. The
increase from the fiscal year ended December 1996 to the fiscal year ended
December 1997 was due primarily to an increase in the net interest margin and
the SAIF assessment in 1996.
INTEREST REVENUE. Interest on loans and securities increased approximately
$400,000 from the fiscal year ended December 31, 1995 to the fiscal year ended
December 31, 1996. Interest income on loans and securities increased
approximately $1.1 million from the fiscal year ended December 31, 1996 to the
fiscal year ended December 31, 1997. The increase from fiscal year ended
December 31, 1995 to the fiscal year ended December 31, 1996 was due to an
increase in the average yield on mortgage loans from approximately 8.5% to 8.7%
compounded by an increase in the average loans balance outstanding of
approximately $4.0 million and was offset by a decrease in the average security
balance outstanding of approximately $6.0 million. The increase from the fiscal
year ended December 31, 1996 to the fiscal year ended December 31, 1997 was due
primarily to an increase in the average yield on mortgage loans from
approximately 8.7% to 9.1%, compounded by an increase in the average balance of
loans and securities outstanding of approximately $3.7 million.
Other interest decreased approximately $38,000 from the fiscal year ended
December 31, 1995 to fiscal year ended December 31, 1996. Other interest
increased approximately $100,000 from fiscal year ended December 31, 1996 to
fiscal year ended December 31, 1997. The decrease from the fiscal year ended
December 31, 1995 to the fiscal year ended December 31, 1996 was due primarily
to a decrease in the average balance of interest-bearing deposits in other banks
outstanding of approximately $400,000. The increase from the fiscal year ended
December 31, 1996 to the fiscal year ended December 31, 1997 was due to an
increase in the average balance of interest-bearing deposits in other banks of
approximately $2.1 million.
INTEREST EXPENSE. Interest expense on deposits increased approximately $600,000
from the fiscal year ended December 31, 1995 to the fiscal year ended December
31, 1996. Interest expense on deposits increased approximately $550,000 from
fiscal year ended December 31, 1996 to fiscal year ended December 31, 1997. The
increase from fiscal year ended December 31, 1995 to the fiscal year ended
December 31, 1996 was due primarily to an increase in the average balance
outstanding of approximately $7.0 million and was offset due to an increase in
the average yield on interest-bearing deposits from 4.8% to 4.9%. The increase
from fiscal year ended December 31, 1997 to fiscal year ended December 31, 1997
was due primarily to an increase in the average balance outstanding of
approximately $11.0 million.
Interest expense on borrowed funds decreased approximately $700,000 from the
fiscal year ended December 31, 1995 to the fiscal year ended December 31, 1996.
Interest expense on borrowed funds decreased approximately $90,000 from the
fiscal year ended December 31, 1996 to the fiscal year ended December 31, 1997.
The decrease from fiscal year ended December 31, 1995 to fiscal year ended
December 31, 1996 was due primarily to a decrease in the average balance of
borrowed funds of approximately $12.0 million, and was compounded by a decrease
in the average yield from 6.3% to
5
<PAGE> 6
5.8%. The decrease from fiscal year ended December 31, 1996 to fiscal year ended
December 31, 1997 was due primarily to a decrease in the average balance of
borrowed funds of approximately $1.5 million.
PROVISIONS FOR LOSSES ON LOANS. Provisions for loan losses are based on
management's analysis of the various factors that affect the loan portfolio and
management's desire to maintain the allowance for loan losses at a level
considered adequate. The provisions for losses on loans were $240,000, $265,000,
and $400,000 for the fiscal years ended December 31, 1995, 1996, and 1997,
respectively. These increases were due primarily in response to overall loan
portfolio growth and a shift from principally single-family mortgage lending to
a greater emphasis on commercial, construction, and consumer lending which
entail greater credit risk and have contributed to increased charge-offs
incurred by the Company.
The Company maintains an allowance for loan losses based on management's review
and classification of the loan portfolio and analyses of borrowers' ability to
pay, historical charge-off experience, risk characteristics of individual loans
or groups of similar loans and underlying collateral, current and prospective
economic conditions, status of nonperforming loans and regulatory reviews. In
establishing the allowance for loan losses, management recognizes that a
substantial portion of the Company's loans, including nonperforming loans, are
secured by mortgages on residential real estate. Total nonperforming loans,
which includes loans on nonaccrual status and loans 120 days past due were
approximately $2.0 million at each of December 31, 1996 and 1997.
NONINTEREST INCOME Noninterest income, which includes fees and charges on
deposit accounts and existing loans, service fee income on loans, income on real
estate operations, and gain (loss) on sale of assets increased approximately
$232,000 from fiscal year ended December 31, 1995 to fiscal year ended December
31, 1996. Non-interest income increased approximately $25,000 from fiscal year
ended December 31, 1996 to fiscal year ended December 31, 1997. The increase
from fiscal year ended December 31, 1995 to fiscal year ended December 31, 1996
was due primarily to an increase in fees and service charges on deposit account,
fees, and charges on loans and net gain on sale of loans. The increase from
fiscal year ended December 31, 1996 to fiscal year ended December 31, 1997 was
due primarily to an increase on the gain on sale of mortgage loans, an increase
in fees and service charges on deposit accounts. This was offset by a decrease
in service fees income and fees and charges on loans and real estate operations,
net.
NONINTEREST EXPENSE. Noninterest expense increased approximately $1.4 million
from the fiscal year ended December 31, 1995 to the fiscal year ended December
31, 1996. Noninterest expense decrease approximately $1.0 million from fiscal
year ended December 31, 1996 to fiscal year ended December 31, 1997. The
increase from fiscal year ended December 31, 1995 to the fiscal year ended
December 31, 1996 was due primarily to an increase in Federal Deposit Insurance
Corporation ("FDIC") premiums. This increase was a result of the one-time
Savings Association Insurance Fund ("SAIF") special assessment of approximately
$1.0 million as well as slight increases in other noninterest expense as was
offset a decrease in accrued legal expense. The decrease in noninterest expense
from the fiscal year ended December 31, 1996 to the December 31, 1997 was due
primarily to a decrease in FDIC insurance premiums.
6
<PAGE> 7
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the ability or the financial flexibility to
manage future cash flows to meet the needs of depositors and borrowers and to
provide funds for operations, as well as future acquisitions if they become
available. Maintaining appropriate levels of liquidity allows the Company to
have sufficient funds available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of deposits and other
liabilities. The Company's primary source of liquidity is dividends paid by the
Bank, which actively manages both assets and liabilities to achieve its desired
level of liquidity. Alabama law imposes restrictions on the amount of dividends
that may be declared by the Bank. Further, any dividend payment by the Bank is
subject to the continuing ability of the Bank to maintain compliance with
federal regulatory capital requirements. See "Market Price and Dividend
Information" and Note 11 of Notes to Consolidated Financial Statements.
In the ordinary course of its business, the Company's primary sources of cash
are interest and fee income, in addition to loan repayments and the maturity of
sales of other earning assets including investment securities and mortgage
loans. The entire investment portfolio at December 31, 1997 was classified as
available for sale, with a market value of $44.4 million. See Note 2 of Notes to
Consolidated Financial Statements. At December 31, 1997, liquid assets,
consisting primarily of cash on hand, interest-bearing deposits in other banks
and short-term investments totaled approximately $52.5 million.
The Bank's liability base provides liquidity through deposit growth, the
rollover of maturing deposits and accessibility to external sources of funds,
including borrowings from the FHLB of Atlanta and other sources. At December 31,
1997, the Bank had an approved credit availability of $29.0 million at the FHLB
of Atlanta and no advances outstanding.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the prices of goods and services, since such prices are
affected by inflation. In the current interest rate environment, liquidity and
the maturity structure of the Bank's assets and liabilities are believed to be
critical to the maintenance of desired performance levels. Management considers
the Bank's liquidity sources to be adequate to meet its current and projected
needs.
CAPITAL RESOURCES. The Company's capital position is reflected in its
stockholders' equity, subject to certain adjustments for regulatory purposes.
Stockholders' equity is a measure of the Company's net worth, soundness and
viability. The capital base of the Company allows it and the Bank to take
advantage of business opportunities, while maintaining a level of resources
deemed appropriate by management to address business risks inherent in daily
operations. Stockholders' equity at December 31, 1997 was approximately $16.8
million.
Risk-based capital regulations adopted by the Board of Governors of the Federal
Reserve Board and the FDIC require bank holding companies and banks,
respectively, to achieve and maintain specified ratios of capital to
risk-weighted assets. The risk-based capital rules are designed to measure Tier
1 Capital and Total Capital in relation to the credit risk of both on- and
off-balance sheet items. Under the guidelines, one of four risk weights is
applied to the different on-balance sheet items. Off-balance sheet items, such
as loan commitments, are also subject to risk-weighting after conversion to
balance sheet equivalent amounts. All bank holding companies and banks must
maintain a minimum total capital to total risk-weighted assets ratio of 8.00%,
at least half of which must be in the form of core, or Tier 1, capital
(consisting of stockholders' equity, less goodwill). At December 31, 1997, each
of the Company and the
7
<PAGE> 8
Bank satisfied its minimum regulatory capital requirement and was
"well-capitalized" within the meaning of federal regulatory requirements.
SAIF RECAPITALIZATION
The FDIC Board of Directors approved a rule that established the special
assessment necessary to recapitalize the SAIF as of March 31, 1995. The
legislation provided that all SAIF member institutions pay a special one time
assessment to recapitalize SAIF, which in the aggregate was sufficient to bring
the reserve ratio in SAIF to 1.25% of insured deposits. Based upon its level of
SAIF deposits as of March 31, 1995, the Bank's special assessment paid and
expensed during the year ended December 31, 1996 was $1,011,000.
YEAR 2000 RISK ASSESSMENT AND ACTION PLAN
The Company is aware of the current concerns throughout the business community
of reliance upon computer software that does not properly recognize the year
2000 in date formats, often referred to as the "Year 2000 Problem." The Year
2000 Problem is the result of software being written using two digits rather
than four digits to define the applicable year (i.e., "98" rather than "1998").
A failure by a business to properly identify and correct a Year 2000 Problem in
its operations could result in system failures or miscalculations. In turn, this
could result in disruptions of operations, including among other things, a
temporary inability to process transactions, or otherwise engage in routine
business transactions on a day-to-day basis.
Operations of the Company depend upon the successful operation on a daily basis
of its computer software programs. The Company relies upon software purchased
from third-party vendors rather than internally generated software. In its
analysis of the software, and based upon its ongoing discussions with these
vendors, a plan of action has been put in place by the Company to minimize its
risk exposure to the Year 2000 Problem.
As part of the plan, an oversight management committee has been set up to
monitor vendor compliance, and identify systems and equipment crucial to the
Company's operation. These systems are being tested to assure they will be able
to handle the Year 2000 event, thus minimizing risk to the Company.
MARKET PRICE AND DIVIDEND INFORMATION
The common stock of the Company is traded on the American Stock Exchange under
the symbol "PLE". As of December 31,1997, the Company had 434 stockholders of
record. This total does not reflect the number of persons or entities who hold
stock in nominee or "street name" through various brokerage firms.
8
<PAGE> 9
Following are the high and low sale prices of the Company's common stock for the
periods indicated. The data has been restated to reflect the Company's stock
split in the fourth quarter of 1997.
<TABLE>
<CAPTION>
PRICE RANGE
COMMON STOCK
-----------------------
HIGH LOW
------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996:
First quarter $ 9-1/8 $ 8-7/8
Second quarter 8-2/8 7-7/8
Third quarter 9-1/8 8-7/8
Fourth quarter 8-2/8 7-7/8
FISCAL YEAR ENDED DECEMBER 31, 1997:
First quarter $11-1/8 $10-3/4
Second quarter 11-7/8 10-5/8
Third Quarter 16-5/8 13
Fourth Quarter 18-3/4 16-7/16
</TABLE>
Dividends of $.36 ($.09 in each of the four quarters) were declared and paid
during fiscal year 1996. Dividends of $.40 ($.10 in each of the four quarters)
were declared and paid during fiscal year 1997. Under Alabama law, the approval
of the Superintendent of Banks of the State of Alabama is required if the total
of all the dividends declared by the Company in any calendar year exceeds the
Company's net income as defined for that year combined with its retained net
income for the preceding two calendar years. Federal law provides that no
insured depository institution may make any capital distribution (including a
cash dividend) if the institution would not satisfy one or more of its minimum
capital requirements after the distribution.
9
<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pinnacle Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Pinnacle Bancshares, Inc. (a Delaware corporation) and subsidiary as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of Pinnacle
Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
February 6, 1998
10
<PAGE> 11
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash on hand and in banks $ 2,879,396 $ 2,747,482
Interest-bearing deposits in other banks 3,868,664 4,873,353
Securities available for sale 48,944,812 44,423,262
Accrued interest on securities and deposits 561,326 491,104
Loans receivable, net 129,857,656 137,676,037
Loans held for sale (fair values $1,428,742 and $1,857,042
at December 31, 1996 and 1997, respectively) 1,428,742 1,857,042
Other real estate owned 1,010,340 2,140,003
Premises and equipment, net 5,176,990 5,785,279
Prepaid and other assets 251,678 388,578
Accrued interest on loans 958,803 1,079,219
Mortgage servicing 53,154 17,718
Excess cost over net assets acquired 510,815 469,951
------------ ------------
Total assets $195,502,376 $201,949,028
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $173,407,101 $179,377,212
Borrowed funds 3,750,000 3,640,000
Official checks outstanding 1,675,929 836,383
Advance payments by borrowers for taxes and insurance 144,587 104,812
Deferred taxes 297,042 338,024
Other liabilities 943,017 871,469
------------ ------------
180,217,676 185,167,900
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, no shares issued,
100,000 authorized 0 0
Common stock, par $.01 per share, 1,864,000 and 1,786,586
outstanding, 4,800,000 and 20,000,000 authorized 18,640 17,865
Additional paid-in capital 8,366,717 8,083,332
Treasury stock, at cost 84,352 shares at December 31, 1996 (345,317) 0
Retained earnings 7,315,182 8,665,499
Unrealized gain (loss) on securities for sale, net (70,522) 14,432
------------ ------------
15,284,700 16,781,128
------------ ------------
Total liabilities and stockholders' equity $195,502,376 $201,949,028
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST REVENUES:
Interest on loans $10,364,505 $11,058,030 $12,546,254
Interest and dividends on securities 3,730,700 3,400,564 2,991,456
Other interest 258,900 221,265 319,952
----------- ----------- -----------
14,354,105 14,679,859 15,857,662
INTEREST EXPENSE:
Interest on deposits 7,537,532 8,145,842 8,695,821
Interest on borrowed funds 1,007,307 296,720 207,317
----------- ----------- -----------
8,544,839 8,442,562 8,903,138
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,809,266 6,237,297 6,954,524
PROVISION FOR LOAN LOSSES 240,000 265,000 400,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS 5,569,266 5,972,297 6,554,524
NONINTEREST INCOME:
Fees and service charges on deposit accounts 292,695 385,775 407,042
Service fee income on loans sold 263,460 260,148 236,590
Fees and charges on loans 221,722 270,731 233,901
Real estate operations, net 141,788 149,763 110,256
Net gain (loss) on sale of:
Loans held for sale 200,407 255,718 359,575
Fixed assets 0 275 0
Real estate owned (19,383) 11,911 7,975
Securities available for sale 607 (234) 1,276
Other income 1,508 803 3,227
----------- ----------- -----------
1,102,804 1,334,890 1,359,842
----------- ----------- -----------
NONINTEREST EXPENSE;
Compensation and benefits 2,147,399 2,243,311 2,570,730
Occupancy 971,693 1,024,807 1,015,553
FDIC insurance premiums 351,519 1,472,231 90,126
Marketing and professional 147,627 241,838 182,938
Legal 42,000 41,967 42,064
Other 619,810 685,194 761,876
----------- ----------- -----------
4,280,048 5,709,348 4,663,287
----------- ----------- -----------
EARNINGS BEFORE INCOME TAX 2,392,022 1,597,839 3,251,079
INCOME TAX EXPENSE 906,480 613,370 1,188,210
----------- ----------- -----------
NET INCOME $ 1,485,542 $ 984,469 $ 2,062,869
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.83 $ 0.55 $ 1.16
DILUTED EARNINGS PER SHARE $ 0.83 $ 0.55 $ 1.15
CASH DIVIDENDS PER SHARE $ 0.36 $ 0.36 $ 0.40
WEIGHTED AVERAGE SHARES OUTSTANDING 1,779,648 1,779,648 1,780,675
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Retained
Shares Amount Capital Earnings
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,864,000 $18,640 $8,366,717 $6,126,519
Net earnings for the year ended December 31, 1995 1,485,542
Cash dividends ($.36 per share) (639,674)
Change in unrealized gain (loss) on securities available
for sale, net 0 0 0 0
--------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1995 1,864,000 18,640 8,366,717 6,972,387
Net earnings for the year ended December 31, 1996 0 0 0 984,469
Cash dividends ($.36 per share) 0 0 0 (641,674)
Change in unrealized gain (loss) on securities available
for sale, net 0 0 0 0
--------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,864,000 18,640 8,366,717 7,315,182
Net earnings for the period ended December 31, 1997 0 0 0 2,062,869
Cash dividends ($.40 per share) 0 0 0 (712,552)
Change in unrealized gain (loss) on securities available
for sale, net 0 0 0 0
Exercise of stock options 6,940 69 61,088 0
Retirement of treasury stock upon formation of
Holding Company (84,354) (844) (344,473) 0
--------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,786,586 $17,865 $8,083,332 $8,665,499
========= ======= ========== ==========
<CAPTION>
Unrealized
Gain (Loss)
on Securities Total
Treasury Available Stockholders'
Stock for Sale, Net Equity
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $(345,317) $(717,896) $13,448,663
Net earnings for the year ended December 31, 1995 0 0 1,485,542
Cash dividends ($.36 per share) 0 0 (639,674)
Change in unrealized gain (loss) on securities available
for sale, net 0 833,785 833,785
--------- --------- -----------
BALANCE, DECEMBER 31, 1995 (345,317) 115,889 15,128,316
Net earnings for the year ended December 31, 1996 0 0 984,469
Cash dividends ($.36 per share) 0 0 (641,674)
Change in unrealized gain (loss) on securities available
for sale, net 0 (186,411) (186,411)
--------- --------- -----------
BALANCE, DECEMBER 31, 1996 (345,317) (70,522) 15,284,700
Net earnings for the period ended December 31, 1997 0 0 2,062,869
Cash dividends ($.40 per share) 0 0 (712,552)
Change in unrealized gain (loss) on securities available
for sale, net 0 84,954 84,954
Exercise of stock options 0 0 61,157
Retirement of treasury stock upon formation of
Holding Company 345,317 0 0
--------- --------- -----------
BALANCE, DECEMBER 31, 1997 $ 0 $ 14,432 $16,781,128
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
PINNACLE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 1,485,543 $ 984,469 $ 2,062,869
Adjustment to reconcile net earnings to net cash flows
provided by operating activities:
Depreciation 470,349 503,165 437,453
Provision for losses on loans 240,000 285,000 400,000
Provision (benefits) for deferred taxes 38,518 19,585 (13,098)
Net (gain) loss on sale of:
Loans held for sale (200,407) (255,718) (359,575)
Securities available for sale (607) 234 (1,276)
Real estate owned 19,383 (11,911) (7,975)
Fixed assets 0 (275) 0
Amortization, net 123,922 (80,890) (375,488)
Proceeds from sale of loans 40,601,256 31,030,932 32,690,234
Loans originated for sale (42,577,130) (33,068,003) (32,745,301)
Decrease (increase) in accrued interest receivable (338,728) 48,793 (50,194)
Decrease (increase) in prepaid and other assets 102,537 (134,675) (136,900)
Increase (decrease) in other liabilities 524,628 254,912 (71,548)
------------ ------------ ------------
Net cash provided by operating activities 489,264 (424,382) 1,829,201
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Principal collected on loans and securities 71,731,736 75,190,309 87,426,406
Loans originated for portfolio (70,469,721) (78,505,069) (93,374,369)
Loans purchased for portfolio (5,204,298) (1,796,692) 0
Net change in interest bearing deposits at other banks (7,261,649) 3,280,302 (1,004,689)
Purchase of securities available for sale (151,251) (21,034,609) (8,030,964)
Proceeds from sale of securities (3,900,000) 14,002,109 8,010,000
Proceeds from maturing securities 8,135,830 10,966,612 1,194,724
Purchase of premises and equipment (130,934) (1,709,831) (1,045,742)
Proceeds from sale of fixed assets 542,511 41,440 0
Proceeds from sale of real estate 894,736 819,736 534,124
------------ ------------ ------------
Net cash provided by (used in) investing activities (5,813,040) 1,254,307 (6,290,510)
------------ ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net (increase) decrease in passbook, NOW, and money
market deposit accounts (2,141,506) (167,735) 642,744
Proceeds from sales of time deposits 40,325,731 28,342,280 35,186,606
Payments from maturing time deposits (25,307,232) (18,203,399) (29,859,239)
Proceeds from borrowed funds (850,000) 6,250,000 0
Payments on borrowed funds (6,330,000) (16,350,000) (110,000)
Increase (decrease) in official checks and advance
payments by borrowers for taxes and insurance 401,600 307,992 (879,321)
Proceeds from stock options exercised 57 0 61,157
Payments of dividends (639,674) (641,674) (712,552)
------------ ------------ ------------
Net cash provided by (used in) financing activities 5,458,976 (462,536) 4,329,395
------------ ------------ ------------
NET (INCREASE) DECREASE IN CASH 135,200 367,389 (131,914)
CASH AT BEGINNING OF PERIOD 2,376,807 2,512,007 2,879,396
------------ ------------ ------------
CASH AT END OF PERIOD $ 2,512,007 $ 2,879,396 $ 2,747,482
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds $ 8,389,232 $ 8,427,805 $ 8,878,245
Cash payments for income taxes 765,000 547,393 1,327,844
Real estate acquired through foreclosure 1,095,000 849,594 1,296,928
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
PINNACLE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following is a description of the more significant accounting policies
followed by Pinnacle Bancshares, Inc. (the "Company") and Pinnacle Bank
(the "Bank") in presenting the consolidated financial statements.
ORIGINATION AND NATURE OF OPERATIONS
On January 29, 1997, the stockholders of the Bank held a special meeting
whereby they approved an Agreement and Plan of Reorganization and
Conversion dated October 9, 1996. Pursuant to such Agreement, on January
31, 1997, the Bank converted from a federal stock savings bank to an
Alabama-chartered commercial bank and the corporate structure of the Bank
was reorganized into the holding company form of ownership. The Bank
became a subsidiary of the newly formed bank holding company, Pinnacle
Bancshares, Inc.
In 1996, the Bank changed its name from First Federal of Alabama, F. S.
B., which had received its federal charter in 1935. The Bank is primarily
in the business of obtaining funds in the form of various savings deposit
products and investing those funds in mortgage loans, consumer, and
commercial loans. The Bank operates in five offices in the central and
northwest portion of Alabama, and originates its loans in this market
area.
FISCAL YEAR
In connection with the conversion of the Bank to an Alabama-chartered
commercial bank, as discussed above, and the concurrent holding company
reorganization, the Bank's stockholders approved changing the fiscal year
end from June 30, to December 31. The accompanying financial statements
have been restated to include audited financial statements for the years
ended December 31, 1995 and 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ from those
estimates. The primary estimates that are reflected in the financial
statements are the valuation allowances for loan losses and real estate
owned.
15
<PAGE> 16
CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Bank, and the Bank's wholly owned subsidiaries First General
Service(s) Corporation, First General Capital Corporation and First
General Ventures. All significant intercompany transactions and accounts
have been eliminated in consolidation.
SECURITIES
Securities classified as available for sale are carried at fair value. The
unrealized difference between amortized cost and fair value on securities
available for sale is excluded from earnings and is reported net of
deferred taxes as a separate component of stockholders' equity. The
available for sale category includes securities that Management intends to
use as part of its asset/liability management strategy or that may be sold
in response to changes in interest rates, changes in prepayment risk,
liquidity needs, or for other purposes. Securities designated as held to
maturity are carried at amortized cost, as management has the positive
intent and the Bank has the ability to hold such securities to maturity.
The Bank had no securities classified as trading at December 31, 1996 or
1997. The Bank had no securities classified as held to maturity at
December 31, 1996 or 1997.
Amortization of premiums and accretion of discounts are computed using the
level yield method. The adjusted cost of the specific security sold is
used to compute gain or loss on the sale of securities.
MARKET RISK MANAGEMENT
Market risk is a risk of loss arising from adverse changes in market
prices and rates. The Company's market risk is comprised primarily of
interest rate risk created by its lending and deposit taking activities.
Management addresses this risk through an active Asset/Liability
Management process and through management of loan and investment portfolio
maturities and repricing.
LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balance, less the
undisbursed portion of loans, unearned interest income and an allowance
for loan losses. Unearned interest on consumer loans is amortized to
income by use of a method which approximates level yield over the lives of
the related loans. Loans that are 120 days contractually past due
generally are placed on nonaccrual status, and interest income is
reversed. Income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make interest and principal payments has been demonstrated in
which case the loan is returned to accrual status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which management
considers to be adequate to absorb losses inherent in the loan portfolio.
Management's estimation of the amount of the allowance is based on a
continuing evaluation of the loan portfolio and includes such factors as
economic conditions, analysis of individual loans, overall portfolio
characteristics, and
16
<PAGE> 17
delinquencies. Changes in the allowances can result from changes in
economic events or changes in the creditworthiness of the borrowers. The
effect of these changes is reflected when known. The amount of the
allowance is maintained through the provision for losses and is decreased
by charge-offs, net of recoveries.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate amortized cost
or fair value as such loans are not intended to be held to maturity. Net
unrealized losses measured in the aggregate are recognized in a valuation
allowance by charges to income.
LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND PREMIUMS AND DISCOUNTS
Loan fees, net of certain direct costs of loan originations, are treated
as an adjustment to the yield of the related loans over the contractual
term of the loan adjusted for prepayments as they occur. Loan commitment
fees are recognized into income upon expiration of the commitment period
or sale of the loan, unless the commitment results in the loans being
funded and maintained in the loan portfolio.
LOAN SALES AND SERVICING
Gains or losses on loan sales are recognized at the time of sale and
determined by the difference between net sales proceeds and the carrying
value of the loan sold.
Servicing fees are recognized as income in the period earned.
OTHER REAL ESTATE OWNED
Other real estate owned acquired through foreclosure is carried at the
fair value of the foreclosed property, less estimated costs of disposition
at the date of foreclosure. Any excess of the recorded investment over
fair value, less estimated cost of disposition of the property is charged
to the allowance for loan losses at the time of foreclosure. Subsequent to
foreclosure, real estate owned is evaluated on an individual basis for
changes in fair value. Declines in fair value of the asset, less cost of
disposition below its carrying amount, increase the valuation allowance
account. Future increases in fair value of the asset, less cost of
disposition, reduce the valuation allowance account, but not below zero.
Increases or decreases in the valuation allowance account are charged or
credited to income. Cost relating to the development and improvement of
property are capitalized, whereas costs relating to the holding of
property are expensed.
The recognition of gains and losses on the sale of real estate is
dependent upon whether the nature and terms of the sale and future
involvement of the Bank in the property meet certain requirements. If the
transaction does not meet these requirements, income recognition is
deferred and recognized under an alternative method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 66, Accounting
for Sales of Real Estate.
17
<PAGE> 18
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are stated at cost less
depreciation accumulated on a straight-line basis over the estimated
service lives of the related assets (30 to 50 years for buildings, 10 to
15 years for leasehold improvements and 3 to 10 years for equipment).
INCOME TAXES
Under the asset and liability method, balance sheet amounts of deferred
taxes are recognized on the temporary differences between the bases of
assets and liabilities as measured by tax laws and their bases as reported
in the consolidated financial statements. Deferred tax expense or benefit
is then recognized for the change in deferred tax liabilities or assets
between periods. Recognition of deferred tax asset balance sheet amounts
is based on management's belief that it is more likely than not that the
tax benefit associated with certain temporary differences will be
realized.
EXCESS COST OVER NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired (goodwill) arose
from a merger which was accounted for under the purchase method of
accounting and is being amortized over its estimated useful life of 20
years.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 revises the methodology to
be used in computing earnings per share ("EPS') such that the computations
required for primary and fully diluted EPS are to be replaced with "basic"
and "diluted" EPS. Basic EPS is computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted
EPS is computed in the same manner as fully diluted EPS, except that,
among other changes, the average share price for the period is used in all
cases when applying the treasury stock method to potentially dilutive
securities. All share and per share information included in these
financial statements have been restated to give effect to the adoption of
SFAS No. 128.
18
<PAGE> 19
The following table represents the earnings per share calculations for the
years ended December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
PER SHARE
FOR THE YEARS ENDED INCOME SHARES AMOUNT
- --------------------------- ---------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1995:
Net income $1,485,542
----------
Basic earnings per share 1,485,542 1,779,648 $0.83
Dilutive securities 0 0 0.00
---------- --------- -----
Diluted earnings per share $1,485,542 1,779,648 $0.83
========== ========= =====
DECEMBER 31, 1996:
Net income $ 984,469
----------
Basic earnings per share 984,469 1,779,648 $0.55
Dilutive securities 0 0 .00
---------- --------- -----
Diluted earnings per share $ 984,469 1,779,648 $0.55
========== ========= =====
DECEMBER 31, 1997:
Net income $2,062,869
----------
Basic earnings per share 2,062,869 1,780,675 $1.15
Dilutive securities 0 14,425 0.00
---------- --------- -----
Diluted earnings per share $2,062,869 1,795,100 $1.15
========== ========= =====
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
About Capital Structure. This statement establishes standards for
disclosing information about an entity's capital structure and is
effective for financial statement periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting of Comprehensive
Income. This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of financial statements and is effective for fiscal
years beginning after December 15, 1997. In June 1997, the FASB also
issued SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. This statement establishes standards for reporting
financial and descriptive information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to stockholders and is effective for financial statements for periods
beginning after December 15, 1997.
The Company will adopt these new standards governing disclosure and
presentation in 1998 as required.
19
<PAGE> 20
2. SECURITIES
The amortized cost, unrealized gross gains and losses, and approximate
fair value of securities at December 31, 1996 and December 31,1997 are as
follows:
<TABLE>
<CAPTION>
Available for Sale December 31, 1996
------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $13,041,282 $ 57,654 $ 0 $13,098,936
Securities of U.S. Government Agencies 7,997,968 13,664 (45,938) 7,965,694
Corporate Securities 1,006,960 0 (1,636) 1,005,324
Federal Home Loan Bank Stock 1,715,800 0 0 1,715,800
Other Securities 216,822 143 0 216,965
Mortgage Backed-Securities 25,083,142 275,407 (416,456) 24,942,093
----------- -------- --------- -----------
Total $49,061,974 $346,868 $(464,030) $48,944,812
=========== ======== ========= ===========
<CAPTION>
Available for Sale December 31, 1997
------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $12,011,022 $ 28,794 $ (837) $12,038,979
Securities of U.S. Government Agencies 9,018,762 23,011 (24,972) 9,016,801
Federal Home Loan Bank Stock 1,519,800 0 0 1,519,800
Other Securities 206,941 0 0 206,941
Mortgage Backed-Securities 21,645,142 283,659 (288,060) 21,640,741
----------- -------- --------- -----------
Total $44,401,667 $335,464 $(313,869) $44,423,262
=========== ======== ========= ===========
</TABLE>
At December 31, 1997, the amortized cost of the Bank's securities
available for sale maturing in one year or less was $11,000,704, with fair
values of $11,020,491; maturing one year through five years was
$10,029,082, with fair values of $10,035,409; maturing five years through
ten years was $3,435,957, with fair values of $3,513,672; after ten years
was $19,935,924, with fair values of $19,853,690.
Proceeds from the sale of securities available for sale during the year
ended December 31, 1997 were $998,724. Gross gains of $1,276 were realized
on those sales.
Securities carried at approximately $19,300,000 at December 31,1997 were
pledged to secure deposits.
20
<PAGE> 21
3. LOANS RECEIVABLE
Loans receivable, net, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Loans receivable, net are summarized as follows:
Real estate mortgage loans with variable rates $ 53,391,923 $ 50,322,445
Real estate mortgage loans with fixed rates 36,576,333 43,994,958
Real estate construction loans 27,761,699 30,746,055
Commercial loans 12,019,364 14,298,567
Consumer loans 9,701,254 8,844,588
------------ ------------
139,450,573 148,206,613
Allowance for loan losses (1,197,854) (1,234,309)
Loans in process (8,198,026) (9,082,657)
Other unearned credits (197,037) (213,610)
------------ ------------
$129,857,656 $137,676,037
============ ============
</TABLE>
During fiscal years 1996 and 1997 certain executive officers and directors
of the Bank and its subsidiaries were loan customers of the Bank. Total
loans outstanding to these persons at December 31, 1996 and 1997 amounted
to $431,459 and $424,663, respectively. The change from December 31, 1996
to December 31, 1997 reflects payments amounting to $87,569 and advances
of $80,773 made during the year.
The Bank has a credit concentration in residential real estate mortgage
loans. Approximately $109,600,000 and $116,000,000 at December 31, 1996
and 1997, respectively, of the Bank's total loan portfolio were in first
or second mortgage residential real estate loans. Substantially all of the
Bank's loan customers are located in the Bank's Primary lending areas of
Walker, Winston, Jefferson, and Shelby Counties in Alabama. Although the
Bank has generally conservative underwriting standards, including a policy
calling for low loan to collateral values, the ability of its borrowers to
meet their mortgage obligations is dependent upon local economic
conditions.
A reconciliation of the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $1,123,057 $1,212,193 $1,197,854
Provisions for losses 240,000 265,000 400,000
Less loan losses charged to allowance (150,864) (279,339) (363,545)
---------- ---------- ----------
BALANCE AT END OF PERIOD $1,212,193 $1,197,854 $1,234,309
========== ========== ==========
</TABLE>
The Bank was servicing participating interest in first mortgage loans for
others totaling $97,499,127 and $89,824,472 at December 31, 1996 and 1997,
respectively.
21
<PAGE> 22
At December 31, 1997, the Bank had outstanding loan commitments of
$18,059,000, including $9,082,657 in undisbursed construction loans in
process; $6,453,933 in unused lines and letters of credit and credit card;
$1,922,410 in commitments to originate mortgage loans consisting primarily
of 30-day commitments; $600,000 in commitments to originate commercial
business loans. Commitments to originate conventional mortgage loans
consisted of fixed-rate mortgages for which interest rates had not been
established of $1,922,410, all having terms ranging from 15 to 30 years.
The recorded investment in impaired loans at December 31, 1996 and
December 31, 1997 was approximately $660,000 and $840,000, respectively.
There were no specific reserves on these loans at December 31, 1996
because the loans were adequately collateralized and $60,000 in specific
reserves on these loans at December 31, 1997. The average recorded
investment in impaired loans during the year ended December 31, 1996 and
1997 was approximately $815,000 and $820,000, respectively. Interest
income on impaired loans was not material for either period.
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land $ 456,794 $ 826,241
Buildings and leasehold improvements 4,311,786 5,348,017
Furniture, fixtures, and equipment 3,627,395 3,134,374
Construction in process 1,096,239 0
Automobiles 72,341 88,788
---------- ----------
9,564,555 9,397,420
Less accumulated depreciation 4,387,565 3,612,141
---------- ----------
$5,176,990 $5,785,279
========== ==========
</TABLE>
The Bank had noncancelable operating leases for the main and branch office
sites. Office building and equipment expenses for the fiscal years ended
December 31, 1995, 1996, and 1997, respectively, include rental expense
under these leases of $96,441, $97,516, and $91,920, respectively. Future
rental payments subject to periodic renegotiations required under these
leases are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AMOUNT
-------------------- --------
<S> <C>
1998 $ 68,566
1999 57,189
2000 51,684
2001 49,284
2002 49,284
Later years 318,150
--------
Total $594,157
========
</TABLE>
22
<PAGE> 23
The Bank had a lease agreement for the building in which the main office
branch is located that generated income of $104,582, $101,860, and $93,277
for the fiscal years ended December 31, 1995, 1996, and 1997,
respectively. During 1995 the Bank entered into a lease from a related
party for a building that formerly housed administrative offices. This
lease generated income of $41,966, $50,000, and $50,000 for the fiscal
years ended December 31, 1995, 1996, and 1997, respectively.
This lease for $50,000 per year expires December 31, 2001.
5. DEPOSITS
The weighted average rate payable on all deposits at December 31, 1996 and
1997 was 4.92% and 4.94%, respectively. Deposits at December 31, 1996 and
1997 and the related rates or range of interest rates payable for deposits
outstanding at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Passbook accounts, 2.75% $ 16,867,047 $ 15,713,749
NOW accounts, 2.65% 11,255,663 12,082,057
Money Market deposit accounts, 3.00% 9,077,227 9,935,210
Noninterest-bearing accounts 5,913,774 6,025,439
------------ ------------
43,113,711 43,756,455
Time deposits (rates of 2.75% to 8.50%):
Fixed rate certificates less than $100,000 93,210,912 94,255,401
Fixed rate certificates greater than $100,000 36,761,621 41,022,007
------------ ------------
129,972,533 135,277,408
------------ ------------
Accrued interest 320,857 343,349
------------ ------------
$173,407,101 $179,377,212
============ ============
</TABLE>
The amounts and scheduled maturities of time deposits at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $ 86,891,814
1999 32,739,799
2000 10,906,094
2001 2,710,315
2002 and thereafter 2,029,386
------------
$135,277,408
============
</TABLE>
23
<PAGE> 24
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Passbook $ 509,347 $ 482,309 $ 449,759
NOW accounts 286,674 284,047 305,074
Money Market deposit accounts 263,691 321,396 417,427
Time deposits 6,477,820 7,058,090 7,523,561
---------- ---------- ----------
$7,537,532 $8,145,842 $8,695,821
========== ========== ==========
</TABLE>
6. BORROWED FUNDS
Borrowed funds are summarized as follows:
<TABLE>
1996 1997
---------- ----------
<S> <C> <C>
Warrants payable, maturing March 1, 2013 with a
weighted-average interest rate of 5.75% at
December 31, 1996 and 5.77% at December 31, 1997 $3,750,000 $3,640,000
========== ==========
</TABLE>
The Bank has an approved credit availability of $29,000,000 at the Federal
Home Loan Bank of Atlanta. At December 31, 1997, the Bank had no advances
on this line of credit. The Bank periodically borrowed funds on a
short-term basis from the Federal Home Loan Bank of Atlanta. The maximum
amount outstanding under advances from the Federal Home Loan Bank of
Atlanta during fiscal year 1996 was $10,000,000. There were no Federal
Home Loan Bank advances outstanding during fiscal 1997.
24
<PAGE> 25
7. INCOME TAX EXPENSE (BENEFIT)
Income tax expense included in the consolidation statements of operations
is comprised of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Current $ 751,747 $116,215 $ 867,962
Deferred 38,518 0 38,518
---------- -------- ----------
$ 790,265 $116,215 $ 906,480
========== ======== ==========
YEAR ENDED DECEMBER 31, 1996:
Current $ 515,148 $ 78,637 $ 593,785
Deferred 19,585 0 19,585
---------- -------- ----------
$ 534,733 $ 78,637 $ 613,370
========== ======== ==========
YEAR ENDED DECEMBER 31, 1997:
Current $1,065,889 $135,419 $1,201,308
Deferred (11,656) (1,442) (13,098)
---------- -------- ----------
$1,054,233 $133,977 $1,188,210
========== ======== ==========
</TABLE>
Total income tax expense differs from the amount determined by multiplying
income before income taxes by the statutory rate of 34%, as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Tax expense at federal income tax rate $813,287 $543,265 $1,105,367
Increase (decrease) resulting from:
Amortization of excess cost over net
assets acquired 13,894 13,894 13,894
Other, net, principally state and local
taxes, net of federal benefit 79,299 56,211 68,949
-------- -------- ----------
$906,480 $613,370 $1,188,210
======== ======== ==========
Effective income tax rate 38% 38% 37%
======== ======== ==========
</TABLE>
25
<PAGE> 26
Temporary differences between the consolidated financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant portions of the deferred tax liability relate to the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Book loan loss allowance $ 459,429 $ 469,037
Unrealized loss on securities available for sale 46,640 0
Termination of employee contracts 106,812 68,942
Litigation settlement 118,465 109,332
Loan fees 49,802 35,573
----------- -----------
Deferred tax assets 781,148 682,884
----------- -----------
Premises and equipment, principally due to difference
in depreciation (451,595) (473,337)
Tax bad debt reserve (219,920) (175,936)
FHLB stock dividends (243,771) (228,682)
Excess mortgage servicing (20,202) (6,737)
Unrealized gain on securities available for sale 0 (7,163)
Other, net (142,702) (129,053)
----------- -----------
Deferred tax liability (1,078,190) (1,020,908)
----------- -----------
Net deferred tax liability $ (297,042) $ (338,024)
=========== ===========
</TABLE>
The Bank, as a former thrift, must recapture into taxable income the
amount of their post- 1987 tax bad debt reserve over a six-year period
beginning after 1995. This recapture can be deferred for up to two years
if the Bank satisfies a residential loan portfolio test. The Bank will
recapture approximately $476,000, $176,000 tax effected, of its tax bad
debt reserves at December 31, 1997 into taxable income over the four
remaining years as a result of this law. The recapture did not have any
effect on the Bank's net income because the related tax expense had
already been accrued.
8. COMPENSATION AND BENEFITS
The Bank has a noncontributory profit sharing plan and a contributory
401(k) plan. The Company's contributions to these plans were approximately
$30,000 for each of the years ended December 31, 1995 and 1996 and $14,000
for the year ended December 31, 1997. There were no contributions made
during fiscal 1997.
The Bank has an employment agreement with a key officer. Under the terms
of this agreement, the officer will receive annual compensation in an
amount fixed by the contract, and may receive annual bonuses at the
discretion of the Board of Directors. The agreement provides for severance
payments in the event employment is terminated following a change in
control. These payments would be equal to 2.99 times the average annual
compensation paid to this officer during the five years immediately prior
to a change in control. These sums would be paid promptly after any change
in control which is defined in the agreements, among other things, as
anytime during the period of employment when change of control is deemed
to have occurred.
26
<PAGE> 27
9. LONG-TERM INCENTIVE COMPENSATION PLAN
During 1997, the Bank's shareholders' approved the adoption of the
Pinnacle Bank 1996 Stock Option and Incentive Plan ("Option Plan"). The
Option Plan provides for a number of forms of stock-based compensation for
key employees of the Company. Under the Option Plan, eligible employees
may be awarded incentive and nonqualified stock options, stock
appreciation rights, and restricted stock. The Option Plan provides for
the issuance of up to 170,000 shares of the Company's common stock. In
addition, each option expires no later than ten years after the grant
date. The exercise price of each option is determined by the stock option
committee but, in the case of incentive stock options, the price shall not
be less than the fair market value on the grant date. At December 31,
1997, options for 60,060 shares were outstanding at $8.81 per share, all
of which were exercisable.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
the Company's December 31, 1997 financial statements. SFAS No. 123 allows
companies to continue to record compensation cost under Accounting
Principles Board Opinion ("APB") No. 25; and as a result, adoption of SFAS
No. 123 did not affect the financial condition or results of operations of
the Company. SFAS No. 123 does, however, require certain pro forma
disclosures reflecting what compensation cost would have been if the fair
value based method of recording compensation expense for stock-based
compensation had been adopted. Had compensation cost been determined,
consistent with SFAS No. 123, the Company's net income would have been
decreased to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31,
1997
----------
<S> <C>
Net income--as reported $2,062,869
Net income--pro forma 1,871,814
Basic earnings per share--as reported $1.16
Basic earnings per share--pro forma 1.05
Diluted earnings per share--as reported $1.15
Diluted earnings per share--pro forma 1.04
</TABLE>
27
<PAGE> 28
A summary of the status of the Company's stock option plan at December 31,
1997 and the changes during the year then ended is as follows:
<TABLE>
<CAPTION>
1997
---------------------
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at beginning of year 0 $0.00
Granted 67,000 8.81
Exercised (6,940) 8.81
------ ----
Outstanding at end of year 60,060 $8.81
====== =====
Exercisable at end of year 60,060 $8.81
====== =====
Fair value of options granted $ 5.93
======
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: a risk free interest rate based on zero coupon
governmental issues at grant date with the maturity equal to the expected
term of the option (6.36% for 1997), no expected forfeiture rate as
options are immediately vested at date of grant, an expected stock
volatility of 18% and an expected annual dividend yield of $.40 per share
10. SPLIT IN STOCK
On September 24, 1997, the Company announced that its Board of Directors
declared a two-for-one split to be effected in the form of a 100% stock
dividend payable to shareholders of record on October 15, 1997.
11. STOCKHOLDERS' EQUITY
Dividends are paid by the Company from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans, or advances. As of December 31, 1997,
approximately $12,100,000 of the Bank's retained earnings was available
for distribution without prior regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements that prescribe quantitative measures of the Company's and
Bank's assets, liabilities, and certain off-balance sheet items. The
regulators have also imposed qualitative guidelines for capital amounts
and classifications such as risk weightings, capital components, and other
details. The quantitative measures to ensure capital adequacy require that
the Company and Bank maintain amounts and ratios, as set forth in the
schedule below, of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital to
average total assets (as defined). Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements.
28
<PAGE> 29
Management believes, as of December 31, 1997, that the Company and Bank
meets all capital adequacy requirements imposed by its regulators.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There have been no conditions or events
since that notification that Management believes have changed the
institution's category.
Actual capital amounts as well as required and well capitalized Tier I,
total, and Tier I leverage ratios as of December 31 for the Company and
the Bank are as follows:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets) $15,778 13.5% >$9,383 >8.0% >$11,728 >10.0%
- - - -
Tier I Capital (to Risk Weighted
Assets) 14,483 12.3 >4,691 >4.0 >7,037 >6.0
- - - -
Tier I Capital (to Average Assets) 14,483 7.6 >7,659 >4.0 >9,574 >5.0
- - - -
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets):
Consolidated 17,010 13.2 >10,274 >8.0 N/A
- -
Pinnacle Bank 16,068 12.5 >10,274 >8.0 >12,843 >10.0
- - - -
Tier I capital (to Risk Weighted
Assets):
Consolidated 16,211 12.6 >5,137 >4.0 N/A
- -
Pinnacle Bank 14,834 11.6 >5,137 >4.0 >7,706 >6.0
- - - -
Tier I Capital (to Average Assets):
Consolidated 16,211 8.1 >8,027 >4.0 N/A
- -
Pinnacle Bank 14,834 7.4 >8,027 >4.0 >10,034 >5.0
- - - -
</TABLE>
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Financial instruments are defined as
cash, evidence of ownership in an entity, contracts that convey either a
right to receive cash or other financial instruments or an obligation to
deliver cash or other financial instruments, or contracts that convey the
right or obligation to exchange financial instruments on potentially
favorable or unfavorable terms. The Company has a variety of financial
instruments which include items recorded on the consolidated statement of
financial condition and items which, by their nature, are not recorded on
the consolidated statement of financial condition.
Quoted market prices, if available, are utilized as an estimate of the
fair value of financial instruments. In cases where quoted market prices
are not available, fair values have been estimated using present value or
other valuation techniques. These methods are highly sensitive to the
assumptions used by management, such as those concerning appropriate
discount rates and estimates of future cash flows. Different assumptions
could significantly affect the estimated fair value amounts presented
above. In that regard, the derived fair value estimates cannot be
29
<PAGE> 30
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instrument.
Further, assets that are not financial instruments are not included in the
following table. Accordingly, the aggregate estimated fair value amounts
presented do not represent the underlying value of the Company.
This summarizes the Company's disclosure of fair value of financial
instruments made in accordance with the requirements of SFAS No. 107:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash on hand and in banks $ 2,879 $ 2,879 $ 2,747 $ 2,747
Interest-bearing deposits 3,869 3,869 4,873 4,873
Securities 48,945 48,945 44,423 44,423
Loans receivable, net 129,858 129,448 137,676 137,610
Loan held for sale 1,429 1,429 1,857 1,857
Accrued interest 1,520 1,520 1,570 1,570
Mortgage servicing 53 94 18 45
LIABILITIES:
Deposits $173,407 $173,983 $179,377 $180,729
Other borrowed funds 3,750 2,823 3,640 2,023
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair values provided above:
CASH ON HAND AND IN BANKS AND INTEREST-BEARING DEPOSITS. The carrying
value of highly liquid instruments, such as cash on hand and in banks and
interest-bearing deposits are considered to approximate their fair values.
SECURITIES AND LOANS HELD FOR SALE. Substantially all of the Company's
securities and loans held for sale, primarily to third-party investors,
have a readily determinable fair value. Fair values for these securities
are based on quoted market prices, where available. If not available, fair
values are based on market prices of comparable instruments. The carrying
value of accrued interest on these instruments approximates fair value.
LOANS RECEIVABLE, NET. For loans with rates that are repriced in
coordination with movements in market rates and with no significant change
or credit risk, fair value estimates are based on carrying values. The
fair value for certain mortgage loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair values for
other loans are estimated by discounting future cash flows using current
rates at which loans with similar terms would be made to borrowers of
similar credit ratings. The carrying amount of accrued interest on loans
approximates its fair values.
MORTGAGE SERVICING. Fair value of excess mortgage servicing is based on a
discounted cash flow analysis, based on market interest rates.
30
<PAGE> 31
DEPOSITS. The fair value of deposits with no stated maturity, such as
interest and noninterest-bearing deposits, NOW accounts, savings accounts,
and money market accounts, is by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair
values for certificates of deposit are estimated using a discounted cash
flow analysis that applies rates currently offered for certificates of
deposits with similar remaining maturities. The carrying amount of accrued
interest payable on deposits approximates its fair value.
The economic value attributed to the long-term relationship with
depositors who provide low-cost funds to the Company is considered to be a
separate intangible asset and is excluded from the presentation.
OTHER BORROWED FUNDS. The fair value of other borrowed funds is estimated
using discounted cash flow analyses, based on the current rates offered
for similar borrowing arrangements. The carrying amount of accrued
interest payable on other borrowed funds approximates its fair value.
OFF-BALANCE SHEET ITEMS. The Company's off-balance sheet instruments
consist of commitments to extend credit, primarily one-to-four-family
mortgages; unfunded commitments of credit, primarily unfunded construction
loans; and standby letters of credit. The carrying amount of unamortized
fees related to these items is not material and, because of the absence of
any known credit risk, and the estimated fair value of these unamortized
fees approximates the carrying value.
13. CONTINGENCIES
LITIGATION. On October 27, 1993, a suit was initiated in the Circuit Court
for Walker County, Alabama, by one customer who alleged that the Bank
improperly charged his account for insufficient funds. The plaintiff also
alleged that he represented a class composed of both current and past
customers of the Bank. The Bank has denied the material allegations of the
plaintiff's complaint. There has been no substantive change in the status
of this lawsuit since June 30, 1995. In addition to the litigation noted
above, the Bank is from time to time subject to routine litigations
incidental to its business. Such litigation may include alleged
compensatory and punitive damages. In recent years in the State of
Alabama, many complaints have been filed which challenge fees charged and
customer obligations associated with traditional bank services.
Additionally, punitive damage awards have been sought in amounts that bear
little or no relation to actual damages. In some of these cases, juries
have awarded large punitive awards to the plaintiffs.
Although it is not possible to determine with any certainty at this point
in time the potential exposure related to damages in connection with any
pending or threatened litigation against the Bank, it is the opinion of
management, based upon consultation with legal counsel, that the ultimate
resolutions of all pending litigation against the Bank will not have a
materially adverse effect on the Bank's financial position or result of
operations.
FDIC ASSESSMENT. The deposits of the Bank were insured by the Savings
Association Insurance Fund ("SAIF") prior to the conversion to a
commercial bank. The deposits of the Bank are currently insured by the
Bank Insurance Fund ("BIF").
31
<PAGE> 32
The FDIC Board of Directors approved a rule that established the special
assessment necessary to recapitalize the SAIF as of March 31, 1995. The
legislation provided that all SAIF member institutions pay a special one
time assessment to recapitalize SAIF, which in the aggregate is sufficient
to bring the reserve ratio in SAIF to 1.25% of insured deposits. Based
upon its level of SAIF deposits as of March 31, 1995, the Bank's special
assessment paid and expensed during the year ended December 31, 1996 was
$1,011,000.
14. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
STATEMENT OF CONDITION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS:
Cash on hand in Banks $ 1*
Interest-bearing deposits in other banks 1,394*
Investment in subsidiaries 15,404*
-------
$16,799
=======
OTHER LIABILITIES $ 18
SHAREHOLDERS' EQUITY 16,781
-------
$16,799
=======
</TABLE>
*Eliminated on consolidation
32
<PAGE> 33
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
INCOME:
Dividend income, Pinnacle Bank $2,000
Interest income 64
------
Total income 2,064
EXPENSES 36
------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,028
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 35
------
Net income $2,063
======
</TABLE>
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries (35)
Increase in other liabilities 18
------
Net cash provided by operating activities 2,046
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 61
Cash dividends paid (712)
------
Net cash used in financing activities (651)
------
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 0
------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,395
======
</TABLE>
33
<PAGE> 34
SELECTED QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited results of operations for each quarter of the years ended
December 31, 1995, December 31, 1996, and December 31, 1997 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Interest revenue $3,652,709 $3,585,256 $3,669,098 $3,772,796
Net interest income after provision for
losses on loans 1,455,779 1,487,116 1,493,153 1,536,249
Noninterest income 352,183 328,539 319,171 334,997
Noninterest expense 1,226,337 1,109,904 2,213,329 1,159,777
Net earnings 360,322 437,434 (258,570) 445,283
Basic and diluted earnings per share .20 .25 (.15) .25
YEAR ENDED DECEMBER 31, 1997:
Interest revenue $3,850,571 $3,963,278 $4,001,525 $4,052,288
Net interest income after provision for
losses on loans 1,691,271 1,667,138 1,683,628 1,612,489
Noninterest income 317,993 359,834 326,894 356,121
Noninterest expense 1,108,139 1,189,501 1,128,784 1,238,883
Net earnings 502,329 524,897 553,169 482,474
Basic earnings per share .28 .30 .31 .27
Diluted earnings per share .28 .30 .31 .26
</TABLE>
34
<PAGE> 35
CORPORATE INFORMATION
DIRECTORS -- PINNACLE BANCSHARES, INC.
AND PINNACLE BANK
Greg Batchelor
President, Dependable True Value Hardware, Inc.
O. H. Brown
CPA - Lapidus, Tuck, Raymond & Fowler, P.C.
James W. Cannon
Senior Vice President - Operations, Burton Golf, Inc.
Melvin R. Kacharos
Retired
Sam W. Murphy
Chairman of the Board & Chief Executive Officer,
Murphy Manufacturing
Robert B. Nolen, Jr.
President
Pinnacle Bancshares, Inc.
Pinnacle Bank
Max W. Perdue
Retired
Al H. Simmons
Chairman of the Board
Pinnacle Bancshares, Inc.
Pinnacle Bank
J. T. "Jabo" Waggoner
Vice President,
Community & Public Affairs HealthSouth Corp.
OFFICERS -- PINNACLE BANCSHARES, INC.
Robert B. Nolen, Jr.
President and Treasurer
Mary Jo Gunter
Vice President
Thomas L. Sherer
Secretary
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Percentage
Incorporation Ownership
<S> <C> <C>
Pinnacle Bank(1) Alabama 100%
First General Service(s) Corporation(2) Alabama 100%
First General Ventures Corporation(2) Alabama 100%
Affiliate
- ---------
First General Lending Corporation
(accounted for on the cost method)(2) Alabama 40%
</TABLE>
- ------------------
(1) Subsidiary of the Registrant.
(2) Subsidiary of Pinnacle Bank.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into the Company's previously filed
Registration Statement File No. 333-35603.
/s/ ARTHUR ANDERSEN LLP
Birmingham, Alabama
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PINNACLE BANCSHARES, INC. FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,747
<INT-BEARING-DEPOSITS> 4,873
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,423
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 138,910
<ALLOWANCE> 1,234
<TOTAL-ASSETS> 201,949
<DEPOSITS> 179,377
<SHORT-TERM> 3,640
<LIABILITIES-OTHER> 2,151
<LONG-TERM> 0
0
0
<COMMON> 18
<OTHER-SE> 16,763
<TOTAL-LIABILITIES-AND-EQUITY> 201,949
<INTEREST-LOAN> 15,246
<INTEREST-INVEST> 2,991
<INTEREST-OTHER> 320
<INTEREST-TOTAL> 15,858
<INTEREST-DEPOSIT> 8,696
<INTEREST-EXPENSE> 8,903
<INTEREST-INCOME-NET> 6,955
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 4,663
<INCOME-PRETAX> 3,251
<INCOME-PRE-EXTRAORDINARY> 2,062
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,062
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 3.7
<LOANS-NON> 2,032
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,197
<CHARGE-OFFS> 427
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 1,234
<ALLOWANCE-DOMESTIC> 1,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
