<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, $16,981,541.
The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price ($9.375 per share) at which the Common Stock was sold
on March 31, 1999, was approximately $15,366,769. 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 31, 1999, 1,789,586 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, 1998.
Part III:
Portions of the definitive proxy statement for the 1999 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,
---------------------------
1997 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
Assets............................................ $ 201,949 $ 218,086
Loans, net........................................ 137,676 128,962
Interest-bearing deposits in other banks.......... 4,873 30,845
Securities........................................ 44,423 40,415
Loans held for sale............................... 1,857 2,986
Deposits.......................................... 179,377 194,687
Borrowed funds.................................... 3,640 3,520
Stockholders' equity.............................. 16,781 17,612
Number of:
Real estate loans outstanding..................... 3,994 3,589
Savings accounts.................................. 16,365 16,136
Full service offices open......................... 5 6
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
OPERATING DATA:
Interest revenue.................................... $ 14,680 $ 15,858 $ 15,921
Interest expense.................................... 8,443 8,903 9,251
------------ ------------ ------------
Net interest income before provision for losses
on loans......................................... 6,237 6,955 6,670
Provision for losses on loans....................... 265 400 637
------------ ------------ ------------
Net interest income after provision for losses
on loans......................................... 5,972 6,555 6,033
Noninterest income.................................. 1,334 1,359 1,060
Noninterest expense................................. 5,709 4,663 4,813
Income tax expense.................................. 613 1,188 778
------------ ------------ ------------
Net earnings........................................ $ 984 $ 2,063 $ 1,502
============ ============ ============
</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,
------------------------------------------------------------------------------------
1997 1998
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................. $ 137,868 $ 12,546 9.1% $ 135,254 $ 12,217 9.0%
Securities available for sale......... 46,031 2,992 6.5% 42,546 2,718 6.4%
Other................................. 5,544 320 5.8% 18,296 986 5.4%
---------- --------- ---------- ---------- ---------
Total................................. $ 189,443 $ 15,858 8.4% 196,096 $ 15,921 8.1%
Non-interest-earning assets........... 11,237 13,613
---------- ----------
Total assets.......................... $ 200,680 $ 209,709
========== ==========
Interest-bearing liabilities:
Deposits.............................. $ 177,319 8,696 4.9% $ 185,944 9,049 4.9%
Borrowings............................ 3,658 207 5.7% 3,539 205 5.8%
---------- --------- ---------- ----------
Total interest-bearing liabilities:... 180,977 8,903 4.9% 189,483 9,254 4.9%
Non-interest-bearing liabilities...... 3,416 2,742
---------- ----------
Total Liabilities:.................... 184,393 192,225
Equity............................. 16,287 17,454
---------- ----------
Total Liabilities and Equity....... $ 200,680 $ 209,679
========== ==========
Net interest-earning assets........... 8,466 6,613
--------- ----------
Net interest income................... $ 6,955 $ 6,667
========= ==========
Interest rate spread.................. 3.5% 3.2%
========== ==========
Net interest margin................... 3.7% 3.4%
========== ==========
Ratio of average interest-earning
assets to interest-bearing
liabilities........................
104.7% 103.5%
========== ==========
</TABLE>
4
<PAGE> 5
LENDING ACTIVITIES
GENERAL. The Bank's net loan portfolio totaled $129.0 million at
December 31, 1998, or 59.1% of its total assets. On that date, $108.0 million,
or 8.4% 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.
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 the year ended December 31, 1998, the
Bank funded loan demands with increases in savings deposits and the proceeds
from loan repayments. The Bank did not increase borrowings during the year ended
December 31, 1998.
The Bank had no securities classified as held to maturity as of
December 31, 1998. 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 $93.4 million during the year ended
December 31, 1997, and $89.6 million during the year ended December 31, 1998.
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 47.1% of the single family residential mortgage loans
in the Bank's loan portfolio, and 31.4% of the Bank's net loan portfolio at
December 31, 1998. 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, 1998, the Bank had no
concentrations of loans exceeding 10% of gross losses other than as described
below.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1998
------------------- --------------------
$ % $ %
--- --- --- ---
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans...... $ 94,317 68.5% $ 86,956 67.4%
Construction loans.............. 30,746 22.3% 32,263 25.0%
Commercial loans................ 14,299 10.4% 12,248 9.5%
Consumer loans.................. 8,845 6.4% 10,069 7.8%
Less --
Loans in process............. 9,083 6.6% 11,143 8.6%
Discounts and other.......... 214 0.2% 231 0.2%
Allowance for loan losses.... 1,234 .9% 1,201 0.9%
---------- ------- ---------- --------
Total...................... $ 137,676 100.0% $ 128,961 100.00%
========== ======= ========== ========
</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, 1998, approximately 82% 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, 1998, the largest amount loaned by the Bank to one
borrower was $2.7 million which was approximately 15% 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, 1998, the Bank had $27.1 million outstanding in
residential construction loans, compared with $28.2 million in construction
loans on residential properties outstanding at December 31, 1997.
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, 1998, the Bank had
$26.9 million outstanding in commercial real estate loans, including $5.2
million in commercial construction loans. These loans are typically limited to
owner-occupied financings.
COMMERCIAL BUSINESS LOANS. At December 31, 1998, there were
approximately $12.2 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, 1998, the Bank had $10.1 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, 1998, the Bank was servicing loans
for others aggregating approximately $79.4 million. Net servicing income for the
years ended December 31, 1997 and 1998 was approximately $237,000 and $214,000,
respectively.
The Bank is continuously selling loans in the secondary market. During
the years ended December 31, 1997 and 1998, the Bank sold in excess of $33.0
million and $59.0 million, respectively, in whole loans. As of December 31,
1998, the Bank had $2.7 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 $19.9 million at December
31, 1998. Of these commitments, $18.5 million were for adjustable rate mortgages
and $1.4 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, 1998 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, 1999 December 31, 1998 December 31, 1998 Total
----------------- ----------------- ----------------- -----
<S> <C> <C> <C> <C>
Real estate mortgage........... $ 8,173,696 $ 29,814,189 $ 50,522,654 $ 88,510,539
Real estate construction....... 21,119,594 -- 21,119,594
Commercial business loans...... 6,213,149 3,622,532 2,412,110 12,247,791
Consumer....................... 3,325,497 6,511,553 232,365 10,069,415
------------ ------------ ------------ -------------
Total....................... $ 38,831,936 $ 39,948,274 $ 53,167,129 $ 131,947,339
============ ============ ============ =============
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at December 31, 1998 which have predetermined interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or Adjustable
Predetermined Rates Rates
------------------- -----
<S> <C> <C>
Real estate mortgage...................... $ 41,495,757 $ 38,841,086
Commercial business loans................. 2,425,176 3,609,466
Consumer.................................. 6,649,389 94,529
-------------- --------------
Total................................... $ 50,570,322 $ 42,545,081
============== ==============
</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,
---------------------------------
1997 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real Estate:
Residential................................... $ 542 $ 521
Commercial.................................... 1,393 610
Consumer......................................... 97 87
------------ ------------
Total............................................ $ 2,032 $ 1,218
============ ===========
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential................................... $ -- $ 2,915
Commercial.................................... -- 656
Consumer......................................... -- --
------------ ------------
Total............................................ $ -- $ 3,571
============ ============
Total of nonaccrual and 90 days
past due loans.............................. $ 2,032 $ 4,789
============ ============
Percentage of total loans........................ 1.48% 3.71%
Percentage of total assets....................... 1.01% 2.20%
Other non-performing assets(2)................... $ 2,140 $ 2,175
</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 $4.4
million at December 31, 1998 (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, 1997 and 1998 gross interest income
of $47,208 and $48,845, 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 $52,258 and $9,078 for the years ended December 31, 1997 and 1998,
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,
--------------------------------------------------
1997 1998
----------------------- ----------------------
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............ $ 540 83.7% $ 618 83.7%
Commercial................... 199 10.1% 123 10.1%
Other loans.................. 256 6.2% 251 6.2%
Unallocated.................. 239 0% 209 0%
---------- ------- --------- -------
Total..................... $ 1,234 100.0% $ 1,201 100.0%
========== ======= ========= =======
</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 December 31,
-----------------------------
1997 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period............ $ 1,197 $ 1,234
----------- -----------
Loans charged-off:
Consumer............................... 129 67
Mortgage............................... 298 651
----------- -----------
Total charge-offs......................... 427 718
----------- -----------
Total recoveries.......................... 64 48
----------- -----------
Net loans charged-off..................... 363 670
----------- -----------
Provision for possible loan losses........ 400 637
----------- -----------
Balance at end of period.................. $ 1,234 $ 1,201
=========== ===========
Ratio of net charge-offs to average
loans outstanding during the period.... .26% .53%
=========== ===========
</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, 1998, the Bank's interest-bearing
deposits and securities portfolio of approximately $40.4 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.
Securities are 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,
--------------------------------
1997 1998
---- ----
(In thousands)
<S> <C> <C>
Securities available for sale:
U.S. Treasury securities...................... $ 12,038 $ 4,027
U.S. Government and agency securities......... 9,017 17,996
FHLB stock.................................... 1,520 1,473
Mortgage-backed securities.................... 21,641 16,877
Other securities.............................. 207 42
------------ ------------
Total............................................ $ 44,423 $ 40,415
============ ============
</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, 1998.
<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 ..... $ 4,009 4.7% $ -- --% $ -- --%
U.S. government and agency.... 1,007 7.7 17,000 5.9 -- --
FHLB of Atlanta stock(1) ..... 1,473 7.3 -- -- -- --
Other securities(2) .......... -- -- -- -- 41 --
Mortgage-backed securities.... -- -- -- -- 3,600 6.9%
------- --- ------- --- ------- ---
Total ........................ $ 6,489 5.8% $17,000 5.9% $ 3,641 6.9%
======= === ======= === ======= ===
<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...... $ -- % $ 4,009 $ 4,027 4.7%
U.S. government and agency.... -- -- 18,007 17,996 6.0
FHLB of Atlanta stock(1)...... 1,473 1,473 7.3
Other securities(2)........... -- -- 42 42 --
Mortgage-backed securities.... 13,237 6.9% 16,837 16,877 6.9
------- --- ------- ------- ---
Total......................... $13,237 6.9% $40,368 $40,415 6.3%
======= === ======= ======= ===
</TABLE>
- ---------------
(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 limited partnerships, at
cost, of $40,138 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.
11
<PAGE> 12
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 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. In 1990, all employees of First General, and
property and equipment relating to loan servicing, were transferred to the Bank.
At December 31, 1998, First General had a total equity investment of $1,715 in
First General Insurance Agency.
FIRST GENERAL VENTURES CORPORATION. As of December 31, 1998, First
General Ventures Corporation had a total investment in joint ventures of
$40,138. 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,
1998, the Bank had no loan commitments and does not presently intend to make
loans to these joint ventures.
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.
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, 1998, the Bank's total deposits were $194.7 million.
12
<PAGE> 13
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 Deposit
--------------- ----------
(In thousands)
<S> <C>
Three months or less........................ $ 19,272
Over three through six months............... 6,195
Over six through twelve months.............. 9,610
Over twelve months.......................... 10,699
------------
Total..................................... $ 45,776
============
</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,
------------------------------------------------------
1997 1998
----------------------- ----------------------
Average Average Average Average
Deposits Rate Deposits Rate
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits............ $ 5,168 --% $ 7,342 --%
Interest bearing demand deposits................ 23,672 3.1 23,670 3.0
Savings deposits................................ 16,484 2.7 15,727 2.7
Time deposits................................... 131,995 5.7 139,205 5.7
------------ ------- ------------ ------
Total deposits............................... $ 177,319 4.9% $ 185,944 4.9%
============ ======= ============ ======
</TABLE>
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.
As disclosed in the following table, the Bank had no short-term
borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-----------------------
1997 1998
---- ----
(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..................................... $ -- $ --
Approximate average amounts outstanding for period:
FHLB advances..................................... $ -- $ --
Approximate weighted average rate paid during
period (1):
FHLB advances..................................... --% --%
</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,
--------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Return on Assets (Net Income Divided By
Average Total Assets) (1)................... 0.5% 1.0% 0.7%
Return on Equity (Net Income Divided By
Average Equity) (1)...................... 6.5% 12.7% 8.6%
Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)......... 8.0% 8.1% 8.0%
Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)........................ 65.5% 34.5% 48.2%
</TABLE>
- ----------------
(1) Ratios have been annualized for the six-month period ended December 31,
1996.
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,
1998, 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
------- ---------- --------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets: (1)
Loans.......................... $ 38,833 $ 39,948 $ 7,925 $ 45,242 $ 131,948
Securities..................... 6,491 17,005 3,676 13,243 40,415
Other assets...................... 30,845 -- -- -- 30,845
----------- ----------- ----------- ----------- -----------
Total........................ $ 76,169 $ 56,953 $ 11,601 $ 58,485 $ 203,208
=========== =========== =========== =========== ===========
Interest-Bearing Liabilities:(2)
Deposits....................... $ 148,630 $ 43,726 $ 2,331 $ -- $ 194,687
Borrowings..................... 130 825 1,100 1,665 3,520
----------- ----------- ----------- ----------- -----------
Total........................ $ 148,760 $ 44,351 $ 3,431 $ 1,665 $ 198,207
=========== =========== =========== =========== ===========
Interest Sensitivity Gap.......... $ (72,591) $ 12,602 $ 8,170 $ 56,820 $ 5,001
=========== =========== =========== =========== ===========
Cumulative Interest Sensitivity
Gap............................ $ (72,591) $ (59,989) $ (51,819) $ 5,001 $ 10,002
=========== =========== =========== =========== ===========
</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,
1996 vs. 1997 1997 vs. 1998
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ............................... $ 964 $ 524 $ 1,488 $ (237) $ (92) $ (329)
Securities .......................... (463) 54 (463) (223) (51) (274)
Other interest-earning assets ....... 82 17 99 686 (20) 666
------- ------- ------- ------- ------- -------
Total interest earning assets ....... $ 583 $ 595 $ 1,178 $ 226 $ (163) $ 63
======= ======= ======= ======= ======= =======
Interest Expense:
Deposits ............................ $ 543 $ 7 $ 550 $ 399 $ (246) $ 153
Borrowed Funds ...................... (83) (7) (90) (7) 5 (2)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities... $ 460 $ -- $ 460 $ 392 $ (241) $ 151
======= ======= ======= ======= ======= =======
</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.
16
<PAGE> 17
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.
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 (the "FDI 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.
17
<PAGE> 18
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.
The FDIC has adopted a risk-based insurance assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. The FDIC assigns an institution to one of three capital categories
based on the institution's financial information, as of the reporting period
ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds.
Assessment rates for SAIF-member institutions like the Bank depend on the
capital category and supervisory category to which they are assigned and
currently range from $0 to 0.27% of insured deposits. 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 FDI Act requires the federal banking agencies, including the OTS,
to prescribe for all insured depository institutions standards relating to,
among other things, internal controls, information systems and audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement safety and soundness standards pursuant to the statute. The Guidelines
set forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act.
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.
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.
18
<PAGE> 19
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.
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 under the FDIC prompt corrective action regulation.
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, 1998, the Holding Company and the Bank had 85
full-time and 22 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., 40 - Mr. Nolen joined the Bank in 1987 as First Vice
President of the Holding President, Chief Financial Officer and Treasurer.
Company and the Bank 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, 46 - Ms. Gunter joined the Bank in September 1976 and
Vice President of the has served in various lending related positions within
Holding Company and Senior the Bank. She is responsible for branch operations,
Vice President - Banking Services personnel, loan servicing and other customer service
of the Bank. 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, 1998,
the Bank maintained six branches in Jasper, Haleyville, Sumiton, Vestavia and
Trussville, 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 $6,600,000 at December 31, 1998. 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.
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 against the Bank in the Circuit Court for Walker County,
Alabama alleged 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 sought both compensatory and punitive
damages. This case was settled for $5,000.
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 Holding Company's Annual Report to Stockholders for
the year ended December 31, 1998 (Exhibit No. 13), 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 to Stockholders for the year ended
December 31, 1998 (Exhibit No. 13) is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the Annual Report to Stockholders
for the year ended December 31, 1998 (Exhibit No. 13) 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
10-KSB (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
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.
23
<PAGE> 24
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, 1998. 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)
(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: April 13, 1999 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>
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: April 13, 1999 Date: April 13, 1999
By: /s/ Albert H. Simmons By:
------------------------------------- -------------------------------------
Albert H. Simmons Max W. Perdue
Chairman of the Board Director
Date: April 13, 1999 Date: April __, 1999
By: /s/ O. H. Brown By: /s/ Greg Batchelor
------------------------------------- -------------------------------------
O. H. Brown Greg Batchelor
Director Director
Date: April 13, 1999 Date: April 13, 1999
By: By: /s/ Melvin R. Kacharos
------------------------------------- -------------------------------------
Sam W. Murphy Melvin R. Kacharos
Director Director
Date: April __, 1999 Date: April 13, 1999
By: /s/ J. T. Waggoner
-------------------------------------
J. T. Waggoner
Director
Date: April 13, 1999
</TABLE>
<PAGE> 1
Exhibit 13
PINNACLE BANCSHARES, INC.
LETTER TO OUR STOCKHOLDERS AND FRIENDS
Dear Stockholders:
Although Pinnacle Bancshares, Inc. earned $1.5 million, or $.84 per
share in 1998, your Board of Directors and management are disappointed in these
results. As you are aware, in 1997 the Company earned $2.1 million, or $1.16 per
share.
The decrease in net income for 1998 was primarily attributable to two
factors: losses on the sale and writedown of other real estate owned of $560,000
and a $240,000 increase in the provision for loan losses. The losses on sale and
writedown of other real estate owned primarily related to a golf course loan in
Walker County, Alabama, a charge to earnings of $400,000 which was taken in the
third quarter of 1998. The increase in the provision for loan losses in 1998 was
primarily due to an increase in the level of charge-offs, which increased by
$290,000 for the year ended December 31, 1998. Of these charge-offs, $250,000
related to the foreclosure of the golf course loan in the second quarter of
1998.
At year end, other real estate owned, net totaled $2.2 million,
including the golf course, which was valued at $1,100,000. We are actively
seeking to sell this property, but to date have not been able to finalize a sale
on acceptable terms.
Pinnacle Bancshares and Pinnacle Bank continue to be in sound
condition. In 1998, we established a new branch in Trussville, Alabama and we
intend to expand further in the Birmingham market, and other metropolitan
markets, as appropriate opportunities become available.
With respect to the Year 2000 issue, a plan of action has been put in
place to minimize the Company's risk exposure. The Company believes that it will
be ready for the Year 2000 and beyond.
Your Board of Directors and management are committed to protecting and
building the value of your investment. We believe that this can best be
accomplished by continuing to deliver quality services to our customers and
community.
Thank you for your support.
Sincerely,
Robert B. Nolen, Jr.
President and Chief Executive Officer
Pinnacle Bancshares, Inc.
Pinnacle Bank
<PAGE> 2
BALANCE SHEET AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1997 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
TOTAL AMOUNT OF:
Assets $ 201,949 $ 218,086
Loans, net 137,676 128,962
Interest-bearing deposits in other banks 4,873 30,845
Securities 44,423 40,415
Loans held for sale 1,857 2,986
Deposits 179,377 194,687
Borrowed funds 3,640 3,520
Stockholders' equity 16,781 17,612
NUMBER OF:
Real estate loans outstanding 3,994 3,589
Savings accounts 16,365 16,136
Full-service offices open 5 6
</TABLE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME $14,680 $15,858 $15,921
INTEREST EXPENSE 8,443 8,903 9,251
------- ------- -------
Net interest income before provision for loan losses 6,237 6,955 6,670
PROVISION FOR LOAN LOSSES 265 400 637
------- ------- -------
Net interest income after provision for loan losses 5,972 6,555 6,033
NONINTEREST INCOME 1,334 1,359 1,060
NONINTEREST EXPENSE 5,709 4,663 4,813
INCOME TAX EXPENSE 613 1,188 778
------- ------- -------
Net income $ 984 $ 2,063 $ 1,502
======= ======= =======
</TABLE>
2
<PAGE> 3
OTHER DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Interest rate spread 3.1% 3.5% 3.2%
Yield on average interest earning assets 8.0 8.4 8.1
Return on assets (net income divided by average total assets) 0.5 1.0 0.7
Return on equity (net income divided by average equity) 6.5 12.7 8.6
Equity-to-assets ratio (average equity divided by total average assets) 8.0 8.1 8.0
Dividend payout ratio (dividends declared divided
by net income) 65.5 34.5 48.2
</TABLE>
YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods and the dates
indicated, the weighted average yields earned on interest-bearing assets and the
weighted interest rates paid on the Bank's interest-bearing liabilities,
together with the net yield on interest earning assets.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AT
DECEMBER 31, DECEMBER 31,
------------------------------ ------------
1996 1997 1998 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average yield on loans..................... 8.7% 9.1% 9.0% 8.9%
Weighted average yield on securities available
for sale......................................... 6.4 6.5 6.4 6.3
Weighted average yield on all interest earning
assets........................................... 8.0 8.4 8.1 7.7
Weighted average rate paid on deposits.............. 4.9 4.9 4.9 4.9
Weighted average rate paid on
borrowed funds................................... 5.8 5.7 5.8 5.8
Weighted average rate paid on all interest
bearing liabilities.............................. 4.9 4.9 4.9 5.0
Interest rate spread (spread between weighted
average rate on all interest bearing assets and
all interest bearing liabilities)................ 3.1 3.5 3.2 2.8
Net yield (net interest income as percentage of
interest-earning assets)......................... 3.4 3.7 3.4
</TABLE>
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Pinnacle Bancshares, Inc. (the "Company") is a bank holding company incorporated
under the laws of the State of Delaware. The Company is the holding company for
Pinnacle Bank (the "Bank"), an Alabama chartered commercial bank that maintains
six branches in Jasper, Haleyville, Sumiton, Vestavia and Trussville, 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 and was acquired by the Company in January 1997.
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 an 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. During fiscal year 1998, the Company established a
new branch in Trussville, Alabama,which is located in the Birmingham market
area. The Company currently intends to further expand in the Birmingham market
as appropriate opportunities become available.
The following is a discussion and analysis of the consolidated financial
condition of the Company and the results of operations as of the dates and for
the years indicated. It is intended to be read in conjunction with the
consolidated financial statements, and the notes thereto, along with various
other financial data disclosures, both current and historical, contained in this
Annual Report.
Management's discussion and analysis includes certain forward-looking statements
addressing, among other things, the Company's prospects for earnings, asset
growth and net interest margin. Forward-looking statements are accompanied by,
and identified with, such terms as "anticipates," "believes," "expects,"
"intends," and similar phrases. Management's expectations for the Company's
future necessarily involve a number of assumptions and estimates. Factors that
could cause actual results to differ from the expectations expressed herein
include: substantial changes in interest rates and changes in the general
economy, as well as changes in the Company's strategies for credit-risk
management, interest-rate risk management and investment activities.
Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized.
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 Consolidated Financial
Statements), as well as qualitative and quantitative disclosures regarding
market risk exposures.
4
<PAGE> 5
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.
FINANCIAL CONDITION
Total deposits increased $15.3 million, to $194.7 million at December 31, 1998.
The increase was primarily in savings accounts and certificates of deposit as
the result of normal growth. Total assets increased to $218.1 million at
December 31, 1998, compared to $201.9 million at December 31, 1997, primarily
due to an increase in interest bearing deposits in other banks, which increased
$25.9 million, from $4.9 million at December 31, 1997 to $30.8 million at
December 31, 1998, and more than offset a $8.7 million decrease in loans
receivable, net from, $137.7 million at December 31, 1997 to $129.0 million at
December 31, 1998. Loan originations increased from $126.1 million at December
31, 1998 to $149.9 million at December 31, 1998. However, due to the increase of
loan repayments of $13.0 million and the lower interest rates available in 1998,
borrowers paid-off adjustable rate loans in favor of long-term fixed rate
mortgages, most of which were sold by the Bank in the secondary market. As a
result of this refinancing activity, real estate loans with variable rates
declined from $50.3 million at December 31, 1997 to $40.5 million at December
31, 1998. See Note 3 of Notes to Consolidated Financial Statements. A
substantial portion of the proceeds from such loan sales and the sale of
securities, as well as the increase in deposits, were invested in
interest-bearing deposits in other banks.
During fiscal year ended December 31, 1996, the Bank repaid approximately $10.0
million in advances from the Federal Home Loan Bank ("FHLB") of Atlanta. There
were no FHLB advances during 1997 and 1998.
The Company's investment portfolio decreased from $44.4 million at December 31,
1997 to $40.4 million at December 31, 1998. The decrease was partially
attributable to sales of securities. The entire portfolio is classified as
"available for sale," causing it to be marked-to-market with the unrealized
gains/losses reflected directly to stockholders' equity. See "--Liquidity" and
Note 2 of Notes to Consolidated Financial Statements
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.
RESULTS FOR 1998
For the year ended December 31, 1998, net income was $1.5 million, compared with
net income of $2.1 million in the prior year. Net interest income after the
provision for loan losses for the year ended December 31, 1998, was $6.0
million, compared to $6.6 million in 1997.
5
<PAGE> 6
The decrease in net income for 1998 was primarily attributable to two factors:
losses on the sale and writedown of other real estate owned of $560,000 and a
$240,000 increase in the provision for loan losses. The losses on the sale and
writedown of other real estate owned primarily related to a golf course loan in
Walker County, Alabama , a charge to earnings of $400,000 which was taken in the
third quarter of 1998. The increase in the provision for loan losses in 1998 was
primarily due to an increase in the level of charge-offs, which increased by
$290,000 for the year ended December 31, 1998. Of such charge-offs, $250,000
related to the foreclosure of the golf course loan in the second quarter of
1998.
At December 31, 1998 the Bank's other real estate owned , net totaled $2.2
million, including the Walker County golf course, which was valued at $1,100,000
million, and a development loan on commercial property in Birmingham, Alabama,
which was valued at $620,000. Although the Bank does not currently anticipate
that further charge-offs on these properties will be necessary, there can be no
assurance that additional charge-offs will not be taken. To date, the Bank has
been unable to negotiate a sale on these properties on acceptable terms.
In 1998, the average loan balance outstanding decreased by $2.5 million,
primarily due to a decrease in home mortgage rates and a lack of demand for
adjustable rate mortgages. Due to the lower interest rates available in 1998,
borrowers paid-off adjustable rate loans in favor of long-term fixed rate
mortgages, which were sold by the Bank in the secondary market. As a result of
the decrease in the Bank's loan portfolio, interest on loans declined from $12.5
million for the fiscal year ended December 31, 1997 to $12.2 million for the
fiscal year ended December 31, 1998.
NET INCOME. The Company reported net income of approximately $1.0 million, $2.1
million, and $1.5 million for fiscal years ended December 31, 1996, December 31,
1997, and December 31, 1998, respectively. 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 net interest margin and the one-time special
Savings Association Insurance Fund (SAIF) assessment in 1996. The decrease from
the fiscal year ended December 31, 1997 to the fiscal year ended December 31,
1998 was due primarily to two factors: an increase in losses on the sale and
writedown of other real estate owned of $560,000 and a $240,000 increase in the
provision for loan losses.
INTEREST REVENUE. 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. Interest income on loans and securities
decreased by approximately $600,000 from the fiscal year ended December 31, 1997
to the fiscal year ended December 31, 1998. The increase from fiscal year 1996
to fiscal year 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. The decrease from fiscal year 1997 to fiscal year 1998 was primarily
due to a decrease in the average balance of loans and securities outstanding of
approximately $5.2 million.
Other interest increased approximately $100,000 from the fiscal year ended
December 31, 1996 to the fiscal year ended December 31, 1997. Other interest
increased approximately $670,000 from the fiscal year ended 1997 to the fiscal
year 1998. The increase from the fiscal year 1996 to fiscal year 1997 was due
primarily to an increase in the average balance of interest-bearing deposits in
other banks of approximately $2.1 million. The increase from fiscal year 1997 to
fiscal year 1998 was due primarily to an increase in the average balance of
interest-bearing deposits in other banks of approximately $12.4 million.
INTEREST EXPENSE. Interest expense on deposits increased approximately $550,000
from the fiscal year ended December 31, 1996 to the fiscal year ended December
31, 1997. Interest expense on deposits increased approximately $350,000 from the
fiscal year ended December 31, 1997 to the fiscal year ended December 31, 1998.
The increase from fiscal year 1996 to fiscal year ended December 31, 1997 was
due primarily to an increase in the average balance outstanding of approximately
$11.0 million. The increase from fiscal year 1997 to fiscal year 1998 was due
primarily to an increase in the average balance outstanding of approximately
$7.0 million.
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.
Interest expense on borrowed funds decreased approximately $5,000 from the
fiscal year ended December 31, 1997 to the fiscal year ended December 31, 1998.
The decrease
6
<PAGE> 7
from fiscal year 1996 to fiscal year 1997 was due primarily to a decrease in the
average balance of borrowed funds of approximately $1.5 million. The decrease
from fiscal year 1997 to fiscal year 1998 was due primarily to a decrease in the
average balance outstanding of approximately $120,000.
PROVISIONS FOR LOAN LOSSES. 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
to provide losses. The provisions for losses on loans were $265,000, $400,000,
and $637,000 for the fiscal years ended December 31, 1996, 1997, and 1998,
respectively. The increase from fiscal year 1997 to fiscal year 1998 was due
primarily 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 entails greater credit risk and
increased charge-offs incurred by the Company. Charge-offs increased by $290,000
for the fiscal year ended December 31, 1998, from $428,000 in 1997 to $718,000
in 1998.
Management reviews the adequacy of the allowance for loan losses on a continuous
basis by assessing the quality of the loan portfolio and adjusting the allowance
when appropriate. Procedures have been established to ensure that potential
problem loans are identified and include a continuous review of the portfolio.
Management's evaluation of each loan includes a review of the financial
condition and capacity of the borrower, the value of the collateral, current
economic trends, historical losses, workout and collection arrangements, and
possible concentrations of credit. The loan review process also includes a
collective evaluation of credit quality within the mortgage and installment loan
portfolios. In establishing the allowance, loss percentages are applied to
groups of loans with similar risk characteristics. These loss percentages are
determined by historical experience, portfolio mix, and other economic factors.
Each quarter this review is quantified in a report to management, which uses it
to determine whether an appropriate allowance is being maintained. This report
is then submitted to the Board of Directors and to the appropriate Board
committee quarterly. Total nonaccural loans, which include loans on nonaccrual
status and loans 120 days past due, were approximately $2.0 million and $1.2
million at December 31, 1997 and 1998, respectively.
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
$25,000 from the fiscal year ended December 31, 1996 to the fiscal year ended
December 31, 1997. Other noninterest income decreased approximately $299,000
from the fiscal year ended December 31, 1997 to the fiscal year ended December
31, 1998. The increase from fiscal year 1996 to fiscal year 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. The decrease from fiscal year 1997 to fiscal year 1998 was due primarily to
an increase on loss on the sale of other real estate owned of approximately
$564,000, a decrease on real estate operations, net of approximately $39,000, a
decrease in service fee income of approximately $23 ,000 as well as other slight
decreases in other noninterest income, and was offset by an increase in the gain
on sale of mortgage loans of approximately $331,000.
NONINTEREST EXPENSE. Noninterest expense decreased approximately $1.0 million
from the fiscal year ended December 31, 1996 to the fiscal year ended December
31, 1997. Noninterest expense increased approximately $150,000 from the fiscal
year ended December 31, 1997 to the fiscal year ended December 31, 1998. The
decrease in noninterest expense from fiscal year 1996 to fiscal year 1997 was
due primarily to a decrease in FDIC insurance premiums. The increase from fiscal
year 1997 to fiscal year 1998 was due to an increase in compensation expense of
approximately $100,000, an increase in occupancy expense of approximately
$14,000, an increase in FDIC premiums of approximately $20,000 and an increase
on other expenses of approximately $56,000, and was offset by a decrease in
marketing and professional expense of approximately $40,000.
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
7
<PAGE> 8
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 12 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. The entire
investment portfolio at December 31, 1998, was classified as available for sale,
with a fair value of $40.4 million. See Note 2 of Notes to Consolidated
Financial Statements. At December 31, 1998, liquid assets, consisting primarily
of cash on hand, interest-bearing deposits in other banks and short-term
investments totaled approximately $75.5 million, compared to $52.5 million at
December 31, 1997. This increase of $23.0 million was primarily attributable to
the decrease in the loan portfolio and the increase in deposits during 1998.
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,
1998, the Bank had an approved credit availability of $29.0 million at the FHLB
of Atlanta and no advances outstanding.
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, 1998 was approximately $17.6
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, 1998, the
Company and the Bank satisfied its minimum regulatory capital requirement and
was "well-capitalized" within the meaning of federal regulatory requirements.
See Note 12 of Notes to Consolidated Financial Statements.
IMPACT OF INFLATION
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.
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 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.
8
<PAGE> 9
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.
The Bank has modified its credit risk assessment to include consideration of
incremental risk that may be faced by the inability of customers to address the
Year 2000 Problem. The Company has developed policies and procedures to help
identify potential customers related risks, and to gain a better understanding
of how its customers are managing their own risks associated with the Year 2000
problem.
The Company estimates the Year 2000 cost to be approximately $120,000. The
Company expensed approximately $7,000 during fiscal year ended December 31,
1998. The remaining Year 2000 cost will be expensed by June 30, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements.
9
<PAGE> 10
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 31,1998, the Company had 1,789,586 shares of
common stock outstanding and 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.
Following are the high and low sale prices of the Company's common stock for the
periods indicated:
<TABLE>
<CAPTION>
PRICE RANGE
COMMON STOCK
-------------------------
HIGH LOW
---------- ----------
<S> <C> <C>
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
Fiscal Year Ended December 31, 1998:
First quarter $ 17-3/4 $ 15-5/8
Second quarter 16-1/2 15-1/4
Third quarter 13-1/2 11-1/2
Fourth quarter 12 11-1/2
</TABLE>
Dividends of $.40 ($.10 in each of the four quarters) were declared and paid
during each of fiscal year 1998 and 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 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. 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.
10
<PAGE> 11
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, 1997 and 1998, 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, 1998.
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 subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
February 12, 1999
11
<PAGE> 12
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash on hand and in banks $ 2,747,482 $ 3,960,991
Interest-bearing deposits in other banks 4,873,353 30,845,417
Securities available for sale 44,423,262 40,414,788
Accrued interest on securities and deposits 491,104 431,499
Loans receivable, net of allowance for loan losses
of ($1,234,309 and $1,200,586, respectively) 137,676,037 128,961,641
Loans held for sale, at lower of cost or market 1,857,042 2,985,698
Other real estate owned, net 2,140,003 2,174,956
Premises and equipment, net 5,785,279 6,648,317
Excess cost over net assets acquired 469,951 429,086
Accrued interest on loans 1,079,219 954,709
Prepaid and other assets 406,296 278,412
------------ ------------
Total assets $201,949,028 $218,085,514
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $179,377,212 $194,687,494
Borrowed funds Deposits 3,640,000 3,520,000
Official checks outstanding 836,383 1,140,849
Advance payments by borrowers for taxes and insurance 104,812 60,725
Other liabilities 1,209,493 1,064,339
------------ ------------
185,167,900 200,473,407
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 4 AND 14)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, no shares issued,
100,000 authorized 0 0
Common stock, par $.01 per share, 1,786,586 and 1,789,586
outstanding, 2,400,000 and 10,000,000 authorized 17,865 17,895
Additional paid-in capital 8,083,332 8,109,740
Retained earnings 8,665,499 9,453,693
Accumulated other comprehensive income, net of tax 14,432 30,779
------------ ------------
Total stockholders' equity 16,781,128 17,612,107
------------ ------------
Total liabilities and stockholders' equity $201,949,028 $218,085,514
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST REVENUES:
Interest on loans $ 11,058,030 $ 12,546,254 $ 12,217,381
Interest and dividends on securities 3,400,564 2,991,456 2,717,566
Other interest 221,265 319,952 986,139
------------ ------------ ------------
14,679,859 15,857,662 15,921,086
INTEREST EXPENSE:
Interest on deposits 8,145,842 8,695,821 9,049,314
Interest on borrowed funds 296,720 207,317 201,961
------------ ------------ ------------
8,442,562 8,903,138 9,251,275
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 6,237,297 6,954,524 6,669,811
PROVISION FOR LOAN LOSSES 265,000 400,000 637,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,972,297 6,554,524 6,032,811
------------ ------------ ------------
NONINTEREST INCOME:
Fees and service charges on deposit accounts 385,775 407,042 401,765
Service fee income, net 260,148 236,590 213,614
Fees and charges on loans 270,731 233,901 237,891
Real estate operations, net 149,763 110,256 71,731
Net gain (loss) on sale or write down of:
Loans held for sale 255,718 359,575 690,311
Real estate owned 11,911 7,975 (555,553)
Securities available for sale (234) 1,276 --
Other income 1,078 3,227 696
------------ ------------ ------------
1,334,890 1,359,842 1,060,455
------------ ------------ ------------
NONINTEREST EXPENSE:
Compensation and benefits 2,243,311 2,570,730 2,671,066
Occupancy 1,024,807 1,015,553 1,029,451
FDIC insurance premiums 1,472,231 90,126 109,870
Marketing and professional 241,838 182,938 143,007
Legal 41,967 42,064 42,098
Other 685,194 761,876 817,598
------------ ------------ ------------
5,709,348 4,663,287 4,813,090
------------ ------------ ------------
EARNINGS BEFORE INCOME TAX 1,597,839 3,251,079 2,280,176
INCOME TAX EXPENSE 613,370 1,188,210 778,055
------------ ------------ ------------
NET INCOME $ 984,469 $ 2,062,869 $ 1,502,121
============ ============ ============
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE $ 0.55 $ 1.16 $ 0.84
CASH DIVIDENDS PER SHARE $ 0.55 $ 1.15 $ 0.83
WEIGHTED AVERAGE SHARES OUTSTANDING $ 0.36 $ 0.40 $ 0.40
WEIGHTED AVERAGE DILUTED SHARES 1,779,648 1,780,675 1,780,116
1,779,648 1,795,100 1,804,779
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Retained
Shares Amount Capital Earnings
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 1,864,000 $ 18,640 $ 8,366,717 $ 6,972,387
Comprehensive Income:
Net earnings for the year ended December 31, 1996 0 0 0 984,469
Change in unrealized gain (loss) on securities available
for sale, net 0 0 0 0
Comprehensive Income
Cash dividends ($.36 per share) 0 0 0 (641,674)
---------------------------------------------------------
BALANCE, December 31, 1996 1,864,000 18,640 8,366,717 7,315,182
Comprehensive Income:
Net earnings for the year ended December 31, 1997 0 0 0 2,062,869
Change in unrealized gain (loss) on securities available
for sale, net
Comprehensive Income
Cash dividends ($.40 per share) 0 0 0 (712,552)
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
Comprehensive Income:
Net earnings for the year ended December 31, 1998 0 0 0 1,502,121
Change in unrealized gain (loss) on securities available
for sale, net 0 0 0 0
Comprehensive Income
Cash dividends ($.40 per share) 0 0 0 (713,927)
Exercise of stock options 3,000 30 26,408 0
---------------------------------------------------------
BALANCE, December 31, 1998 1,789,586 $ 17,895 $ 8,109,740 $ 9,453,693
=========================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, December 31, 1995 $ (345,317) $ 115,889 $ 15,128,316
Comprehensive Income:
Net earnings for the year ended December 31, 1996 0 0 984,469
Change in unrealized gain (loss) on securities available
for sale, net 0 (186,411) (186,411)
Comprehensive Income 798,058
Cash dividends ($.36 per share) 0 0 (641,674)
--------------------------------------------
BALANCE, December 31, 1996 (345,317) (70,522) 15,284,700
Comprehensive Income:
Net earnings for the year ended December 31, 1997 0 0 2,062,869
Change in unrealized gain (loss) on securities available
for sale, net 84,954 84,954
Comprehensive Income 2,147,823
Cash dividends ($.40 per share) 0 0 (712,552)
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
Comprehensive Income:
Net earnings for the year ended December 31, 1998 0 0 1,502,121
Change in unrealized gain (loss) on securities available
for sale, net 0 16,347 16,347
Comprehensive Income 1,518,468
Cash dividends ($.40 per share) 0 0 (713,927)
Exercise of stock options 0 0 26,438
--------------------------------------------
BALANCE, December 31, 1998 $ 0 $ 30,779 $ 17,612,107
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
PINNACLE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 984,469 $ 2,062,869 $ 1,502,121
Adjustment to reconcile net earnings to net cash flows provided by (used in)
operating activities:
Depreciation 502,890 437,453 470,427
Provision for losses on loans 285,000 400,000 637,000
Provision (benefits) for deferred taxes 19,585 (13,098) (366,910)
Net (gain) loss on sale and writedown of:
Loans held for sale (255,718) (359,575) (690,311)
Securities available for sale 234 (1,276) 0
Real estate owned (11,911) (7,975) 555,533
Amortization, net (80,890) (375,488) (367,383)
Proceeds from sale of loans 31,030,932 32,690,234 60,270,699
Loans originated for sale (33,068,003) (32,745,301) (59,708,591)
Decrease (increase) in accrued interest receivable 48,793 (50,194) 184,115
Decrease (increase) in prepaid and other assets (134,675) (136,900) 168,749
Increase (decrease) in other liabilities 254,912 (71,548) 168,975
------------- ------------- -------------
Net cash provided by (used in) operating activities (424,382) 1,829,201 2,824,424
------------- ------------- -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Principal collected on loans and securities 75,190,309 87,426,406 100,013,446
Loans originated for portfolio (78,505,069) (93,374,369) (89,578,900)
Loans purchased for portfolio (1,796,692) 0 0
Net change in interest bearing deposits at other banks 3,280,302 (1,004,689) (25,972,064)
Purchase of securities available for sale (21,034,609) (8,030,964) (25,000,000)
Proceeds from sale of securities 14,002,109 1,194,724 0
Proceeds from callable securities 0 0 8,212,289
Proceeds from maturing securities 10,966,612 8,010,000 16,000,000
Purchase of premises and equipment (1,709,831) (1,045,742) (1,333,465)
Proceeds from sale of premises and equipment 41,440 0 0
Proceeds from sale of real estate 819,736 534,124 1,240,520
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,254,307 (6,290,510) (16,418,174)
------------- ------------- -------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net (increase) decrease in passbook, NOW, and money market deposit accounts (167,735) 642,744 4,913,674
Proceeds from sales of time deposits 28,342,280 35,186,606 39,317,362
Payments from maturing time deposits (18,203,399) (29,859,239) (28,920,754)
Proceeds from borrowed funds 6,250,000 0 0
Payments on borrowed funds (16,350,000) (110,000) (120,000)
Increase (decrease) in official checks and advance payments by borrowers
for taxes and insurance 307,992 (879,321) 304,466
Proceeds from stock options exercised 0 61,157 26,438
Payments of dividends (641,674) (712,552) (713,927)
------------- ------------- -------------
Net cash provided by (used in) financing activities (462,536) 4,329,395 14,807,259
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 367,389 (131,914) 1,213,509
CASH AT BEGINNING OF PERIOD 2,512,007 2,879,396 2,747,482
------------- ------------- -------------
CASH AT END OF PERIOD $ 2,879,396 $ 2,747,482 $ 3,960,991
============= ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds $ 8,427,805 $ 8,878,245 $ 9,281,566
Cash payments for income taxes 547,393 1,327,844 837,207
Other real estate owned transferred to mortgage loans, net 0 0 934,107
Real estate acquired through foreclosure 849,594 1,296,928 2,765,113
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE> 16
PINNACLE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
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.
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.
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.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany transactions and
accounts have been eliminated in consolidation.
SECURITIES
Securities are classified as available for sale and 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, other comprehensive income. 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. Included in securities available for sale is
stock in the Federal Home Loan Bank, which is carried at cost.
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.
16
<PAGE> 17
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, net of deferred
loan fees, 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 uncollected accrued interest 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 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.
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. There were no
unrealized losses at December 31, 1997 or 1998.
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
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.
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
require an increase in the valuation allowance account. Future
increases in fair value of the asset, less cost of disposition, may
cause a reduction 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
17
<PAGE> 18
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.
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).
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
Basic Earnings per share ("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, except the number of
weighted average shares outstanding is adjusted for the number of
additional common shares that would have been outstanding if the
potential common shares had been issued.
The following table represents the earnings per share calculations for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
NET PER SHARE
FOR THE YEARS ENDED INCOME SHARES AMOUNT
---------------------------- ----------- --------- ------
<S> <C> <C> <C>
December 31, 1996
Basic earnings per share $ 984,469 1,779,648 $ 0.55
Dilutive securities -- -- --
----------- --------- ------
Diluted earnings per share $ 984,469 1,779,648 $ 0.55
=========== ========= ======
December 31, 1997
Basic earnings per share $ 2,062,869 1,780,675 $ 1.16
Dilutive securities -- 14,425 0.01
----------- --------- ------
Diluted earnings per share $ 2,062,869 1,795,100 $ 1.15
=========== ========= ======
December 31, 1998
Basic earnings per share $ 1,502,121 1,780,116 $ 0.84
Dilutive securities -- 24,663 0.01
----------- --------- ------
Diluted earnings per share $ 1,502,121 1,804,779 $ 0.83
=========== ========= ======
</TABLE>
18
<PAGE> 19
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement establishes
standards for the way that public business enterprise report
information about certain operating segments in annual financial
statements and require that those enterprises report selected
information about certain operating segments in interim financial
reports to stockholders. This Statement was effective for fiscal year
1998. The Corporation's principal activities did not constitute
separate reportable segments of its business as defined in SFAS No.
131, but encompassed traditional banking activities which offered
similar products and services within the same primary geographic area
and regulatory and economic environment. Therefore the Statement had no
impact on the financial presentation of the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Statement is effective as of the beginning of fiscal years ending after
June 15, 1999. Management is in the process of assessing the impact of
this Statement on the presentation of the Company's financial condition
and results of operation.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This
Statement, an amendment to SFAS No. 65, requires that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability to sell or
hold those investments. The Company adopted the provisions of this
Statement on January 1, 1999; however, based on the Company's current
operating activities, management does not believe that adoption of this
Statement will have a material impact on the presentation of the
Company's financial condition or results of operation.
2. SECURITIES
The amortized cost, unrealized gross gains and losses, and approximate
fair value of securities available for sale at December 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
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>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,009,635 $ 17,168 $ 0 $ 4,026,803
Securities of U.S. Government Agencies 18,006,838 22,826 (33,859) 17,995,805
Federal Home Loan Bank Stock 1,472,600 0 0 1,472,600
Other Securities 41,853 0 0 41,853
Mortgage Backed-Securities 16,837,227 200,019 (159,519) 16,877,727
----------- -------- --------- -----------
Total $40,368,153 $240,013 $(193,378) $40,414,788
=========== ======== ========= ===========
</TABLE>
19
<PAGE> 20
At December 31, 1998, the amortized cost of the Bank's securities
available for sale maturing in one year or less was $6,488,954, with
fair values of $6,490,549; maturing one year through five years was
$17,000,119 with fair values of $17,004,748; maturing five years
through ten years was $3,600,381 with fair values of $3,676,611 after
ten years was $13,278,699 with fair values of $13,242,880.
Securities carried at approximately $23,681,000 at December 31,1998
were pledged to secure deposits.
3. LOANS RECEIVABLE
Loans receivable, net, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Real estate mortgage loans with variable rates $ 50,322,445 $ 40,515,083
Real estate mortgage loans with fixed rates 43,994,958 46,441,117
Real estate construction loans 30,746,055 32,262,624
Commercial loans 14,298,567 12,247,791
Consumer loans 8,844,588 10,069,415
------------ ------------
148,206,613 141,536,030
Allowance for loan losses (1,234,309) (1,200,586)
Loans in process (9,082,657) (11,143,030)
Other unearned credits (213,610) (230,773)
------------ ------------
$137,676,037 $128,961,641
============ ============
</TABLE>
During fiscal years 1997 and 1998 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, 1997 and
1998 amounted to $424,663 and $426,811 respectively. The change from
December 31, 1997 to December 31, 1998 reflects payments amounting to
$281,710 and advances of $283,858 made during the year.
The Bank has a credit concentration in residential real estate mortgage
loans. Approximately $93,000,000 and $86,000,000 at December 31, 1997
and 1998, respectively, of the Bank's total loan portfolio represented
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
---------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $1,212,193 $1,197,854 $1,234,309
Provisions for losses 265,000 400,000 637,000
Less loans charged-off, net of recoveries
(279,339) (363,545) (670,723)
---------- ---------- ----------
Balance at end of period $1,197,854 $1,234,309 $1,200,586
========== ========== ==========
</TABLE>
20
<PAGE> 21
The Bank was servicing first mortgage loans for others totaling
$89,824,472 and $79,435,750 at December 31, 1997 and 1998,
respectively.
At December 31, 1998, the Bank had outstanding loan commitments of
$19,896,323, including $11,143,030 in undisbursed construction loans in
process; $7,332,433 in unused lines and letters of credit and credit
cards; $1,420,860 in commitments to originate mortgage loans consisting
primarily of 30-day commitments. Commitments to originate conventional
mortgage loans consisted of fixed-rate mortgages for which interest
rates had not been established of $1,420,860, all having terms ranging
from 15 to 30 years.
The recorded investment in impaired loans at December 31, 1997 and
December 31, 1998 was approximately $840,000 and $521,000,
respectively. There were $60,000 and $75,000 in specific reserves on
these loans at December 31, 1997 and 1998, respectively. The average
recorded investment in impaired loans during the year ended December
31, 1997 and 1998 was approximately $820,000 and $681,000,
respectively. Interest income on impaired loans was not material for
either period.
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Land $ 826,241 $ 883,230
Buildings and leasehold improvements 5,348,017 6,073,018
Furniture, fixtures, and equipment 3,134,374 3,661,202
Automobiles 88,788 101,158
---------- -----------
9,397,420 10,718,608
Less accumulated depreciation 3,612,141 4,070,291
---------- -----------
$5,785,279 $ 6,648,317
========== ===========
</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, 1996, 1997, and 1998, respectively, include
rental expense under these leases of $97,516, $91,920, and $77,282,
respectively. Future rental payments subject to periodic renegotiations
required under these leases are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 Amount
---------------------- --------
<S> <C>
1999 $ 54,084
2000 54,083
2001 49,284
2002 49,284
2003 39,900
Later years 289,500
--------
Total $536,135
========
</TABLE>
The Bank had a lease agreement for the building in which the main
office branch is located that generated income of $101,860, $93,277 and
$92,946 for the fiscal years ended December 31, 1996, 1997, and 1998,
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, 1996, 1997, and 1998, respectively. This lease
for $50,000 per year expires December 31, 2001.
21
<PAGE> 22
5. DEPOSITS
Deposits at December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Passbook accounts $ 15,713,749 $ 15,700,157
NOW accounts 12,082,057 14,180,056
Money Market deposit accounts 9,935,210 10,314,237
Noninterest-bearing accounts 6,025,439 8,475,679
------------ ------------
43,756,455 48,670,129
Time deposits
Fixed rate certificates less than $100,000 94,255,401 99,923,087
Fixed rate certificates greater than $100,000 41,022,007 45,775,840
------------ ------------
135,277,408 145,698,927
------------ ------------
Accrued interest 343,349 318,438
------------ ------------
$179,377,212 $194,687,494
============ ============
</TABLE>
The amounts and scheduled maturities of time deposits at December 31,
1998 are as follows:
<TABLE>
<S> <C>
1998 $ 99,642,021
2000 30,811,877
2001 10,549,036
2002 2,365,369
2003 and thereafter 2,330,624
------------
$145,698,927
============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Passbook $ 482,309 $ 449,759 $ 432,038
NOW accounts 284,047 305,074 325,870
Money Market deposit accounts 321,396 417,427 377,751
Time deposits 7,058,090 7,523,561 7,913,655
---------- ---------- ----------
$8,145,842 $8,695,821 $9,049,314
========== ========== ==========
</TABLE>
6. BORROWED FUNDS
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Warrants payable, maturing March 1, 2013 with a
weighted-average interest rate of 5.77% at
December 31, 1997 and 5.79% at December 31, 1998 $3,640,000 $3,520,000
========== ==========
</TABLE>
22
<PAGE> 23
The Bank has an approved credit availability of $29,000,000 at the
Federal Home Loan Bank of Atlanta. At December 31, 1997 and 1998, 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. There were no Federal Home Loan Bank advances outstanding
during fiscal years 1997 and 1998.
7. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate in as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1997 $ 0
Provision charged to income 536,000
Charge-offs, net of recoveries 0
-----------
Balance at December 31, 1998 $ 536,000
===========
</TABLE>
8. INCOME TAX EXPENSE (BENEFIT)
Income tax expense, included in the consolidated statements of
operations is comprised of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
Year ended December 31, 1998:
Current $ 1,035,469 $ 111,496 $ 1,146,965
Deferred (312,643) (54,267) (366,910)
----------- ----------- -----------
$ 722,826 $ 57,229 $ 780,055
=========== =========== ===========
</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,
----------------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense at federal income tax rate $ 543,265 $1,105,367 $ 775,260
Increase (decrease) resulting from:
Amortization of excess cost over net
assets acquired 13,894 13,894 13,894
Other 56,211 68,949 (9,099)
---------- ---------- ----------
$ 613,370 $1,188,210 $ 780,055
========== ========== ==========
Effective income tax rate 38% 37% 34%
========== ========== ==========
</TABLE>
23
<PAGE> 24
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,
1997 1998
----------- -----------
<S> <C> <C>
Book loan loss allowance $ 469,037 $ 456,223
Other real estate reserves 0 203,680
Termination of employee contracts 68,942 28,730
Litigation settlement 109,332 90,095
Loan fees 35,573 21,343
----------- -----------
Deferred tax assets 682,884 800,071
----------- -----------
Premises and equipment, principally due to difference in
depreciation
(473,337) (480,573)
Tax bad debt reserve (175,936) (32,671)
FHLB stock dividends (228,682) (221,580)
Unrealized gain on securities available for sale (7,163) (15,856)
Other, net (135,790) (29,198)
----------- -----------
Deferred tax liability (1,020,908) (779,878)
----------- -----------
Net deferred tax asset (liability) $ (338,024) $ 20,193
=========== ===========
</TABLE>
9. 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, $14,000 and $30,000 for the years ended December
31, 1996 , December 31, 1997 and December 31, 1998.
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.
10. 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.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective
for the Company's December 31, 1998 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
24
<PAGE> 25
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
reflected the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
Ended Ended
December 31, December 31,
1997 1998
----------- -----------
<S> <C> <C>
Net income--as reported $ 2,062,869 $ 1,502,121
Net income--pro forma 1,871,814 1,502,121
Basic earnings per share--as reported $ 1.16 $ 0.84
Basic earnings per share--pro forma 1.05 0.84
Diluted earnings per share--as reported 1.15 $ 0.83
Diluted earnings per share--pro forma 1.04 0.83
</TABLE>
A summary of the status of the Company's stock option plan at December
31, 1997 and 1998 and the changes during the years then ended is as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 0 $ 0 60,060 $ 8.81
Granted 67,000 8.81 0 0
Exercised (6,940) 8.81 (3,000) 8.81
------ -------- ------ --------
Outstanding at end of year 60,060 $ 8.81 57,060 $ 8.81
====== ======== ====== ========
Exercisable at end of year 60,060 $ 8.81 57,060 $ 8.81
====== ======== ====== ========
Fair value of options granted 5.93 NA
====== ======
</TABLE>
The fair value of each option was 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
11. SPLIT IN STOCK
On September 24, 1997, the Company announced that its Board of
Directors declared a two-for-one split effect in the form of a 100%
stock dividend payable to shareholders of record on October 15, 1997.
12. 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
25
<PAGE> 26
form of cash dividends, loans, or advances. As of January 1, 1999
approximately $1,346,000 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. Management believes, as of December 31, 1998,
that the Company and Bank meets all capital adequacy requirements
imposed by its regulators.
As of December 31, 1998, 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 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>
Under Prompt
For Capital 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, 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
- - - -
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets):
Consolidated 18,311 14.7 >9,936 >8.0 N/A
- -
Pinnacle Bank 17,490 14.1 >9,936 >8.0 >12,421 >10.0
- - - -
Tier I capital (to Risk Weighted
Assets):
Consolidated 17,110 13.8 >4,968 >4.0 N/A
- -
Pinnacle Bank 16,289 13.1 >4,968 >4.0 >7,452 >6.0
- - - -
Tier I Capital (to Average Assets):
Consolidated 17,110 7.8 >8,735 >4.0 N/A
- -
Pinnacle Bank 16,289 7.5 >8,735 >4.0 >10,919 >5.0
- - - -
</TABLE>
26
<PAGE> 27
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. Comprehensive income is the change in equity during a period
from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
In addition to net income, the Company has identified changes related
to other nonowner transactions in the consolidated statement of changes
in stockholders' equity and comprehensive income. For the Company,
changes in other nonowner transactions consist entirely of changes in
unrealized gains and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed
as part of net income and other comprehensive income in that period or
earlier periods. The following table reflects the reclassification
amounts and the related tax effects for the three years ended
December 31:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
--------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the year $(282,796) $ (96,151) $(186,645)
Less reclassification for adjustments for gains
(losses) included in net earnings (355) (121) (234)
--------- --------- ---------
Net change in unrealized gain/(loss) on securities $(282,441) $ (96,030) $(186,411)
========= ========= =========
<CAPTION>
1997
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-------- -------- --------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the year $130,651 $ 44,421 $ 86,230
Less reclassification for adjustments for gains
(losses) included in net earnings 1,933 657 1,276
-------- -------- --------
Net change in unrealized gain/(loss) on securities $128,718 $ 43,764 $ 84,954
======== ======== ========
<CAPTION>
1998
----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
------- ------- -------
<S> <C> <C> <C>
Unrealized gains (losses )arising during the year $25,040 $ 8,693 $16,347
Less reclassification for adjustments for gains
(losses) included in net earnings 0 0 0
------- ------- -------
Net change in unrealized gain/(loss) on securities $25,040 $ 8,693 $16,347
======= ======= =======
</TABLE>
13. 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
27
<PAGE> 28
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 statements 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 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, 1997 AT DECEMBER 31, 1998
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash on hand and in banks $ 2,747 $ 2,747 $ 3,961 $ 3,961
Interest-bearing deposits 4,873 4,873 30,845 30,845
Securities 44,423 44,423 40,415 40,415
Loans receivable, net 137,676 137,610 128,962 129,008
Loan held for sale 1,857 1,857 2,986 2,986
Accrued interest 1,570 1,570 1,386 1,386
LIABILITIES:
Deposits $179,377 $180,729 $194,687 $194,008
Other borrowed funds 3,640 3,640 3,520 3,520
</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.
28
<PAGE> 29
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.
14. 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").
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.
29
<PAGE> 30
15. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CONDITION
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
ASSETS:
Cash on hand in Banks $ 1 $ 1
Interest-bearing deposits in other banks 1,394 914
Investment in subsidiaries 15,404 16,732
--------- ---------
16,799 $ 17,647
========= =========
OTHER LIABILITIES $ 18 $ 35
SHAREHOLDERS' EQUITY 16,781 17,612
--------- ---------
$ 16,799 $ 17,647
========= =========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
INCOME:
Dividend income, Pinnacle Bank $ 2,000 $ 179
Interest income 64 50
Total income 2,064
EXPENSES 36 38
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,028 191
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 35 1,311
------- -------
Net income $ 2,063 $ 1,502
======= =======
</TABLE>
30
<PAGE> 31
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,063 $ 1,502
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiaries (35) (1,311)
Increase in other liabilities 18 17
------- -------
Net cash provided by operating activities 2,046 208
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 61 26
Cash dividends paid (712) (714)
------- -------
Net cash used in financing activities (651) (688)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 0 1,395
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $(1,395) $ 915
======= =======
</TABLE>
31
<PAGE> 32
SELECTED QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited results of operations for each quarter of the years ended
December 31, 1997, and December 31, 1998 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Interest revenue $ 3,850,571 $ 3,963,278 $ 4,001,525 $ 4,105,712
Net interest income after provision for
loan losses 1,691,271 1,667,138 1,683,628 1,536,249
Noninterest income 317,993 359,834 326,894 334,997
Noninterest expense 1,108,139 1,189,501 1,128,784 1,159,777
Net income 502,329 524,897 553,169 445,283
Basic and diluted earnings per share .28 .30 .31 .27
Diluted earnings per share .28 .30 .31 .26
YEAR ENDED DECEMBER 31, 1998:
Interest revenue $ 3,933,246 $ 3,940,113 $ 4,014,797 $ 4,032,797
Net interest income after provision for
loan losses 1,558,599 1,526,925 1,306,347 1,640,940
Noninterest income 399,464 404,464 (5,512) 262,039
Noninterest expense 1,187,566 1,163,511 1,207,869 1,254,144
Net income 503,093 501,158 77,976 419,894
Basic earnings per share .28 .28 .04 .24
Diluted earnings per share .28 .28 .04 .23
</TABLE>
32
<PAGE> 33
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,Inc.
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,
Public Affairs HealthSouth Corp.
OFFICERS -- PINNACLE BANCSHARES, INC.
Robert B. Nolen, Jr.
President and Treasurer
Mary Jo Gunter
Vice President
Thomas L. Sherer
Secretary
33
<PAGE> 34
OFFICERS - PINNACLE BANK
Robert B. Nolen, Jr.
President
Thomas L. Sherer
Secretary
Mary Jo Gunter
Senior Vice President Banking Service
John Kirby
Senior Vice President Birmingham Region
C. Ray Fowler
Vice President - Internal Audit & Compliance
Marilyn K. Gober
Vice President - Retail Banking
Marie Guthrie
Controller
William O. Hairston, Jr.
Vice President - Lending & Business Development
Jaye Ottinger
Vice President - Mortgage Lending
Carl Schoettlin
Vice President - Lending
Carmen Sparks
Vice President - Loan Servicing
Brenda Steele
Vice President - Deposit Accounts
Pam Elliott
Haleyville Regional President
Edward A. Davidson
Birmingham Regional President
Linda Woods
Office Manager - Mall
Bonnie Sanford
Office Manager - Sumiton
34
<PAGE> 35
OFFICES
Main Office, 1811 2nd Avenue/Jasper (205/221-4111)
Mall Office, 204 Highway 78 East/Jasper (205/221-1322)
Sumiton Office, Bryan Road and U.S. 78/Sumiton (205/648-6091)
Haleyville Office, 1012 20th Street/Haleyville (205/486-2225)
Birmingham South, 2013 Canyon Road/Birmingham (205/822-2265)
Trussville Office, 2064 Gadsden Highway/Trussville (205/661-9625)
TRANSFER AGENT
The Bank of New York.
New York, New York
GENERAL COUNSEL
Maddox, MacLaurin, Nicholson & Thornley
Jasper, Alabama
SPECIAL COUNSEL
Kutak Rock
Washington, D.C.
AUDITORS
Arthur Andersen LLP
Birmingham, Alabama
ADDITIONAL INFORMATION
Analysts, stockholders and any other parties
interested in obtaining additional information
may contact Marie Guthrie at
Post Office Box 1388, Jasper AL 35502-1388 (205/221-4111)
ANNUAL MEETING
The 1999 Annual Meeting of Stockholders of Pinnacle Bancshares, Inc.
will be held at CHS Activity Center
204 19th Street East, Jasper, Alabama
at 11:00 a.m. on May 26, 1999
FORM 10-KSB
A COPY OF THE PINNACLE BANCSHARES, INC. ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE TO
STOCKHOLDERS OF RECORD FOR THE 1999 ANNUAL MEETING
WITHOUT CHARGE UPON WRITTEN REQUEST TO
MARIE GUTHRIE
PINNACLE BANCSHARES, INC.
POST OFFICE BOX 1388
JASPER, ALABAMA 35502-1388
35
<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
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,960,991
<INT-BEARING-DEPOSITS> 30,845,417
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 40,414,788
<LOANS> 128,961,641
<ALLOWANCE> 1,200,586
<TOTAL-ASSETS> 218,085,514
<DEPOSITS> 194,687,494
<SHORT-TERM> 3,520,000
<LIABILITIES-OTHER> 2,265,913
<LONG-TERM> 0
0
0
<COMMON> 17,895
<OTHER-SE> 17,594,212
<TOTAL-LIABILITIES-AND-EQUITY> 218,085,514
<INTEREST-LOAN> 12,217,381
<INTEREST-INVEST> 2,717,566
<INTEREST-OTHER> 986,139
<INTEREST-TOTAL> 15,921,086
<INTEREST-DEPOSIT> 9,049,314
<INTEREST-EXPENSE> 9,251,275
<INTEREST-INCOME-NET> 6,669,811
<LOAN-LOSSES> 637,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,813,090
<INCOME-PRETAX> 2,280,176
<INCOME-PRE-EXTRAORDINARY> 1,502,501
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502,121
<EPS-PRIMARY> $0.84
<EPS-DILUTED> $0.83
<YIELD-ACTUAL> 8.10
<LOANS-NON> 1,218,000
<LOANS-PAST> 3,571,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,234,309
<CHARGE-OFFS> 717,722
<RECOVERIES> 46,999
<ALLOWANCE-CLOSE> 1,200,586
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
