<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12707
-----------
PINNACLE BANCSHARES, INC.
(Name of small business issuer in its charter)
Delaware 72-1370314
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 Second Avenue, Jasper, Alabama 35502-1388
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (205) 221-4111.
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- -------------------------------------- -----------------------
Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $17,246,948.
The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price ($7.8750 per share) at which the Common Stock was sold
on February 29, 2000, was approximately $12,561,885. 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 30, 2000, 1,792,086 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, 1999.
Part III:
Portions of the definitive proxy statement for the 2000 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 six
offices located in Central and Northwest Alabama. 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,
----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
Assets ................................. $231,032 $218,086
Loans, net ............................. 146,430 128,962
Interest-bearing deposits in other banks 2,177 30,845
Securities ............................. 64,599 40,415
Loans held for sale .................... 894 2,986
Deposits ............................... 189,175 194,687
Borrowed funds ......................... 21,890 3,520
Stockholders' equity ................... 17,849 17,612
Number of:
Real estate loans outstanding .......... 3,419 3,589
Savings accounts ....................... 17,509 16,136
Full service offices open .............. 6 6
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
OPERATING DATA:
Interest revenue .............................. $16,130 $15,921 $15,858
Interest expense .............................. 9,238 9,251 8,903
------- ------- -------
Net interest income before provision for losses
on loans ................................... 6,892 6,670 6,955
Provision for losses on loans ................. 177 637 400
------- ------- -------
Net interest income after provision for losses
on loans ................................... 6,715 6,033 6,555
Noninterest income ............................ 1,116 1,060 1,359
Noninterest expense ........................... 5,195 4,813 4,663
Income tax expense ............................ 958 778 1,188
------- ------- -------
Net income .................................... $ 1,678 $ 1,502 $ 2,063
======= ======= =======
</TABLE>
3
<PAGE> 4
The following table sets forth certain information relating to the
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if
any, are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net .............. $ 135,556 $ 12,041 8.9% $ 135,254 $ 12,217 9.0%
Securities available-for-sale ...... 63,896 3,761 5.9% 42,546 2,718 6.4%
Other .............................. 6,725 328 4.9% 18,296 986 5.4%
--------- -------- ------- --------- -------- -------
Total .............................. 206,177 16,130 7.8% 196,096 $ 15,921 8.1%
Non-interest-earning assets ........ 14,808 0.0 13,613 0.0
--------- ---------
Total assets ....................... $ 220,985 $ 209,709 0.0
========= =========
Interest-bearing liabilities:
Deposits ........................... $ 193,331 8,831 4.6% $ 185,944 9,046 4.9%
Borrowings ......................... 6,961 407 5.8% 3,539 205 5.8%
--------- -------- ------- --------- -------- -------
Total interest-bearing liabilities: 200,292 9,238 4.6% 189,483 9,251 4.9%
Non-interest-bearing liabilities ... 2,933 2,742
-------- ------
Total Liabilities: ................. 203,225 0.0 192,225 0.0
--------- ---------
Equity .......................... 17,760 0.0 17,454 0.0
-------- ------
Total Liabilities and Equity .... $ 220,985 0.0 $ 209,679 0.0
========= =========
Net interest-earning assets ........ $ 5,885 0.0 $ 6,613 0.0
========= =========
Net interest income ................ $ 6,892 0.0 $ 6,670 0.0
======== ========
Interest rate spread ............... 3.2% 3.2%
======= =======
Net interest margin ................ 3.3% 3.4%
======= =======
Ratio of average interest-earning
assets to interest-bearing
liabilities
102.9% 103.5%
======= =======
</TABLE>
4
<PAGE> 5
LENDING ACTIVITIES
GENERAL. The Bank's net loan portfolio totaled $146.4 million at
December 31, 1999, or 63.4% of its total assets. On that date, $119.6 million,
or 81.7% 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, 1999 the Bank increased its
borrowings from the Federal Home Loan Bank of Atlanta (FHLB) by $18.5 million.
The increase in borrowings along with the proceeds from loan repayments and
interest bearing deposits was used to fund lending activities. 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, 1999. 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 $109.5 million during the year ended
December 31, 1999, 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 53.0% of the single family residential mortgage loans
in the Bank's loan portfolio, and 29.3% of the Bank's net loan portfolio at
December 31, 1999. 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, 1999 the Bank had no
concentrations of loans exceeding 10% of gross loans other than as described
below.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans . $ 94,288 64.4% $ 86,957 67.4%
Construction loans ......... 38,446 26.3% 32,263 25.0%
Commercial loans ........... 14,364 9.8% 12,248 9.5%
Consumer loans ............. 12,442 8.4% 10,069 7.8%
Less --
Loans in process ........ 11,580 7.9% 11,143 8.6%
Discounts and other ..... 307 0.2% 231 0.2%
Allowance for loan losses 1,223 0.8% 1,201 0.9%
-------- -------- -------- --------
Total ................. $146,430 100.00% $128,962 100.00%
======== ======== ======== ========
</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, 1999, approximately 81% 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, 1999, the largest amount loaned by the Bank to one
borrower was $2.6 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, 1999, the Bank had $36.6 million outstanding in
residential construction loans, compared with $27.1 million in construction
loans on residential properties outstanding at December 31, 1998.
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, 1999, the Bank had
$25.1 million outstanding in commercial real estate loans, including $2.1
million in commercial construction loans. These loans are typically limited to
owner-occupied financings.
COMMERCIAL BUSINESS LOANS. At December 31, 1999, there were
approximately $14.3 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, 1999, the Bank had $12.4 million
outstanding in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a
combination of walk-in customers and real estate brokers. See 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 certain 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, 1999, the Bank was
servicing loans for others aggregating approximately $71.2 million. Net
servicing income for the years ended December 31, 1999 and 1998 was
approximately $190,000 and $214,000, respectively.
During the years ended December 31, 1999 and 1998, the Bank sold
approximately $47.0 million and $59.0 million, respectively, in whole loans. As
of December 31, 1999, the Bank had approximately $700,000 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 $21.7 million at December
31, 1999. Of these commitments, $20.5 million were for adjustable rate mortgages
and $1.2 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 Notes to Consolidated Financial Statements.
7
<PAGE> 8
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1999, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans 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, December 31, December 31,
2000 1999 1999 Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real estate mortgage .... $ 6,094,682 $35,521,497 $52,034,849 $ 93,651,028
Real estate construction 26,866,052 -- -- 26,866,052
Commercial business loans 6,326,497 5,955,116 2,082,267 14,363,880
Consumer ................ 4,045,632 7,916,340 480,491 12,442,463
----------- ----------- ----------- ------------
Total ................ $43,332,863 $49,392,953 $54,597,607 $147,323,423
=========== =========== =========== ============
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year at December 31, 1999 which have predetermined interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Predetermined Adjustable
Rates Rates
----------- -----------
<S> <C> <C>
Real estate mortgage .... $46,937,649 $40,618,697
Commercial business loans 3,761,706 4,275,677
Consumer ................ 8,335,713 61,118
----------- -----------
Total ................. $59,035,068 $44,955,492
=========== ===========
</TABLE>
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans that are 120 days
contractually past due are placed on nonaccrual status and accrued 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 has been demonstrated,
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 a 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
are 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,
-------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real Estate:
Residential ............................... $ 850 $ 521
Commercial ................................ 172 610
Consumer ..................................... 70 87
------ ------
Total ........................................ $1,092 $1,218
====== ======
Accruing loans which are contractually past
due 90 days or more:
Real Estate:
Residential ............................... $2,990 $2,915
Commercial ................................ -- 656
Consumer ..................................... -- --
------ ------
Total ........................................ $2,990 $3,571
====== ======
Total of nonaccrual and 90 days
past due loans .......................... $4,082 $4,789
====== ======
Percentage of total loans .................... 2.79% 3.71%
Percentage of total assets ................... 1.77% 2.20%
Other non-performing assets(2) ............... $1,522 $2,175
</TABLE>
(1) Nonaccrual status denotes loans on which accrual of interest has been
ceased in accordance with the guidelines discussed previously. 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 $3.0
million at December 31, 1999 (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
are made to continue to reduce principal, secure additional collateral and
improve the overall payment status of their loans.
During the years ended December 31, 1999 and 1998, gross interest
income of $36,733 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 $23,600 and $9,078 for the years ended December 31, 1999 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,
-------------------------------------------------
1999 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 $ 756 81.7% $ 618 83.7%
Commercial ...... 189 9.8% 123 10.1%
Other loans ..... 278 8.5% 251 6.2%
Unallocated ..... -- 0% 209 0%
------ ------ ------ ------
Total ........ $1,223 100.0% $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,
-----------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period ....... $1,201 $1,234
------ ------
Loans charged-off:
Consumer .......................... 28 67
Mortgage .......................... 199 651
------ ------
Total charge-offs .................... 227 718
------ ------
Total recoveries ..................... 72 48
------ ------
Net loans charged-off ................ 155 670
------ ------
Provision for possible loan losses ... 177 637
------ ------
Balance at end of period ............. $1,223 $1,201
====== ======
Ratio of net charge-offs to average
loans outstanding during the period .10% .53%
====== ======
</TABLE>
For further information and for an analysis of the Bank's allowances
for loan and real estate losses, see Notes 3 and 4 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, 1999, the Bank's interest-bearing
deposits and securities portfolio of approximately $64.6 million, excluding
mortgage-backed securities,
10
<PAGE> 11
consisted primarily of interest-bearing bank deposits, U.S. government and
agency obligations, corporate securities, and FHLB of Atlanta stock.
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,
---------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Securities available-for-sale:
U.S. Treasury securities ............ $ -- $ 4,027
U.S. Government and agency securities 47,116 17,996
FHLB stock .......................... 925 1,473
Mortgage-backed securities .......... 16,518 16,877
Other securities .................... 40 42
------- -------
Total .................................. $64,599 $40,415
======= =======
</TABLE>
The following table sets forth the scheduled maturities, amortized
cost, estimated fair values and weighted average yields for the Bank's
securities available-for-sale at December 31, 1999.
<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. government and agency ... $1,000 6.2% $47,000 5.7% $ -- --%
FHLB of Atlanta stock(1) ..... -- -- -- -- --
Other securities(2) .......... -- -- -- -- 40 --
Mortgage-backed securities(3) -- -- -- -- 2,510 6.7
------ ----- ------- ------ ------ -----
Total ........................ $1,000 6.2% $47,000 5.7% $2,550 6.7%
====== ===== ======= ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
After Ten Years
------------------------- Total
Amortized Weighted Amortized Weighted
Cost Average Yield Cost Fair Value Average Yield
------- ------------- ------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. government and agency $ -- % $48,000 $47,116 5.7%
FHLB of Atlanta stock(1).. 925 7.7 925 925 7.8
Other securities(2) ...... -- -- 40 40 --
Mortgage-backed securities 14,258 6.4 16,768 16,518 6.5
------- ----- ------- ------- -----
Total .................... $15,183 6.5% $65,733 $64,599 5.9%
======= ===== ======= ======= =====
</TABLE>
11
<PAGE> 12
- ----------
(1) FHLB of Atlanta stock is an equity security. The amount of such stock held
by the Bank is included under "After Ten Years" as the Bank is required to
hold such stock as a FHLB of Atlanta member.
(2) Other securities includes the Bank's investment in limited partnerships, at
cost, of $40,695 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.
(3) Mortgage-backed securities are reflected in the above table based on their
contractual maturity.
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 $715 in
First General Insurance Agency.
FIRST GENERAL VENTURES CORPORATION. As of December 31, 1999, First
General Ventures Corporation had a total investment in joint ventures of
$39,980. 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,
1999, 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
12
<PAGE> 13
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, 1999, the Bank's total deposits were $189.2 million.
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of December 31, 1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period Of Deposit
--------------- ----------
(In thousands)
<S> <C>
Three months or less........................ $ 23,443
Over three through six months............... 15,047
Over six through twelve months.............. 6,566
Over twelve months.......................... 517
--------
Total..................................... $ 45,573
========
</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,
---------------------------------------------
1999 1998
------------------- -------------------
Average Average Average Average
Deposits Rate Deposits Rate
-------- --- -------- ---
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 7,526 --% $ 7,342 --%
Interest bearing demand deposits ... 26,015 2.8 23,670 3.0
Savings deposits ................... 15,436 2.6 15,727 2.7
Time deposits ...................... 144,354 5.3 139,205 5.7
-------- --- -------- ---
Total deposits .................. $193,331 4.6% $185,944 4.9%
======== === ======== ===
</TABLE>
For further information, see 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.
13
<PAGE> 14
The Bank had no short-term borrowings during 1998.
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-----------------------------
1999 1998
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances ......................................... $18,500,000 $ --
Weighted average rate paid at period end:
FHLB advances ......................................... 6.04% --%
Maximum amount of borrowings outstanding at any month end:
FHLB advances ......................................... $19,500,000 $ --
Approximate average amounts outstanding for period:
FHLB advances ......................................... $ 3,550,000 $ --
Approximate weighted average rate paid during
period (1):
FHLB advances ......................................... 6.09% --%
</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 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,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Return on Assets (Net Income Divided By
Average Total Assets) ................. 0.8% 0.7% 1.0%
Return on Equity (Net Income Divided By
Average Equity) .................... 9.4% 8.6% 12.7%
Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets) ... 8.0% 8.0% 8.1%
Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share) .................. 42.7% 48.2% 34.5%
</TABLE>
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,
1999, 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 ....................... $ 43,333 $ 49,393 $ 7,266 $47,332 $147,324
Securities .................. 999 46,117 2,502 14,981 64,599
Other assets ................... 2,177 -- -- -- 2,177
--------- -------- -------- ------- --------
Total ..................... $ 46,509 $ 95,510 $ 9,768 $62,313 $214,100
========= ======== ======== ======= ========
Interest-Bearing Liabilities:(2)
Deposits .................... $ 158,424 $ 29,092 $ 1,659 $ -- $189,175
Borrowings .................. 18,640 670 1,490 1,090 21,890
--------- -------- -------- ------- --------
Total ..................... $ 177,064 $ 29,762 $ 3,149 $ 1,090 $211,065
========= ======== ======== ======= ========
Interest Sensitivity Gap ....... $(130,555) $ 65,748 $ 6,619 $61,223 $ 3,035
========= ======== ======== ======= ========
Cumulative Interest Sensitivity
Gap ......................... $(130,555) $(64,807) $(58,188) $ 3,035 $ 3,035
========= ======== ======== ======= ========
</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,
1998 vs. 1999 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 ............................. $ 27 $(203) $ (176) $(237) $ (92) $(329)
Securities ........................ 1,237 (194) 1,043 (223) (51) (274)
Other interest-earning assets ..... (572) (86) 686 (20) 666 (658)
------- ----- ------- ----- ----- -----
Total interest earning assets ..... $ 692 $(483) $ 209 $ 226 $(163) $ 63
======= ===== ======= ===== ===== =====
Interest Expense:
Deposits .......................... $ 400 $(617) $ (217) $ 399 $(246) $ 153
Borrowed Funds .................... 200 2 202 (7) 5 (2)
------- ----- ------- ----- ----- -----
Total interest-bearing liabilities $ 600 $(615) $ (15) $ 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.
Financial Modernization Legislation. On November 12, 1999, the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was signed into law. The GLB Act
includes a number of provisions intended to modernize and to increase
competition in the American financial services industry, including authority for
bank holding companies to engage in a wider range of nonbanking activities,
including securities underwriting and general insurance activities. Under the
GLB Act, a bank holding company that elects to become a financial holding
company may engage in any activity that the FRB, in consultation with the
Secretary of the Treasury, determines by regulation or order is (i) financial in
nature, (ii) incidental to any such financial activity, or (iii) complementary
to any such financial activity and does not pose a substantial risk to the
safety or soundness of depository institutions or the financial system
16
<PAGE> 17
generally. The GLB Act specifies certain activities that are deemed to be
financial in nature, including lending, exchanging, transferring, investing for
others, or safeguarding money or securities; underwriting and selling insurance;
providing financial, investment, or economic advisory services; underwriting,
dealing in or making a market in, securities; and any activity currently
permitted for bank holding companies by the FRB under section 4(c)(8) of the
Holding Company Act. A bank holding company may elect to be treated as a
financial holding company only if all depository institution subsidiaries of the
holding company are and continue to be well-capitalized and well-managed and
have at least a satisfactory rating under the Community Reinvestment Act.
National banks are also authorized by the GLB Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (i) insurance underwriting,
(ii) real estate development or real estate investment activities (unless
otherwise permitted by law), (iii) insurance company portfolio investments and
(iv) merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from capital the bank's outstanding investments in financial
subsidiaries). The GLB Act also provides that state banks may invest in
financial subsidiaries (assuming they have the requisite investment authority
under applicable state law) subject to the same conditions that apply to
national bank investments in financial subsidiaries.
The GLB Act also adopts a number of consumer protections, including
provisions intended to protect privacy of bank customers' financial information
and provisions requiring disclosure of ATM fees imposed by banks on customers of
other banks.
Most of the GLB Act's provisions have delayed effective dates and
require the adoption of implementing regulations to implement the statutory
provisions. At this time, the Holding Company has not determined whether it will
become a financial holding company in order to utilize the expanded powers
offered by the GLB Act, and the Bank is unable to predict the impact of the GLB
Act's financial subsidiary provisions and consumer protections on its
operations.
Bank Holding Company Regulation. The Holding Company is registered as a
bank holding company under the Holding Company Act and, as such, subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System ("FRB"). A bank holding company is required to furnish to the FRB annual
and quarterly reports of its operations and to furnish such additional
information as the FRB may require pursuant to the Holding Company Act. The
Holding Company is also subject to regular examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the
prior approval of the FRB before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. The Holding Company 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.
As a bank holding company, the Holding Company is prohibited under the
BHC Act, with certain exceptions, 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 that, 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
17
<PAGE> 18
activities of the Holding Company and of its non-bank subsidiaries 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 GLB Act greatly expands the scope of business activities
permissible for bank holding companies by creating the new classification of
"financial holding companies." Effective March 11, 2000, the GLBA Act will
permit a bank holding company, upon classification as a financial holding
company and assuming such holding company's subsidiary banks meet certain
requirements, to engage in a broad variety of activities "financial" in nature.
See "Regulation, Supervision and Governmental Policy - Financial Modernization
Legislation."
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.
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.
As a federally insured bank, the Bank is required to pay deposit
insurance assessments to the FDIC based on a percentage of its insured deposits.
Under the FDIC's risk-based deposit insurance assessment system, the assessment
rate for an insured bank depends on the assessment risk classification assigned
to the bank. The FDIC has set the 2000 annual insurance assessment rates
applicable to Savings Association Insurance Fund ("SAIF") member banks like the
Bank from $0 for well-capitalized banks in the highest supervisory subgroup to
0.27% of insured deposits for undercapitalized banks in the lowest supervisory
subgroup. The Bank was a "well-capitalized" bank as of December 31, 1999. In
addition to deposit insurance assessments, FDIC-insured institutions are
required to pay assessments to the FDIC at an annual rate of approximately 0.02%
of insured deposits to fund interest payments on certain bonds issued by the
Financing Corporation, an agency of the federal government established to
recapitalize the predecessor to the SAIF.
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
18
<PAGE> 19
that, if undertaken, could have a direct material effect on the Bank's and the
Company's financial statements. See "--Capital Requirements."
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.
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 includible as capital to 1.25% of total
risk-weighted assets.
The FRB, the FDIC and the other federal 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
19
<PAGE> 20
comprehensive policies and procedures for managing interest rate risk and
setting forth general standards for such internal policies.
The FDIC has issued regulations that classify insured depository
institutions by capital levels and provide that the FDIC will take various
prompt corrective actions to resolve the problems of any state bank it regulates
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, 1999, the Bank was categorized as "well-capitalized" by the
FDIC.
See Item 6, "Management's Discussion and Analysis or Plan of
Operation," and Notes to Consolidated Financial Statements contained in the
Holding Company's Annual Report to Stockholders for the year ended December 31,
1999 (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, 1999, the Holding Company and the Bank had 87
full-time and 15 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.
20
<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name, Age and Position Business Experience
- ---------------------- -------------------
<S> <C>
Robert B. Nolen, Jr., 41 - 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 As President of each of the Holding Company
Officer of the Bank. 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.
Mary Jo Gunter, 47 - 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, 1999,
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 Notes to
Consolidated Financial Statements.
The total net book value of the Bank's investment in premises and
equipment was $6,700,000 at December 31, 1999. See Notes to Consolidated
Financial Statements for further information.
21
<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are parties to litigation and claims arising
in the normal course of business Management, after consultation with legal
counsel, believes that the liabilities, if any, arising from such litigation and
claims will not be material to the consolidated financial statements.
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, 1999 (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, 1999 (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.
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.
22
<PAGE> 23
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.
10.1 Employment Agreement between Registrant and Robert B.
Nolen, Jr.
10.2 Pinnacle Bank 1996 Stock Option and Incentive Plan -
Incorporated by reference to Exhibit 10.4 to
Registrant's Registration Statement on Form S-4 (File
No. 333-11495).
10.3 Pinnacle Bank Profit Sharing Retirement Plan -
incorporated by reference to Registrant's
Registration Statement on Form S-8 (File No.
333-85441).
13 Annual Report to Stockholders for the year ended
December 31, 1999. 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.
22 Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule (SEC use only)
(b) Not applicable.
23
<PAGE> 24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE BANCSHARES, INC.
Date: March 30, 2000 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.
By: /s/ Robert B. Nolen, Jr. By:
-------------------------------- ---------------------------------
Robert B. Nolen, Jr. James W. Cannon
President and Chief Executive Director
Officer (Principal Executive
Officer, Principal Financial
Officer and Principal Accounting
Officer)
Date: March 30, 2000 Date: March ___, 2000
By: /s/ Albert H. Simmons By: /s/ Max W. Perdue
-------------------------------- ---------------------------------
Albert H. Simmons Max W. Perdue
Chairman of the Board Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ O. H. Brown By: /s/ Greg Batchelor
-------------------------------- ---------------------------------
O. H. Brown Greg Batchelor
Director Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Sam W. Murphy By: /s/ Melvin R. Kacharos
-------------------------------- ---------------------------------
Sam W. Murphy Melvin R. Kacharos
Director Director
Date: March 30, 2000 Date: March 30, 2000
By:
--------------------------------
J. T. Waggoner
Director
Date: March __, 2000
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of April 22, 1998, by and between
Pinnacle Bancshares, Inc. (the "Company"), Pinnacle Bank (the "Bank") and Robert
B. Nolen, Jr. (the "Employee").
WHEREAS, the Company and the Bank wish to assure retention of the
services of the Employee for the period provided in this Agreement; and
WHEREAS, the Employee is willing to serve in the employ of the Bank for
said period.
WHEREAS, the Boards of Directors of each of the Company and the Bank
have separately determined that the term of the Employee's employment hereunder
shall be for a period commencing on April 22, 1999 and ending 36 months
thereafter (or such earlier date as is determined in accordance with Section 9),
unless extended in accordance with Section 5; and
WHEREAS, the Bank is currently paying the Employee a salary at the rate
of $120,000 per annum; and
WHEREAS, the Boards of Directors of each of the Company and the Bank
and the Employee have determined that it is in their respective best interests
to amend and restate the Agreement in order to reflect the extended term of
employment hereunder and the Employee's current salary;
NOW, THEREFORE, the Agreement shall be amended and restated as follows,
with such amendment to be effective as of January 26, 2000:
1. Employment. The Employee is employed as the President and Chief
Executive Officer of each the Company and the Bank. The Employee shall render
such administrative and management services for each of the Company and the Bank
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
each of the Company and the Bank. The Employee's other duties shall be such as
the Board of Directors of each of the Company and the Bank may from time to time
reasonably direct, including normal duties as an officer of the Company and the
Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $120,000 per annum, payable in
cash not less frequently than monthly; provided, however, that such salary shall
be reduced by any salary paid to the Employee by the Company. The Board of
Directors of the Bank shall review, not less often than annually, the rate of
the Employee's salary, and in its sole discretion may decide to adjust his
salary; provided, however, that any reduction of the Employee's salary shall be
commensurate with a general reduction in the salaries of the Bank's senior
officers.
3. Discretionary Bonuses. The Employee may be entitled to annual
bonuses at the sole discretion of the Board. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
Employee shall participate in any plan that the Company or the Bank maintains
for the benefit of its employees if the plan relates to (i) pension,
profit-sharing, or other retirement benefits, (ii) medical insurance or the
reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.
<PAGE> 2
(b) Employee Benefits; Expenses. The Employee shall
participate in any fringe benefits which are or may become available to the
senior management employees of the Company and the Bank and which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Company and the Bank.
(c) Liability Insurance; Indemnification. The Company and/or
the Bank shall provide the Employee (including his heirs, executors, and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at their expense, or in lieu thereof, shall indemnify
the Employee (and his heirs, executors, and administrators) to the fullest
extent permitted under applicable law against all expenses and liabilities
reasonably incurred by him in connection with or arising out of any action, suit
or proceeding in which he may be involved by reason of his having been a
director or officer of the Company and the Bank (whether or not he continues to
be a director or officer at the time of incurring such expenses or liabilities);
such expenses and liabilities to include, but not limited to, judgments, court
costs and attorneys' fees and the cost of reasonable settlements, and such
settlements to be approved by the Board of Directors of each of the Company and
the Bank; provided, however, that such indemnification shall not extend to
matters as to which the Employee is finally adjudged to be liable for willful
misconduct or gross negligence in the performance of his duties as a director or
officer.
5. Term. Each of the Company and the Bank hereby employs the Employee,
and the Employee hereby accepts such employment under this Agreement, for the
period commencing on April 22, 1999 (the "Effective Date") and ending 36 months
thereafter (or such earlier date as is determined in accordance with Section 9).
Additionally, on each annual anniversary date from the Effective Date, the
Employee's term of employment may be extended for an additional one-year period
beyond the then effective expiration date; provided, however, that the Board of
Directors of the Company and the Bank each determines in a duly adopted
resolution that the performance of the Employee has met the Board's requirements
and standards and that this Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties to the Company and the Bank hereunder
and/or to their affiliates; provided, however, that from time to time, the
Employee may serve on the boards of directors of, and hold any other offices or
positions in, companies or organizations which will not present, in the
reasonable opinion of the Board, any conflict of interest with the Company or
the Bank or any of its subsidiaries or affiliates, or unfavorably affect the
performance of the Employee's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation. "Full business time" is hereby
defined as that amount of time usually devoted to like companies by similarly
situated executive officers. During the term of his employment under this
Agreement, the Employee shall not engage in any business or activity contrary to
the business affairs or interests of the Company, the Bank and/or their
affiliates, or be gainfully employed in any other position or job other than as
provided above.
(b) In consideration of his right to receive the payments described
in this Agreement, the Employee covenants and agrees that, for the period
beginning on the voluntary termination of his employment hereunder pursuant to
Section 9(f) or 11(b)(2) hereof and ending 12 months after the effective date of
such termination, he shall not: (i) within Walker and Jefferson Counties,
Alabama, engage directly or indirectly, as an individual, in partnership, or
through any corporation or unincorporated association as an owner, proprietor,
director, officer, other employee, consultant, agent, representative or
otherwise, in any business which directly competes with the Company, the Bank or
their successors in interest, in any line of business or component thereof; or
(ii) recruit or solicit for employment any current or future employee of the
Company, the Bank or any of their successors in interest. The provisions of this
Section 6(b) shall survive any termination of this Agreement.
<PAGE> 3
(c) Nothing contained in this Section 6 shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Company or the Bank, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Company and the Bank will provide the Employee
with the working facilities and staff customary for similar executives and
necessary for him to perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors of the Bank shall in its discretion permit, the Employee shall be
entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment under this Agreement, all such voluntary absences
to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board of Directors of the Bank
periodically establishes for senior management employees. The timing of
vacations shall be scheduled in a reasonable manner by the Board of Directors of
the Bank. The Employee shall not be entitled to receive any additional
compensation on account of his failure to take a vacation; nor shall he be
entitled to accumulate unused vacation from one fiscal year to the next except
to the extent authorized by the Board of Directors for senior management
officials.
(b) The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in accordance with the policies of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment hereunder for such additional periods of time and
for such valid and legitimate reasons as the Board of Directors of the Company
and/or the Bank may in its discretion determine. Further, the Board may grant to
the Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as such Board in its discretion may
determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board of Directors of the Bank for senior
management officials of the Bank.
9. Termination and Termination Pay. Subject to Section 11 hereof, the
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
for the remaining term of the contract, payable on a monthly basis, plus any
accrued and unpaid discretionary bonus due Employee at the time of his death,
payable in a lump sum amount within 30 days of the Employee's death. In
addition, the Bank shall maintain the existing medical insurance for the
Employee's spouse for six months after the Employee's death.
(b) Disability. The Company and the Bank may terminate the
Employee's employment after having established the Employee's Disability. For
purposes of this Agreement, "Disability" means a physical or mental infirmity
which impairs the Employee's ability to substantially perform his duties under
this Agreement and which results in the Employee becoming eligible for long-term
disability benefits under the Bank's long-term disability plan which the Bank
shall maintain during the term of this Agreement. The Employee shall be entitled
to the compensation and benefits provided for under this Agreement for (i) any
period during the term of this Agreement and prior to the establishment of the
Employee's Disability during which the Employee is unable to work due to the
physical or mental infirmity, or (ii) any period of Disability which is prior to
the Employee's
<PAGE> 4
termination of employment pursuant to this Section 9(b); provided, that any
benefits paid pursuant to the Bank's long-term disability plan will continue in
accordance therewith.
(c) Just Cause. The Board of Directors of the Company and/or the
Bank may, by written notice to the Employee, immediately terminate his
employment at any time, for Just Cause. The Employee shall have no right to
receive compensation or other benefits for any period after termination for Just
Cause. Termination for "Just Cause" shall mean termination because of, in the
good faith determination of the Board, the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. No act, or failure to act, on the Employee's part shall be considered
"willful" unless he has acted, or failed to act, with an absence of good faith
and without a reasonable belief that his action or failure to act was in the
best interest of the Company and the Bank. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Just Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board of Directors of each of the Company and the Bank at a meeting of each
Board called and held for that purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the third sentence of this Subsection (c) and specifying the
particulars thereof in detail. If following such meeting the Employee is
reinstated, he shall be entitled to receive back pay for the period following
termination and continuing through reinstatement.
(d) Without Just Cause; Constructive Discharge. (1) The Board of
Directors of the Company and/or the Bank may, by written notice to the Employee,
immediately terminate his employment at any time for a reason other than Just
Cause, in which event the Employee shall be entitled to receive the following
compensation and benefits (unless such involuntary termination occurs within the
time period set forth in Section 11(a) hereof, in which event the benefits and
compensation provided for in Section 11 shall apply): (i) the salary provided
pursuant to Section 2 hereof, up to the date of termination of the term as
provided in Section 5 hereof (including any renewal term) of this Agreement (the
"Expiration Date"), plus said salary for an additional 12-month period, and (ii)
at the Employee's election, either (A) cash in an amount equal to the cost to
the Employee of obtaining all health, life, disability and other benefits which
the Employee would have been eligible to participate in through the Expiration
Date based upon the benefit levels substantially equal to those that the Company
and/or the Bank provided for the Employee at the date of termination of
employment, or (B) continued participation under such benefit plans through the
Expiration Date, but only to the extent the Employee continues to qualify for
participation therein. All amounts payable to the Employee shall be paid, at the
option of the Employee, either (I) in periodic payments through the Expiration
Date, or (II) in one lump sum within 10 days of such termination.
(2) The Employee may voluntarily terminate his employment under
this Agreement, and the Employee shall thereupon be entitled to receive the
compensation and benefits payable under Section 9(d)(1) hereof, within 90 days
following the occurrence of any of the following events, which has not been
consented to in advance by the Employee in writing (unless such voluntary
termination occurs within the time period set forth in Section 11(b) hereof, in
which event the benefits and compensation provided for in Section 11 shall
apply): (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than 50 miles from his primary
office; (ii) a material reduction without reasonable cause in the Employee's
base compensation which is not commensurate with a general reduction in the
salaries of senior officers or as the same may be changed by mutual agreement
from time to time; (iii) the failure by the Company and/or the Bank to continue
to provide the Employee with compensation and benefits provided for under this
Agreement, as the same may be increased from time to time, or with benefits
substantially similar to those provided to him under any of the employee benefit
plans in which the Employee now or hereafter becomes a participant, or the
taking of any action by the Company and/or Bank which would directly or
indirectly reduce any of such benefits or deprive the Employee of any material
fringe benefit enjoyed by him; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position as referenced at Section 1; (v) a failure to elect or reelect the
Employee to the Board of Directors of the Company or the Bank; (vi) a material
diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in
<PAGE> 5
connection with his employment; or (vii) a material reduction in the secretarial
or other administrative support of the Employee.
(3) In the even that Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code") becomes applicable to payments made under this
Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section
11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2)
of this Agreement.
(e) Termination or Suspension Under Federal Law. (1) If the Employee
is removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all
obligations of the Company and the Bank under this Agreement shall terminate, as
of the effective date of the order, but vested rights of the parties shall not
be affected.
(2) If the Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default; however, this Paragraph shall not affect the vested rights of the
parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee. The Employee may voluntarily
terminate employment with the Company and the Bank during the term of this
Agreement upon at least 30 days' prior written notice to the Board of Directors
of each of the Company and the Bank, in which case the Employee shall receive
only his compensation, vested rights and employee benefits up to the date of his
termination (unless such voluntary termination occurs pursuant to Section
9(d)(2) or 11(b) hereof, in which event the benefits and compensation provided
for in Section 9(d) or 11, as applicable, shall apply).
10. No Mitigation. The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
(a) Change in Control; Involuntary Termination. (1) Notwithstanding
any provision herein to the contrary, if the Employee's employment under this
Agreement is terminated by the Company or the Bank, without the Employee's prior
written consent and for a reason other than Just Cause, in connection with or
within 12 months after any Change in Control (as hereafter defined) of the Bank
or the Company, the Employee shall, subject to paragraph (2) of this Section
11(a), be paid an amount equal to the difference between (i) the product of 2.99
times his "base amount" as defined in Section 280G(b)(3) of the Code and
regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of
any other parachute payments (as defined under Section 280G(b)(2) of the Code)
that the Employee receives on account of the Change in Control. Said sum shall
be paid in one lump sum within 10 days of such termination, and shall be paid in
lieu of the payment of any benefits under Section 9 hereof. The Bank shall also
maintain existing insurance for six months after termination of the Employee's
employment, or if Employee dies within such six months, the Bank shall maintain
health insurance for the Employee's spouse, if living, for the remainder of the
six month period. At the election of the Employee, which election is to be made
within 30 days of Employee's termination, such payments shall be made in a lump
sum or paid monthly during the remaining term of this Agreement following the
Employee's termination, and shall be payable, in the event of the Employee's
death before full payment is made, to the Employee's surviving spouse, if any,
and otherwise to his
<PAGE> 6
estate. In the event that no election is made, payment to the Employee will be
made [in a lump sum] on a monthly basis during the remaining term of this
Agreement.
(2) In the event that the Employee, on the one hand, and the
Company and the Bank, on the other hand, jointly determine and agree that the
total parachute payments receivable under clauses (i) and (ii) of Section
11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure
set forth in Section 11(a)(1) hereof, the Employee shall determine which and how
much, if any, of the parachute payments to which he is entitled shall be
eliminated or reduced so that the total parachute payments to be received by the
Employee do not exceed the Maximum Amount. If the Employee does not make his
determination within 10 business days after receiving a written request from the
Company and the Bank, the Company and/or the Bank may make such determination
and shall notify the Employee promptly thereof. Within five business days of the
earlier of receipt of the Employee's determination pursuant to this paragraph or
the determination by the Company and/or the Bank in lieu of a determination by
the Employee, the Company and/or the Bank shall pay to or distribute to or for
the benefit of the Employee such amounts as are then due the Employee under this
Agreement.
(3) As a result of uncertainty in application of Section 280G of
the Code at the time of payment hereunder, it is possible that such payments
will have been made by the Company and/or the Bank which should not have been
made ("Overpayment") or that additional payments will not have been made by the
Company and/or the Bank which should have been made ("Underpayment"), in each
case, consistent with the calculations required to be made under Section
11(a)(1) hereof. In the event that the Employee, based upon the assertion by the
Internal Revenue Service against the Employee of a deficiency which the Employee
believes has a high probability of success, determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Company and/or the
Bank to or for the benefit of Employee shall be treated for all purposes as a
loan ab initio which the Employee shall repay to the Company and/or the Bank
together with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed
to have been made and no amount shall be payable by the Employee to the Company
and/or the Bank if and to the extent such deemed loan and payment would not
either reduce the amount on which the Employee is subject to tax under Section 1
and Section 4999 of the Code or generate a refund of such taxes. In the event
that the Employee and the Company and/or the Bank determine, based upon
controlling precedent or other substantial authority, that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Company and/or the
Bank to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
(4) The term "Change in Control" shall mean any one of the
following events: (i) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Company's voting stock, (ii) the acquisition
of the ability to control the election of a majority of the Bank's or the
Company's directors, (iii) the acquisition of a controlling influence over the
management or policies of the Bank or the Company by any person or by persons
acting as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended) (except in the case of (i), (ii) and (iii)
hereof, ownership or control of the Bank by the Company itself shall not
constitute a "change in control"), or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company or the Bank (the "Existing Board") (the "Continuing
Directors") cease for any reason to constitute at least a majority thereof,
provided that any individual whose election or nomination for election as a
member of the Existing Board was approved by a vote of at least a majority of
the Continuing Directors then in office shall be considered a Continuing
Director. For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The discussion of the Continuing
Directors as to whether a Change in Control has occurred shall be conclusive and
binding.
(b) Change in Control; Voluntary Termination.
(1) Notwithstanding any other provision of this Agreement to the
contrary, but subject to Section 11(a)(2) hereof, the Employee may voluntarily
terminate his employment under this Agreement within 24
<PAGE> 7
months following a Change in Control of the Bank or the Company, as defined in
paragraph (a)(4) of this Section 11, and the Employee shall thereupon be
entitled to receive the payment described in Section 11(a) of this Agreement
upon the occurrence of any of the following events, or within 90 days
thereafter, which has not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than 50 miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in the
Employee's base compensation as in effect on the date of the Change in Control
or as the same may be changed by mutual agreement from time to time; (iii) the
failure by the Company and/or the Bank to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any employee benefit plans in which the Employee is a
participant at the time of the Change in Control, or the taking of any action
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him at the time of the Change
in Control; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with his position as
referenced at Section 1; (v) a failure to elect or reelect the Employee to the
Board of Directors of the Company or the Bank, if the Employee is serving on the
Board on the date of the Change in Control and the Company and/or the Bank is a
surviving corporation in the transaction which results in the Change in Control;
(vi) a material diminution or reduction in the Employee's responsibilities or
authority (including reporting responsibilities) in connection with his
employment; or (vii) a material reduction in the secretarial or other
administrative support of the Employee. Said sum shall be paid in lieu of the
payment of any benefit under Section 9 hereof.
(2) Notwithstanding any other provision of this Agreement to the
contrary, but subject to Section 11(a)(2) hereof, the Employee may voluntarily
terminate his employment under this Agreement following a Change in Control of
the Bank or the Company, as defined in paragraph (a)(4) of this Section 11, and
the Employee shall thereupon be entitled to receive the following payments: (i)
within 12 months following a Change in Control of the Bank or the Company, the
Employee shall be entitled to receive the salary provided pursuant to Section 2
hereof for an additional 12-month period; (ii) after 12 months but within 24
months following a Change in Control of the Bank or the Company, the Employee
shall be entitled to receive the salary provided pursuant to Section 2 hereof
for an additional 24-month period; and (iii) after 24 months but within 36
months following a Change in Control of the Bank or the Company, the Employee
shall be entitled to receive the payments described in Section 11(a) of this
Agreement. At the election of the Employee, which election is to be made within
30 days of the Employee's voluntary termination, such payments shall be made in
a lump sum or paid monthly. Said sum shall be paid in lieu of the payment of any
benefit under Section 9 hereof.
(c) Compliance with 12 U.S.C. Section 1828(k). The obligations of
the Company and the Bank to make payments to the Employee pursuant to this
Agreement, or otherwise, are subject to compliance with Section 18(k) of the
FDIA (12 U.S.C. 1828(k)) and any regulations promulgated thereunder.
12. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitration award in any court having
jurisdiction; provided, however, that until the Expiration Date the Employee
shall be entitled to seek specific performance of his right to be paid during
the pendency of any dispute or controversy arising under or in connection with
this Agreement. Any arbitration proceeding shall be governed by and subject to
Alabama arbitration law.
13. Federal Income Tax Withholding. The Company and/or the Bank may
withhold all Federal and State income or other taxes from any benefit payable
under this Agreement as shall be required pursuant to any law or government
regulation or ruling.
14. Successors and Assigns.
(a) Company and Bank. This Agreement shall not be assignable by the
Company or the Bank, provided that this Agreement shall inure to the benefit of
and be binding upon any corporate or other
<PAGE> 8
successor of the Company or the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Company or Bank.
(b) Employee. Since the Company and the Bank are contracting for the
unique and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Company and the Bank; provided, however, that nothing
in this paragraph shall preclude (i) the Employee from designating a beneficiary
to receive any benefit payable hereunder upon his death, or (ii) the executors,
administrators, or other legal representatives of the Employee or his estate
from assigning any rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
15. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
16. Applicable Law. Except to the extent preempted by Federal law, the
laws of the State of Alabama shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
17. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Entire Agreement. This Agreement, together with any understanding
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ATTEST: PINNACLE BANCSHARES, INC.
By:
- ---------------------------------- --------------------------------------
Secretary
ATTEST: PINNACLE BANK
By:
- ---------------------------------- --------------------------------------
WITNESS:
- ---------------------------------- --------------------------------------
Robert B. Nolen, Jr.
<PAGE> 1
EXHIBIT 13
BALANCE SHEET AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
TOTAL AMOUNT OF:
Assets $231,032 $218,086
Loans, net 146,430 128,962
Interest-bearing deposits in other banks 2,177 30,845
Securities available-for-sale 64,599 40,415
Loans held for sale 894 2,986
Deposits 189,175 194,687
Borrowed funds 21,890 3,520
Stockholders' equity 17,849 17,612
NUMBER OF:
Real estate loans outstanding 3,419 3,589
Savings accounts 17,509 16,136
Full-service offices open 6 6
</TABLE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME $16,130 $15,921 $15,858
INTEREST EXPENSE 9,238 9,251 8,903
------- ------- -------
Net interest income before provision for loan losses 6,892 6,670 6,955
PROVISION FOR LOAN LOSSES 177 637 400
------- ------- -------
Net interest income after provision for loan losses 6,715 6,033 6,555
NONINTEREST INCOME 1,116 1,060 1,359
NONINTEREST EXPENSE 5,195 4,813 4,663
INCOME TAX EXPENSE 958 778 1,188
------- ------- -------
Net income $ 1,678 $ 1,502 $ 2,063
======= ======= =======
</TABLE>
2
<PAGE> 2
OTHER DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest rate spread 3.2% 3.2% 3.5%
Yield on average interest earning assets 7.8 8.1 8.4
Return on assets (net income divided by average total assets) 0.8 0.7 1.0
Return on equity (net income divided by average equity) 9.4 8.6 12.7
Equity-to-assets ratio (average equity divided by total average assets) 8.0 8.0 8.1
Dividend payout ratio (dividends declared divided
by net income) 42.7 48.2 34.5
</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
DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loans........................ 8.9% 9.0% 9.1%
Weighted average yield on securities available-
for-sale ........................................... 5.9 6.4 6.5
Weighted average yield on all interest-earning
assets.............................................. 7.8 8.1 8.4
Weighted average rate paid on deposits................. 4.6 4.9 4.9
Weighted average rate paid on
borrowed funds...................................... 5.8 5.8 5.7
Weighted average rate paid on all interest-
bearing liabilities ................................ 4.6 4.9 4.9
Interest rate spread (spread between weighted
average rate on all interest-bearing assets and
all interest bearing-liabilities)................... 3.2 3.2 3.5
Net yield (net interest income as percentage of
interest-earning assets)............................ 3.3 3.4 3.7
</TABLE>
3
<PAGE> 3
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 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, as well as qualitative and quantitative
disclosures regarding market risk exposures.
4
<PAGE> 4
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 approximately $796,000. 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 decreased $5.5 million, to $189.2 million at December 31, 1999 as
compared to $194.7 million at December 31, 1998. This decrease was due primarily
to a decrease in time deposits of $4.1 million as a result of rate competition.
Total assets increased $12.9 million, to $231.0 million at December 31, 1999,
compared to $218.1 million at December 31, 1998. This increase was primarily due
to an increase in net loans receivable of approximately $15.3 million, an
increase in securities available-for-sale of approximately $24.2 million, an
increase in cash of approximately $1.3 million and an increase in all other
assets of approximately $1.3 million. This increase was offset by a decrease in
interest bearing deposits of approximately $28.7 million and a decrease in other
real estate owned of approximately $650,000.
During the fiscal year ended December 31, 1999, the Bank increased its short
term borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") by $18.5
million. The increase in borrowings along with the proceeds from loan repayments
and interest bearing deposits was used to fund lending activities.
The Company's investment portfolio increased to $64.6 million at December 31,
1999 from $40.4 million at December 31, 1998. The increase was partially
attributable to purchases of securities with the proceeds from other interest
bearing deposits. The entire portfolio is classified as "available-for-sale,"
causing it to be marked-to-market with the unrealized gains/losses reflected
directly in 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.
NET INCOME. The Company reported net income of approximately $1.7 million, $1.5
million, and $2.1 million for the fiscal years ended December 31, 1999, December
31, 1998, and December 31,1997, respectively. The increase from the fiscal year
ended December 31, 1998 to the fiscal year ended December 31, 1999 was primarily
attributable to two factors: a $460,000 decrease in the provision for loan
losses and a $108,000 decrease in the loss on the sale of other real estate
owned. 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.
5
<PAGE> 5
INTEREST REVENUE. Interest income on loans and securities increased
approximately $900,000 from the fiscal year ended December 31, 1998 to the
fiscal year ended December 31, 1999. 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 the fiscal year
ended December 31, 1998 to the fiscal year ended December 31, 1999 was primarily
due to an increase in the average balance of loans and securities outstanding of
approximately $21.7 million which offset the slight decreases in yields earned.
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 decreased approximately $700,000 from the fiscal year ended
December 31, 1998 to the fiscal year ended December 31, 1999. Other interest
increased approximately $670,000 from the fiscal year ended 1997 to the fiscal
year ended 1998. The decrease from the fiscal year ended December 31, 1998 to
the fiscal year ended December 31, 1999 was due primarily to a decrease in the
average balance of interest-bearing deposits in other banks of approximately
$11.6 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. The proceeds from other
interest-bearing deposits were used to fund lending activities.
INTEREST EXPENSE. Interest expense on deposits decreased approximately $200,000
from the fiscal year ended December 31, 1999 compared to the fiscal year ended
December 31, 1998. Interest expense on deposits increased approximately $350,000
from the fiscal year ended December 31, 1997 compared to the fiscal year ended
December 31, 1998. The decrease from fiscal year 1998 to fiscal year ended
December 31, 1999 was due to the combination of a decrease in the weighted
average rate paid on deposits and a decrease in the average balance of deposits.
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 increased approximately $200,000 from the
fiscal year ended December 31, 1998 to the fiscal year ended December 31, 1999.
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 increase from fiscal year 1998 to fiscal year 1999 was due primarily to an
increase in the average balance of borrowed funds of approximately $3.4 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 absorb inherent losses. The provisions for losses on loans were $177,000,
$637,000, and $400,000 for the fiscal years ended December 31, 1999, 1998, and
1997, respectively. The decrease from the fiscal year ended December 31, 1998 to
the fiscal year ended December 31, 1999 was primarily due to improved
performance of the loan portfolio as evidenced by the decrease in the level of
charge-offs incurred by the Company. The total charge-offs were $226,000,
$718,000 and $428,000 for fiscal years ended December 31, 1999, 1998 and 1997,
respectively.
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. 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, regulatory influence, 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 $1.1
million and $1.2 million at December 31, 1999 and 1998, respectively.
6
<PAGE> 6
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
$56,000 from the fiscal year ended December 31, 1998 to the fiscal year ended
December 31, 1999 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 1998 to fiscal year 1999 was due primarily
to an increase in fees and service charges on deposit accounts of approximately
$59,000, a decrease in the loss on sale of real estate owned of approximately
$108,000, an increase in real estate operations, net of approximately $50,000,
and an increase in all other noninterest income of approximately $75,000. This
was offset by a decrease in net gain on sale of mortgage loans of approximately
$206,000, and a decrease in service fee income and other fee income on loans of
approximately $30,000. The decrease from fiscal year 1997 to fiscal year 1998
was due primarily to an increase in loss on the sale of 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 increased $382,000 from the fiscal year
ended December 31, 1998 to the fiscal year ended December 31, 1999. Noninterest
expense increased approximately $150,000 from the fiscal year ended December 31,
1997 to the fiscal year ended December 31, 1998. The increase from the fiscal
year ended December 31, 1999 to the fiscal year ended December 31, 1998, was due
primarily to an increase in compensation expense of approximately $238,000, an
increase in occupancy expense of approximately $119,000, an increase in
marketing and professional expense of approximately $16,000, and an increase in
legal expense of approximately $30,000. This increase was offset by a decrease
in all other noninterest expense of approximately $21,000. 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 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 securities. The entire investment
portfolio at December 31, 1999, was classified as available-for-sale, with a
fair value of $64.6 million. See Notes 1 and 2 of Notes to Consolidated
Financial Statements. At December 31, 1999, liquid assets, consisting primarily
of cash on hand, interest-bearing deposits in other banks and short-term
investments totaled approximately $72.1 million, compared to $75.5 million at
December 31, 1998. This decrease of $3.4 million was primarily attributable to
an increase in loan portfolio growth.
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,
1999, the Bank had an approved credit availability of $29.0 million at the FHLB
of Atlanta. At December 31, 1999 the Bank had $18,500,000 in advances on this
credit line. The Bank also has a discount window borrowing agreement of
$5,873,000 with the Federal Reserve Bank of Atlanta. At December 31, 1999 the
Bank has no borrowing on this discount window borrowing agreement.
7
<PAGE> 7
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, 1999 was approximately $17.8
million.
Risk-based capital regulations adopted by the Board of Governors of the Federal
Reserve Board and the FDIC require bank holding companies and banks,
respectively, to achieve and maintain specified ratios of capital to
risk-weighted assets. The risk-based capital rules are designed to measure Tier
1 Capital and Total Capital in relation to the credit risk of both on- and
off-balance sheet items. Under the guidelines, one of four risk weights is
applied to the different on-balance sheet items. Off-balance sheet items, such
as loan commitments, are also subject to risk-weighting after conversion to
balance sheet equivalent amounts. All bank holding companies and banks must
maintain a minimum total capital to total risk-weighted assets ratio of 8.00%,
at least half of which must be in the form of core, or Tier 1, capital
(consisting of stockholders' equity, less goodwill). At December 31, 1999, the
Company and the Bank satisfied the 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.
YEAR 2000
Expenses incurred in preparation for the year 2000 totaled approximately
$34,000, all of which were expensed by December 31, 1999. The Company
experienced no material adverse effects related to the year 2000.
8
<PAGE> 8
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, 1999, the Company had 1,792,086 shares of
common stock outstanding and 403 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, 1999
First quarter $12 $ 9
Second quarter 11-3/16 9-1/2
Third quarter 10-1/8 8-1/2
Fourth quarter 9-1/2 8
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 years 1999 and 1998. 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.
9
<PAGE> 9
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 position of Pinnacle Bancshares,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
February 18, 2000
10
<PAGE> 10
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
ASSETS:
Cash on hand and in banks $ 5,289,619 $ 3,960,991
Interest-bearing deposits in other banks 2,177,294 30,845,417
Securities available-for-sale 64,599,164 40,414,788
Loans held for sale 893,733 2,985,698
Loans receivable, net of allowance for loan losses
of $1,222,978 and $1,200,586, respectively 146,429,690 128,961,641
Real estate owned, net 1,521,533 2,174,956
Premises and equipment, net 6,995,375 6,648,317
Excess cost over net assets acquired 388,220 429,086
Accrued interest receivable 1,982,134 1,386,208
Other assets 754,801 278,412
------------- ------------
Total assets $ 231,031,563 $218,085,514
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 189,174,804 $194,687,494
Borrowed funds 21,890,000 3,520,000
Official checks outstanding 1,529,946 1,140,849
Other liabilities 588,051 1,125,064
------------- ------------
Total liabilities 213,182,801 200,473,407
------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTES 3 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, 1,792,086 and 1,789,586
outstanding, 10,000,000 authorized 17,921 17,895
Additional paid-in capital 8,131,746 8,109,740
Retained earnings 10,414,858 9,453,693
Accumulated other comprehensive income, net of tax (715,763) 30,779
------------- ------------
Total stockholders' equity 17,848,762 17,612,107
------------- ------------
Total liabilities and stockholders' equity $ 231,031,563 $218,085,514
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 11
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
INTEREST REVENUES:
Interest on loans $ 12,041,424 $ 12,217,381 $12,546,254
Interest and dividends on securities 3,760,885 2,717,566 2,991,456
Other interest 328,178 986,139 319,952
------------ ------------ -----------
16,130,487 15,921,086 15,857,662
INTEREST EXPENSE:
Interest on deposits 8,831,557 9,049,314 8,695,821
Interest on borrowed funds 406,927 201,961 207,317
------------ ------------ -----------
9,238,484 9,251,275 8,903,138
------------ ------------ -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 6,892,003 6,669,811 6,954,524
PROVISION FOR LOAN LOSSES 177,000 637,000 400,000
------------ ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,715,003 6,032,811 6,554,524
------------ ------------ -----------
NONINTEREST INCOME:
Fees and service charges on deposit accounts 460,864 401,765 407,042
Service fee income, net 189,954 213,614 236,590
Fees and charges on loans 231,524 237,891 233,901
Real estate operations, net 121,460 71,731 110,256
Net gain (loss) on sale or write-down of:
Loans held for sale 484,066 690,311 359,575
Real estate owned (447,900) (555,553) 7,975
Other income 76,493 696 4,503
------------ ------------ -----------
1,116,461 1,060,455 1,359,842
------------ ------------ -----------
NONINTEREST EXPENSE:
Compensation and benefits 2,908,928 2,671,066 2,570,730
Occupancy 1,148,041 1,029,451 1,015,553
FDIC insurance premiums 113,730 109,870 90,126
Marketing and professional 159,730 143,007 182,938
Legal 71,947 42,098 42,064
Other 792,846 817,598 761,876
------------ ------------ -----------
5,195,222 4,813,090 4,663,287
------------ ------------ -----------
INCOME BEFORE INCOME TAX EXPENSE 2,636,242 2,280,176 3,251,079
INCOME TAX EXPENSE 958,520 778,055 1,188,210
------------ ------------ -----------
NET INCOME $ 1,677,722 $ 1,502,121 $ 2,062,869
============ ============ ===========
BASIC EARNINGS PER SHARE $ 0.94 $ 0.84 $ 1.16
DILUTED EARNINGS PER SHARE $ 0.93 $ 0.83 $ 1.15
CASH DIVIDENDS PER SHARE $ 0.40 $ 0.40 $ 0.40
WEIGHTED AVERAGE SHARES OUTSTANDING 1,791,079 1,780,116 1,780,675
WEIGHTED AVERAGE DILUTED SHARES 1,796,474 1,804,779 1,795,100
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 12
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------- Paid-in Retained Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings Stock Income Equity
--------- ------- ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,864,000 $18,640 $8,366,717 $ 7,315,182 $(345,317) $ (70,522) $15,284,700
-----------
Comprehensive Income:
Net Income 0 0 0 2,062,869 0 0 2,062,869
Change in unrealized gain (loss) on
securities available-for-sale, net 0 0 0 0 0 84,954 84,954
-----------
Comprehensive Income 2,147,823
Cash dividends ($.40 per share) 0 0 0 (712,552) 0 0 (712,552)
Exercise of stock options 6,940 69 61,088 0 0 0 61,157
Retirement of treasury stock upon
formation of Holding Company (84,354) (844) (344,473) 0 345,317 0 0
--------- ------- ---------- ----------- --------- --------- -----------
BALANCE, December 31, 1997 1,786,586 17,865 8,083,332 8,665,499 0 14,432 16,781,128
-----------
Comprehensive Income:
Net Income 0 0 0 1,502,121 0 0 1,502,121
Change in unrealized gain (loss) on
securities available-for-sale, net 0 0 0 0 0 16,347 16,347
-----------
Comprehensive Income 1,518,468
Cash dividends ($.40 per share) 0 0 0 (713,927) 0 0 (713,927)
Exercise of stock options 3,000 30 26,408 0 0 0 26,438
--------- ------- ---------- ----------- --------- --------- -----------
BALANCE, December 31, 1998 1,789,586 17,895 8,109,740 9,453,693 0 30,779 17,612,107
-----------
Comprehensive Income:
Net Income 0 0 0 1,677,722 0 0 1,677,722
Change in unrealized gain (loss) on
securities available-for-sale, net 0 0 0 0 0 (746,542) (746,542)
-----------
Comprehensive Income 931,180
Cash dividends ($.40 per share) 0 0 0 (716,557) 0 0 (716,557)
Exercise of stock options 2,500 26 22,006 0 0 0 22,032
--------- ------- ---------- ----------- --------- --------- -----------
BALANCE, December 31, 1999 1,792,086 $17,921 $8,131,746 $10,414,858 $ 0 $(715,763) $17,848,762
========= ======= ========== =========== ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 13
PINNACLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,677,722 $ 1,502,121 $ 2,062,869
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 556,802 470,427 437,453
Provision for losses on loans 177,000 637,000 400,000
Provision for losses on real estate owned 458,785 536,000 0
Provision (benefit) for deferred taxes (13,068) (366,910) (13,098)
Net (gain) loss on sale and write-down of:
Loans held for sale (484,066) (690,311) (359,575)
Premises and equipment (500) 0 0
Securities available-for-sale 93 0 (1,276)
Real estate owned (10,885) 19,533 (7,975)
Amortization, net (430,375) (367,383) (375,488)
Proceeds from sale of loans 49,910,385 60,270,699 32,690,234
Loans originated for sale (47,334,354) (59,708,591) (32,745,301)
Decrease (increase) in accrued interest receivable (595,926) 184,115 (50,194)
Decrease (increase) in other assets (8,877) 168,749 (136,900)
Increase (decrease) in other liabilities (498,820) 168,975 (71,548)
------------ ------------- -------------
Net cash provided by operating activities 3,403,916 2,824,424 1,829,201
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans and securities 97,634,566 100,013,446 87,426,406
Loans originated for portfolio (89,578,900) (93,374,369) (109,496,846)
Net change in interest bearing deposits at other banks 28,668,123 (25,972,064) (1,004,689)
Purchase of securities available-for-sale (46,915,405) (25,000,000) (8,030,964)
Proceeds from sale of securities available-for-sale 4,000,093 0 1,194,724
Proceeds from maturing and callable securities 11,620,700 24,212,289 8,010,000
Purchases of premises and equipment (913,508) (1,333,465) (1,045,742)
Proceeds from sales of premises and equipment 10,148 0 0
Proceeds from sale of real estate owned 823,344 1,240,520 534,124
------------ ------------- -------------
Net cash used in investing activities (14,568,785) (16,418,174) (6,290,510)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in passbook, NOW, and money market deposit accounts (1,385,634) 4,913,674 642,744
Proceeds from sales of time deposits 19,999,705 39,317,362 35,186,606
Payments on maturing time deposits (24,126,761) (28,920,754) (29,859,239)
Net increase in borrowed funds 18,370,000 (120,000) (110,000)
Increase (decrease) in official checks and advance payments by borrowers
for taxes and insurance 330,712 304,466 (879,321)
Proceeds from stock options exercised 22,032 26,438 61,157
Payments of cash dividends (716,557) (713,927) (712,552)
------------ ------------- -------------
Net cash provided by financing activities 12,493,497 14,807,259 4,329,395
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH 1,328,628 1,213,509 (131,914)
CASH AT BEGINNING OF PERIOD 3,960,991 2,747,482 2,879,396
------------ ------------- -------------
CASH AT END OF PERIOD $ 5,289,619 $ 3,960,991 $ 2,747,482
============ ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds $ 9,176,467 $ 9,281,566 $ 8,878,245
Cash payments for income taxes 1,330,263 837,207 1,327,844
Real estate owned transferred to mortgage loans, net 0 934,107 0
Real estate acquired through foreclosure 617,821 2,765,113 1,296,928
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 14
PINNACLE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Following is a description of the business and the more significant
accounting policies followed by Pinnacle Bancshares, Inc. (the
"Company") and Pinnacle Bank (the "Bank") in presenting the
consolidated financial statements.
NATURE OF OPERATIONS
The Bank is primarily in the business of obtaining funds in the form of
various savings deposit products and investing those funds in mortgage,
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. The Company's principal activities do not
constitute separate reportable segments of its business, but encompass
traditional banking activities which offer similar products and
services within the same primary geographic area and regulatory and
economic environment.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 consolidated 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 in accumulated 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 as there is no market for this stock.
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.
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
15
<PAGE> 15
valuation allowance by charges to income. There were no unrealized
losses during December 31, 1999, 1998, or 1997.
LOAN SALES
Gains or losses on loan sales are recognized at the time of sale and
are determined by the difference between net sales proceeds and the
carrying value of the loan sold.
LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balance, less the
undisbursed portion of loans, unearned interest income, net deferred
loan fees, and an allowance for loan losses. Unearned interest on
consumer loans is accreted into income by use of a method which
approximates the level yield method 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, delinquencies and the balance of any
impaired loans (generally considered to be nonperforming loans,
excluding residential mortgages and other homogeneous loans). Changes
in the allowance can result from changes in economic events or changes
in the creditworthiness of the borrowers. The effect of these changes
is reflected when known. Though management believes the allowance for
loan losses to be adequate, ultimate losses may vary from estimations.
Specific allowances for impaired loans are based on comparisons of the
carrying values of the loans to the estimated fair value of the
collateral.
LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND PREMIUMS AND DISCOUNTS
Amortization of loan fees, net of certain direct costs of loan
origination, 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 loan being funded and maintained in the loan
portfolio.
REAL ESTATE OWNED
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 in the valuation allowance account, but not below zero.
Increases or decreases in the valuation allowance account are 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 owned 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
16
<PAGE> 16
alternative method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66, Accounting for Sales of Real Estate.
LONG-LIVED ASSETS
Land is carried at cost. Premises and equipment are stated at cost less
depreciation computed 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). Expenditures for maintenance and repairs are charged to
operations as incurred; expenditures for renewals and improvements are
capitalized and written off through depreciation and amortization
charges. Equipment retired or sold is removed from the asset and
related accumulated depreciation amounts and any profits or loss
resulting therefrom is reflected in the accompanying consolidated
statement of income.
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. Accumulated amortization at December 31, 1999 and 1998 was
approximately $602,667 and $561,802, respectively.
The Company continually evaluates whether events and circumstances have
occurred that indicate such long-lived assets have been impaired.
Measurement of any impairment of such long-lived assets is based on
those assets' fair values and is recognized through a valuation
allowance with the resulting charge reflected in the accompanying
consolidated statements of income. There were no impairment losses
recorded during any period reported herein.
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.
17
<PAGE> 17
The following table represents the earnings per share calculations for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
NET PER SHARE
FOR THE YEARS ENDED INCOME SHARES AMOUNT
------------------- ---------- --------- --------
<S> <C> <C> <C>
December 31, 1999
Basic earnings per share $1,677,722 1,791,079 $ 0.94
Dilutive securities -- 5,395 0.01
---------- --------- --------
Diluted earnings per share $1,677,722 1,796,474 $ 0.93
========== ========= ========
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
========== ========= ========
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
========== ========= ========
</TABLE>
2. SECURITIES
The amortized cost, unrealized gross gains and losses, and approximate
fair value of securities available-for-sale at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Securities of U.S. Government Agencies $48,000,000 $694,512 $(1,579,000) $47,115,512
Federal Home Loan Bank Stock 925,000 0 0 925,000
Other Securities 40,695 0 0 40,695
Mortgage-Backed Securities 16,767,721 16,315 (266,079) 16,517,957
----------- -------- ----------- -----------
Total $65,733,416 $710,827 $(1,845,079) $64,599,164
=========== ======== =========== ===========
</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>
18
<PAGE> 18
The amortized cost and estimated fair value of securities
available-for-sale at December 31, 1999 by contractual maturity are
shown below. Expected maturities will differ from contractual
maturities because the issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 1,000,000 $ 998,762
Due after one year through five years 47,000,000 46,116,750
Due after five years through ten years 40,695 40,695
----------- -----------
48,040,695 47,156,207
Federal Home Loan Bank Stock 925,000 925,000
Mortgage-Backed Securities 16,767,721 16,517,957
----------- -----------
$65,733,416 $64,599,164
=========== ===========
</TABLE>
Securities carried at approximately $18,326,000, and $23,681,000 at
December 31, 1999, and 1998, respectively, were pledged to secure
deposits. Deposits associated with pledged securities had an aggregate
balance of approximately $15,153,000 and $15,327,000 at December 31,
1999 and 1998, respectively. Proceeds from sales of securities
available-for-sale were $4,000,093, $0 and $1,194,724 in 1999, 1998,
and 1997, respectively. Gross gains of $0, $0, and $1,276 and gross
losses of $93, $0, and $0 were realized on those sales.
3. LOANS RECEIVABLE
Loans receivable, net, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Real estate mortgage loans with variable rates $ 42,848,539 $ 40,515,083
Real estate mortgage loans with fixed rates 51,438,830 46,441,117
Real estate construction loans 38,446,289 32,262,624
Commercial loans 14,363,880 12,247,791
Consumer loans 12,442,463 10,069,415
------------- -------------
159,540,001 141,536,030
Allowance for loan losses (1,222,978) (1,200,586)
Loans in process (11,580,237) (11,143,030)
Other unearned amounts (307,096) (230,773)
------------- -------------
$ 146,429,690 $ 128,961,641
============= =============
</TABLE>
During fiscal years 1999 and 1998, certain executive officers and
directors of the Bank were loan customers of the Bank. Total loans
outstanding to these persons at December 31, 1999 and 1998 amounted to
$345,494 and $426,811, respectively. The change from December 31, 1998
to December 31, 1999 reflects payments amounting to $486,575, advances
of $448,911 made during the year, and loans no longer related of
$43,653.
The Bank has a credit concentration in residential real estate mortgage
loans. Approximately $96,000,000 and $86,000,000 at December 31, 1999
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
19
<PAGE> 19
obligations is dependent upon local economic conditions. At December
31, 1999, the largest amount loaned by the Bank to one borrower was
$2.6 million which was approximately 15% of the Company's stockholders'
equity.
A reconciliation of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,200,586 $ 1,234,309 $ 1,197,854
Provision 177,000 637,000 400,000
Less loans charged-off, net of recoveries (154,608) (670,723) (363,545)
----------- ----------- -----------
Balance at end of year $ 1,222,978 $ 1,200,586 $ 1,234,309
=========== =========== ===========
</TABLE>
The Bank was servicing first mortgage loans for others totaling
$71,206,596 and $79,435,750 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the Bank had outstanding loan commitments of
$21,747,112 including $11,580,237 in undisbursed construction loans in
process; $8,995,602 in unused lines and letters of credit and credit
cards; and $1,171,273 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, all having terms ranging from
15 to 30 years.
The recorded investment in impaired loans at December 31, 1999 and
December 31, 1998 was approximately $331,000 and $521,000,
respectively. There were $66,000 and $75,000 in specific reserves on
these loans at December 31, 1999 and 1998, respectively. The average
recorded investment in impaired loans during the year ended December
31, 1999 and 1998 was approximately $325,088 and $681,000,
respectively. Interest income on impaired loans was not material for
either period.
4. REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is as
follows:
<TABLE>
<CAPTION>
For the Years Ended
----------------------
1999 1998
--------- --------
<S> <C> <C>
Balance at beginning of year $ 536,000 $ 0
Provision 458,785 536,000
Charge-offs, net of recoveries (313,005) 0
--------- --------
Balance at end of year $ 681,780 $536,000
========= ========
</TABLE>
There was no allowance for losses on real estate owned at December 31,
1997 and no activity for the year then ended.
20
<PAGE> 20
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 883,230 $ 883,230
Buildings and leasehold improvements 6,294,008 6,073,018
Furniture, fixtures, and equipment 4,116,499 3,661,202
Automobiles 114,683 101,158
----------- -----------
11,408,420 10,718,608
Less accumulated depreciation 4,413,045 4,070,291
----------- -----------
$ 6,995,375 $ 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, 1999, 1998, and 1997, respectively, include
rental expense under these leases of $84,770, $77,282, and $91,920,
respectively. Future rental payments subject to periodic renegotiations
required under these leases are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 Amount
-------------------- ------
<S> <C>
2000 $ 54,383
2001 54,683
2002 54,683
2003 45,300
2004 45,300
Thereafter 252,300
--------
Total $505,149
========
</TABLE>
The Bank had a lease agreement for the building in which the main
office branch is located that generated income of $85,976, $92,946 and
$93,277 for the fiscal years ended December 31, 1999, 1998, and 1997,
respectively. During 1995 the Bank entered into a lease from a related
party for a building that formerly housed administrative offices. This
lease generated income of $50,000, for each of the fiscal years ended
December 31, 1999, 1998, and 1997, respectively, and expires December
31, 2001.
21
<PAGE> 21
6. DEPOSITS
Deposits at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Passbook accounts $ 14,798,171 $ 15,700,157
NOW accounts 15,068,042 14,180,056
Money Market deposit accounts 9,771,744 10,314,237
Noninterest-bearing accounts 7,646,537 8,475,679
------------ ------------
47,284,494 48,670,129
Time deposits
Fixed-rate certificates less than $100,000 95,933,310 99,923,087
Fixed-rate certificates greater than $100,000 45,573,456 45,775,840
------------ ------------
141,506,766 145,698,927
------------ ------------
Accrued interest 383,544 318,438
------------ ------------
$189,174,804 $194,687,494
============ ============
</TABLE>
The amounts and scheduled maturities of time deposits at December 31,
1999 are as follows:
<TABLE>
<S> <C>
2000 $ 110,756,172
2001 21,273,279
2002 5,563,686
2003 2,255,118
2004 and thereafter 1,658,511
------------
$141,506,766
============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts $ 398,237 $ 432,038 $ 449,759
NOW accounts 309,081 325,870 305,074
Money Market deposit accounts 414,692 377,751 417,427
Time deposits 7,709,547 7,913,655 7,523,561
---------- ---------- ----------
$8,831,557 $9,049,314 $8,695,821
========== ========== ==========
</TABLE>
22
<PAGE> 22
7. BORROWED FUNDS
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Warrants payable, maturing March 1, 2013 with a
weighted-average interest rate of 5.81% at
December 31, 1999 and 5.79% at December 31, 1998 $ 3,390,000 $3,520,000
=========== ==========
Short term advances from the Federal Home Loan Bank of
Atlanta: $7,500,000 with an interest rate of 5.97%
maturing January 28, 2000; $6,000,000 with an
interest rate of 5.95% maturing March 15, 2000; and
$5,000,000 with an interest rate of 6.25% maturing
October 27, 2000 $18,500,000 $ --
=========== ==========
</TABLE>
The Bank has an approved credit availability of $29,000,000 at the
Federal Home Loan Bank of Atlanta. During fiscal year 1999 the Bank
periodically borrowed funds on a short term basis from the Federal Home
Loan Bank of Atlanta. The maximum amount outstanding under advances
from the Federal Home Loan Bank of Atlanta during 1999 was $19,500,000
and the average amount outstanding during 1999 was $3,550,000. There
were no advances during the fiscal year ended December 31, 1998.
During fiscal year 1999 the bank established a discount window
borrowing agreement with the Federal Reserve Bank of Atlanta with a
maximum credit availability of $5,873,000. During fiscal year 1999
there were no borrowings on this discount window borrowing agreement.
Securities carried at $5,851,000 at December 31, 1999 were pledged to
secure this discount window borrowing agreement.
23
<PAGE> 23
8. INCOME TAXES
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, 1999:
Current $ 818,179 $ 153,409 $ 971,588
Deferred (11,005) (2,063) (13,068)
----------- ----------- -----------
$ 807,174 $ 151,346 $ 958,520
=========== =========== ===========
Year ended December 31, 1998:
Current $ 1,033,469 $ 111,496 $ 1,144,965
Deferred (312,643) (54,267) (366,910)
----------- ----------- -----------
$ 720,826 $ 57,229 $ 778,055
=========== =========== ===========
Year ended December 31, 1997:
Current $ 1,065,889 $ 135,419 $ 1,201,308
Deferred (11,656) (1,442) (13,098)
----------- ----------- -----------
$ 1,054,233 $ 133,977 $ 1,188,210
=========== =========== ===========
</TABLE>
Total income tax expense differs from the amount determined by
multiplying income before income taxes by the statutory rate of 34%, as
follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------------
1999 1998 1997
--------- ----------- ----------
<S> <C> <C> <C>
Tax expense at federal income tax rate $ 896,322 $ 775,260 $1,105,367
Increase (decrease) resulting from:
Amortization of excess cost over net
assets acquired 13,894 13,894 13,894
Other (48,304) (9,099) 68,949
--------- ----------- ----------
$ 958,520 $ 778,055 $1,188,210
========= =========== ==========
Effective income tax rate 36% 34% 37%
========= =========== ==========
</TABLE>
24
<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 net deferred tax asset relate to the
following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- ---------
<S> <C> <C>
Allowance for loan losses $ 462,929 $ 423,552
Unrealized loss on securities available-for-sale 418,419 0
Other real estate reserves 116,489 203,680
Litigation reserves 38,426 90,095
Other, net 15,423 50,073
----------- ---------
Deferred tax asset 1,051,686 767,400
----------- ---------
Depreciation (455,822) (480,573)
FHLB stock (128,328) (221,580)
Unrealized gain on securities available-for-sale 0 (15,856)
Other, net 0 (29,198)
----------- ---------
Deferred tax liability (584,150) (747,207)
----------- ---------
Net deferred tax asset $ 467,536 $ 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 $41,000, $30,000 and $14,000 for the years ended December
31, 1999, December 31, 1998 and December 31, 1997.
The Company and the Bank have an employment agreement with a key
officer. This agreement provides for salary continuation for the
remaining term of the contract and insurance benefits for a 12 month
period in the event of a change in control of the Company. This
contract expires in April 2002. Maximum aggregate liability to the
company at December 31, 1999 is approximately $359,000.
10. LONG-TERM INCENTIVE COMPENSATION PLAN
The Bank maintains the 1996 Stock Option and Incentive Plan ("Option
Plan") which 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.
25
<PAGE> 25
A summary of the status of the Company's stock option plan at December
31, 1999, 1998, and 1997 and the changes during the years then ended is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 57,060 $ 8.81 60,060 $ 8.81 0 $ 0
Granted 48,500 10.13 0 0 67,000 8.81
Exercised (2,500) 8.81 (3,000) 8.81 (6,940) 8.81
------- -------- ------ -------- ------ --------
Outstanding at end of year 103,060 $ 9.26 57,060 $ 8.81 60,060 $ 8.81
======= ======== ====== ======== ====== ========
Exercisable at end of year 54,560 $ 8.81 57,060 $ 8.81 60,060 $ 8.81
======= ======== ====== ======== ====== ========
Fair value of options granted $ 2.07 NA $ 5.93
======= ====== ======
</TABLE>
In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company has elected to continue to record
compensation cost under Accounting Principles Board Opinion ("APB") No.
25 and, accordingly does not recognize compensation cost for options
granted at or above market value of the related stock. 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 FISCAL YEAR
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income--as reported $ 1,677,722 $ 1,502,121 $ 2,062,869
Net income--pro forma 1,386,377 1,502,121 1,871,814
Basic earnings per share--as reported $ 0.94 $ 0.84 $ 1.16
Basic earnings per share--pro forma 0.77 0.84 1.05
Diluted earnings per share--as reported $ 0.93 $ 0.83 $ 1.15
Diluted earnings per share--pro forma 0.77 0.83 1.04
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
Expected dividend yield $ 0.40 N/A $ 0.40
Expected stock price volatility 27% N/A 18%
Risk-free interest rate 5.59% N/A 6.36%
Expected life of option 4 years N/A 4 years
</TABLE>
26
<PAGE> 26
11. STOCKHOLDERS' EQUITY
Dividends are paid by the Company from funds provided by dividends from
the Bank. However, certain restrictions exist regarding the ability of
the Bank to transfer funds to the Company in the form of cash
dividends, loans, or advances. As of January 1, 2000 approximately $1.7
million 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, 1999 and
1998, that the Company and Bank meet all capital adequacy requirements
imposed by its regulators.
As of December 31, 1999 and 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>
To be Well-
For Capital Capitalized
Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated 19,359 14.7% >$10,509 >8.0% N/A N/A
- -
Pinnacle Bank 17,929 13.6 >$10,509 >8.0% >$13,136 >10.0%
- - - -
Tier I capital (to Risk Weighted
Assets):
Consolidated 18,136 13.8 >5,254 >4.0 N/A N/A
- -
Pinnacle Bank 16,706 12.7 >5,254 >4.0 > 7,881 > 6.0
- - - -
Tier I Capital (to Average Assets):
Consolidated 18,136 8.0 >9,103 >4.0 N/A N/A
- -
Pinnacle Bank 16,706 7.3 >9,103 >4.0 >11,379 > 5.0
- - - -
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated 18,311 14.7 >9,936 >8.0 N/A 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 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 N/A
- -
Pinnacle Bank 16,289 7.5 >8,735 >4.0 >10,919 > 5.0
- - - -
</TABLE>
27
<PAGE> 27
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 statements of
changes in stockholders' equity. 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 accumulated 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>
1999
-------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
----------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the $(1,180,746) $ 434,297 $(746,449)
year
Less reclassification for adjustments for gains
(losses) included in net earnings (141) (48) (93)
----------- --------- ---------
Net change in unrealized gain/(loss) on securities $(1,180,887) $ 434,345 $(746,542)
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
----------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the $ 25,040 $ 8,693 $ 16,347
year
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>
<TABLE>
<CAPTION>
1997
-------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
----------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the $ 130,651 $ 44,421 $ 86,230
year
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
=========== ========= =========
</TABLE>
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments
requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. Financial instruments are
defined as cash, evidence of ownership in an entity, contracts that
convey either a right to receive cash or other financial instruments or
an obligation to deliver cash or other financial instruments, or
contracts that convey the right or obligation to exchange financial
instruments on potentially favorable or unfavorable terms. The Company
has a variety of
28
<PAGE> 28
financial instruments which include items recorded on the consolidated
statements 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.
A summary of the Company's disclosure of fair value of financial
instruments made in accordance with the requirements of SFAS No. 107 is
as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 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 $ 5,290 $ 5,290 $ 3,961 $ 3,961
Interest-bearing deposits 2,177 2,177 30,845 30,845
Securities 64,599 64,599 40,415 40,415
Loans receivable, net 146,430 146,128 128,962 129,008
Loans held for sale 894 894 2,986 2,986
Accrued interest receivable 1,982 1,982 1,386 1,386
LIABILITIES:
Deposits $189,175 $189,471 $194,687 $194,008
Other borrowed funds 21,890 21,890 3,520 3,520
Accrued interest payable 447 447 385 385
</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. The carrying value of accrued interest in these instruments
approximates fair value.
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
credit risk, fair value estimates are based on carrying values. The
fair value for certain mortgage loans is 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 value.
29
<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, the estimated fair value of
these unamortized fees approximates the carrying value.
13. CONTINGENCIES
LITIGATION. The Company and the Bank are parties to litigation and
claims arising in the normal course of business. Management, after
consultation with legal counsel, believes that the liabilities, if any,
arising from such litigation and claims will not be material to the
consolidated financial statements.
30
<PAGE> 30
14. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS:
Cash on hand and in banks $ 1 $ 1
Interest-bearing deposits in other banks 1,475 914
Investment in subsidiaries 16,419 16,732
------- -------
Total assets $17,895 $17,647
======= =======
OTHER LIABILITIES $ 46 $ 35
STOCKHOLDERS' EQUITY 17,849 17,612
------- -------
Total liabilities and stockholders' equity $17,895 $17,647
======= =======
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
INCOME:
Dividend income, Pinnacle Bank $1,217 $ 179 $2,000
Interest income 45 50 64
------ ------ ------
Total income 1,262 229 2,064
EXPENSES: 17 38 36
------ ------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 1,245 191 2,028
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 433 1,311 35
------ ------ ------
Net income $1,678 $1,502 $2,063
====== ====== ======
</TABLE>
31
<PAGE> 31
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,678 $ 1,502 $ 2,063
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed income of subsidiaries (433) (1,311) (35)
Increase in other liabilities 11 17 18
------- ------- -------
Net cash provided by operating activities 1,256 208 2,046
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 22 26 61
Cash dividends paid (717) (714) (712)
------- ------- -------
Net cash used in financing activities (695) (688) (651)
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 561 480 1,395
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 915 1,395 0
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,476 $ 915 $ 1,395
======= ======= =======
</TABLE>
32
<PAGE> 32
SELECTED QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited results of operations for each quarter of the years ended
December 31, 1999, and December 31, 1998 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Interest revenue $3,896,651 $3,930,271 $ 4,040,385 $4,263,180
Interest expense 2,302,127 2,245,392 2,261,335 2,429,630
Net interest income after provision for
loan losses 1,467,524 1,564,879 1,759,050 1,923,550
Noninterest income 440,976 340,373 262,955 72,157
Noninterest expense 1,295,511 1,241,385 1,242,451 1,415,875
Net income 386,269 410,660 488,655 392,138
Basic and diluted earnings per share .22 .23 .27 .22
Diluted earnings per share .21 .23 .27 .22
YEAR ENDED DECEMBER 31, 1998:
Interest revenue $3,933,246 $3,940,113 $ 4,014,797 $4,032,797
Interest expense 2,233,647 2,272,188 2,358,450 2,386,990
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>
33
<PAGE> 33
CORPORATE INFORMATION
DIRECTORS -- PINNACLE BANCSHARES, INC.
AND PINNACLE BANK
Greg Batchelor
President, Dependable True Value Hardware, Inc.
O. H. Brown
Warren Averett Kimbrough & Marino,LLC
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
34
<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
Susie Roberts
Vice President-Office Manager - Sumiton
35
<PAGE> 35
OFFICES
Main Office, 1811 2nd Avenue/Jasper (205/221-4111)
Mall Office, 204 Highway 78 East/Jasper (205/221-1322)
Sumiton Office, 790 Highway 78 East/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
The2000 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 24, 2000
FORM 10-KSB
A COPY OF THE PINNACLE BANCSHARES, INC. ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE TO
STOCKHOLDERS OF RECORD FOR THE 2000 ANNUAL MEETING
WITHOUT CHARGE UPON WRITTEN REQUEST TO
MARIE GUTHRIE
PINNACLE BANCSHARES, INC.
POST OFFICE BOX 1388
JASPER, ALABAMA 35502-1388
36
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
State of Percentage
Incorporation Ownership
------------- ---------
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%
- ----------
(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 Statements on Form S-8 (File No. 333-35603 and 333-85441).
/s/ ARTHUR ANDERSEN LLP
Birmingham, Alabama
March, 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,289,619
<INT-BEARING-DEPOSITS> 2,177,294
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 64,599,164
<INVESTMENTS-MARKET> 0
<LOANS> 146,429,690
<ALLOWANCE> 1,222,978
<TOTAL-ASSETS> 231,031,563
<DEPOSITS> 189,174,804
<SHORT-TERM> 21,890,000
<LIABILITIES-OTHER> 2,117,997
<LONG-TERM> 0
0
0
<COMMON> 17,921
<OTHER-SE> 17,830,841
<TOTAL-LIABILITIES-AND-EQUITY> 231,031,563
<INTEREST-LOAN> 12,041,424
<INTEREST-INVEST> 3,760,885
<INTEREST-OTHER> 328,178
<INTEREST-TOTAL> 16,130,487
<INTEREST-DEPOSIT> 8,831,557
<INTEREST-EXPENSE> 9,238,484
<INTEREST-INCOME-NET> 6,892,003
<LOAN-LOSSES> 177,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,195,222
<INCOME-PRETAX> 2,636,242
<INCOME-PRE-EXTRAORDINARY> 1,677,722
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,677,722
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 7.8
<LOANS-NON> 1,092,000
<LOANS-PAST> 2,990,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,200,586
<CHARGE-OFFS> 226,856
<RECOVERIES> 72,248
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 1,222,978
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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