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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23909
PINNACLE BANKSHARES CORPORATION
(Name of small business issuer in its charter)
VIRGINIA 54-1832714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 29
Altavista, Virginia 24517 24517-0029
(Address of principal executive offices) (ZIP CODE)
Issuer's telephone number (804) 369-3000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $3.00
(Title of Class)
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 there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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.[ ]
State issuer's revenues for its most recent fiscal year:$10,530,000
The aggregate market value of the voting stock held by nonaffiliates as
of February 10, 1998: $13,289,000
The number of shares outstanding of Common Stock as of March 10, 1998: 719,025
Shares
DOCUMENTS INCORPORATED BY REFERENCE
The Portions of Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated in Part II of this report which is
attached hereto as Exhibit 13. Portions of the Proxy Statement for the Company's
Annual Meeting of Shareholders to be held on April 14, 1998 as filed with the
Registrants definitive proxy statement filed with the Commission on March 10,
1998 are incorporated in Part III of this report.
Transitional small business disclosure format: Yes [ ] No [x].
<PAGE>
PINNACLE BANKSHARES CORPORATION
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
General Development of Business
Competition
Supervision and Regulation
Employees
Item 2. Description of Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters Dividends 7
Item 6. Management's Discussion and Analysis
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 8
Item 10. Executive Compensation 8
Item 11. Security Ownership of Certain Beneficial Owners
and Management 8
Item 12. Certain Relationships and Related Transactions 8
Item 13. Exhibits and Reports on Form 8-K 8
SIGNATURES
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PART I
Item 1. Description of Business.
General Development of Business
Pinnacle Bankshares Corporation, a Virginia corporation (the
"Company"), was organized in 1997 and is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. The Company is
headquartered in Altavista, Virginia. The Company conducts all of its business
activities through offices of its wholly-owned subsidiary bank, The First
National Bank of Altavista (the "Bank"). The Company exists primarily for the
purpose of holding the stock of its subsidiary, the Bank, and of such other
subsidiaries as it may acquire or establish. The Company's administrative
offices are located at 622 Broad Street, Altavista, Virginia.
The Bank was organized as a national bank in 1908 and commenced its
general banking operations in December of that year, providing services to
commercial and agricultural businesses and individuals in the Altavista area.
With an emphasis on personal service, the Bank today offers a broad range of
commercial and retail banking products and services including checking, savings
and time deposits, individual retirement accounts, merchant bankcard processing,
residential and commercial mortgages, home equity loans, consumer installment
loans, agricultural loans, investment loans, small business loans, commercial
lines of credit and letters of credit.
The Bank serves a trade area consisting primarily of southern Campbell
County, northern Pittsylvania County and southeastern Bedford County from
facilities located in the Town of Altavista.
The Bank owns one wholly-owned subsidiary, FNB Property Corp., which is
incorporated under the laws of the Commonwealth of Virginia. FNB Property Corp.
was formed to hold title to Bank premises real estate.
Competition
In general, the banking business in central Virginia is highly
competitive with respect to both loans and deposits and is dominated by a number
of major banks which have offices operating throughout the state and in the
Company's market area. The Company actively competes for all types of deposits
and loans with other banks and with nonbank financial institutions, including
savings and loan associations, finance companies, credit unions, mortgage
companies, insurance companies and other lending institutions.
Institutions such as brokerage firms, credit card companies and even
retail establishments offer alternative investment vehicles such as money market
funds and traditional banking services. Other entities (both public and private)
seeking to raise capital through the issuance and sale of debt or equity
securities also represent a source of competition for the Company with respect
to acquisition of deposits. Among the advantages which the major banks have over
the Company are their ability to finance extensive advertising campaigns and to
allocate their investment assets to regions of highest yield and demand, and
over a more diverse geographic area. Although major banks have some competitive
advantages over small independent banks, the Bank has actively tried to make the
loss of local independent banks a competitive advantage by soliciting customers
who prefer the personal service offered by the Bank.
The Company does not have a dependency upon a single customer or
industry, the loss of which would have a material adverse effect. The Company
believes the prompt response to lending requests is a positive contributing
factor to the Company's competitive position in its area. The accessibility of
senior management to customers and local decision-making also distinguish the
Company from other financial institutions.
In order to compete with the other financial institutions in its
primary service area, the Company relies principally upon local promotional
activities, personal contact by its officers, directors, employees and
stockholders and specialized services that it offers to customers. The Company's
promotional activities emphasize the advantages of dealing with a local bank
attuned to the particular needs of the community.
Regulation and Supervision
The following discussion of statutes and regulations is only a summary
and does not
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purport to be complete. This discussion is qualified in its entirety by
reference to such statutes and regulations. No assurance can be given that such
statutes or regulations will not change in the future.
General. The Company is subject to the periodic reporting requirements
of the Securities and Exchange Act of 1934, as amended(the "Exchange Act"),
which include, but are not limited to, the filing of annual, quarterly and other
reports with the Securities and Exchange Commission (the "SEC").
The Company is a bank holding company within the meaning of the Bank
Holding Company Act, and is registered as such with and is subject to the
supervision of the Federal Reserve Bank of Richmond (the "FRB"). Generally, a
bank holding company is required to obtain the approval of the FRB before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, the bank holding company would own or control more than
5% of the voting shares of such bank. The FRB's approval is also required for
the merger or consolidation of bank holding companies.
The Company is required to file reports with the FRB and provide such
additional information as the FRB may require. The FRB also has the authority to
examine the Company and the Bank, as well as any arrangements between the
Company and the Bank, with the cost of any such examination to be borne by the
Company.
Banking subsidiaries of bank holding companies are also subject to
certain restrictions imposed by Federal law in dealings with their holding
companies and other affiliates. Subject to certain restrictions set forth in the
Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase
or invest in the securities of an affiliate, purchase assets from an affiliate
or issue a guarantee, acceptance or letter of credit on behalf of an affiliate;
provided that the aggregate amount of the above transactions of a bank and its
subsidiaries does not exceed 10% of the capital stock and surplus of the bank on
a per affiliate basis or 20% of the capital stock and surplus of the bank on an
aggregate affiliate basis. In addition, such transactions must be on terms and
conditions that are consistent with safe and sound banking practices and, in
particular, a bank and its subsidiaries generally may not purchase from an
affiliate a low-quality asset, as defined in the Federal Reserve Act. Such
restrictions also prevent a bank holding company and its other affiliates from
borrowing from a banking subsidiary of the bank holding company unless the loans
are secured by marketable collateral of designated amounts. Further, the Company
and its subsidiary are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, sale or lease of property or
furnishing of services.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company engaged in nonbanking activities. One of the principal exceptions to
this prohibition is for activities found by the FRB by order or regulation to be
so closely related to banking or managing or controlling banks as to be proper
incident thereto. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public which outweigh possible adverse effects.
As a national bank, the Bank is subject to regulation, supervision and
regular examination by the Office of the Comptroller of the Currency
("Comptroller"). Each depositor's account with the Bank is insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum amount
permitted by law, which is currently $100,000 for each insured deposit. The Bank
is also subject to certain regulations promulgated by the FRB and applicable
provisions of Virginia law, insofar as they do not conflict with or are not
preempted by Federal banking law.
The regulations of the FDIC, the Comptroller and FRB govern most
aspects of the Company's business, including deposit reserve requirements,
investments, loans, certain check clearing activities, issuance of securities,
payment of dividends, branching, deposit interest rate ceilings and numerous
other matters. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Company's business is particularly
susceptible to changes in state and Federal legislation and regulations, which
may have the effect of increasing the cost of doing business, limiting
permissible activities or increasing competition.
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Governmental Policies and Legislation. Banking is a business that
depends primarily on rate differentials. In general, the difference between the
interest rates paid by the Bank on its deposits and its other borrowings and the
interest rates received by the Bank on loans extended to its customers and
securities held in its portfolio, comprise the major portion of the Bank's net
revenues. These rates are highly sensitive to many factors that are beyond the
Bank's control. Accordingly, the Company's growth and earnings are subject to
the influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The commercial banking business is affected not only by general
economic conditions, but is also influenced by the monetary and fiscal policies
of the Federal government and the policies of regulatory agencies, particularly
the FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in U.S.
Government securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of bank holding companies, banks and other financial
institutions are frequently made in Congress, in the Virginia Legislature and
before various bank holding company and bank regulatory agencies. The likelihood
of any major changes and the impact such changes might have are impossible to
predict. Certain of the potentially significant changes which have been enacted
recently by Congress or various regulatory or professional agencies are
discussed below.
Capital Requirements. The FRB, the Comptroller and the FDIC have
adopted risk-based capital adequacy guidelines for bank holding companies and
banks. The risk-based capital adequacy guidelines establish a risk-based capital
ratio based on the overall risk of the entity determined by (I) assigning
weighted risks to each balance sheet asset and certain off-balance sheet
commitments and (II) adding up all of the weighted risks of all assets and
includable off-balance sheet commitments to obtain the total risk. The
guidelines generally require banks to maintain a total qualifying capital to
weighted risk assets level of 8% (the "Risk-based Capital Ratio"). Of the total
8%, at least 4% of the total qualifying capital to weighted risk assets (the
"Tier 1 Risk-based Capital Ratio") must be Tier 1 or core capital consisting
primarily of equity stock. Tier 2 capital, which is to make up the remainder of
total capital, consists of (I) loan loss allowance, up to 1.25% of weighted risk
assets (II) mandatory convertible debentures and (III) other forms of capital.
Qualified preferred capital stock may be considered core capital up to 25% of
all core capital elements.
The FRB, the Comptroller and the FDIC have adopted leverage
requirements that apply in addition to the risk-based capital requirements.
Under these requirements, bank holding companies and bank are required to
maintain core capital of at least 3% of their assets (the "Leverage Ratio").
However, an institution may be required to maintain core capital of at least 4%
or 5%, or possibly higher, depending upon the activities, risks, rate of growth,
and other factors deemed material by regulatory authorities. As of December 31,
1997, the Company and Bank both met all applicable capital requirements imposed
by regulation. See "Item 6. Management's Discussion and Analysis--Capital
Resources."
Dividends. There are regulatory restrictions on dividend payments by
both the Bank and the Company that may affect the Company's ability to pay
dividends on its Common Stock. See "Item 5. Market for Common Equity and Related
Stockholder Matters."
Federal Deposit Insurance Corporation Improvement Act of 1991. On
December 19, 1991, President Bush signed into law the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA is an omnibus banking
reform bill which added new regulation and made changes in existing regulation
of the operations, procedures and regulatory reporting of insured institutions,
bank holding companies and affiliates. Among other things, FDICIA establishes
five capital categories applicable to insured institutions, each with specific
regulatory consequences. If the appropriate Federal banking agency determines,
after notice and an opportunity for hearing, that an insured
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<PAGE>
institution is in an unsafe or unsound condition, it may reclassify the
institution to the next lower capital category (other than critically
undercapitalized) and require the submission of a plan to correct the unsafe or
unsound condition. The Comptroller has issued regulations (the "Prompt
Corrective Action Regulation") to implement these provisions. Under the
regulations, the five categories are:
a. Well Capitalized -- The institution exceeds the required minimum
level for each relevant capital measure. A well capitalized institution is one
(I) having a Risk-based Capital Ratio of 10% or greater, (II) having a Tier 1
Risk-based Capital Ratio of 6% or greater, (III) having a Leverage Ratio of 5%
or greater and (IV) not being subject to any order or written directive to meet
and maintain a specific capital level for any capital measure.
b. Adequately Capitalized -- The institution meets the required minimum
level for each relevant capital measure. No capital distribution may be made
that would result in the institution becoming undercapitalized. An adequately
capitalized institution is one (I) having a Risk-based Capital Ratio of 8% or
greater, (II) having a Tier 1 Risk-based Capital Ratio of less than 4% or (III)
having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if
the institution is rated composite 1 under the CAMEL rating system.
c. Undercapitalized -- The institution fails to meet the required
minimum level for any relevant capital measure. An undercapitalized institution
is one (I) having a Risk-based Capital Ratio of less than 8% or (II) having a
Tier 1 Risk-based Capital Ratio of less than 4% or (III) having a Leverage Ratio
of less than 4%, or if the institution is rated a composite 1 under the CAMEL
rating system, a Leverage Ratio of less than 3%.
The appropriate Federal banking agency must closely monitor an
undercapitalized institution and the institution must submit an acceptable
capital restoration plan. Each company having control over the undercapitalized
institution must provide a limited guarantee that the institution will comply
with its capital restoration plan. Except under limited circumstances consistent
with an accepted capital restoration plan, an undercapitalized institution may
not grow. An undercapitalized institution may not acquire another institution,
establish additional branch offices or engage in any new line of business unless
determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan or the FDIC determines that the proposed
action will further the purpose of prompt corrective action. The appropriate
Federal banking agency may take any action authorized for a significantly
undercapitalized institution if an undercapitalized institution fails to submit
an acceptable capital restoration plan or fails in any material respect to
implement a plan accepted by the agency.
An insured depository institution may not pay a management fee to a
bank holding company controlling that institution or any other person having
control of the institution if, after making the payment, the institution, would
be undercapitalized. In addition, an institution cannot make a capital
distribution, such as a dividend or other distribution that is in substance a
distribution of capital to the owners of the institution if following such a
distribution the institution would be undercapitalized. Thus, if payment of such
a management fee or the making of such would cause the Bank to become
undercapitalized, it could not pay a management fee or dividend to the Company.
d. Significantly Undercapitalized -- The institution is significantly
below the required minimum level for any relevant capital measure. A
significantly undercapitalized institution is one (I) having a Risk-based
Capital Ratio of less than 6% or (II) having a Tier 1 Risk-based Capital Ratio
of less than 4% or (III) having a Leverage Ratio of less than 3%.
e. Critically Undercapitalized -- The institution fails to meet a
critical capital level set by the appropriate Federal banking agency. A
critically undercapitalized institution is one having a ratio of tangible equity
to total assets that is equal to or less than 2%.
As of December 31, 1997, the Company was considered "well capitalized"
and the Bank was considered "well capitalized." See "Item 6. Management's
Discussion and Analysis--Capital Resources."
An institution which is classified as adequately capitalized or higher
may not pay a management fee to its holding company or other controlling person
or make capital distributions which in either case, would cause it to be less
than adequately capitalized.
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An institution which is less than adequately capitalized must adopt an
acceptable capital restoration plan, is subject to increased regulatory
oversight, and is increasingly restricted in the scope of its permissible
activities. A critically undercapitalized institution is subject to having a
receiver or conservator appointed to manage its affairs and for loss of its
charter to conduct banking activities.
Deposit Insurance Assessments. FDICIA also requires the FDIC to
implement a risk-based assessment system in which the insurance premium relates
to the probability that the deposit insurance fund will incur a loss and directs
the FDIC to set semi-annual assessments in an amount necessary to increase the
reserve ratio of the Bank Insurance Fund (the "BIF") to at least 1.25% of
insured deposits or a higher percentage as determined to be justified by the
FDIC
The FDIC has promulgated implementing regulations that base an
institution's risk category partly upon whether the institution is well
capitalized ("1"), adequately capitalized ("2") or less than adequately
capitalized ("3"), as defined under the Prompt Corrective Action Regulations
described above. In addition, each insured depository institution is assigned to
one of three "supervisory subgroups." Subgroup "A" institutions are financially
sound institutions with few minor weaknesses, subgroup "B" institutions
demonstrate weaknesses which, if not corrected, could result in significant
deterioration and subgroup "C" institutions are those as to which there is a
substantial probability that the FDIC will suffer a loss in connection with the
institution unless effective action is taken to correct the areas of weakness.
Based on the current capital levels the Company is categorized as a
well-capitalized institution.
Employees
As of December 31, 1997, the Company had 46 full-time employees. The
Company's Management believes that its employee relations are satisfactory.
Item 2. Description of Properties.
The Company's headquarters are located at 622 Broad Street in downtown
Altavista, Virginia, which is owned and occupied principally by the Bank.
The Vista Branch, located at 1301 N. Main Street in Altavista,
Virginia, consists of a single-story building owned by the Bank.
The Bank is in the process of completing a three-story addition to its
main office. The Bank, through FNB Property Corp., also owns property at
4416-4418 Wards Road in Campbell County for future expansion. The Company
maintains comprehensive general liability and casualty loss insurance covering
its properties and activities conducted in or about its properties. The Company
believes such insurance provides adequate protection for liabilities or losses
which might arise out of the ownership and use of such properties.
Item 3. Legal Proceedings.
The Company is not involved in any pending legal proceedings other than
nonmaterial proceedings arising in the ordinary course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information contained on page 52 of the 1997 Annual Report to
Shareholders, under the caption, "Market for Common Equity and Related
Stockholders Matters", is incorporated herein by reference.
Item 6. Management's Discussion and Analysis.
The information presented under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 5
through 22 of the 1997 Annual
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Report to Shareholders is incorporated herein by reference.
Item 7. Financial Statements.
The consolidated financial statements of the Registrant and
subsidiary contained on pages 23 through 50 of the 1997 Annual Report to
Shareholders is incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
PART III
Except as otherwise indicated, information called for by the following
items under Part III is contained in the Proxy Statement for the 1998 Annual
Meeting of Pinnacle Bankshares Corporation ("Proxy Statement") mailed to
Shareholders on or about March 10, 1998.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
In response to this item, Registrant hereby incorporates by references
the section entitled "Election of Directors," at page 2 thru 5 of the Proxy
Statement to be held on April 14, 1998. The Registrant hereby incorporates by
references the section entitled "Officers-Pinnacle Bankshares Corporation," as
set forth on page 51 of the 1997 Annual Report of the Shareholders. The
Registrant hereby incorporates by references the Section 16(a) Beneficial
Ownership Reporting Compliance at page 7 of the Proxy Statement.
Item 10. Executive Compensation.
Information on Executive Compensation is contained on pages 5 and 6 of
the Proxy Statment and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information on Security Ownership of Certain Beneficial Owners and
Management is contained on pages 2 through 4 of the Proxy Statement and is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
Information on Certain Relationships and Related Transactions is
contained on page 5 of the Proxy Statement and is incorporated herein by
reference.
Item 13. Exhibits List and Reports on Form 8-K
(a) Exhibits
Exhibit 13-1997 Annual Report to Shareholders
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the Company's fiscal year ended December 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PINNACLE BANKSHARES CORPORATION
MARCH 16, 1998 /s/ Robert H. Gilliam, Jr.
- ----------------------- ------------------------------------
Date Robert H. Gilliam Jr., President and
Chief Executive Officer
MARCH 16, 1998 /s/ Dawn P. Crusinberry
- ----------------------- ------------------------------------
Date Dawn P. Crusinberry, Secretary,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/Alvah P. Bohannon, III Director March 16, 1998
- --------------------------
Alvah P. Bohannon, III
/s/John P. Erb Director March 16, 1998
- --------------------------
John P. Erb
/s/Robert L. Finch Director March 16, 1998
- --------------------------
Robert L. Finch
/s/Robert H. Gilliam, Jr. President, Chief Executive March 16, 1998
- -------------------------- Officer and Director
Robert H. Gilliam, Jr.
/s/Carroll E. Shelton Vice President and Director March 16, 1998
- --------------------------
Carroll E. Shelton
/s/John L. Waller Director March 16, 1998
- --------------------------
John L. Waller
/s/R.B. Hancock, Jr. Director March 16, 1998
- --------------------------
R.B. Hancock, Jr.
/s/James P. Kent, Jr. Director March 16, 1998
- --------------------------
James P. Kent, Jr.
/s/Percy O. Moore Director March 16, 1998
- --------------------------
Percy O. Moore
/s/Herman P. Rogers, Jr. Director March 16, 1998
- --------------------------
Herman P. Rogers, Jr.
/s/Kenneth S. Tyler, Jr. Director March 16, 1998
- ------------------------
Kenneth S. Tyler, Jr.
</TABLE>
9
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Annual Report
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
December 31, 1997 and 1996
Page
Selected Historical Consolidated Financial Information...................1
President's Letter.......................................................2
Mission Statement........................................................4
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................5
Consolidated Balance Sheets.............................................23
Consolidated Statements of Income.......................................24
Consolidated Statements of Changes in Stockholders' Equity..............25
Consolidated Statements of Cash Flows...................................26
Notes to Consolidated Financial Statements..............................27
Independent Auditors' Report ...........................................50
Directors and Officers..................................................51
Shareholder Information.................................................52
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Selected Historical Consolidated Financial Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Income Statement Data:
Net interest income $ 5,228 4,749 4,388 4,595 4,163
Provision for loan losses 350 205 240 200 210
Noninterest income 406 378 192 340 363
Noninterest expenses 2,905 2,764 2,712 2,581 2,370
Income tax expense 662 573 438 626 546
Net income 1,717 1,585 1,190 1,528 1,401
Per Share Data (2):
Net income 2.39 2.20 1.66 2.13 1.95
Cash dividends 0.67 0.59 0.56 0.51 0.44
Book value 19.53 17.60 16.28 14.18 13.31
Balance Sheet Data:
Assets 131,650 124,951 119,380 116,024 115,888
Loans, net of unearned income and
fees and allowance for loan losses 86,816 79,842 75,484 73,063 65,293
Total investment securities (1) 32,740 35,766 34,647 34,613 38,708
Deposits 115,533 111,204 106,678 104,952 105,551
Stockholders' equity (1) 14,042 12,657 11,709 10,194 9,573
Average shares outstanding (2) 719,025 719,025 719,025 719,025 719,025
Performance Ratios:
Return on average assets 1.35% 1.30% 1.01% 1.29% 1.21%
Return on average equity 12.86% 13.01% 10.87% 15.46% 15.51%
Dividend payout 28.03% 26.93% 33.80% 24.14% 22.77%
Asset Quality Ratios:
Allowance for loan losses to total loans,
net of unearned income and fees 0.85% 0.84% 0.82% 0.76% 0.79%
Net chargeoffs to average loans, net of
unearned income and fees 0.33% 0.20% 0.24% 0.23% 0.01%
Capital Ratios:
Leverage 10.65% 10.14% 9.63% 8.89% 8.18%
Risk-based:
Tier 1 capital 15.40% 15.79% 15.06% 14.45% 14.09%
Total capital 16.24% 16.63% 15.88% 15.22% 14.87%
Average equity to average assets 10.50% 10.01% 9.27% 8.33% 7.78%
</TABLE>
- ------------------------------------------------
(1) Investment securities and stockholders' equity amounts subsequent to
December 31, 1993 reflect net unrealized gains or losses resulting from
the adoption in 1994 of Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities.
(2) All share and per share data have been retroactively adjusted to reflect
the three-for-one exchange in connection with formation of the holding
company.
- --------------------------------------------------------------------------------
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TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
It is a pleasure to present to you the first annual report of Pinnacle
Bankshares Corporation.
1997 was a dramatic year for your company, particularly with the implementation
of the new holding company structure effective May 1. As we are now a Securities
and Exchange Commission reporting company, you will be inundated with financial
information about Pinnacle Bankshares in this report. I will limit my usual
comments regarding our performance for the year, as the figures and accompanying
dialogue speak for themselves.
In the face of corporate change and in the midst of expenditures for expansion
purposes, it is most gratifying to report that 1997 net income was an all time
high. Net income for the year was $1,717,000, an increase of 8.33% over the
previous year, resulting in a return on average assets of 1.35%. Return on
average equity for 1997 was 12.86%.
Total assets grew 5.36% for the year, to a new high of $131,650,000 as of
December 31, 1997. Growth of 8.73% in net loans outstanding, to $86,816,000 at
year end, resulted in stronger net interest income which was a significant
factor in the higher earnings achieved in 1997.
Stockholders' equity at December 31, 1997 was $14,042,000, an increase of 10.94%
for the year. The cash dividend payout of $482,000 in 1997 was 12.88% greater
than in 1996. With a dividend rate of $.67 per share, 1997 marked the
twenty-first consecutive year of an increase in cash dividend payments.
1997 saw your company make significant investments in facilities and property
that should result in long-term operating benefits. Completion and occupancy of
the three-story addition to the bank's main office, which was started early in
1997, is imminent. In addition to the enhanced office space and improved
efficiency in our data processing operation that will result from the main
office expansion, the new building provides a "high" profile for First National
Bank in the community. We are pleased that many citizens are seeing this
expansion project as an asset to the Altavista area.
Following a lengthy search process, we were successful during the second half of
1997 in acquiring property in northern Campbell County as a site for a new
branch. A subsidiary of First National Bank, FNB Property Corp., was formed to
hold title to and develop this property. The property is located on the west
side of U.S. Rt. 29, opposite the intersection with Russell Wood Drive, just
south of the Lynchburg airport. A primary corporate objective in 1998 is to be
in business at this location at the earliest possible time.
A significant initiative in 1997 was the engagement of a consulting firm to
perform a technology assessment of our company. The assessment has resulted in
the adoption of a technology plan that establishes multiple objectives for us to
consider and implement over time, as we position ourselves for delivery of
financial services to our customer base into the twenty-first century.
2
<PAGE>
The ultimate purpose of our business is to enhance the value of the investment
of our shareholders. We feel 1997 was a successful year toward this end. With
the issuance of three shares of Pinnacle Bankshares stock for each share of
First National stock in the holding company formation process, we have seen more
trading in the company stock and a respectable increase in the market value of
the stock. Pinnacle Bankshares Corporation is listed on the OTC Bulletin Board
under the symbol PPBN. Information on the stock is available through the
Internet and any brokerage firm can provide a price quote.
As a further benefit to shareholders, another of our 1998 objectives is to
implement a dividend reinvestment plan. Information on the plan should be
forthcoming later in the year.
The performance of this company could not be achieved without the dedicated
efforts of your board, management and staff. One change occurred in the Board of
Directors in 1997. Herman P. Rogers, Jr. was elected to the board of both the
holding company and the bank following the retirement of Hugh W. Rosser after
fifteen years of distinguished service. There were no changes in the management
team and staff in 1997 and the knowledge, experience and stability of this group
are invaluable elements of our success. Thanks go out to all directors and
employees for the vital role they play in this organization.
Participation in our annual meeting scheduled for April 14, 1998 is encouraged
for all of our shareholders. The annual meeting is a significant event in the
life of your company and we value your presence and involvement in this
function.
Change in the financial services industry is rampant, as it is in most other
businesses, as well. Change produces challenges and provides opportunities.
Consolidation in our industry will change the face of our primary competitors in
1998. Although our competition will be no less fierce, we will have an
opportunity to attract customers who want to deal with a local bank and
personnel they know and trust.
As we go forward, the expansion of our market through a new branch, our
technology initiatives and changing competition will provide opportunities that
bode well for an exciting and promising future for Pinnacle Bankshares
Corporation.
Your continuing loyalty and support are sincerely appreciated.
Robert H. Gilliam, Jr.
President and Chief Executive Officer
March 2, 1998
3
<PAGE>
MISSION
We dedicate ourselves
to honestly and fairly meet
the financial needs of our community
through well trained, enthusiastic staff
providing superior customer service
resulting in a positive return
for our stockholders.
4
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1997 and 1996
Management's Discussion and Analysis. (Amounts in 000's)
The following is management's discussion and analysis of the financial condition
and results of operations of the Company as of and for the years ended December
31, 1997 and 1996. The discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
Overview
Total assets at December 31, 1997 were $131,650, up 5.36% from $124,951 at
December 31, 1996. The principal components of the Company's assets at the end
of the period were $32,740 in securities and $86,816 in net loans. During the
twelve-month period, gross loans increased 8.62% or $6,979. The Company's
lending activities are a principal source of income.
Total liabilities at December 31, 1997 were $117,608, up from $112,294 at
December 31, 1996, with the increase reflective of a rise in total deposits of
$4,329 or 3.89%. Non-interest bearing demand deposits decreased $306 or 3.11%
and represented 8.24% of total deposits. The Company's deposits are provided by
individuals and businesses located within the communities served.
Total stockholders' equity at December 31, 1997 was $14,042. At December 31,
1996, total stockholders' equity was $12,657.
The Company had net income of $1,717 for the year ended December 31, 1997,
compared with net income of $1,585 for the year ended December 31, 1996, an
increase of 8.33%. Higher interest income which led to larger net interest
income contributed substantially to the increase in net earnings.
Profitability as measured by the Company's return on average assets (ROA) was
1.35% in 1997, up from 1.30% in 1996. Another key indicator of performance, the
return on average equity (ROE) for 1997 was 12.86%, compared to 13.01% for 1996.
Results of Operations
Net Interest Income. Net interest income represents the principal source of
earnings for the Company. Net interest income is the amount by which interest
and fees generated from loans, securities and other earning assets exceeds the
expense associated with funding those assets. Changes in the volume and mix of
earning assets and interest-bearing liabilities, as well as their respective
yields and rates, have a significant impact on the level of net interest income.
Changes in the interest rate environment and the Company's cost of funds also
affected net interest income.
5
<PAGE>
The net interest margin increased from 4.26% for the year ended December 31,
1996, to 4.47% for the year ending December 31, 1997. Net interest income was
$5,404 for the year ended December 31, 1997 and is attributable to interest
income from loans and securities exceeding the cost associated with interest
paid on deposits. The increase in the interest rate spread is a result of
investing available funds into higher yielding loans rather than securities. The
Company benefited from lower interest expense due to certain deposits repricing
at lower rates.
The following table presents the major categories of interest-earnings assets,
interest-earning liabilities and stockholders' equity with corresponding average
balances, related interest income or expense and resulting yields and rates for
the periods indicated.
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996
------------------------------ ---------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Assets Balance Expense Paid Balance Expense Paid
- -------------------------------------------------------------------------------------
<S> <C>
Interest-earning assets:
Loans(2)(3) $ 83,987 7,838 9.33% 77,153 7,128 9.24%
Investment securities:
Taxable 24,409 1,632 6.69% 25,139 1,657 6.59%
Tax exempt 10,044 694 6.91% 10,556 746 7.07%
Interest-earning deposits 31 2 6.45% -- -- --
Federal funds sold 2,479 134 5.41% 3,131 167 5.33%
- ---------------------------------------------- -----------------
Total interest-earnings
assets 120,950 10,300 8.37% 115,979 9,698 8.20%
Other assets:
Reserve for loan losses (712) (654)
Cash and due from banks 2,739 2,676
Other assets, net 4,153 3,645
- ------------------------------------ --------
Total assets $127,130 $121,646
==================================== ========
</TABLE>
6
<PAGE>
ANALYSIS OF NET INTEREST INCOME (Cont.)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Liabilities and Stockholders' Equity Balance Expense Paid Balance Expense Paid
- ---------------------------------------------------------------------------------------------------
<S> <C>
Interest-bearing liabilities:
Savings and NOW $ 37,113 1,123 3.02% 36,694 1,113 3.03%
Time 65,970 3,766 5.71% 62,783 3,647 5.81%
Other borrowings 121 7 5.79% -- -- --
- ---------------------------------------------------------- ------------------
Total interest-bearing
liabilities 103,204 4,896 4.74% 99,477 4,760 4.79%
Noninterest-bearing liabilities:
Demand deposits 9,485 8,958
Other liabilities 1,146 1,145
- ------------------------------------------------- ---------
Total liabilities 113,835 109,580
Stockholders' equity 13,295 12,066
- ------------------------------------------------- ---------
Total liabilities and
stockholders' equity $127,130 $121,646
================================================= =========
Net interest income $5,404 $4,938
====== ======
Net interest margin (5) 4.47% 4.26%
===== =====
</TABLE>
- --------------------------------
(1) Averages are daily averages
(2) Loan interest income includes late charges and accretion of loan fees
of $234 and $233 for the years 1997 and 1996, respectively
(3) For the purpose of these computations, nonaccrual loans are included in
average loans.
(4) Tax-exempts income from investment securities is presented on a
tax-equivalent basis assuming a 34 percent federal tax rate for 1997 and
1996.
(5) The net interest margin is calculated by dividing net interest income by
average total earnings assets.
As discussed above, the Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change," as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and other borrowed
funds, referred to as "rate changes." The following table presents, for the
periods indicated, a summary of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities and the amounts of change attributable to variations in volumes and
rates.
7
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------- ----------------------
1997 compared to 1996 1996 compared to 1995
Increase (Decrease) Increase (Decrease)
--------------------- ----------------------
Volume Rate Net Volume Rate Net
- --------------------------------------------------------------------------------------------
<S> <C>
Interest earned on interest-earning assets:
Loans(1) $639 71 710 286 127 413
Investment securities:
Taxable (50) 25 (25) (226) 114 (112)
Tax exempt (35) (17) (52) 217 (14) 203
Interest-earning deposits -- 2 2 -- -- --
Federal funds sold (36) 3 (33) 15 (9) 6
- --------------------------------------------------------------------------------------------
Total interest earned on interest-
earning assets 518 84 602 292 218 510
- --------------------------------------------------------------------------------------------
Interest paid on interest-bearing liabilities:
Savings and NOW 13 (3) 10 9 (44) (35)
Time 180 (61) 119 95 37 132
Other borrowings -- 7 7 -- -- --
- --------------------------------------------------------------------------------------------
Total interest paid on interest-bearing
liabilities 193 (57) 136 104 (7) 97
- --------------------------------------------------------------------------------------------
Change in net interest income $325 141 466 188 225 413
============================================================================================
</TABLE>
(1) Nonaccrual loans are included in the loan totals used in the calculation of
this table.
Provision for Loan Losses. The provision for loan losses is based upon the
Company's evaluation of the quality of the loan portfolio, total outstanding and
committed loans, previous loan losses and current and anticipated economic
conditions. The amount of the provision for loan losses is a charge against
earnings. Actual loan losses are charges against the allowance for loan losses.
The Company's allowance for loan losses is typically maintained at a level
deemed adequate to provide for known and inherent losses in the loan portfolio.
No assurance can be given that unforeseen adverse economic conditions or other
circumstances will not result in increased provisions in the future.
Additionally, regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgment about information available
to them at the time of their examinations.
8
<PAGE>
The provisions for loan losses for the years ended December 31, 1997 and 1996
were $350 and $205, respectively. The increase in 1997 was a result of an
increase in the amount of actual net loan losses coupled with an increase in
outstanding loans.
The allowance for loan losses was $747 or .85% of gross loans as of December
31, 1997 as compared to $674 or .83% of gross loans as of December 31, 1996. See
"Allowance for Loan Losses."
Noninterest Income. Total noninterest income for the year ended December 31,
1997 increased $28 or 7.41% to $406 from $378 in 1996. The Company's principal
source of noninterest income is service charges and fees on deposit accounts,
particularly transaction accounts, and fees from other bank products. The
majority of the increase in 1997 is attributed to income generated from fees on
various loan products.
Noninterest Expense. Total noninterest expense for the year ended December 31,
1997 increased $141 or 5.1% to $2,905 from $2,764 for 1996. The increase in
noninterest expense is attributed to the effect of overall growth of the Company
on personnel expenses, fixed asset costs and other operating expenses. The
largest component of the increase in other operating expenses occurred in
consultant services, which increased $32 primarily due to a technology
assessment performed for the Bank. Additionally, FDIC insurance cost decreased
significantly, from $118, to $21, a decrease of $91 or 82.20%, as a result of a
restructuring of FDIC premium rates effective in 1996. In 1996, the Bank was
required to pay a one-time SAIF assessment to the FDIC in the amount of $89.
The Company is currently reviewing applications for Year 2000 issues. The
Company's assessment of mission critical applications has been completed. An
action plan is in the process of being formulated. The Company has established a
Year 2000 team to assure that critical actions are accomplished concerning Year
2000 compliance. Future Year 2000 expenses are not expected to be material.
Income Taxes. Applicable income taxes on 1997 earnings amounted to $662,
resulting in an effective tax rate of 27.8% compared to $573, or 26.6%, in 1996.
Liquidity and Asset/Liability Management
Effective asset/liability management includes maintaining adequate liquidity and
minimizing the impact of future interest rate changes on net interest income.
The responsibility for monitoring the Company's liquidity and the sensitivity of
its interest-earning assets and interest-bearing liabilities lies with the Asset
Liability Committee of the Bank which meets at least quarterly to review
liquidity and the adequacy of funding sources.
Cash Flows. The Company derives cash flows from its operating, investing and
financing activities. Cash flows of the Company are primarily used to fund loans
and are provided by the deposits and borrowings of the Company.
9
<PAGE>
The Company's operating activities for the year ended December 31, 1997 resulted
in net cash provided of $2,403 primarily due to net earnings of $1,717 adjusted
for depreciation of $213, a provision for loan losses of $350, a decrease in
other assets of $121 and a provision for deferred income taxes of $74. Total
operating cash flows were reduced by a benefit for amortization of net unearned
fees of $102. The Company's operating activities for the year ended December 31,
1996 resulted in net cash provided of $2,093 primarily due to net earnings of
$1,585 adjusted for depreciation of $202 and provision for loan losses of $205.
These cash flows were reduced by a benefit for amortization of net unearned fees
of $102.
The Company's cash flows from investing activities used net cash of $6,303 for
the year ended December 31, 1997 compared to net cash used of $6,613 for the
same period in 1996. In 1997, cash was used primarily to fund loans in the
amount of $7,576 and for purchases of bank premises and equipment of $2,155.
Investing activities generated cash flows from net proceeds from investment
securities maturities and calls of $3,243. In 1996, cash was used primarily to
fund loans in the amount of $4,762 and for net investment securities purchases
in the amount of $1,825.
Net cash provided by financing activities for the year ended December 31, 1997
was $4,847 as compared to $4,099 for the year ended December 31, 1996. The net
increase in deposits was $4,329 and the increase in other borrowings was $1,000
during 1997. The net cash provided in 1996 was a result of a net increase in
deposits of $4,526.
Liquidity. Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations, and to provide for customers' credit needs.
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds from alternative funding sources.
The Company's liquidity is provided by cash and due from banks, federal funds
sold, investments available for sale, managing investment maturities,
interest-earning deposits in other financial institutions and loan repayments.
The Company's ratio of liquid assets to deposits and short-term borrowings was
24.86% as of December 31, 1997 as compared to 26.62% as of December 31, 1996.
The Company sells excess funds as overnight Federal funds sold to provide an
immediate source of liquidity. Federal funds sold as of December 31, 1997 was
$3,387 as compared to $2,585 as of December 31, 1996.
The level of deposits may fluctuate significantly due to seasonal business
cycles of depository customers. Similarly, the level of demand for loans may
vary significantly and at any given time may increase or decrease substantially.
However, unlike the level of deposits, management has more direct control over
lending activities and maintains the level of those activities according to the
amounts of available funds.
10
<PAGE>
As a result of the Company's management of liquid assets and the ability to
generate liquidity through alternative funding sources, management believes that
the Company maintains overall liquidity which is sufficient to satisfy its
depositors' requirements and to meet customers' credit needs. Additional sources
of liquidity available to the Company include its capacity to borrow funds
through correspondent banks and the Federal Home Loan Bank.
Interest Rates
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity is
to measure, over a variety of time periods, the differences in the amounts of
the Company's rate-sensitive assets and rate-sensitive liabilities. These
differences or "gaps" provide an indication of the extent to which net interest
income may be affected by future changes in interest rates. A "positive gap"
exists when rate-sensitive assets exceed rate-sensitive liabilities and
indicates that a greater volume of assets than liabilities will reprice during a
given period. This mismatch may enhance earnings in a rising interest rate
environment and may inhibit earnings in a declining interest rate environment.
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets,
referred to as a "negative gap," it indicates that a greater volume of
liabilities than assets will reprice during the period. In this case, a rising
interest rate environment may inhibit earnings and a declining interest rate
environment may enhance earnings. The cumulative one-year gap as of December 31,
1997 was $(20,849), representing 15.84% of total assets. This negative gap falls
within the parameters set by the Company.
The following table illustrates the Company's interest rate sensitivity gap
position at December 31, 1997.
REPRICING GAP POSITION
<TABLE>
<CAPTION>
Repricing Period at December 31, 1997
------------------------------------------------------------
1 Year 1-3 Year 3-5 Years 5-15 Years
------ -------- --------- ----------
<S> <C>
ASSET/(LIABILITY):
Cumulative interest
rate sensitivity gap $(20,849) $(26,602) $(9,026) $16,339
</TABLE>
As of December 31, 1997, the Company was liability-sensitive in periods up to
five years and asset-sensitive beyond five years. The foregoing table does not
necessarily indicate the impact of general interest rate movements on the
Company's net interest yield, because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact price at different times and at different
rate levels. Management attempts to mitigate the impact of changing interest
rates in several ways, one of which is to manage its interest rate-sensitivity
gap. At December 31, 1997, all fluctuations fell within Company policy
limitations. In addition to managing its asset/liability position, the Company
has taken steps to mitigate the impact of changing interest rates by generating
noninterest income through service charges, and offering products which are not
interest rate-sensitive.
11
<PAGE>
Effects of Inflation
The effect of changing prices on financial institutions is typically different
from other industries as the Company's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation, but neither the
timing nor the magnitude of the changes are directly related to price level
indices. Impacts of inflation on interest rates, loan demand and deposits are
reflected in the financial statements.
Investment Portfolio
The Company's investment portfolio is used primarily for investment income and
secondarily for liquidity purposes. The Company invests funds not used for
capital expenditures or lending purposes in securities of the U.S. Government
and its agencies, mortgage-backed securities, and taxable and tax-exempt
municipal bonds or certificate of deposit. Obligations of the U.S. Government
and its agencies include treasury notes and callable or noncallable agency
bonds. Mortgage-backed securities include collateralized mortgage obligations
and mortgage-backed security pools. The collateralized mortgage obligations in
the Company's investment securities portfolio are "low risk" as defined by
applicable bank regulations and are diverse as to collateral and interest rates
of the underlying mortgages. The mortgage-backed securities are diverse as to
interest rates and guarantors. The Company does not invest in derivatives or
other high-risk type securities.
Investment securities available-for-sale as of December 31, 1997 were $22,039, a
decrease of $1,822 or 7.64% from $23,861 as of December 31, 1996. The decrease
was primarily due to maturities and calls of $2,516. Investment securities
held-to-maturity decreased to $10,701 as of December 31, 1997 from $11,905 as of
December 31, 1997, a decrease of $1,204 or 10.11%, primarily due to maturities
and calls of $1,879.
The table below presents the composition of the Company's investment portfolios
as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996
--------------------- -------------------
Amortized Fair Amortized Fair
Available-for-Sale Costs Values Costs Values
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $10,844 $10,880 11,834 11,778
Obligations of states and
political subdivisions 3,891 4,012 4,194 4,260
Mortgage-backed securities-
Government 6,223 6,258 7,028 6,985
Corporate securities 764 782 773 788
Other securities 107 107 50 50
- ----------------------------------------------------------------------------------
Total available-for-sale $21,829 22,039 23,879 23,861
==================================================================================
</TABLE>
12
<PAGE>
December 31,
------------------------------------------
1997 1996
------------------- --------------------
Amortized Fair Amortized Fair
Held-to-Maturity Costs Values Costs Values
- ------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 3,142 3,155 3,635 3,641
Obligations of states and
political subdivisions 7,548 7,732 8,253 8,275
Mortgage-backed securities-
Private 11 11 17 17
- ------------------------------------------------------------------------------
Total held-to-maturity $10,701 10,898 11,905 11,933
==============================================================================
The following table presents the maturity distribution based on fair value and
amortized cost of the investment portfolios as of the dates indicated.
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
December 31, 1997
-------------------------------
Amortized Fair
Available-for-Sale Costs Values Yield
- ---------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations:
Within one year $ 2,699 2,697 5.725%
After one but within five years 4,695 4,698 6.436%
After five years through
ten years 2,200 2,237 7.304%
After ten years 1,250 1,248 7.175%
Obligations of states and
subdivisions:
Within one year 50 51 7.140%
After one but within five years 927 956 5.198%
After five years through ten
years 2,192 2,268 5.235%
After ten years 722 737 5.021%
Corporate securities:
After one but within five years 764 782 7.112%
Mortgage-backed securities-
Government 6,223 6,258 7.099%
Other securities (1) 107 107 34.859%
- ---------------------------------------------------------
Total available-for-sale $21,829 22,039
=========================================================
13
<PAGE>
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
December 31, 1997
-----------------------------
Amortized Fair
Held-to-Maturity Costs Values Yield
- -------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations:
Within one year $ 1,199 1,194 5.289%
After one but within five
years 1,692 1,706 6.322%
After five years through
ten years 251 255 6.854%
Obligations of states and
subdivisions:
Within one year 300 302 8.251%
After one but within five years 2,279 2,322 5.341%
After five years through ten years 2,896 2,963 4.924%
After ten years 2,073 2,145 5.531%
Mortgage-backed securities - private 11 11 5.875%
- --------------------------------------------------------
Total held-to-maturity $10,701 10,898
========================================================
(1) Equity securities assume a life greater than ten years.
Loan Portfolio
The Company's net loans were $86,816 as of December 31, 1997, an increase
of $6,974 or 8.73% from $79,842 as of December 31, 1996.
The Company's ratio of net loans to total deposits was 75.14% as of December 31,
1997. Typically, the Company maintains a ratio of loans to deposits of between
70% and 85%. The loan portfolio primarily consists of commercial, real estate
(including real estate term loans, construction loans and other loans secured by
real estate), and loans to individuals for household, family and other consumer
expenditures. However, the Company adjusts its mix of lending and the terms of
its loan programs according to market conditions and other factors. The
Company's loans are typically made to businesses and individuals located within
the Company's market area, most of whom have account relationships with the
Bank. There is no concentration of loans exceeding 10% of total loans which is
not disclosed in the categories presented below. The Company has not made any
loans to any foreign entities including governments, banks, businesses or
individuals. Commercial and construction loans in the Company's portfolio are
primarily variable rate loans and have little interest rate risk.
14
<PAGE>
The table below presents the composition of the Company's loan portfolio as of
the dates indicated.
LOAN PORTFOLIO
December 31,
--------------------
1997 1996
Real estate loans:
Residential $37,557 37,184
Other 8,912 7,903
Loans to individuals for household,
family and other consumer
expenditures 31,942 28,902
Commercial and industrial loans 8,714 6,363
All other loans 840 634
- -----------------------------------------------------------------
Total loans, gross 87,965 80,986
Less unearned income and fees (402) (470)
- -----------------------------------------------------------------
Loans, net of unearned income and fees 87,563 80,516
Less allowance for loan losses (747) (674)
- -----------------------------------------------------------------
Loans, net $86,816 79,842
=================================================================
Commercial Loans. Commercial and industrial loans accounted for 9.91% of the
Company's loan portfolio as of December 31, 1997. Such loans are generally made
to provide operating lines of credit, to finance the purchase of inventory or
equipment, and for other business purposes. Commercial loans are primarily made
at rates that adjust with changes in the prevailing prime interest rate, are
generally made for a maximum term of five years (unless they are term loans),
and generally require interest payments to be made monthly. The creditworthiness
of the borrower is reviewed, analyzed and evaluated on a periodic basis. Most
commercial loans are collateralized with business assets such as accounts
receivable, inventory and equipment. Even with substantial collateralization
such as all the assets of the business and personal guarantees, commercial
lending involves considerable risk of loss in the event of a business downturn
or failure of the business.
Real Estate Loans. Real estate loans accounted for 52.83% of the Company's loan
portfolio as of December 31, 1997. The Company makes commercial and industrial
real estate term loans that are typically secured by a first deed of trust.
77.68% of the real estate loans were secured by 1-4 family residential
properties. 1.5% of total gross loans were construction loans. Real estate
lending involves risk elements when there is lack of timely payment and/or a
decline in the value of the collateral.
Installment Loans. Installment loans are represented by loans to individuals for
household, family and other consumer expenditures. Installment loans accounted
for 36.31% of the Company's loan portfolio as of December 31, 1997. Vehicle
financing involves the risk that collateral will decline in value faster than
the balance of the loan it secures.
15
<PAGE>
Loan Maturity and Interest Rate Sensitivity. The following table presents loan
portfolio information related to maturity distribution of commercial and
industrial loans and real estate construction loans based on scheduled
repayments at December 31, 1997.
LOAN MATURITY
Due Within Due One to Due After
One Year Five Years Five Years Total
- -------------------------------------------------------------------------------
Commercial and industrial loans $1,888 5,403 1,423 8,714
Real estate - construction 1,030 287 -- 1,317
The following table presents the interest rate sensitivity of commercial and
industrial loans and real estate construction loans maturing after one year as
of December 31, 1997.
INTEREST RATE SENSITIVITY
Fixed interest rates $1,689
Variable interest rates 5,424
- ---------------------------------------------------------
Total maturing after one year $7,113
=========================================================
Nonperforming Assets. Interest on loans is normally accrued from the date a
disbursement is made and recognized as income as it is accrued. Generally, the
Company reviews any loan on which payment has not been made for 90 days for
potential nonaccrual. The loan is examined and the collateral is reviewed to
determine loss potential. If the loan is placed on nonaccrual, any prior accrued
interest which remains unpaid is reversed. Loans on nonaccrual amounted to $38
and $80 as of December 31, 1997 and 1996, respectively. Interest income that
would have been earned on nonaccrual loans if they had been current in
accordance with their original terms and the recorded interest that was included
in income on these loans was not significant for 1997 and 1996. There were no
commitments to lend additional funds to customers whose loans were on nonaccrual
at December 31, 1997.
The following tables present information with respect to the Company's
nonperforming assets and accruing loans 90 days or more past due by type as of
the dates indicated.
16
<PAGE>
NONPERFORMING ASSETS
Years Ended
December 31,
----------------
1997 1996
- -------------------------------------------------------------------
Nonperforming loans:
Loans on nonaccrual - real estate $ 38 80
Other real estate owned (OREO) 151 156
- -------------------------------------------------------------------
Total nonperforming assets $189 236
===================================================================
Nonperforming assets totaled $189 or .21% of total gross loans and OREO as of
December 31, 1997, as compared to $236 or .29% as of December 31, 1996. The
following table presents the balance of accruing loans 90 days or more past due
by type as of the dates indicated.
ACCRUING LOANS 90 DAYS OR MORE
PAST DUE BY TYPE
Years Ended
December 31,
--------------------
1997 1996
- ---------------------------------------------------------------
Loans 90 days or more past due
by type:
Real estate loans $202 410
Loans to individuals 138 193
Commercial loans 32 148
- ---------------------------------------------------------------
$372 751
===============================================================
Allowance for Loan Losses. The Company maintains an allowance for loan losses
which it considers adequate to cover the risk of losses in the loan portfolio.
The allowance is based upon management's ongoing evaluation of the quality of
the loan portfolio, total outstanding and committed loans, previous charges
against the allowance and current and anticipated economic conditions. The
allowance is also subject to regulatory examinations and determination as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance. The Company's management believed that as of December
31, 1997 the allowance was adequate. The amount of the provision for loan losses
is a charge against earnings. Actual loan losses are charged against the
allowance for loan losses.
17
<PAGE>
The provision for loan losses for the years ended December 31, 1997 and 1996 was
$350 and $205, respectively. The increase in the provision during 1997 was due
to the increase in the loan portfolio and an increase in the amount of actual
net loan losses.
As of December 31, 1997, the allowance for loan losses totaled $747 or .84% of
total gross loans as compared with $674 or .83% of total loans as of December
31, 1996. Net charge-offs for the Company were $277 and $154 for the years ended
December 31, 1997 and 1996, respectively. The ratio of net loan charge-offs
during the period to average loans outstanding for the period was .33% and .20%
for the years ended December 31, 1997 and 1996, respectively. Management
evaluates the reasonableness of the allowance for loan losses on a quarterly
basis and adjusts the provision as deemed necessary.
The following table presents charged off loans, provisions for loan losses,
recoveries on loans previously charged off, allowance adjustments and the amount
of the allowance for the dates indicated.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Years Ended
December 31,
------------------
1997 1996
- -------------------------------------------------------------------
Balance at beginning of year $ 674 623
Loan charge-offs:
Real estate loans:
Residential 1 --
Loans to individuals for household,
family and other consumer
expenditures 373 257
Commercial and industrial 83 41
- -------------------------------------------------------------------
Total loan charge-offs 457 298
- -------------------------------------------------------------------
Less recoveries:
Real estate loans:
Residential 1 --
Loans to individuals for household,
family and other consumer
expenditures 165 141
Commercial and industrial 14 3
- -------------------------------------------------------------------
Total loan recoveries 180 144
- -------------------------------------------------------------------
Net loan charge-offs (277) (154)
Provisions for loan losses 350 205
- -------------------------------------------------------------------
Balance at end of year $ 747 674
===================================================================
18
<PAGE>
The primary risk element considered by management with respect to each
installment and conventional real estate loan is lack of timely payment and the
value of the collateral. The primary risk elements with respect to real estate
construction loans are fluctuations in real estate values in the Company's
market areas, inaccurate estimates of construction costs, fluctuations in
interest rates, the availability of conventional financing, the demand for
housing in the Company's market area and general economic conditions. The
primary risk elements with respect to commercial loans are the financial
condition of the borrower, general economic conditions in the Company's market
area, the sufficiency of collateral, the timeliness of payment and, with respect
to adjustable rate loans, interest rate fluctuations. Management has a policy of
requesting and reviewing annual financial statements from its commercial loan
customers and periodically reviews the existence of collateral and its value.
Management also has a reporting system that monitors all past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position.
Loans are charged against the allowance when, in management's opinion, they are
deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the allowance for loan losses is
adequate to absorb losses as they arise, there can be no assurance that (i) the
Company will not sustain losses in any given period which could be substantial
in relation to the size of the allowance for loan losses, (ii) the Company's
level of nonperforming loans will not increase, (iii) the Company will not be
required to make significant additional provisions to its allowance for loan
losses, or (iv) the level of net charge-offs will not increase and possibly
exceed applicable reserves.
The following table presents the allocation of the allowance for loan losses as
of the dates indicated. Notwithstanding these allocations, the entire allowance
for loan losses is available to absorb charge-offs in any category of loans.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31, 1997 December 31, 1996
------------------------ ------------------------
Percent of Percent of
Allowance Loans in Each Allowance Loans in Each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
- --------------------------------------------------------------------------------
Real estate loans:
Residential $ -- 42.70% -- 45.91%
Other -- 10.13% -- 9.76%
Loans to individuals for
households, family and
other consumer expenditures 198 36.31% 225 35.69%
Commercial and industrial loans 68 9.91% 87 7.86%
All other loans -- .95% -- .78%
Unallocated 481 -- 362 --
- --------------------------------------------------------------------------------
$747 100.00% 674 100.00%
================================================================================
19
<PAGE>
Credit Risk Management. The risk of nonpayment of loans is an inherent aspect of
commercial banking. The degree of perceived risk is taken into account in
establishing the structure of, and interest rates and security for, specific
loans and various types of loans. The Company strives to minimize its credit
risk exposure by its credit underwriting standards and loan policies and
procedures. Management continually evaluates the credit risks of such loans and
believes it has provided adequately for the credit risks associated with these
loans. The Company has implemented and expects to continue to implement and
update new policies and procedures to maintain its credit risk management
systems.
Premises and Equipment
The Company's premises and equipment grew 159.70%, basically due to
contracts-in-progress related to construction of an addition to the main office
facility. In addition, on August 14, 1997, the Bank formed a subsidiary, FNB
Property Corp., and through this subsidiary has purchased property in Campbell
County for future expansion.
Deposits
Average deposits were $112,568 for the year ended December 31, 1997, an increase
of $4,133 or 3.81% from $108,435 of average deposits for the year ended December
31, 1996. As of December 31, 1997, total deposits were $115,533, representing an
increase of $4,329 or 3.89% from $111,204 in total deposits as of December 31,
1996. The increase in deposits during 1997 was primarily due to increases in
previously existing accounts as well as new accounts opened as a result of
relationship changes.
For the year ended December 31, 1997, average demand deposits were $9,485 or
8.4% of average deposits. For the year ended December 31, 1996, average demand
deposits were $8,958 or 8.26% of average deposits. Average interest-bearing
deposits were $103,083 for the year ended December 31, 1997, representing an
increase of $3,606 or 3.62% over the $99,477 in average interest-bearing
deposits for the year ended December 31, 1996.
The levels of noninterest-bearing demand deposits (including retail accounts)
are influenced by such factors as customer service, service charges and the
availability of banking services. No assurance can be given that the Company
will be able to maintain its current level of noninterest-bearing deposits.
Competition from other banks and thrift institutions as well as money market
funds, some of which offer interest rates substantially higher than the Company,
makes it difficult for the Company to maintain the current level of
noninterest-bearing deposits. Management continually works to implement pricing
and marketing strategies designed to control the cost of interest-bearing
deposits and to maintain a stable deposit mix.
The following table presents the Company's average deposits and the average rate
paid for each category of deposits for the periods indicated.
20
<PAGE>
AVERAGE DEPOSIT INFORMATION
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------ -------------------
Average Average Average Average
Amount of Rate Amount of Rate
Deposits Paid Deposits Paid
- ------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 9,485 N/A 8,958 N/A
Interest-bearing demand deposits 13,408 2.92% 12,820 2.92%
Savings deposits 23,705 3.08% 23,874 3.09%
Certificates of deposit:
Under $100,000 55,891 5.70% 53,216 5.82%
$100,000 or more 10,079 5.78% 9,567 5.74%
- ------------------------------------------------ -------
Total certificates of deposit 65,970 62,783
- ------------------------------------------------ -------
Total average deposits $112,568 108,435
================================================ =======
The following table presents the maturity schedule of certificates of deposit
of $100,000 or more as of December 31, 1997.
CERTIFICATES OF DEPOSIT OVER $100,000
Three months or less $ 3,552
Over three through six months 1,323
Over six through 12 months 1,611
Over 12 months 5,339
- --------------------------------------------------------
Total $11,825
========================================================
Financial Ratios
The following table presents certain financial ratios for the periods indicated.
RETURN ON EQUITY AND ASSETS
Years Ended
December 31,
-------------------
1997 1996
- -------------------------------------------------------------
Return on average assets 1.35% 1.30%
Return on average equity 12.86% 13.01%
Dividend payout ratio 28.03% 26.93%
Average equity to average assets 10.50% 10.01%
21
<PAGE>
Capital Resources
The Company's financial position at December 31, 1997 reflects liquidity and
capital levels currently adequate to fund anticipated future business expansion.
Capital ratios are well in excess of required regulatory minimums for a
well-capitalized institution. The assessment of capital adequacy depends on a
number of factors such as asset quality, liquidity, earnings performance, and
changing competitive conditions and economic forces. The adequacy of the
Company's capital is reviewed by management on an ongoing basis. Management
seeks to maintain a capital structure that will assure an adequate level of
capital to support anticipated asset growth and to absorb potential losses.
The Company's capital position continues to exceed regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier I capital, total risk-based capital and leverage ratios.
Tier I capital consists of common and qualifying preferred stockholders' equity
less goodwill. Total capital consists of Tier I capital, qualifying subordinated
debt and a portion of the allowance for loan losses. Risk-based capital ratios
are calculated with reference to risk weighted assets. The Company's Tier I
capital ratio was 15.40% at December 31, 1997, compared to 15.79% at December
31, 1996. The total capital ratio was 16.24% at December 31, 1997, compared to
16.63% at December 31, 1996. These ratios are in excess of the mandated minimum
requirement of 4% and 8%, respectively. As of December 31, 1997, the Company met
all regulatory capital ratio requirements and was considered "well capitalized"
in accordance with FDICIA.
Stockholders' equity reached $14,042 at December 31, 1997 compared to $12,657 at
December 31, 1996. The leverage ratio consists of Tier I capital divided by
quarterly average assets. At December 31, 1997, the Company's leverage ratio was
10.65% compared to 10.14% at December 31, 1996. Each of these exceeds the
required minimum leverage ratio of 3%. The dividend payout ratio was 28.03% and
26.93% in 1997 and 1996, respectively. During 1997, the Company paid dividends
of $0.67 per share, up 13.56% from $0.59 per share paid in 1996.
Future Accounting Considerations
In June 1997, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, and No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement 130 establishes standards for reporting and display of
comprehensive income and was issued to address concerns over the practice of
reporting elements of income directly in equity. Statement 131 requires
disclosures about operating segments, products, services, geographic areas and
major customers. In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. Statement 132
standardizes certain disclosure requirements and requires certain additional
information on pension and postretirement obligations but does not change the
methods of measurement or accounting for these obligations. All statements are
effective for fiscal years beginning after December 15, 1997 and are not
expected to have a material effect on consolidated financial position or results
of operations; however, Statement 130 will result in a modification of the
Company's future financial statement displays and Statement 132 will result in
additional disclosure in the notes to consolidated financial statements.
22
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Assets 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents:
Cash and due from banks (note 2) $ 3,304 3,159
Federal funds sold 3,387 2,585
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 6,691 5,744
Securities (note 3):
Available-for-sale, at fair value 22,039 23,861
Held-to-maturity, at amortized cost (fair value of $10,898 in 1997
and $11,933 in 1996) 10,701 11,905
Federal Reserve Bank stock, at cost 75 75
Federal Home Loan Bank Stock, at cost 409 403
Loans, net (notes 4, 9 and 10) 86,816 79,842
Premises and equipment, net (note 5) 3,158 1,216
Other real estate owned 151 156
Accrued income receivable 1,045 1,066
Other assets (note 8) 565 683
- --------------------------------------------------------------------------------------------------------------
Total assets $ 131,650 124,951
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (note 6):
Demand 9,524 9,830
Savings and NOW accounts 37,104 36,322
Time 68,905 65,052
- --------------------------------------------------------------------------------------------------------------
Total deposits 115,533 111,204
Note payable to Federal Home Loan Bank 1,000 -
Accrued interest payable 534 537
Other liabilities (note 7) 541 553
- --------------------------------------------------------------------------------------------------------------
Total liabilities 117,608 112,294
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 1 and 11):
Common stock, $3 par value. Authorized 3,000,000 shares, issued
and outstanding 719,025 shares in 1997 and 1996 2,157 2,157
Capital surplus 338 338
Retained earnings 11,409 10,174
Unrealized gains (losses) on available-for-sale securities, net of deferred
income tax expense (benefit) of $71 and $(6) in 1997
and 1996, respectively (notes 3 and 8) 138 (12)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,042 12,657
Commitments, contingencies and other matters (notes 7, 9, 10 and 11)
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 131,650 124,951
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1997 and 1996
(In thousands, except per share data)
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 7,838 7,128
Interest on securities:
U.S. Treasury 256 226
U.S. Government agencies 1,140 1,264
Corporate 165 167
States and political subdivisions (tax exempt) 518 557
Other 73 -
Interest on federal funds sold 134 167
- -------------------------------------------------------------------------------
Total interest income 10,124 9,509
- -------------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Savings and NOW accounts 1,123 1,113
Time - other 3,184 3,098
Time - $100,000 and over 582 549
Other interest expense 7 -
- -------------------------------------------------------------------------------
Total interest expense 4,896 4,760
- -------------------------------------------------------------------------------
Net interest income 5,228 4,749
Provision for loan losses (note 4) 350 205
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,878 4,544
- -------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 268 255
Net gain on calls and sales of securities (note 3) 4 12
Other operating income 134 111
- -------------------------------------------------------------------------------
Total noninterest income 406 378
- -------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits (note 7) 1,650 1,570
Occupancy expense 98 95
Furniture and equipment 330 304
FDIC insurance cost 21 118
Other operating expenses 806 677
- -------------------------------------------------------------------------------
Total noninterest expense 2,905 2,764
- -------------------------------------------------------------------------------
Income before income tax expense 2,379 2,158
Income tax expense (note 8) 662 573
- -------------------------------------------------------------------------------
Net income $ 1,717 1,585
- -------------------------------------------------------------------------------
Net income per share $ 2.39 2.20
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997 and 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Unrealized
Gains
(Losses) on
Common Stock Available-
----------------------------- Capital Retained for-Sale
Shares Par Value Surplus Earnings Securities Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances, December 31, 1995, as
originally reported by Bank 239,675 479 2,016 9,016 198 11,709
Issuance of 719,025 shares of
Bankshares, $3.00 par value in
exchange for 239,675 shares of
Bank, $2.00 par value relating
to the formation of Bank holding
company 479,350 1,678 (1,678) - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995, as
adjusted for the exchange 719,025 2,157 338 9,016 198 11,709
Net income - - - 1,585 - 1,585
Cash dividends declared by Bank
prior to formation of Bankshares
($.593 per share) - - - (427) - (427)
Change in unrealized gains on
available-for-sale securities, net
of deferred income tax benefit
of $108 - - - - (210) (210)
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 719,025 2,157 338 10,174 (12) 12,657
Net income - - - 1,717 - 1,717
Cash dividends declared by
Bankshares ($.67 per share) - - - (482) - (482)
Change in unrealized losses on
available-for-sale securities,
net of deferred income tax
expense of $77 - - - - 150 150
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 719,025 2,157 338 11,409 138 14,042
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 1,717 1,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of bank premises and equipment 213 202
Amortization of organization costs 4 -
Amortization of core deposit premium 16 18
Amortization of unearned fees, net (102) (102)
Net amortization (accretion) of premiums and
discounts on securities 8 (2)
Provision for loan losses 350 205
Provision for deferred income taxes 74 (33)
Net gain on calls and sales of securities (4) (12)
Net (increase) decrease in:
Accrued income receivable 21 (64)
Other assets 121 199
Net increase (decrease) in:
Accrued interest payable (3) 30
Other liabilities (12) 67
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,403 2,093
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of held-to-maturity securities (675) (1,961)
Purchases of available-for-sale securities (471) (5,959)
Proceeds from maturities and calls of held-to-maturity
securities 1,874 1,430
Proceeds from paydowns and maturities of held-to-maturity
mortgage-backed securities 5 7
Proceeds from maturities and calls of available-for-sale
securities 1,720 4,477
Proceeds from paydowns and maturities of available-for-sale
mortgage-backed securities 796 584
Purchase of Federal Home Loan Bank stock (6) (403)
Net increase in loans (7,576) (4,762)
Recoveries on loans charged off 180 144
Purchases of premises and equipment (2,155) (172)
Rent payments on other real estate owned 5 2
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (6,303) (6,613)
- --------------------------------------------------------------------------------------------
</TABLE>
26
(Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C>
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits $ 476 1,203
Net increase in time deposits 3,853 3,323
Increase in note payable to Federal Home Loan Bank 1,000 -
Dividends paid (482) (427)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,847 4,099
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 947 (421)
Cash and cash equivalents, beginning of year 5,744 6,165
- --------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $6,691 5,744
- --------------------------------------------------------------------------------------------
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Income taxes $ 629 628
- --------------------------------------------------------------------------------------------
Interest $4,899 4,730
- --------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to repossessed properties $ 174 157
- --------------------------------------------------------------------------------------------
Loans charged against the allowance for loan
losses $ 457 298
- --------------------------------------------------------------------------------------------
Unrealized gains (losses) on available-for-sale
securities $ 227 (318)
- --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Pinnacle Bankshares Corporation
(Bankshares) and its wholly-owned subsidiary, The First National Bank of
Altavista (the "Bank") (collectively, the "Company"), conform to generally
accepted accounting principles and general practices within the banking
industry.
Bankshares, a Virginia Corporation, was incorporated under the laws of the
Commonwealth of Virginia on January 22, 1997, primarily to serve as a
holding company for the Bank. Effective on May 1, 1997, the Bank became a
wholly-owned subsidiary of Bankshares. Pursuant to this reorganization,
Bankshares issued 719,025 shares of its common stock, $3.00 par value in
exchange for 239,675 shares of the Bank's common stock, $2.00 par value.
The reorganization has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for the periods prior
to May 1, 1997 include the accounts and results of operations of the Bank.
All shares and per share data have been adjusted to reflect the exchange
of Bankshares' shares for Bank shares.
The following is a summary of the more significant accounting policies:
Consolidation
The consolidated financial statements include the accounts of Pinnacle
Bankshares Corporation and its wholly-owned subsidiary. All material
intercompany balances and transactions have been eliminated.
Securities
The Bank classifies its securities in three categories: (1) debt
securities that the Bank has the positive intent and ability to hold to
maturity are classified as "held-to-maturity securities" and reported at
amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as "trading securities" and reported at fair value, with
unrealized gains and losses included in net income; and (3) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as "available-for-sale securities" and
reported at fair value, with unrealized gains and losses excluded from net
income and reported in a separate component of stockholders' equity.
Held-to-maturity securities are stated at cost, adjusted for amortization
of premiums and accretion of discounts on a basis which approximates the
level yield method. The Bank does not maintain trading account securities.
Gains or losses on disposition are based on the net proceeds and adjusted
carrying values of the securities called or sold, using the specific
identification method. A decline in the market
28
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(1) (Continued)
value of any available-for-sale or held-to-maturity security below cost
that is deemed other than temporary is charged to net income, resulting in
the establishment of a new cost basis for the security.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
income and fees on loans, and an allowance for loan losses. Income is
recognized over the terms of the loans using methods which approximate the
level yield method. The allowance for loan losses is a valuation allowance
consisting of the cumulative effect of the provision for loan losses, plus
any amounts recovered on loans previously charged off, minus loans charged
off. The provision for loan losses charged to operating expenses is the
amount necessary in management's judgment to maintain the allowance for
loan losses at a level it believes sufficient to cover losses in the
collection of its loans. Management determines the adequacy of the
allowance based upon reviews of individual credits, recent loss
experience, delinquencies, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent
factors. Loans are charged against the allowance for loan losses when
management believes the collectibility of the principal is unlikely. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on
changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their
examinations.
Interest related to nonaccrual loans is recognized on the cash basis.
Loans are generally placed in nonaccrual status when the collection of
principal and interest is 90 days or more past due, unless the obligation
is both well-secured and in the process of collection.
Impaired loans are required to be presented in the financial statements at
the present value of the expected future cash flows or at the fair value
of the loan's collateral. Homogeneous loans such as real estate mortgage
loans, individual consumer loans, home equity loans and bankcard loans are
evaluated collectively for impairment. Management, considering current
information and events regarding the borrowers ability to repay their
obligations, considers a loan to be impaired when it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment losses are included in
the allowance for loan losses through a charge to the provision for loan
losses. Cash receipts on impaired loans receivable are applied first to
reduce interest on such loans to the extent of interest contractually due
and any remaining amounts are applied to principal.
29
<PAGE>
(1) (Continued)
Loan Origination and Commitment Fees and Certain Related Direct Costs
Loan origination and commitment fees and certain direct loan origination
costs charged by the Bank are deferred and the net amount amortized as an
adjustment of the related loan's yield. The Bank is amortizing these net
amounts over the contractual life of the related loans or, in the case of
demand loans, over the estimated life. Net fees related to standby letters
of credit are recognized over the commitment period.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation on buildings and equipment is computed by the
straight-line and declining-balance methods over the estimated useful
lives of the assets. The cost of assets retired and sold and the related
accumulated depreciation are eliminated from the accounts and the
resulting gains or losses are included in determining net income.
Expenditures for maintenance and repairs are charged to expense as
incurred, and improvements and betterments are capitalized.
Other Real Estate Owned
Other real estate owned consists of properties acquired through
foreclosure or deed in lieu of foreclosure. These properties are carried
at the lower of cost or fair value less estimated selling costs. Losses
from the acquisition of property in full or partial satisfaction of debt
are charged against the allowance for loan losses. Subsequent write-downs,
if any, are charged to expense. Gains and losses on the sales of other
real estate owned are recorded in net income in the year of the sale.
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan which
covers substantially all of its employees. The net periodic pension
expense includes a service cost component, interest on the projected
benefit obligation, a component reflecting the actual return on plan
assets, the effect of deferring and amortizing certain actuarial gains and
losses, and the amortization of any unrecognized net transition obligation
on a straight-line basis over the average remaining service period of
employees expected to receive benefits under the plan. The Bank's funding
policy is to make annual contributions in amounts necessary to satisfy the
Internal Revenue Service's funding standards and to the extent that they
are tax deductible.
30
<PAGE>
(1) (Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in net income in the period that includes the enactment date.
Net Income Per Share
Net income per share of common stock is computed based on the weighted
average number of shares outstanding for the year. The weighted average
number of common stock shares outstanding was 719,025 for 1997 and 1996.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks (with original
maturities of three months or less), and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated balance sheets and
revenues and expenses for the years ended December 31, 1997 and 1996.
Actual results could differ from those estimates.
Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share.
Statement 128 establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
31
<PAGE>
(1) (Continued)
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
The provisions of Statement 128 were adopted by the Company at December
31, 1997. The Statement requires restatement of all prior years' EPS data
previously presented. The adoption of this Statement did not have any
effect on current or prior years' EPS data presented by the Company. The
Company does not have any potentially dilute securities at December 31,
1997 or 1996. Accordingly, only basic earnings per share are disclosed.
The Company adopted the provisions of Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, on January 1, 1997. The Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. This Statement also
provides implementation guidance for assessing isolation of transferred
assets and for accounting for transfers of partial interests, servicing of
financial assets, securitizations, transfers of sales-type and direct
financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments
of liabilities. Statement No. 127, Deferral of the Effective Date of
Certain Provisions of Statement No. 125, issued in December 1996, deferred
until January 1, 1998, the effective date of paragraph 15 of Statement 125
and implementation of Statement 125 for repurchase agreement, dollar-roll,
securities lending and similar transactions as defined in Statement 125.
Statement 125 was required to be adopted on a prospective basis; adoption
did not have a material impact on the Company's financial position,
results of operations or liquidity.
Reclassifications
Certain reclassifications were made to prior year amounts to conform
with 1997 presentation.
32
<PAGE>
(2) Restrictions on Cash
To comply with Federal Reserve regulations, the Bank is required to
maintain certain average reserve balances. The daily average reserve
requirements were approximately $540 and $540 for the weeks including
December 31, 1997 and 1996, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities at December 31, 1997 and 1996 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $10,844 52 (16) 10,880
Obligations of states and political
subdivisions 3,891 122 (1) 4,012
Mortgage-backed securities-Government 6,223 60 (25) 6,258
Corporate securities 764 18 -- 782
Other securities 107 -- -- 107
- ----------------------------------------------------------------------------------
Totals $21,829 252 (42) 22,039
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-Maturity Costs Gains Losses Values
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies 3,142 17 (4) 3,155
Obligations of states and political
subdivisions 7,548 192 (8) 7,732
Mortgage-backed securities-private 11 -- -- 11
- ----------------------------------------------------------------------------------
Totals $10,701 209 (12) 10,898
==================================================================================
</TABLE>
(Continued)
33
<PAGE>
(3) (Continued)
<TABLE>
<CAPTION>
1996
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $11,834 46 (102) 11,778
Obligations of states and political
subdivisions 4,194 98 (32) 4,260
Mortgage-backed securities-Government 7,028 53 (96) 6,985
Corporate securities 773 15 -- 788
Other securities 50 -- -- 50
- ----------------------------------------------------------------------------------
Totals $23,879 212 (230) 23,861
==================================================================================
Held-to-Maturity
- ----------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 3,635 17 (11) 3,641
Obligations of states and political
subdivisions 8,253 79 (57) 8,275
Mortgage-backed securities-private 17 -- -- 17
- ----------------------------------------------------------------------------------
Totals $11,905 96 (68) 11,933
==================================================================================
</TABLE>
The amortized costs and fair values of available-for-sale and
held-to-maturity securities at December 31, 1997, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
1997
-----------------------------------------
Available-for-Sale Held-to-Maturity
------------------- ------------------
Amortized Fair Amortized Fair
Costs Values Costs Values
- ---------------------------------------------------------------------
Due in one year or less $ 2,749 2,748 1,499 1,496
Due after one year
through five years 6,386 6,436 3,971 4,028
Due after five years
through ten years 4,392 4,505 3,147 3,218
Due after ten years 2,079 2,092 2,073 2,145
- ---------------------------------------------------------------------
15,606 15,781 10,690 10,887
(Continued)
34
<PAGE>
(3) (Continued)
1997
-------------------------------------
Available-for-Sale Held-to-Maturity
------------------ -----------------
Amortized Fair Amortized Fair
Costs Values Costs Values
- --------------------------------------------------------------------
Mortgage-backed securities $ 6,223 6,258 11 11
- --------------------------------------------------------------------
Totals $21,829 22,039 10,701 10,898
====================================================================
No securities were sold in 1997 or 1996. Gross gains of $4 and $12
were realized in 1997 and 1996, respectively, on calls of securities.
Securities with amortized costs of approximately $3,950 and $3,801 (fair
values of $3,989 and $3,807, respectively) as of December 31, 1997 and
1996, respectively, were pledged as collateral for public deposits.
(4) Loans
A summary of loans at December 31, 1997 and 1996 follows:
1997 1996
- ------------------------------------------------------------
Real estate loans:
Residential $37,557 37,184
Other 8,912 7,903
Loans to individuals for household,
family and other consumer
expenditures 31,942 28,902
Commercial and industrial loans 8,714 6,363
All other loans 840 634
- ------------------------------------------------------------
Total loans, gross 87,965 80,986
Less unearned income and fees (402) (470)
- ------------------------------------------------------------
Loans, net of unearned income
and fees 87,563 80,516
Less allowance for loan losses (747) (674)
- ------------------------------------------------------------
Loans, net $86,816 79,842
============================================================
(Continued)
35
<PAGE>
(4) (Continued)
Nonaccrual loans amounted to approximately $38 and $80 at December 31,
1997 and 1996, respectively. Interest income that would have been earned
on nonaccrual loans if they had been current in accordance with their
original terms and the recorded interest that was included in income on
these loans was not significant for 1997 and 1996. There were no
commitments to lend additional funds to customers whose loans were on
nonaccrual at December 31, 1997.
In the normal course of business, the Bank has made loans to executive
officers and directors. At December 31, 1997, loans to executive officers
and directors were approximately $1,096 compared to $837 at December 31,
1996. During 1997, new loans to executive officers and directors amounted
to approximately $749 and repayments amounted to approximately $490. Loans
to companies in which executive officers and directors have an interest
amounted to approximately $1,297 and $1,330 at December 31, 1997 and 1996,
respectively. In addition, dealer loans purchased from companies owned by
certain directors, and against whom the bank has recourse, amounted to
approximately $261 and $2,153 at December 31, 1997 and 1996, respectively.
Activity in the allowance for loan losses is summarized as follows:
1997 1996
- -------------------------------------------------------------
Balances, beginning of year $ 674 623
Provision for loan losses 350 205
Loans charged off (457) (298)
Loan recoveries 180 144
- -------------------------------------------------------------
Balances, end of year $ 747 674
=============================================================
At December 31, 1997 and 1996, the recorded investment in loans for which
an impairment has been identified totaled approximately $96 and $144,
respectively. Of this amount, approximately $-0- and $40 related to loans
with no valuation allowance and $96 and $104 related to loans with
corresponding valuation allowances of approximately $13 and $65 at
December 31, 1997 and 1996, respectively. The average recorded investment
in impaired loans receivable during 1997 and 1996 was approximately $120
and $184. Interest income recognized on impaired loans during 1997 and
1996 was $5 and $9, including approximately $-0- and $6, respectively,
recognized on a cash basis.
36
<PAGE>
(5) Premises and Equipment
Premises and equipment were comprised of the following as of December
31, 1997 and 1996:
1997 1996
- --------------------------------------------------------
Land improvements $ 169 110
Buildings 1,056 1,056
Equipment, furniture and fixtures 1,894 1,828
- --------------------------------------------------------
3,119 2,994
Less accumulated depreciation (2,417) (2,204)
- --------------------------------------------------------
702 790
Land 1,139 341
Construction-in-progress 1,317 85
- --------------------------------------------------------
$3,158 1,216
========================================================
(6) Deposits
A summary of deposits at December 31, 1997 and 1996 follows:
1997 1996
- ------------------------------------------------------------
Noninterest bearing:
Demand deposits $ 9,524 9,830
Interest bearing:
Savings 23,700 23,380
NOW accounts 13,404 12,942
Time deposits 57,080 54,683
Time deposits greater than
$100,000 11,825 10,369
- ------------------------------------------------------------
$115,533 111,204
============================================================
At December 31, 1997, the scheduled maturity of time deposits are as
follows: $34,370 in 1998; $25,202 in 1999; $6,595 in 2000; $918 in 2001
and $1,820 in 2002.
(7) Employee Benefit Plans
The Bank maintains a noncontributory defined benefit pension plan which
covers substantially all of its employees. Benefits are computed based on
employees' average final compensation and years of credited service.
Pension expense amounted to approximately $82 and $92 in 1997 and 1996,
respectively. Contributions of $116 and $73 were made to the Plan in 1997
and 1996, respectively.
37
<PAGE>
(7) (Continued)
The funded status of the pension plan at September 30, 1997 and 1996
(most recent information available) is as follows:
1997 1996
- --------------------------------------------------------------------
Fair value of plan assets $1,456 1,144
- --------------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefits 845 691
Nonvested benefits 23 14
- --------------------------------------------------------------------
Accumulated benefit obligation 868 705
Effect of projected future salary
increases 791 554
- --------------------------------------------------------------------
Projected benefit obligation 1,659 1,259
- --------------------------------------------------------------------
Plan assets less than projected
benefit obligation (203) (115)
Unrecognized net gain (315) (446)
Unrecognized net transition obligation 51 55
Unrecognized prior service cost 65 70
- --------------------------------------------------------------------
Accrued pension cost included in other
liabilities $ (402) (436)
====================================================================
Pension cost under the plan is summarized as follows:
1997 1996
- -----------------------------------------------
Service cost $ 97 94
Interest cost 94 89
Actual return on plan assets (103) (88)
Net amortization (accretion) (6) (3)
- -----------------------------------------------
Net pension cost $ 82 92
===============================================
The expected long-term rate of return on plan assets was 9 percent for
1997 and 1996. The discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation at September 30, 1997 was 7.5 and 5.0
percent, and at September 30, 1996 was 7.5 and 6.0 percent. Plan assets
consisted of cash equivalents, U.S. Government securities, mortgage-backed
securities, corporate bonds and equities securities in a pooled pension
fund administered by the Virginia Bankers Association. The Company also
instituted a 401(k) plan during 1997. The Company does not currently match
employee contributions to the plan.
38
<PAGE>
(8) Income Taxes
Total income taxes for the years ended December 31, 1997 and 1996 are
allocated as follows:
1997 1996
- -----------------------------------------------------------------------------
Income $ 662 573
Stockholders' equity for unrealized gains
(losses) on available-for-sale
securities recognized for financial
reporting purposes 77 (108)
- -----------------------------------------------------------------------------
Total $ 739 465
=============================================================================
Income tax expense (benefit) attributable to income before income tax
expense is summarized as follows:
1997 1996
- -----------------------------------------------------------------------------
Current $ 588 606
Deferred 74 (33)
- -----------------------------------------------------------------------------
Total $ 662 573
=============================================================================
Included in income tax expense were tax expenses of approximately $1 and
$4 for the years ended December 31, 1997 and 1996, respectively, related
to net realized gains and losses on the calls and sales of securities.
Income tax expense for the years ended December 31, 1997 and 1996 differed
from the amounts computed by applying the U.S. Federal income tax rate of
34 percent to income before income tax expense as a result of the
following:
1997 1996
- -----------------------------------------------------------------------------
Computed "expected" income tax expense $ 809 734
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest (176) (190)
Disallowance of interest expense 26 28
Other 3 1
- -----------------------------------------------------------------------------
Total $ 662 573
=============================================================================
39
<PAGE>
(8) (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
1997 1996
- -----------------------------------------------------------------------------
Deferred tax assets:
Loans, principally due to allowance for
loan losses $ 158 133
Accrued pension, due to accrual for financial
reporting purposes in excess of actual
pension contributions 137 148
Loans, due to unearned fees, net - 112
Net unrealized losses on available-for-sale
securities - 6
Other 27 18
- -----------------------------------------------------------------------------
Total gross deferred tax assets 322 417
Less valuation allowance - -
- -----------------------------------------------------------------------------
Net deferred tax assets 322 417
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment, due to
differences in depreciation 40 55
Prepaid expenses, due to capitalization
for financial reporting purposes 2 2
Net unrealized gains on available-for-sale
securities 71 -
- -----------------------------------------------------------------------------
Total gross deferred tax liabilities 113 57
- -----------------------------------------------------------------------------
Net deferred tax asset, included in other assets $ 209 360
=============================================================================
The Bank has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1997 and 1996, since
realization of the entire gross deferred tax assets can be supported by
the amounts of taxes paid during the carryback periods available under
current tax laws.
40
<PAGE>
(9) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments may involve, to
varying degrees, credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
Credit risk is defined as the possibility of sustaining a loss because the
other parties to a financial instrument fail to perform in accordance with
the terms of the contract. The Bank's maximum exposure to credit loss
under commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
The Bank requires collateral to support financial instruments when it is
deemed necessary. The Bank evaluates such customers' creditworthiness on a
case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral may include deposits held in financial institutions, U.S.
Treasury securities, other marketable securities, real estate, accounts
receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
Contract Amounts at
December 31,
--------------------
1997 1996
- ----------------------------------------------------------------------------
Commitments to extend credit $ 9,015 7,419
============================================================================
Standby letters of credit $ 1,369 737
============================================================================
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
41
<PAGE>
(9) (Continued)
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. Unless
renewed, substantially all of the Bank's credit commitments at December
31, 1997 will expire within one year. Management does not anticipate any
material losses as a result of these transactions. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
(10) Concentrations of Credit Risk
The Bank grants commercial, residential, consumer and agribusiness loans
to customers in the central Virginia area. The Bank has a diversified loan
portfolio which is not dependent upon any particular economic sector. As a
whole, the portfolio could be affected by general economic conditions in
the central Virginia region.
The Bank's commercial loan portfolio is diversified, with no significant
concentrations of credit. The real estate loan portfolio consists
principally of 1-4 family residential property. The installment loan
portfolio consists of consumer loans primarily for automobiles and other
personal property. Overall, the Bank's loan portfolio is not concentrated
within a single industry or group of industries, the loss of any one or
more of which would generate a materially adverse impact on the business
of the Bank.
The Bank has established operating policies relating to the credit process
and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property. Credit
approval is principally a function of collateral and the evaluation of the
creditworthiness of the borrower based on available financial information.
(11) Dividend Restrictions and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary Bank. For the year ended December 31, 1997,
dividends from the subsidiary Bank totaled $522.
42
<PAGE>
(11) (Continued)
Substantially all of Bankshares' retained earnings consists of
undistributed earnings of its subsidiary Bank, which are restricted by
various regulations administered by federal banking regulatory agencies.
Under applicable federal laws, the Comptroller of the Currency restricts,
without prior approval, the total dividend payments of the Bank in any
calendar year to the net profits of that year, as defined, combined with
the retained net profits for the two preceding years. At December 31,
1997, retained net profits of the Bank which were free of such restriction
approximated $2,400.
Bankshares and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on Bankshares' consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Bankshares and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bankshares and the Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1997, that Bankshares and the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from Office of the
Comptroller of the Currency categorized Bankshares and the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Bankshares and the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since that notification that management believes have changed Bankshares
and the Bank's category.
43
<PAGE>
(11) (Continued)
Bankshares and the Bank's actual capital amounts and ratios are presented
in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 14,529 16.24% $ 7,159 >8.0% $ N/A N/A
Bank 14,535 16.24% 7,159 >8.0% 8,949 >10.0%
Tier I Capital
(to Risk Weighted Assets):
Bankshares consolidated 13,782 15.40% 3,580 >4.0% N/A N/A
Bank 13,788 15.41% 3,580 >4.0% 5,369 >6.0%
Tier I Capital (Leverage)
(to Average Assets):
Bankshares consolidated 13,782 10.65% 5,174 >4.0% N/A N/A
Bank 13,788 10.66% 5,174 >4.0% 6,468 >5.0%
As of December 31, 1996:
Bank:
Total Capital
(to Risk Weighted Assets) $ 13,233 16.63% $ 6,365 >8.0% 7,957 >10.0%
Tier I Capital
(to Risk Weighted Assets) 12,559 15.79% 3,183 >4.0% 4,774 >6.0%
Tier I Capital (Leverage)
(to Average Assets) 12,559 10.14% 4,954 >4.0% 6,192 >5.0%
</TABLE>
(12) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires the Company to disclose
estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the
approximate fair value of each class of financial instrument for which it
is practicable to estimate that value.
Cash and Due from Banks and Federal Funds Sold
The carrying amounts are a reasonable estimate of fair value.
44
<PAGE>
(12) (Continued)
Securities
The fair value of securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate - residential, real estate - other, loans to individuals and other
loans. Each loan category is further segmented into fixed and adjustable
rate interest terms.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan as well as
estimates for prepayments. The estimate of maturity is based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions.
Deposits
The fair value of demand deposits, NOW accounts and savings deposits is
the amount payable on demand. The fair value of fixed maturity time
deposits and certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and standby
letters of credit are the deferred fees arising from these unrecognized
financial instruments. These deferred fees are not deemed significant at
December 31, 1997 and 1996, and as such, the related fair values have not
been estimated.
45
<PAGE>
(12) (Continued)
The carrying amounts and approximate fair values of the Company's
financial instruments are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997
-------------------------
Carrying Approximate
Amounts Fair Values
<S> <C>
- ---------------------------------------------------------------------------------
Financial assetes:
Cash and due from banks $ 3,304 3,304
Federal funds sold 3,387 3,387
Securities:
Available-for-sale 22,039 22,039
Held-to-maturity 10,701 10,898
Federal Reserve Bank Stock 75 75
Federal Home Loan Bank Stock 409 409
Loans, net of unearned income and fees 87,563 87,828
- ---------------------------------------------------------------------------------
Total financial assets $ 127,478 127,940
=================================================================================
Financial liabilities:
Deposits 115,533 116,165
Note payable to Federal Home Loan Bank 1,000 1,000
- ---------------------------------------------------------------------------------
Total financial liabilities $ 116,533 117,165
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996
-------------------------
Carrying Approximate
Amounts Fair Values
<S> <C>
- ---------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 3,159 3,159
Federal funds sold 2,585 2,585
Securities:
Available-for-sale 23,861 23,861
Held-to-maturity 11,905 11,933
Federal Reserve Bank Stock 75 75
Federal Home Loan Bank Stock 403 403
Loans, net of unearned income and fees 80,516 80,675
- ---------------------------------------------------------------------------------
Total financial assets $ 122,504 122,691
=================================================================================
</TABLE>
46
<PAGE>
(12) (Continued)
<TABLE>
<CAPTION>
December 31,
1996
-------------------------
Carrying Approximate
Amounts Fair Values
<S> <C>
- ---------------------------------------------------------------------------------
Financial liabilities:
Deposits 111,204 111,755
- ---------------------------------------------------------------------------------
Total financial liabilities $ 111,204 111,755
=================================================================================
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are not
considered financial assets include deferred tax assets and premises and
equipment and other real estate owned. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
the estimates.
47
<PAGE>
(13) Parent Company Financial Information
Condensed financial information of Pinnacle Bankshares Corporation
(Parent) is presented below:
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
-------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C>
Assets
Investment in subsidiaries, at equity $ 14,020 12,657
Other assets 36 -
- ----------------------------------------------------------------------------------------------
Total assets $ 14,056 12,657
==============================================================================================
Liabilities and Stockholders' Equity
Other liabilities 14 -
Stockholders' equity (notes 1 and 11):
Common stock of $3.00 par value. Authorized
3,000,000 shares; issued and outstanding
719,025 shares 2,157 2,157
Capital surplus 338 338
Retained earnings 11,409 10,174
Net unrealized gains (losses) on securities
available for sale (notes 3 and 8) 138 (12)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 14,042 12,657
Commitments, contingencies and other matters
(notes 5, 7, 9, 10 and 11)
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 14,056 12,657
==============================================================================================
</TABLE>
48
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(13) (Continued)
<TABLE>
<CAPTION>
Condensed Statements of Income Years ended
December 31,
-------------------------
1997 1996
<S> <C>
- ----------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries (note 11) $ 522 -
Expenses
Other expenses 25 -
- ----------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed net income of subsidiaries 497 -
Applicable income tax benefit 7 -
==============================================================================================
Income before equity in undistributed net income
of subsidiaries 504 -
Equity in undistributed net income of subsidiaries 1,213 1,585
- ----------------------------------------------------------------------------------------------
Net income $ 1,717 1,585
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years Ended
December 31,
-------------------------
1997 1996
<S> <C>
- ----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,717 1,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (1,213) (1,585)
Increase in other assets (36) -
Increase in other liabilities 14 -
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 482 -
- ----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid (482) -
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (482) -
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ - -
==============================================================================================
</TABLE>
49
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Pinnacle Bankshares Corporation:
We have audited the accompanying consolidated balance sheets of Pinnacle
Bankshares Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Bankshares
Corporation and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 10, 1998
50
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Directors and Officers
===============================================================================
Directors
Pinnacle Bankshares Corporation
The First National Bank of Altavista
Alvah P. Bohannon, III Percy O. Moore
John P. Erb Herman P. Rogers, Jr.
Robert L. Finch Carroll E. Shelton
Robert H. Gilliam, Jr. Kenneth S. Tyler, Jr.
R. B. Hancock, Jr. John L. Waller
James P. Kent, Jr.
Officers
Pinnacle Bankshares Corporation
Robert H. Gilliam, Jr. President & Chief Executive Officer
Carroll E. Shelton Vice President
Dawn P. Crusinberry Secretary, Treasurer & Chief
Financial Officer
Officers and Managers
The First National Bank of Altavista
Robert H. Gilliam, Jr. President & Chief Executive Officer
Carroll E. Shelton Senior Vice President & Chief Lending
Officer
Dawn P. Crusinberry Vice President, Cashier & Chief
Financial Officer
Betty S. Adkins Vice President - Deposit Services
Lucy H. Johnson Vice President - Data Processing
Danny R. Wilson Vice President - Mortgage Lending
Pamela R. Adams Vice President
Ronald C. Clay Assistant Vice President & Recovery
Manager
Robert L. Jennings Assistant Vice President & Security
Officer
Tony J. Bowling Assistant Vice President & Branch
Manager
Cynthia W. Dunnavant Loan Officer, Assistant Branch Manager &
Compliance Officer
Shawn D. Stone Loan Officer
Daniel R. Wheeler Loan Officer & Dealer Finance Manager
Brenda M. Eades Real Estate Loan Officer
C. Miranda Flynn Auditor
Tarry R. Pribble Collection Manager
===============================================================================
51
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Shareholder Information
================================================================================
Annual Meeting
The 1998 Annual Meeting of Shareholders will be held on April 14, 1998, at 11:30
a.m. at the Fellowship Hall of Altavista Presbyterian Church, located at 707
Broad Street, Altavista, Virginia.
Market for Common Equity and Related Stockholder Matters
Prior to May 1, 1997, the information is based on known trades as disclosed to
the Company by brokers. Since May 1, 1997, the Company's Common Stock has been
quoted on the OTC Bulletin Board. The following table below presents the high
and low bid prices per share of the Common Stock and dividend information of the
Company for the quarters presented. The high and low bid prices of the Common
Stock do not include retail markups, markdowns or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
1997 1996
--------------------------- -----------------------------
High Low Dividends High Low Dividends
------- ------ ---------- ------ ------ ------------
<S> <C>
First Quarter $20.33 $18.00 .16 $17.33 $16.33 .14
Second Quarter $20.00 $19.00 .17 $18.33 $16.67 .14
Third Quarter $24.00 $21.00 .17 $18.17 $17.67 .15
Fourth Quarter $26.00 $21.00 .17 $19.21 $18.71 .16
</TABLE>
Each share of Common Stock is entitled to participate equally in dividends,
which are payable as and when determined by the Board of Directors after
consideration of the earnings, general economic conditions, the financial
condition of the business and other factors as might be appropriate. The
Company's ability to pay dividends is dependent upon its receipt of dividends
from its subsidiary. National banks may use only capital surplus that represents
retained earnings, not paid-in capital, when calculating permissible dividends.
On February 10, 1998, there were approximately 388 Stockholders of record of the
Common Stock.
Requests for Information
Requests for information about the Company should be directed to Dawn P.
Crusinberry, Secretary, Treasurer and Chief Financial Officer, P.O. Box 29,
Altavista, Virginia 24517, telephone (804) 369-3000. A copy of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997, will be
furnished without charge to shareholders upon request after March 31, 1998.
================================================================================
52
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE PERIOD ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-KSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,304
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,387
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,039
<INVESTMENTS-CARRYING> 10,701
<INVESTMENTS-MARKET> 10,898
<LOANS> 86,816
<ALLOWANCE> 747
<TOTAL-ASSETS> 131,650
<DEPOSITS> 115,533
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,075
<LONG-TERM> 0
0
0
<COMMON> 2,157
<OTHER-SE> 11,885
<TOTAL-LIABILITIES-AND-EQUITY> 131,650
<INTEREST-LOAN> 7,838
<INTEREST-INVEST> 2,152
<INTEREST-OTHER> 134
<INTEREST-TOTAL> 10,124
<INTEREST-DEPOSIT> 4,889
<INTEREST-EXPENSE> 4,896
<INTEREST-INCOME-NET> 5,228
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 2,905
<INCOME-PRETAX> 2,379
<INCOME-PRE-EXTRAORDINARY> 2,379
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,717
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 4.47
<LOANS-NON> 38
<LOANS-PAST> 372
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 674
<CHARGE-OFFS> 457
<RECOVERIES> 180
<ALLOWANCE-CLOSE> 747
<ALLOWANCE-DOMESTIC> 747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 481
</TABLE>
