<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 29
Altavista, Virginia 24517 24517-0029
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(Address of principal executive offices) (ZIP CODE)
Issuer's telephone number (804) 369-3000
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Securities registered pursuant to 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 disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $11,881,000
-----------
The aggregate market value of the voting stock held by nonaffiliates as
of February 8, 2000: $24,843,000
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The number of shares outstanding of Common Stock as of March 10, 1999: 720,096
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Shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1999 Annual Report to Shareholders is 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 11, 2000 are incorporated in Part III of this report.
Transitional small business disclosure format: Yes No x .
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<PAGE>
PINNACLE BANKSHARES CORPORATION
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business 3
General Development of Business
Competition
Supervision and Regulation
Employees
Item 2. Description of Property 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 8
Item 6. Management's Discussion and Analysis or Plan of Operation 8
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 9
SIGNATURES 10
Index to Attached Exhibits 11
<PAGE>
PART I
Item 1. Description of Business.
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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. In October, 1998, a mortgage loan
production office was opened in Forest, Virginia. The Airport Branch facility,
located just outside the Lynchburg city limits, opened in June, 1999. These
offices were opened to better serve the Lynchburg and northern Campbell County
area.
The Bank owns two wholly-owned subsidiaries. FNB Property Corp., which
is incorporated under the laws of the Commonwealth of Virginia, was formed to
hold title to Bank premises real estate. First Properties, Inc., which is
incorporated under the laws of the Commonwealth of Virginia, was formed to hold
title to other real estate owned.
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.
<PAGE>
Regulation and Supervision
The following discussion of statutes and regulations is only a summary
and does not 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.
<PAGE>
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 Company on its deposits and its other borrowings and
the interest rates received by the Company on loans extended to its customers
and securities held in its portfolio, comprise the major portion of the
Company's net revenues. These rates are highly sensitive to many factors that
are beyond the Company'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,
1999, 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, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was signed into law. 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
<PAGE>
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 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 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, 1999, the Company was considered "well capitalized"
and the Bank was considered "well capitalized." See "Item 6. Management's
Discussion and Analysis--Capital Resources."
<PAGE>
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.
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, 1999, the Company had 57 full-time employees. The
Company's Management believes that its employee relations are satisfactory.
Item 2. Description of Property.
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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.
First National Mortgage, located at 17841 Forest Road in Forest,
Virginia, consists of a single-story building leased by the Bank.
The Airport Branch, located at 14580 Wards Road in Campbell County,
Virginia, consists of a single-story building owned by the Bank.
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.
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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.
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No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 1999.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
- ------- ---------------------------------------------------------
The information contained on page 52 of the 1999 Annual Report to
Shareholders, under the caption, "Market for Common Equity and Related
Stockholder Matters", is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------- ----------------------------------------------------------
The information presented under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 4
through 20 of the 1999 Annual Report to Shareholders is incorporated herein by
reference.
Item 7. Financial Statements.
- ------- ---------------------
The consolidated financial statements of the Registrant and its
subsidiary and independent auditors' report thereon contained on pages 21
through 49 of the 1999 Annual Report to Shareholders are 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 Company's 2000
Annual Meeting of Shareholders ("Proxy Statement") mailed to Shareholders on or
about March 10, 2000.
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 for the Annual Meeting of Shareholders to be held on April 11, 2000.
The Registrant hereby incorporates by reference the section entitled
"Officers-Pinnacle Bankshares Corporation," as set forth on page 50 of the 1999
Annual Report to Shareholders. The Registrant hereby incorporates by reference
the Section 16(a) Beneficial Ownership Reporting Compliance at page 8 of the
Proxy Statement.
Item 10. Executive Compensation.
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Information on Executive Compensation is contained on pages 5 through
7 of the Proxy Statement and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
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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.
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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 and Reports on Form 8-K
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(a) Exhibits List
Exhibit 13-1999 Annual Report to Shareholders(Such report except to the
<PAGE>
extent incorporated herein by reference, is being furnished for the information
of the Commission only and is not deemed to be filed as part of this report on
Form 10-KSB.)
Exhibit 23-Consent of KPMG LLP to incorporation by reference of independent
auditors' report incorporated by reference in this Form 10-KSB, into
registrant's registration statement on Form S-8 and registration
statement on Form S-3.
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the Company's fiscal year ended December 31, 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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 14, 2000 /s/ Robert H. Gilliam, Jr.
- -------------------- ---------------------------
Date Robert H. Gilliam Jr., President and
Chief Executive Officer
MARCH 14, 2000 /s/ Dawn P. Crusinberry
- -------------------- ------------------------
Date Dawn P. Crusinberry, Secretary,
Treasurer and Chief Financial Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/A. Willard Arthur Director March 14, 2000
- --------------------------
A. Willard Arthur
/s/Alvah P. Bohannon, III Director March 14, 2000
- --------------------------
Alvah P. Bohannon, III
/s/James E. Burton, IV Director March 14, 2000
- --------------------------
James E. Burton, IV
/s/John P. Erb Director March 14, 2000
- --------------------------
John P. Erb
/s/Robert L. Finch Director March 14, 2000
- --------------------------
Robert L. Finch
/s/Robert H. Gilliam, Jr. President, Chief Executive March 14, 2000
- -------------------------- Officer and Director
Robert H. Gilliam, Jr.
/s/R.B. Hancock, Jr. Director March 14, 2000
- --------------------------
R.B. Hancock, Jr.
/s/James P. Kent, Jr. Director March 14, 2000
- --------------------------
James P. Kent, Jr.
/s/Warren G. Lowder Director March 14, 2000
- --------------------------
Warren G. Lowder
/s/Percy O. Moore Director March 14, 2000
- --------------------------
Percy O. Moore
/s/Herman P. Rogers, Jr. Director March 14, 2000
- --------------------------
Herman P. Rogers, Jr.
/s/Carroll E. Shelton Vice President and Director March 14, 2000
- --------------------------
Carroll E. Shelton
/s/John L. Waller Director March 14, 2000
- --------------------------
John L. Waller
</TABLE>
<PAGE>
INDEX TO ATTACHED EXHIBITS
Exhibit Number Description
- -------------- -----------
13 1999 Annual Report to Shareholders (such report except to
the extent incorporated herein by reference, is being
furnished for the information of the Commission only and is
not deemed to be filed as part of this report on Form
10-KSB).
23 Consent of KPMG LLP to incorporation by reference of
independent auditors' report incorporated by reference in
this Form 10-KSB, into registrant's registration statement
on Form S-8 and registration statement on Form S-3.
27 Financial Data Schedule.
<PAGE>
PINNACLE BANKSHARES CORPORATION
1999
Annual Report
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Selected Historical Consolidated Financial Information........................ 1
President's Letter............................................................ 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 4
Consolidated Balance Sheets................................................... 21
Consolidated Statements of Income and Comprehensive Income.................... 22
Consolidated Statements of Changes in Stockholders' Equity.................... 23
Consolidated Statements of Cash Flows......................................... 24
Notes to Consolidated Financial Statements.................................... 26
Independent Auditors' Report.................................................. 49
Directors and Officers........................................................ 50
Bank Locations................................................................ 51
Shareholder Information....................................................... 52
</TABLE>
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Selected Historical Consolidated Financial Information
(In thousands, except ratios, share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 5,525 5,210 5,228 4,749 4,388
Provision for loan losses 340 300 350 205 240
Noninterest income 759 513 406 378 192
Noninterest expenses 3,863 3,358 2,905 2,764 2,712
Income tax expense 526 548 662 573 438
Net income 1,555 1,517 1,717 1,585 1,190
Per Share Data:
Basic net income 2.16 2.11 2.39 2.20 1.66
Diluted net income 2.14 2.09 2.39 2.20 1.66
Cash dividends 0.72 0.70 0.67 0.59 0.56
Book value 21.66 21.06 19.53 17.60 16.28
Balance Sheet Data:
Assets 153,956 142,458 131,650 124,951 119,380
Loans, net of unearned income
and fees and allowance for
loan losses 100,737 90,532 86,816 79,842 75,484
Total investment securities 37,260 35,072 32,740 35,766 34,647
Deposits 136,389 125,187 115,533 111,204 106,678
Stockholders' equity 15,590 15,142 14,042 12,657 11,709
Basic average shares outstanding 719,649 719,025 719,025 719,025 719,025
Diluted average shares outstanding 725,877 724,285 719,578 719,025 719,025
Performance Ratios:
Return on average assets 1.03% 1.12% 1.35% 1.30% 1.01%
Return on average equity 10.10% 10.40% 12.86% 13.01% 10.87%
Dividend payout 33.33% 33.18% 28.03% 26.93% 33.80%
Asset Quality Ratios:
Allowance for loan losses to
total loans, net of unearned
income and fees 0.92% 0.96% 0.85% 0.84% 0.82%
Net charge-offs to average loans,
net of unearned income and
fees 0.29% 0.20% 0.33% 0.20% 0.24%
Capital Ratios:
Leverage 10.47% 10.66% 10.65% 10.14% 9.63%
Risk-based:
Tier 1 capital 14.87% 15.30% 15.40% 15.79% 15.06%
Total capital 15.75% 16.20% 16.24% 16.63% 15.88%
Average equity to average assets 10.24% 10.76% 10.50% 10.01% 9.27%
</TABLE>
1
<PAGE>
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
The highlight of 1999 was clearly the establishment of the Bank's new Airport
Branch on Wards Road in northern Campbell County, just south of the Lynchburg
Regional Airport. The branch represents the Bank's first full service office
located outside the limits of the Town of Altavista. The opening in June
culminated a two year effort involving site location and acquisition, site
development and building design and construction. We are most pleased with our
location and facility which provide a needed expansion of our market and
position us to capitalize on the rapid growth occurring on the Route 29 corridor
between Lynchburg and Altavista. The Airport Branch contributed to our growth
in deposits and loans in 1999 and added to our costs which resulted in our
returns being lower in 1999 than in 1998.
Net income for 1999 was $1,555,000, 2.50% higher than in 1998. Return on
average assets was 1.03% for 1999 and return on average equity was 10.10%.
Competitive pricing pressures continue to compress our net interest margin. A
significant increase in income from sources other than interest has served to
partially offset higher operating costs.
Total assets as of December 31, 1999 were $153,956,000, an increase of 8.07% for
the year and a new high for the Company. Average assets for 1999 amounted to
$150,464,000.
Loans, net of unearned income and allowance for loan losses, grew by
$10,205,000, 11.27%, in 1999. The growth was spread over all categories of
loans. Net loans outstanding amounted to $100,737,000 at year-end 1999. A
strong economy has resulted in continued positive loan demand. $340,000 was
expensed during the year as a provision for losses on loans and the balance of
the allowance for loan losses at the end of 1999 was $938,000.
Total deposits increased $11,202,000, 8.95%, in 1999 and ended the year at
$136,389,000. Although growth did occur in noninterest-bearing demand deposits
during the year, interest-bearing deposits amounted to 91.50% of total deposits
at the end of 1999.
Stockholders' equity was $15,590,000 at December 31, 1999. Average equity for
1999 was 10.24% of average assets. By all regulatory standards Pinnacle
Bankshares is a "well capitalized" company. Cash dividends of $0.72 per share
were paid in 1999, compared with $0.70 per share in 1998. 1999 marks the
twenty-third consecutive year of an increase in cash dividend payments.
The Dividend Reinvestment Plan implemented in April 1999, has been favorably
received by shareholders. Approximately 26% of outstanding shares are currently
participating in this plan, whereby shareholders utilize cash dividends to
acquire additional shares in the Company. Commensurate with implementation of
the Dividend Reinvestment Plan, Registrar and Transfer Company of Cranford, New
Jersey, was appointed transfer and dividend distribution agent for Pinnacle
Bankshares.
2
<PAGE>
One change in board membership occurred in 1999. Scott Tyler resigned from both
the holding company and Bank boards due to relocation of his residence out-of-
state. Scott was our senior board member in terms of service and his experience
and board leadership are missed. We are fortunate to have added Warren Lowder
to both boards. Warren is Vice President, Secretary and Chief Financial Officer
of The Lane Company, Inc. and his strong financial background and acumen are
already contributing to our Company. Warren is standing for election as a Class
III Director of Pinnacle Bankshares at the 2000 Annual Meeting of Shareholders.
The service of Robert L. Finch as a Director of First National Bank and Pinnacle
Bankshares is coming to a close in 2000. Bob is to be commended for the
diligence and faithfulness with which he has discharged his duties over the past
fourteen years.
As we enter a new millennium, it is gratifying to recognize that Y2K has quietly
faded away. An inordinate level of human and financial resources were devoted
to insuring that the millennium change would not cause a disruption in our
service. We can now focus our attention on new products and services and new
and more effective means of service delivery.
Pinnacle Bankshares represents a valuable community banking franchise for
Campbell County and surrounding areas. We are continually seeking ways to make
our Company better, to be more productive and to enhance shareholder value.
Your support is critical to our success and for that support we are eternally
grateful. Working together, we look forward to producing stronger returns in
the future.
Robert H. Gilliam, Jr.
President and Chief Executive Officer
March 1, 2000
3
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
Management's Discussion and Analysis (Dollar 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, 1999 and 1998. The discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
Overview
Total assets at December 31, 1999 were $153,956, up 8.07% from $142,458 at
December 31, 1998. The principal components of the Company's assets at the end
of the year were $37,260 in securities and $100,737 in net loans. During the
year ended December 31, 1999, gross loans increased 11.13% or $10,211. The
Company's lending activities are a principal source of income.
Total liabilities at December 31, 1999 were $138,366, up 8.68% from $127,316 at
December 31, 1998, with the increase reflective of a rise in total deposits of
$11,202 or 8.95%. Noninterest-bearing demand deposits increased $602 or 5.48%
and represented 8.50% of total deposits at December 31, 1999. The Company's
deposits are provided by individuals and businesses located within the
communities served.
Total stockholders' equity at December 31, 1999 was $15,590, compared to $15,142
at December 31, 1998.
The Company had net income of $1,555 for the year ended December 31, 1999,
compared to net income of $1,517 for the year ended December 31, 1998, an
increase of 2.50%.
Profitability as measured by the Company's return on average assets (ROA) was
1.03% in 1999, down from 1.12% in 1998. Another key indicator of performance,
the return on average equity (ROE), was 10.10% for 1999, compared to 10.40% for
1998.
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 interest-earning assets
exceed the expense associated with funding those assets. Changes in the amounts
and mix of interest-earning assets and interest-bearing liabilities, as well as
their respective yields and rates, have a significant impact on the level of net
interest income. Changes in the interest rate environment and the Company's
cost of funds also affected net interest income.
The net interest margin decreased from 4.20% for the year ended December 31,
1998, to 4.08% for the year ended December 31, 1999. Net interest income was
$5,525 for the year ended December 31, 1999 and is attributable to interest
income from loans and securities exceeding the cost associated with interest
paid on deposits. The decrease in the interest rate spread is a result of the
falling interest rate environment and assets repricing at lower rates faster
than corresponding interest-bearing liabilities. Although the Bank's cost of
funds was 0.23% less than the same period in 1998, a lower interest rate
environment and strong competitive factors contributed to a decline in the yield
on loans and investments for the year ended December 31, 1999, compared to
December 31, 1998.
4
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
The following table presents the major categories of interest-earning assets,
interest-earning liabilities and stockholders' equity with corresponding average
balances, related interest income or interest expense and resulting yield and
rates for the period indicated.
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Assets Balance(1) Expense Paid Balance(1) Expense Paid
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2)(3) $ 96,735 8,657 8.95% 87,057 8,011 9.20%
Investment securities:
Taxable 25,083 1,557 6.21% 22,701 1,496 6.59%
Tax-exempt (4) 12,907 825 6.39% 11,476 758 6.61%
Interest-earning deposits 52 3 5.77% 48 3 6.25%
Federal funds sold 5,922 289 4.88% 7,425 395 5.32%
----------- ---------- ----------- ----------
Total interest-earning assets 140,699 11,331 8.05% 128,707 10,663 8.29%
Other assets:
Allowance for loan losses (921) (811)
Cash and due from banks 2,109 2,682
Other assets, net 8,577 5,109
----------- -----------
Total assets $ 150,464 135,687
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings and NOW $ 42,410 1,237 2.92% 37,733 1,137 3.01%
Time 79,498 4,307 5.42% 71,130 4,065 5.71%
Other borrowings 860 53 6.16% 960 59 6.14%
----------- ---------- ----------- ----------
Total interest-bearing liabilities 122,768 5,597 4.56% 109,823 5,261 4.79%
Noninterest-bearing liabilities:
Demand deposits 10,994 10,160
Other liabilities 1,299 1,296
----------- -----------
Total liabilities 135,061 121,279
Stockholders' equity 15,403 14,408
----------- -----------
Total liabilities and
stockholders' equity $ 150,464 135,687 --
=========== ---------- =========== ----------
Net interest income 5,734 5,402
========== ========== ---------
Net interest margin (5) 4.08% 4.20%
========= =========
</TABLE>
____________________
(1) Averages are daily averages.
5
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
(2) Loan interest income includes late charges and accretion of loan fees of
$278 and $270 for 1999 and 1998, respectively.
(3) For the purpose of these computations, nonaccrual loans are included in
average loans.
(4) Tax-exempt income from investment securities is presented on a tax-
equivalent basis assuming a 34 percent U.S. Federal tax rate for 1999 and
1998.
(5) The net interest margin is calculated by dividing net interest income by
average total interest-earning assets.
As discussed above, the Company's net interest income is affected by the change
in the amounts 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 change." 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.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1999 compared to 1998 1998 compared to 1997
Increase (Decrease) Increase (Decrease)
--------------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on interest-earning assets:
Loans (1) $ 858 (212) 646 280 (107) 173
Investment securities:
Taxable 137 (76) 61 (112) (24) (136)
Tax-exempt (2) 90 (23) 67 92 (28) 64
Interest-earning deposits -- -- -- 1 -- 1
Federal funds sold (75) (31) (106) 263 (2) 261
----------- ---------- ---------- ----------- ---------- ----------
Total interest earned on
interest-earning assets 1,010 (342) 668 524 (161) 363
----------- ---------- ---------- ----------- ---------- ----------
Interest paid on interest-bearing liabilities:
Savings and NOW 134 (34) 100 18 (4) 14
Time 430 (188) 242 299 -- 299
Other borrowings (6) -- (6) 52 -- 52
----------- ---------- ---------- ----------- ---------- ----------
Total interest paid on
interest-bearing liabilities 558 (222) 336 369 (4) 365
----------- ---------- ---------- ----------- ---------- ----------
Change in net interest
income $ 452 (120) 332 155 (157) (2)
=========== ========== ========== =========== ========== ==========
</TABLE>
__________________________
(1) Nonaccrual loans are included in the average loan totals used in the
calculation of this table.
(2) Tax-exempt income from investment securities is presented on a tax
equivalent basis assuming a 34 percent U.S. Federal tax rate for 1999 and
1998.
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
6
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
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.
The provisions for loan losses for the years ended December 31, 1999 and 1998
were $340 and $300, respectively. The increase in 1999 was a result of an
increase in the amount of actual net loan losses. See "Allowance for Loan
Losses" for further discussion.
Noninterest Income. Total noninterest income for the year ended December 31,
1999 increased $246 or 47.95% to $759 from $513 in 1998. 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 increase in 1999 is attributed to income generated from mortgage loans
originated for sale in the secondary market which increased $99 for the year
ended December 31, 1999, compared to 1998. Finance charges on the Business
Manager Receivables Financing Program was another source of the increase. Fees
from this program increased $61 for the year ended December 31, 1999, compared
to 1998. In addition, in May the Bank began surcharging foreign customers at
all three of its ATM locations.
Noninterest Expense. Total noninterest expense for the year ended December 31,
1999 increased $505 or 15.04% to $3,863 from $3,358 in 1998. The increase in
noninterest expense is attributed to the effect of overall growth of the Company
on personnel expenses, fixed asset costs associated with bank premises additions
and other operating expenses. The Company opened a new branch just outside the
city limits of Lynchburg, Virginia in June 1999.
Income Tax Expense. Applicable income taxes on 1999 earnings amounted to $526,
resulting in an effective tax rate of 25.28% compared to $548, or 26.54%, in
1998. Effective tax rates are comparable with the overall decline attributable
to an increase in tax exempt income in 1999 as compared to 1998.
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 securities and are provided by the deposits and borrowings of the
Company.
7
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
The Company's operating activities for the year ended December 31, 1999 resulted
in net cash provided of $1,701 primarily due to net income of $1,555 adjusted
for depreciation of $280, a provision for loan losses of $340, and an increase
in accrued interest payable of $15, and partially offset by an increase in other
assets of $252, an increase in accrued income receivable of $115, a decrease in
other liabilities of $67, a provision for deferred income taxes of $26, and
amortization of net unearned fees of $119. The Company's operating activities
for the year ended December 31, 1998 resulted in net cash provided of $2,048
primarily due to net income of $1,517 adjusted for depreciation of $240, a
provision for loan losses of $300, a decrease in other assets of $153, and
increases in other liabilities and accrued interest payable of $101 and $53,
respectively, and partially offset by an increase in accrued income receivable
of $67, a provision for deferred income taxes of $166, and amortization of net
unearned fees of $133.
The Company's cash flows from investing activities used net cash of $14,868 for
the year ended December 31, 1999 compared to net cash used of $7,109 for 1998.
In 1999, cash was used primarily to fund loans in the amount of $10,877, and for
purchases of bank premises and equipment of $1,185. In 1998, cash was used
primarily to fund loans in the amount of $4,203, and for purchases of bank
premises and equipment of $1,202. Investing activities representing net
proceeds from investment securities purchases, maturities and calls generated
cash outflows of $3,153 in 1999 and $2,223 in 1998.
Net cash provided by financing activities for the year ended December 31, 1999
was $10,615 as compared to $9,502 for the year ended December 31, 1998. The net
increase in deposits was $11,202 and $9,654 in 1999 and 1998, respectively. The
Company borrowed $1,000 during 1997 under a note payable to the Federal Home
Loan Bank and made principal repayments of $100 during each of 1999 and 1998.
Cash dividends paid to stockholders were $519 and $502 in 1999 and 1998,
respectively. During the year, the Company sold 900 shares of common stock to
the Company's dividend reinvestment plan.
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
22.03% as of December 31, 1999 as compared to 24.79% as of December 31, 1998.
The Company sells excess funds as overnight federal funds sold to provide an
immediate source of liquidity. Federal funds sold as of December 31, 1999 was
$2,768 as compared to $7,359 as of December 31, 1998. Cash and due from banks
of $5,362 as of December 31, 1999 was $2,039 higher when compared to the
December 31, 1998 balance of $3,323. The increase in cash and due from banks
was primarily related to Year 2000 cash reserve requirements. See "Year 2000"
for further discussion.
8
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
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.
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, 1999 was $(54,522), representing 35.45% 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, 1999.
REPRICING GAP POSITION
<TABLE>
<CAPTION>
Repricing Period at December 31, 1999
------------------------------------------------------------
1 Year 1-3 Years 3-5 Years 5-15 Years
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSET/(LIABILITY):
Cumulative interest rate sentivity gap (54,552) (48,106) (20,852) 17,130
</TABLE>
9
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
As of December 31, 1999, 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, 1999, 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.
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 certificates 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, 1999 were $21,920,
an increase of $1,568 or 7.70% from $20,352 as of December 31, 1998. Investment
securities held-to-maturity increased to $15,340 as of December 31, 1999 from
$14,720 as of December 31, 1998, an increase of $620 or 4.21%.
10
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
The following table presents the composition of the Company's investment
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1999 1998
------------------------- ---------------------------
Amortized Fair Amortized Fair
Available-for-Sale Costs Values Costs Values
- ------------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 15,994 15,446 10,996 11,127
Obligations of states and political subdivisions 4,192 4,158 4,199 4,343
Mortgage-backed securities - government 2,285 2,266 4,208 4,267
Corporate securities -- -- 504 508
Other securities 50 50 107 107
---------- --------- --------- ---------
Total available-for-sale $ 22,521 21,920 20,014 20,352
========== ========= ========= =========
Held-to-Maturity
- ----------------
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 1,675 1,623 2,411 2,427
Obligations of states and political subdivisions 13,661 13,284 12,302 12,650
Mortgage-backed securities - private 4 4 7 7
---------- --------- --------- ---------
Total held-to-maturity $ 15,340 14,911 14,720 15,084
========== ========= ========= =========
</TABLE>
The following table presents the maturity distribution based on fair values and
amortized costs of the investment portfolios as of the dates indicated.
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------
Amortized Fair
Available-for-Sale Costs Values Yield
- ------------------ ---------- --------- ---------
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations:
Within one year $ 1,998 1,991 5.31%
After one but within five years 5,999 5,850 5.98%
After five years through ten years 7,997 7,605 6.49%
Obligations of states and subdivisions:
After one but within five years 1,709 1,718 5.26%
After five years through ten years 1,503 1,482 4.69%
After ten years 980 958 5.07%
Mortgage-backed securities - government 2,285 2,266 6.58%
Other securities (1) 50 50 1.25%
---------- --------
Total available-for-sale $ 22,521 21,920
========== ========
</TABLE>
11
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION (Cont.)
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
Amortized Fair
Held-to-Maturity Costs Values Yield
- ---------------- ----------- ---------- -----------
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations:
After one but within five years $ 1,175 1,160 5.31%
After five years through ten years 500 463 6.00%
Obligations of states and subdivisions:
Within one year 381 382 5.81%
After one but within five years 3,265 3,245 5.22%
After five years through ten years 8,425 8,154 5.43%
After ten years 1,590 1,503 4.38%
Mortgage-backed securities - private 4 4 5.00%
---------- --------
Total held-to-maturity $ 15,340 14,911
========== ========
</TABLE>
_______________________
(1) Equity securities assume a life greater than ten years.
Loan Portfolio
The Company's net loans were $100,737 as of December 31, 1999, an increase of
$10,205 or 11.27% from $90,532 as of December 31, 1998.
The Company's ratio of net loans to total deposits was 73.86% as of December 31,
1999. 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.
12
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
The following table presents the composition of the Company's loan portfolio as
of the dates indicated.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Real estate loans:
Residential $ 35,544 34,324
Other 12,378 11,307
Loans to individuals for household, family and other
consumer expenditures 37,046 32,817
Commercial and industrial loans 16,457 12,890
All other loans 491 367
---------- ---------
Total loans, gross 101,916 91,705
Less unearned income and fees (241) (296)
---------- ---------
Loans, net of unearned income and fees 101,675 91,409
Less allowance for loan losses (938) (877)
---------- ---------
Loans, net $ 100,737 90,532
========== =========
</TABLE>
Commercial Loans. Commercial and industrial loans accounted for 16.15% of the
Company's loan portfolio as of December 31, 1999. 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 47.02% of the Company's loan
portfolio as of December 31, 1999. The Company makes commercial and industrial
real estate term loans that are typically secured by a first deed of trust.
72.30% of the real estate loans were secured by 1-4 family residential
properties and 1.96% of total real estate 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 36.35% of the Company's loan portfolio as of December 31, 1999. Vehicle
financing involves the risk that collateral will decline in value faster than
the balance of the loan it secures.
13
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
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, 1999.
LOAN MATURITY
<TABLE>
<CAPTION>
Due Within Due One to Due After
One Year Five Years Five Years Total
---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Commercial and industrial loans $ 3,263 10,526 2,668 16,457
Real estate - construction 941 -- -- 941
</TABLE>
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, 1999.
INTEREST RATE SENSITIVITY
<TABLE>
<S> <C>
Fixed interest rates $ 7,072
Variable interest rates 6,122
---------
Total maturing after one year $ 13,194
=========
</TABLE>
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 $48
and $45 as of December 31, 1999 and 1998, 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 1999 and 1998. There were no
commitments to lend additional funds to customers whose loans were on nonaccrual
at December 31, 1999.
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.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
-------- -------
<S> <C> <C>
Nonperforming loans - real estate loans on nonaccrual $ 48 45
Foreclosed properties -- 48
-------- -------
Total nonperforming assets $ 48 93
======== =======
</TABLE>
14
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
Nonperforming assets totaled $48 or 0.05% of total gross loans and foreclosed
properties as of December 31, 1999, as compared to $93 or 0.10% as of December
31, 1998. 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
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Loans 90 days or more past due by type:
Real estate loans $ 230 194
Loans to individuals 112 232
Commercial loans 46 22
-------- --------
Total accruing loans 90 days or more past due $ 388 448
======== ========
</TABLE>
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 determinations as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance. The Company's management believe that as of December
31, 1999, the allowance is 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.
As of December 31, 1999, the allowance for loan losses totaled $938 or 0.92% of
total loans, net of unearned income and fees, as compared to $877 or 0.96% as of
December 31, 1998. The provision for loan losses for the years ended December
31, 1999 and 1998 was $340 and $300, respectively. The increase in the provision
during 1999 was due to an increase in the amount of actual net loan losses. Net
charge-offs for the Company were $279 and $170 for the years ended December 31,
1999 and 1998, respectively. The ratio of net loan charge-offs during the period
to average loans outstanding for the period was .29% and .20% for the years
ended December 31, 1999 and 1998, 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.
15
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Balance at beginning of year $ 877 747
Loan charge-offs:
Real estate loans - residential (61) (15)
Loans to individuals for household, family
and other consumer expenditures (289) (281)
Commercial and industrial (121) (7)
------- -------
Total loan charge-offs (471) (303)
------- -------
Loan recoveries:
Real estate loans - residential 3 3
Loans to individuals for household, family
and other consumer expenditures 162 127
Commercial and industrial 27 3
------- -------
Total loan recoveries 192 133
------- -------
Net loan charge-offs (279) (170)
Provisions for loan losses 340 300
------- -------
Balance at end of year $ 938 877
======= =======
</TABLE>
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
16
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
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.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------- -------------------------------
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
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Real estate loans:
Residential $ 30 34.87% 2 37.43%
Other 62 12.15% -- 12.33%
Loans to individuals for households, family
and other consumer expenditures 178 36.35% 272 35.78%
Commercial and industrial loans 175 16.15% 169 14.06%
All other loans -- 0.48% -- 0.40%
Unallocated 493 -- 434 --
---------- ---------- ----- ----------
Totals $ 938 100.00% 877 100.00%
========== ========== ===== ==========
</TABLE>
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 28.47%, primarily due to completion of
a new branch built immediately outside the city limits of Lynchburg, Virginia.
Deposits
Average deposits were $132,902 for the year ended December 31, 1999, an increase
of $13,879 or 11.66% from $119,023 of average deposits for the year ended
December 31, 1998. As of December 31, 1999, total deposits were $136,389,
representing an increase of $11,202 or 8.95% from $125,187 in total deposits as
of December 31, 1998. The increase in deposits during 1999 was primarily due to
increases in previously
17
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
existing accounts as well as new accounts opened as a result of relationship
changes, new products offered and the opening of the new branch.
For the year ended December 31, 1999, average demand deposits were $10,994 or
8.27% of average deposits. For the year ended December 31, 1998, average demand
deposits were $10,160 or 8.54% of average deposits. Average interest-bearing
deposits were $121,908 for the year ended December 31, 1999, representing an
increase of $13,045 or 11.98% over the $108,863 in average interest-bearing
deposits for the year ended December 31, 1998.
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 period indicated.
AVERAGE DEPOSIT INFORMATION
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
---------------------------- -----------------------------
Average Average Average Average
Amount of Rate Amount of Rate
Deposits(1) Paid Deposits(1) Paid
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 10,994 N/A 10,160 N/A
Interest-bearing demand deposits 18,186 2.84% 14,802 2.93%
Savings deposits 24,224 2.97% 22,931 3.07%
Certificates of deposit:
Under $100,000 65,802 5.43% 59,418 5.72%
$100,000 or more 13,696 5.36% 11,712 5.70%
------------ ---------
Total average certificates of deposit 79,498 71,130
------------ ---------
Total average deposits $ 132,902 119,023
============ =========
</TABLE>
________________________
(1) Averages are daily averages.
18
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
The following table presents the maturity schedule of certificates of deposit of
$100,000 or more as of December 31, 1999.
CERTIFICATES OF DEPOSIT OVER $100,000
<TABLE>
<S> <C>
Three months or less $ 1,321
Over three through six months 1,113
Over six through 12 months 6,628
Over 12 months 4,599
--------
Total certificates of deposit over $100,000 $ 13,661
========
</TABLE>
Financial Ratios
The following table presents certain financial ratios for the periods indicated.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Return on average assets 1.03% 1.12%
Return on average equity 10.10% 10.40%
Dividend payout ratio 33.33% 33.18%
Average equity to average assets 10.24% 10.76%
</TABLE>
Capital Resources
The Company's financial position at December 31, 1999 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 14.87% at December 31, 1999, compared to 15.30% at December
31, 1998. The total capital ratio was 15.75% at December 31, 1999, compared to
16.20% at December 31, 1998.
19
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1999 and 1998
(In thousands, except ratios, share and per share data)
These ratios are in excess of the mandated minimum requirements of 4% and 8%,
respectively. As of December 31, 1999, the Company met all regulatory capital
ratio requirements and was considered "well capitalized" in accordance with
FDICIA.
Stockholders' equity reached $15,590 at December 31, 1999 compared to $15,142 at
December 31, 1998. The leverage ratio consists of Tier I capital divided by
quarterly average assets. At December 31, 1999, the Company's leverage ratio was
10.47% compared to 10.66% at December 31, 1998. Each of these exceeds the
required minimum leverage ratio of 4%. The dividend payout ratio was 33.33% and
33.18% in 1999 and 1998, respectively. During 1999, the Company paid dividends
of $0.72 per share, up 2.86% from $0.70 per share paid in 1998.
Year 2000
The Company was cognizant of the risks posed by the Year 2000 (Y2K) issue for
both our operation and our borrowers. Subsequent to December 31, 1999, we are
not aware of any information that indicates a significant vendor or service
provider may be unable to sell goods or provide services to the Company because
of Year 2000 issues. Further, the Company has not received any notifications
from borrowers or regulatory agencies to which we are subject, nor are we aware
of any such information which indicates that (1) a borrower has experienced
significant issues which may impact their ability to service their loan or which
may impact their borrowing agreement terms or covenants or (2) significant
regulatory action is being or may be taken against the Company, as a result of
Year 2000 issues.
The Company has not experienced any significant disruptions to our financial or
operating activities caused by failure of our computerized systems resulting
from Year 2000 issues. Management does not expect Year 2000 issues to have a
material adverse effect on the Company's operations or financial results in
2000.
The Company has recorded costs associated with Year 2000 issues as incurred. As
of December 31, 1999, a total of $16 of costs have been incurred, of which $9
was expensed in 1999.
The Company was prepared for the millennium change and continues to successfully
operate and handle the transactions of our customers subsequent to December 31,
1999.
Future Accounting Considerations
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 defers the effective date
of SFAS No. 133 to apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. It is not anticipated that SFAS No. 133 will have a
material effect on the consolidated financial position, results of operations or
liquidity of the Company.
20
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1999 1998
-------------- ----------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks (note 2) $ 5,362 3,323
Federal funds sold 2,768 7,359
-------------- ------------
Total cash and cash equivalents 8,130 10,682
Securities (note 3):
Available-for-sale, at fair value 21,920 20,352
Held-to-maturity, at amortized cost (fair value of $14,911 in 1999
and $15,084 in 1998) 15,340 14,720
Federal Reserve Bank stock, at cost (note 1(c)) 75 75
Federal Home Loan Bank Stock, at cost (note 1(c)) 427 409
Loans, net (notes 4, 9 and 10) 100,737 90,532
Premises and equipment, net (note 5) 4,084 3,179
Foreclosed properties -- 48
Accrued income receivable 1,227 1,112
Other assets (notes 5 and 8) 2,016 1,349
-------------- ------------
Total assets $ 153,956 142,458
============== ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6):
Demand 11,595 10,993
Savings and NOW accounts 43,770 39,575
Time 81,024 74,619
-------------- ------------
Total deposits 136,389 125,187
Note payable to Federal Home Loan Bank (note 1(c)) 800 900
Accrued interest payable 602 587
Other liabilities (note 7) 575 642
-------------- ------------
Total liabilities 138,366 127,316
-------------- ------------
Stockholders' equity (notes 11 and 14):
Common stock, $3 par value. Authorized 3,000,000 shares; issued
and outstanding 719,925 shares in 1999 and 719,025 shares in 1998 2,160 2,157
Capital surplus 367 338
Retained earnings 13,460 12,424
Accumulated other comprehensive income (loss) (397) 223
-------------- ------------
Total stockholders' equity 15,590 15,142
Commitments, contingencies and other matters (notes 7, 9, 10 and 11)
-------------- ------------
Total liabilities and stockholders' equity $ 153,956 142,458
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 8,657 8,011
Interest on securities:
U.S. Treasury 214 229
U.S. Government agencies 1,019 963
Corporate 288 214
States and political subdivisions (tax-exempt) 616 566
Other 39 93
Interest on federal funds sold 289 395
-------------- ------------
Total interest income 11,122 10,471
-------------- ------------
Interest expense:
Interest on deposits:
Savings and NOW accounts 1,237 1,137
Time - other 3,573 3,398
Time - $100,000 and over 734 667
Other interest expense 53 59
-------------- ------------
Total interest expense 5,597 5,261
-------------- ------------
Net interest income 5,525 5,210
Provision for loan losses (note 4) 340 300
-------------- ------------
Net interest income after provision for loan losses 5,185 4,910
-------------- ------------
Noninterest income:
Service charges on deposit accounts 297 263
Net realized gain on calls and sales of securities (note 3) 4 10
Commissions and fees 267 107
Other operating income 191 133
-------------- ------------
Total noninterest income 759 513
-------------- ------------
Noninterest expense:
Salaries and employee benefits (note 7) 2,096 1,847
Occupancy expense 205 167
Furniture and equipment 361 316
Other operating expenses 1,201 1,028
-------------- ------------
Total noninterest expense 3,863 3,358
-------------- ------------
Income before income tax expense 2,081 2,065
Income tax expense (note 8) 526 548
-------------- ------------
Net income 1,555 1,517
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on securities available for sale (620) 85
-------------- ------------
Comprehensive income $ 935 1,602
============== ============
Basic net income per share (note 1(k)) $ 2.16 2.11
============== ============
Diluted net income per share (note 1(k)) $ 2.14 2.09
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Stock Capital Retained Income
------------------------
Shares Par Value Surplus Earnings (Loss) Total
--------- ------------ --------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 719,025 $ 2,157 338 11,409 138 14,042
Net income -- -- -- 1,517 -- 1,517
Cash dividends declared by
Bankshares ($0.70 per share) -- -- -- (502) -- (502)
Change in net unrealized gains on
available-for-sale securities,
net of deferred income tax
expense of $44 -- -- -- -- 85 85
--------- ------------ --------- ---------- --------------- ----------
Balances, December 31, 1998 719,025 2,157 338 12,424 223 15,142
Net income -- -- -- 1,555 -- 1,555
Cash dividends declared by
Bankshares ($0.72 per share) -- -- -- (519) -- (519)
Issuance of common stock 900 3 29 -- -- 32
Change in net unrealized gains
(losses) on available-for-sale
securities, net of deferred
income tax benefit of $319 -- -- -- -- (620) (620)
--------- ------------ --------- ---------- --------------- ----------
Balances, December 31, 1999 719,925 $ 2,160 367 13,460 (397) 15,590
========= ============ ========= ========== =============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,555 1,517
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of bank premises and equipment 280 240
Amortization of organization costs -- 28
Amortization of core deposit premium 12 13
Amortization of unearned fees, net (119) (133)
Net amortization of premiums and discounts on
securities 30 29
Provision for loan losses 340 300
Provision for deferred income taxes 26 (166)
Net gain on calls and sales of securities (4) (10)
Net gain on sale of premises and equipment -- (10)
Net decrease (increase) in:
Accrued income receivable (115) (67)
Other assets (252) 153
Net increase (decrease) in:
Accrued interest payable 15 53
Other liabilities (67) 101
------------ ------------
Net cash provided by operating activities 1,701 2,048
------------ ------------
Cash flows from investing activities:
Purchases of held-to-maturity securities (3,380) (5,598)
Purchases of available-for-sale securities (6,755) (9,817)
Proceeds from maturities and calls of held-to-maturity securities 2,738 1,568
Proceeds from paydowns and maturities of held-to-maturity
mortgage-backed securities 4 4
Proceeds from maturities and calls of available-for-sale securities 2,322 9,617
Proceeds from paydowns and maturities of available-for-sale
mortgage-backed securities 1,918 2,003
Purchase of Federal Home Loan Bank stock (18) --
Net increase in loans (10,877) (4,203)
Recoveries on loans charged off 192 133
Purchases of bank premises and equipment (1,185) (1,202)
Other capital expenditures (224) (178)
Proceeds from sale of bank premises 300 461
Proceeds from sale and rental of foreclosed properties 97 103
------------ ------------
Net cash used in investing activities (14,868) (7,109)
------------ ------------
</TABLE>
(Continued)
24
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits $ 4,797 3,940
Net increase in time deposits 6,405 5,714
Repayments of note payable to Federal Home Loan Bank (100) (100)
Proceeds from issuance of common stock 32 --
Cash dividends paid (519) (502)
----------- -----------
Net cash provided by financing activities 10,615 9,052
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,552) 3,991
Cash and cash equivalents, beginning of year 10,682 6,691
----------- -----------
Cash and cash equivalents, end of year $ 8,130 10,682
=========== ===========
Supplemental Disclosure of Cash Flows Information:
Cash paid during the year for:
Income taxes $ 459 719
=========== ===========
Interest $ 5,582 5,250
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to repossessed properties $ 259 187
=========== ===========
Loans charged against the allowance for loan
losses $ 471 303
=========== ===========
Unrealized gains (losses) on available-for-sale
securities $ (939) 129
=========== ===========
Receivable from sale of bank premises $ -- 300
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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.
The following is a summary of the more significant accounting policies:
(a) 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.
(b) 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 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.
(c) Required Investments
As members of the Federal Reserve and the Federal Home Loan Bank
(FHLB) of Atlanta, the Bank is required to maintain certain minimum
investments in the common stock of those entities. Required levels of
investment are based upon the Bank's capital and a percentage of
qualifying assets. In addition, the Bank is eligible to borrow from
the FHLB with borrowings collateralized
26 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
by qualifying assets, primarily residential mortgage loans, and the
Bank's capital stock investment in the FHLB. At December 31, 1999, the
Bank's available borrowing limit was approximately $21,300. The Bank had
$800 and $900 in borrowings outstanding at December 31, 1999 and 1998,
respectively. The note payable, due in December 2007, is payable in
annual installments of $100 and bears interest at a fixed rate of 6.13
percent.
(d) 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
relates to a consumer or residential real estate loan or 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.
27 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(e) 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.
(f) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed by the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Depreciable lives include 15 years for land improvements, 39 years for
buildings, and 7 years for equipment, furniture and fixtures. 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.
(g) Foreclosed Properties
Foreclosed properties 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.
(h) Pension Plan
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, Employers' Disclosure about Pension and Other
Post-retirement Benefits. SFAS No. 132 revises the Company's disclosure
about pension and other post-retirement benefit plans. SFAS No. 132 does
not change the method of accounting for such plans.
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.
28 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(i) 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.
(j) Stock Options
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(k) Net Income Per Share
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 following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the periods indicated:
29 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Net Income Shares Per Share
Year Ended December 31, 1999 (Numerator) (Denominator) Amount
---------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Basic net income per share $ 1,555 719,649 $ 2.16
=================
Effect of dilutive stock options -- 6,228
----------------- -----------------
Diluted net income per share $ 1,555 725,877 $ 2.14
================= ================= =================
Year Ended December 31, 1998
----------------------------
Basic net income per share $ 1,517 719,025 $ 2.11
=================
Effect of dilutive stock options -- 5,260
----------------- -----------------
Diluted net income per share $ 1,517 724,285 $ 2.09
================= ================= =================
</TABLE>
(l) 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.
(m) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 was issued to
address concerns over the practice of reporting elements of comprehensive
income directly in equity.
The Company is required to classify items of "Other Comprehensive Income"
(such as net unrealized gains (losses) on securities available-for-sale)
by their nature in a financial statement and present the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position. It does not require per share amounts of
comprehensive income to be disclosed.
In accordance with the provisions of the Statement, the Company has
included Consolidated Statements of Income and Comprehensive Income in
the accompanying consolidated financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities
available-for-sale. Also, accumulated other comprehensive income is
included as a separate disclosure within the Consolidated Statements of
Changes in Stockholders' Equity in the accompanying consolidated
financial statements. The adoption of SFAS No. 130 did not have any
effect on the Company's consolidated financial position, results of
operation or liquidity.
30 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(n) Reclassifications
Certain reclassifications have been made to prior year's consolidated
financial statements to place them on a basis comparable with the 1999
consolidated financial statements.
(o) Use of Estimates
In preparing the consolidated 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, 1999 and 1998. Actual results could differ from those estimates.
(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 $709 and $661 for the weeks including
December 31, 1999 and 1998, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 15,994 -- (548) 15,446
Obligations of states and political subdivisions 4,192 26 (60) 4,158
Mortgage-backed securities - government 2,285 15 (34) 2,266
Other securities 50 -- -- 50
------------ ------------ ------------ ------------
Total available-for-sale $ 22,521 41 (642) 21,920
============ ============ ============ ============
</TABLE>
31 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-Maturity Costs Gains Losses Values
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 1,675 -- (52) 1,623
Obligations of states and political subdivisions 13,661 81 (458) 13,284
Mortgage-backed securities - private 4 -- -- 4
------------ ------------ ------------ ------------
Total held-to-maturity $ 15,340 81 (510) 14,911
============ ============ ============ ============
1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
------------------ ------------ ------------ ------------ ------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 10,996 138 (7) 11,127
Obligations of states and political subdivisions 4,199 144 -- 4,343
Mortgage-backed securities - government 4,208 61 (2) 4,267
Corporate securities 504 4 -- 508
Other securities 107 -- -- 107
------------ ------------ ------------ ------------
Total available-for-sale $ 20,014 347 (9) 20,352
============ ============ ============ ============
Held-to-Maturity
----------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 2,411 16 -- 2,427
Obligations of states and political subdivisions 12,302 360 (12) 12,650
Mortgage-backed securities - private 7 -- -- 7
------------ ------------ ------------ ------------
Total held-to-maturity $ 14,720 376 (12) 15,084
============ ============ ============ ============
</TABLE>
The amortized costs and fair values of available-for-sale and held-to-
maturity securities at December 31, 1999, 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.
32 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
------------------------------------ ----------------------------------
Amortized Fair Amortized Fair
Costs Values Costs Values
-------------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,998 1,991 381 382
Due after one year through five years 7,708 7,568 4,440 4,405
Due after five years through ten years 9,500 9,087 8,925 8,617
Due after ten years 1,030 1,008 1,590 1,503
-------------------- ------------- ------------------ -------------
20,236 19,654 15,336 14,907
Mortgage-backed securities 2,285 2,266 4 4
-------------------- ------------- ------------------ -------------
Totals $ 22,521 21,920 15,340 14,911
==================== ============= ================== =============
</TABLE>
No securities were sold in 1999 or 1998. Gross gains of $4 and $10 were
realized in 1999 and 1998, respectively, on calls of securities.
Securities with amortized costs of approximately $1,473 and $2,100 (fair
values of $1,465 and $2,156, respectively) as of December 31, 1999 and
1998, respectively, were pledged as collateral for public deposits.
(4) Loans
A summary of loans at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Real estate loans:
Residential $ 35,544 34,324
Other 12,378 11,307
Loans to individuals for household, family and other
consumer expenditures 37,046 32,817
Commercial and industrial loans 16,457 12,890
All other loans 491 367
---------------- ----------------
Total loans, gross 101,916 91,705
Less unearned income and fees (241) (296)
---------------- ----------------
Loans, net of unearned income and fees 101,675 91,409
Less allowance for loan losses (938) (877)
---------------- ----------------
Loans, net $ 100,737 90,532
================ ================
</TABLE>
Nonaccrual loans amounted to approximately $48 and $45 at December 31, 1999
and 1998, respectively. Interest income that would have been
33 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
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 1999 and 1998. There were no
commitments to lend additional funds to customers whose loans were on
nonaccrual at December 31, 1999.
In the normal course of business, the Bank has made loans to executive
officers and directors. At December 31, 1999, loans to executive officers
and directors were approximately $566 compared to $785 at December 31,
1998. During 1999, new loans to executive officers and directors amounted
to approximately $411 and repayments amounted to approximately $630. Loans
to companies in which executive officers and directors have an interest
amounted to approximately $2,199 and $1,316 at December 31, 1999 and 1998,
respectively. In addition, dealer loans purchased from companies owned by
certain directors, and against whom the bank has recourse, amounted to
approximately $126 and $174 at December 31, 1999 and 1998, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Balances, beginning of year $ 877 747
Provision for loan losses 340 300
Loans charged off (471) (303)
Loan recoveries 192 133
----------------- -----------------
Balances, end of year $ 938 877
================= =================
</TABLE>
At December 31, 1999 and 1998, the recorded investment in loans for which
an impairment has been identified totaled approximately $115 and $216,
respectively. The entire amounts of impaired loans of $115 and $216 related
to loans with corresponding valuation allowances of approximately $66 and
$91 at December 31, 1999 and 1998, respectively. The average recorded
investment in impaired loans receivable during 1999 and 1998 was
approximately $224 and $152. Interest income recognized on impaired loans
during 1999 and 1998 was $6 and $25, including approximately $3 and $9,
respectively, recognized on a cash basis.
34 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(5) Premises and Equipment
Premises and equipment were comprised of the following as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Land improvements $ 364 189
Buildings 3,172 2,528
Equipment, furniture and fixtures 2,810 2,417
---------------- ----------------
6,346 5,134
Less accumulated depreciation (2,921) (2,643)
---------------- ----------------
3,425 2,491
Land 659 642
Construction-in-progress -- 46
---------------- ----------------
Premises and equipment, net $ 4,084 3,179
================ ================
</TABLE>
Certain land acquired in connection with the construction of the Company's
newest branch facility will not be used in operations and is currently
listed for sale. Accordingly, the property's carrying value of $329 is
included in other assets on the consolidated balance sheets. In addition,
certain land improvements made during construction of the branch were
subject to a cost sharing arrangement with an adjacent property owner.
Pursuant to this arrangement, the Company has recorded a receivable for
reimbursement of capital expenditures in the amount of $263, which is
included in other assets on the consolidated balance sheet.
(6) Deposits
A summary of deposits at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Noninterest-bearing demand deposits $ 11,595 10,993
Interest-bearing:
Savings 24,430 22,675
NOW accounts 19,340 16,900
Time deposits 67,363 62,535
Time deposits greater than $100,000 13,661 12,084
---------------- ----------------
Total deposits $ 136,389 125,187
================ ================
</TABLE>
At December 31, 1999, the scheduled maturity of time deposits are as
follows: $60,746 in 2000; $10,016 in 2001; $3,835 in 2002; $4,602 in 2003
and $1,825 in 2004.
35 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(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 $141 and $108 in 1999 and 1998,
respectively.
The change in benefit obligation, change in plan assets and funded status
of the pension plan at September 30, 1999 and 1998 (most recent information
available) and pertinent assumptions are as follows:
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------
Change in Benefit Obligation 1999 1998
---------------- ----------------
<S> <C> <C>
Benefit obligation at beginning of year $ 1,921 1,659
Service cost 118 114
Interest cost 144 124
Actuarial gain (176) 28
Benefits paid (25) (5)
---------------- ----------------
Benefit obligation at end of year 1,982 1,920
---------------- ----------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,442 1,456
Actual return on plan assets 202 (9)
Employer contribution 222 --
Benefit paid (25) (5)
---------------- ----------------
Fair value of plan assets at end of year 1,841 1,442
---------------- ----------------
Funded status (141) (478)
Unrecognized net actuarial gain (386) (139)
Unrecognized prior service cost 98 107
---------------- ----------------
Accrued pension benefit cost, included
in other liabilities $ (429) (510)
================ ================
Weighted Average Assumptions as of December 31, 1999 1998
---------------- ----------------
Weighted average discount rate 7.50% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
</TABLE>
36 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
The components of net pension benefit cost under the plan is summarized as
follows:
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Service cost $ 118 114
Interest cost 144 124
Expected return on plan assets (130) (131)
Net amortization (accretion) 9 1
---------------- ----------------
Net pension benefit cost $ 141 108
================ ================
</TABLE>
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 has a 401(k) plan for which the Company does not currently
match employee contributions to the plan.
(8) Income Taxes
Total income taxes for the years ended December 31, 1999 and 1998 are
allocated as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Income $ 526 548
Stockholders' equity for net unrealized gains
(losses) on available-for-sale securities
recognized for financial reporting purposes (319) 44
---------------- ----------------
Total income taxes $ 207 592
================ ================
</TABLE>
Income tax expense (benefit) attributable to income before income tax
expense is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Current $ 500 714
Deferred 26 (166)
---------------- ----------------
Total income tax expense $ 526 548
================ ================
</TABLE>
Included in income tax expense were tax expenses of approximately $1 and $3
for the years ended December 31, 1999 and 1998, respectively, related to
net realized gains and losses on the calls of securities.
37 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
Reported income tax expense for the years ended December 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Computed "expected" income tax expense $ 708 702
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest (217) (195)
Disallowance of interest expense 34 31
Other, net 1 10
---------------- ----------------
Reported income tax expense $ 526 548
================ ================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 223 202
Accrued pension, due to accrual for financial
reporting purposes in excess of actual pension
contributions 146 173
Loans, due to unearned fees, net 75 87
Net unrealized losses on available-for-sale securities 204 --
Other 44 27
---------------- ----------------
Total gross deferred tax assets 692 489
Less valuation allowance -- --
---------------- ----------------
Net deferred tax assets 692 489
---------------- ----------------
</TABLE>
38 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities:
Bank premises and equipment, due to differences
in depreciation $ (66) (41)
Prepaid expenses, due to capitalization for
financial reporting purposes (2) (2)
Net unrealized gains on available-for-sale securities -- (115)
---------------- ----------------
Total gross deferred tax liabilities (68) (158)
---------------- ----------------
Net deferred tax assets, included in other
assets $ 624 331
================ ================
</TABLE>
The Bank has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1999 and 1998, 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.
(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.
39 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
Financial instruments whose contract amounts represent credit risk:
Contract Amounts at
December 31,
------------------------
1999 1998
---------- ----------
Commitments to extend credit $ 11,874 11,661
========== ==========
Standby letters of credit $ 185 703
========== ==========
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.
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, 1999
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.
40 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
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 years ended December 31, 1999
and 1998, dividends from the subsidiary Bank totaled $565 and $538,
respectively.
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, 1999,
retained net profits of the Bank which were free of such restriction
approximated $2,051.
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, 1999, that Bankshares and the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, 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.
41 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
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> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 16,856 15.75% $ 8,561 *8.0% $ N/A N/A
Bank 16,818 15.72% 8,561 *8.0% 10,702 *10.0%
Tier I Capital
(to Risk Weighted Assets):
Bankshares consolidated 15,918 14.87% 4,281 *4.0% N/A N/A
Bank 15,880 14.84% 4,281 *4.0% 6,421 * 6.0%
Tier I Capital (Leverage)
(to Average Assets):
Bankshares consolidated 15,918 10.47% 6,081 *4.0% N/A N/A
Bank 15,880 10.45% 6,080 *4.0% 7,600 * 5.0%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 15,715 16.20% $ 7,761 *8.0% $ N/A N/A
Bank 15,708 16.19% 7,761 *8.0% 9,701 *10.0%
Tier I Capital
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated 14,838 15.30% 3,880 *4.0% N/A N/A
Bank 14,831 15.29% 3,880 *4.0% 5,821 * 6.0%
Tier I Capital (Leverage)
(to Average Assets):
Bankshares consolidated 14,838 10.66% 5,569 *4.0% N/A N/A
Bank 14,831 10.65% 5,568 *4.0% 6,960 * 5.0%
</TABLE>
(12) Disclosures About Fair Value of Financial Instruments
SFAS 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.
(a) Cash and Due from Banks and Federal Funds Sold
The carrying amounts are a reasonable estimate of fair value.
* means more than
42 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(b) Securities
The fair value of securities, except 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.
(c) 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.
(d) Deposits and Note Payable to Federal Home Loan Bank
The fair value of demand deposits, NOW accounts, savings deposits and the
note payable to the Federal Home Loan Bank is the amount payable on
demand. The fair value of fixed maturity time deposits, certificates of
deposit and the note payable to the Federal Home Loan Bank is estimated
using the rates currently offered for deposits or borrowings of similar
remaining maturities.
(e) 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, 1999 and 1998, and as such, the related fair values have not
been estimated.
The carrying amounts and approximate fair values of the Company's financial
instruments are as follows at December 31, 1999 and 1998:
43 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Carrying Approximate Carrying Approximate
Amounts Fair Values Amounts Fair Values
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 5,362 5,362 3,323 3,323
Federal funds sold 2,768 2,768 7,359 7,359
Securities:
Available-for-sale 21,920 21,920 20,352 20,352
Held-to-maturity 15,340 14,911 14,720 15,084
Federal Reserve Bank Stock 75 75 75 75
Federal Home Loan Bank Stock 427 427 409 409
Loans, net of unearned income and fees 101,675 101,708 91,409 93,000
------------- ------------- ------------- -------------
Total financial assets $ 147,567 147,171 137,647 139,602
============= ============= ============= =============
Financial liabilities:
Deposits $ 136,389 136,705 125,187 126,019
Notes payable to Federal Home Loan
Bank 800 793 900 903
------------- ------------- ------------- -------------
Total financial liabilities $ 137,189 137,498 126,087 126,922
============= ============= ============= =============
</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.
44 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(13) Parent Company Financial Information
Condensed financial information of Bankshares (Parent) is presented below:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Assets
Investment in subsidiaries, at equity $ 15,552 15,135
Other assets 55 19
---------------- ----------------
Total assets $ 15,607 15,154
================ ================
Liabilities and Stockholders' Equity
Other liabilities 17 12
Stockholders' equity (notes 1 and 11):
Common stock of $3 par value. Authorized
3,000,000 shares; issued and outstanding 719,925
shares in 1999 and 719,025 shares in 1998 2,160 2,157
Capital surplus 367 338
Retained earnings 13,460 12,424
Accumulated other comprehensive income (loss) (397) 223
---------------- ----------------
Total stockholders' equity 15,590 15,142
Commitments, contingencies and other matters
(notes 7, 9, 10 and 11)
---------------- ----------------
Total liabilities and stockholders' equity $ 15,607 15,154
================ ================
</TABLE>
45 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
Condensed Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Income
Dividends from subsidiaries (note 11) $ 565 538
Expenses
Other expenses 71 63
---------------- ----------------
Income before income tax benefit and equity
in undistributed net income of subsidiary 494 475
Applicable income tax benefit 24 12
---------------- ----------------
Income before equity in undistributed net
income of subsidiary 518 487
Equity in undistributed net income of subsidiary 1,037 1,030
---------------- ----------------
Net income 1,555 1,517
Equity in other comprehensive income (loss), net of income tax
expense (benefit):
Net unrealized gains (losses) on securities available-for-sale (620) 85
---------------- ----------------
Comprehensive income $ 935 1,602
================ ================
Condensed Statements of Cash Flows
Years ended
December 31,
-------------------------------------
1999 1998
---------------- ----------------
Cash Flows from Operating Activities
Net income $ 1,555 1,517
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiary (1,037) (1,030)
(Increase) decrease in other assets (36) 17
Increase (decrease) in other liabilities 5 (2)
---------------- ----------------
Net cash provided by operating activities 487 502
---------------- ----------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 32 --
Cash dividends paid (519) (502)
---------------- ----------------
Net cash used in financing activities (487) (502)
---------------- ----------------
Net increase (decrease) in cash $ -- --
================ ================
</TABLE>
46 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
(14) Stock Options
The Company has an Incentive Stock Option Plan (the Plan) instituted on the
effective date of May 1, 1997, pursuant to which the Company's Board of
Directors may grant stock options to officers and key employees. The Plan
authorizes grants of options to purchase up to 25,000 shares of the
Company's authorized, but unissued common stock. Accordingly, 25,000 shares
of authorized, but unissued common stock are reserved for use in the Plan.
All stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. At December 31, 1999, there were
10,000 additional shares available for grant under the Plan.
Stock options generally have 10-year terms, vest at the rate of 20 percent
per year, and become fully exercisable five years from the date of grant.
There were no options granted during 1999 or 1998. The per share weighted
average fair value of stock options granted during 1997 was $5.00 on the
date of grant utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions:
Expected dividend yield 4%
Risk-free interest rate 6.5%
Expected life of options 7.5 years
Expected volatility of stock price 30%
As previously mentioned, the Company applies APB Opinion No. 25 in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value of its
stock options at the grant date under SFAS No. 123, the Company's net
income, basic net income per share and diluted net income per share would
have decreased to the pro forma amounts indicated below:
1999 1998
---------- ----------
Net income:
As reported $ 1,555 1,517
Pro forma 1,545 1,507
Basic net income per share:
As reported $ 2.16 2.11
Pro forma 2.15 2.10
Diluted net income per share:
As reported $ 2.14 2.09
Pro forma 2.13 2.08
47 (Continued)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share and per share data)
Stock option activity during the years ended December 31, 1999 and 1998 is
as follows:
Number Weighted
of Average
Shares Exercise Price
------ --------------
Granted in 1997 15,000 $ 20
Expired/forfeited/exercised -- --
------ --------------
Balances at December 31, 1999 and 1998 15,000 $ 20
====== ==============
At December 31, 1999 and 1998, all options outstanding had an exercise
price of $20 per share. At December 31, 1999, options for 6,000 shares were
exercisable.
48
<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, 1999 and 1998, and the
related consolidated statements of income and comprehensive 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Bankshares
Corporation and subsidiary as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Roanoke, Virginia
January 24, 2000
49
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Directors and Officers
Directors
- ---------
Pinnacle Bankshares Corporation
The First National Bank of Altavista
A. Willard Arthur James P. Kent, Jr.
Alvah P. Bohannon, III Warren G. Lowder
James E. Burton, IV Percy O. Moore
John P. Erb Herman P. Rogers, Jr.
Robert L. Finch Carroll E. Shelton
Robert H. Gilliam, Jr. John L. Waller
R. B. Hancock, 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 & Trust
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 Manager
Lucy H. Johnson Vice President & Data Processing Manager
Danny R. Wilson Vice President & Mortgage Lending Manager
Pamela R. Adams Vice President & Real Estate Loan Officer
Ronald C. Clay Assistant Vice President & Recovery Manager
Tony J. Bowling Assistant Vice President, Network
Administrator & Security Officer
Daniel R. Wheeler Assistant Vice President & Dealer Finance
Manager
Shawn D. Stone Assistant Vice President & Branch Manager
Harry P. Umberger Assistant Vice President & Branch Manager
Cynthia W. Dunnavant Loan Officer, Assistant Branch Manager &
Compliance Officer
John Mark Cook Loan Officer & Assistant Branch Manager
Brenda M. Eades Real Estate Loan Officer
Tarry R. Pribble Collection Manager
Cynthia I. Gibson Bookkeeping Manager
50
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Bank Locations
ALTAVISTA
MAIN OFFICE
622 Broad Street
Altavista, Virginia 24517
Telephone: (804) 369-3000
VISTA BRANCH
1301 N. Main Street
Altavista, Virginia 24517
Telephone: (804) 369-3001
LYNCHBURG
AIRPORT BRANCH
14580 Wards Road
Lynchburg, Virginia 24502
Telephone: (804) 237-3788
FIRST NATIONAL MORTGAGE
Route 221, Graves Mill Center
Forest, Virginia 24551
Telephone: (804) 385-8494
51
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Shareholder Information
Annual Meeting
- --------------
The 2000 Annual Meeting of Shareholders will be held on April 11, 2000, 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
- --------------------------------------------------------
The Company's Common Stock is 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>
1999 1998
------------------------------------------- -------------------------------------------
High Low Dividends High Low Dividends
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $34.50 $33.25 $0.18 $27.00 $26.00 $0.17
Second Quarter $34.00 $34.00 $0.18 $33.00 $28.50 $0.17
Third Quarter $35.00 $33.50 $0.18 $35.00 $29.50 $0.18
Fourth Quarter $35.00 $34.50 $0.18 $35.00 $32.38 $0.18
</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 January 24, 2000, there were approximately 383 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, 1999, will be
furnished without charge to shareholders upon request after March 31, 2000.
Shareholders seeking information regarding lost certificates and dividends
should contact Registrar and Transfer Company in Cranford, New Jersey, telephone
(800) 368-5948. Please submit address changes in writing to:
Registrar and Transfer Company
Investor Relations Department
10 Commerce Drive
Cranford, New Jersey 07016-9982
52
<PAGE>
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
Pinnacle Bankshares Corporation
We consent to incorporation by reference in Registration Statement No. 333-63361
on Form S-8 and Registration Statement No. 333-69321 on Form S-3 of Pinnacle
Bankshares Corporation of our report dated January 24, 2000, relating to the
consolidated balance sheets of Pinnacle Bankshares Corporation and subsidiary as
of December 31, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, changes in stockholders' equity, and cash flows for
the years then ended, which report is incorporated by reference in the December
31, 1999 Annual Report on Form 10-KSB of Pinnacle Bankshares Corporation.
/s/ KPMG LLP
Roanoke, Virginia
March 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-KSB FOR THE PERIOD ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,362
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,768
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,920
<INVESTMENTS-CARRYING> 15,340
<INVESTMENTS-MARKET> 14,911
<LOANS> 100,737
<ALLOWANCE> 938
<TOTAL-ASSETS> 153,956
<DEPOSITS> 136,389
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,177
<LONG-TERM> 800
0
0
<COMMON> 2,160
<OTHER-SE> 13,430
<TOTAL-LIABILITIES-AND-EQUITY> 153,956
<INTEREST-LOAN> 8,657
<INTEREST-INVEST> 2,176
<INTEREST-OTHER> 289
<INTEREST-TOTAL> 11,122
<INTEREST-DEPOSIT> 5,544
<INTEREST-EXPENSE> 5,597
<INTEREST-INCOME-NET> 5,525
<LOAN-LOSSES> 340
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 3,863
<INCOME-PRETAX> 2,081
<INCOME-PRE-EXTRAORDINARY> 2,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,555
<EPS-BASIC> 2.16
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 4.08
<LOANS-NON> 48
<LOANS-PAST> 388
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 877
<CHARGE-OFFS> 471
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 938
<ALLOWANCE-DOMESTIC> 938
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 493
</TABLE>
