U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
(Mark one)
x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
o Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 1-12707
Pinnacle Bancshares, Inc.
| Delaware | 72-1370314 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1811 Second Avenue, Jasper, Alabama 35502-1388
(205) 221-4111
Check whether the issuer: (1) 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 | ||||||
The number of shares outstanding of each of the issuer’s classes of common equity, as of October 14, 2003: 1,558,684 shares of common stock.
Transitional Small Business Disclosure Format (check one):
| Yes | No | X | ||||||
1
CONTENTS
| PART I FINANCIAL INFORMATION | Page | |
| Item 1. Financial Statements | ||
| Unaudited Condensed Consolidated Statements of Financial Condition at September 30, 2003 and December 31, 2002. | 3 | |
| Unaudited Condensed Consolidated Statements of Operations for the three and nine-months ended September 30, 2003 and 2002. | 4 | |
| Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine-months ended September 30, 2003 and September 30, 2002. | 5 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2003 and September 30, 2002 | 6 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
| Item 2. Management’s Discussion and Analysis | 10 | |
| Item 3. Controls and Procedures | 13 | |
| Part II OTHER INFORMATION | ||
| Item 6. Exhibits and Reports on Form 8-K | 14 | |
| Signatures | 15 | |
| Certifications | 16 |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
ASSETS: | ||||||||||
| Cash and cash equivalents | $ | 3,699,858 | $ | 3,862,956 | ||||||
| Interest-bearing deposits in other banks | 1,539,908 | 357,467 | ||||||||
| Securities available-for-sale | 78,065,544 | 75,301,227 | ||||||||
| FHLB stock | 732,400 | 975,000 | ||||||||
| Loans held for sale | 3,091,524 | 4,968,715 | ||||||||
| Loans receivable, net of allowance for loan losses of $1,529,382 and $1,322,380, respectively | 107,416,866 | 119,375,036 | ||||||||
| Real estate owned, net | 990,959 | 1,608,710 | ||||||||
| Premises and equipment, net | 5,682,382 | 5,654,823 | ||||||||
| Goodwill | 306,488 | 306,488 | ||||||||
| Bank owned life insurance | 4,443,496 | 4,229,280 | ||||||||
| Accrued interest receivable | 1,150,340 | 1,318,060 | ||||||||
| Other assets | 534,359 | 332,439 | ||||||||
| Total assets | $ | 207,654,124 | $ | 218,290,201 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||||
LIABILITIES: | ||||||||||
| Deposits | $ | 181,968,059 | $ | 188,954,730 | ||||||
| Borrowed funds | 4,265,000 | 5,940,000 | ||||||||
| Official checks outstanding | 849,113 | 1,504,293 | ||||||||
| Accrued interest payable | 532,072 | 614,320 | ||||||||
| Other liabilities | 781,413 | 1,321,380 | ||||||||
| 188,395,657 | 198,334,723 | |||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||
| Preferred stock, par value $.01 per share, no shares issued, 100,000 authorized | 0 | 0 | ||||||||
| Common stock, par value $.01 per share, 2,400,000 authorized; 1,792,086 issued, 1,565,684 and 1,652,684 outstanding, at September 30, 2003 and December 31, 2002, respectively | 17,921 | 17,921 | ||||||||
| Additional paid-in capital | 8,131,746 | 8,131,746 | ||||||||
| Treasury stock, at cost (226,402 and 139,402 shares at September 30, 2003 and December 31, 2002) | (2,568,716 | ) | (1,497,777 | ) | ||||||
| Retained earnings | 14,108,384 | 12,716,579 | ||||||||
| Accumulated other comprehensive (loss) income, net of tax | (430,868 | ) | 587,009 | |||||||
| Total stockholders’ equity | 19,258,467 | 19,955,478 | ||||||||
| Total liabilities and stockholders’ equity | $ | 207,654,124 | $ | 218,290,201 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| INTEREST REVENUES: | ||||||||||||||||||
| Interest on loans | $ | 2,025,875 | $ | 2,347,648 | $ | 6,376,902 | $ | 7,245,780 | ||||||||||
| Interest and dividends on securities | 729,002 | 973,130 | 2,195,738 | 2,676,805 | ||||||||||||||
| Other interest | 3,726 | 8,172 | 19,362 | 64,940 | ||||||||||||||
| 2,758,603 | 3,328,950 | 8,592,002 | 9,987,525 | |||||||||||||||
| INTEREST EXPENSE: | ||||||||||||||||||
| Interest on deposits | 872,850 | 1,417,973 | 2,918,569 | 4,559,821 | ||||||||||||||
| Interest on borrowed funds | 43,399 | 52,691 | 142,687 | 138,637 | ||||||||||||||
| 916,249 | 1,470,664 | 3,061,256 | 4,698,458 | |||||||||||||||
| NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES | 1,842,354 | 1,858,286 | 5,530,746 | 5,289,067 | ||||||||||||||
| PROVISION FOR LOAN LOSSES | 347,000 | 120,000 | 882,000 | 380,300 | ||||||||||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,495,354 | 1,738,286 | 4,648,746 | 4,908,767 | ||||||||||||||
| NON-INTEREST INCOME: | ||||||||||||||||||
| Fees and service charges on deposit accounts | 228,956 | 211,589 | 689,098 | 616,153 | ||||||||||||||
| Service fee income, net | 41,130 | 39,812 | 121,145 | 118,468 | ||||||||||||||
| Fees and service charges on loans | 71,780 | 60,336 | 142,904 | 157,146 | ||||||||||||||
| Bank owned Life Insurance | 71,406 | 70,341 | 214,216 | 211,024 | ||||||||||||||
| Net gain (loss) on sale or write-down of: | ||||||||||||||||||
| Loans held for sale | 290,561 | 127,022 | 783,604 | 381,132 | ||||||||||||||
| Securities available-for-sale | 14,063 | 17,785 | 390,303 | 37,941 | ||||||||||||||
| Real estate owned and other assets | 57,685 | (15,709 | ) | 6,948 | 4,566 | |||||||||||||
| Premises and equipment | 0 | 0 | 13,500 | 0 | ||||||||||||||
| 775,581 | 511,176 | 2,361,718 | 1,526,430 | |||||||||||||||
| NON-INTEREST EXPENSE: | ||||||||||||||||||
| Compensation and benefits | 799,318 | 765,773 | 2,382,926 | 2,269,277 | ||||||||||||||
| Occupancy | 280,827 | 470,442 | 802,496 | 1,065,425 | ||||||||||||||
| Marketing and professional | 72,978 | 49,201 | 182,176 | 153,208 | ||||||||||||||
| Other | 251,750 | 253,255 | 792,539 | 795,133 | ||||||||||||||
| 1,404,873 | 1,538,671 | 4,160,137 | 4,283,043 | |||||||||||||||
| INCOME BEFORE INCOME TAX EXPENSE | 866,062 | 710,791 | 2,850,327 | 2,152,154 | ||||||||||||||
| INCOME TAX EXPENSE | 294,855 | 237,766 | 980,116 | 721,588 | ||||||||||||||
| NET INCOME | $ | 571,207 | $ | 473,025 | $ | 1,870,211 | $ | 1,430,566 | ||||||||||
| Basic earnings per share | $ | 0.36 | $ | 0.27 | $ | 1.17 | $ | 0.81 | ||||||||||
| Diluted earnings per share | $ | 0.36 | $ | 0.27 | $ | 1.15 | $ | 0.80 | ||||||||||
| Cash dividends per share | $ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | ||||||||||
| Weighted average basic shares outstanding | 1,565,684 | 1,775,384 | 1,593,528 | 1,775,384 | ||||||||||||||
| Weighted average diluted shares outstanding | 1,606,058 | 1,783,769 | 1,623,478 | 1,779,688 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
| Accumulated | ||||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||||
| Paid-in | Treasury | Retained | Comprehensive | Stockholders' | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | (Loss) Income | Equity | ||||||||||||||||||||||||
| BALANCE, December 31, 2001 | 1,775,384 | $ | 17,921 | $ | 8,131,746 | $ | (128,075 | ) | $ | 11,413,945 | $ | (423,671 | ) | $ | 19,011,866 | |||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 0 | 0 | �� | 0 | 0 | 1,430,566 | 0 | 1,430,566 | ||||||||||||||||||||||
| Change in fair value of securities available- for-sale, net of tax | 0 | 0 | 0 | 0 | 0 | 864,570 | 864,570 | |||||||||||||||||||||||
| Comprehensive income | 2,295,136 | |||||||||||||||||||||||||||||
| Cash dividends declared ($.30 per share) | 0 | 0 | 0 | 0 | (532,615 | ) | (532,615 | ) | ||||||||||||||||||||||
| BALANCE, September 30, 2002 | 1,775,384 | $ | 17,921 | $ | 8,131,746 | $ | (128,075 | ) | $ | 12,311,896 | $ | 440,899 | $ | 20,774,387 | ||||||||||||||||
| BALANCE, December 31, 2002 | 1,792,086 | $ | 17,921 | $ | 8,131,746 | $ | (1,497,777 | ) | $ | 12,716,579 | $ | 587,009 | $ | 19,955,478 | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 0 | 0 | 0 | 0 | 1,870,211 | 0 | 1,870,211 | |||||||||||||||||||||||
| Change in fair value of securities available- for-sale, net of tax | 0 | 0 | 0 | 0 | 0 | (1,017,877 | ) | (1,017,877 | ) | |||||||||||||||||||||
| Comprehensive income | 852,334 | |||||||||||||||||||||||||||||
| Repurchase of common stock (87,000 shares at cost) | 0 | 0 | 0 | (1,070,939 | ) | 0 | (1,070,939 | ) | ||||||||||||||||||||||
| Cash dividends declared ($.30 per share) | 0 | 0 | 0 | 0 | (478,406 | ) | 0 | (478,406 | ) | |||||||||||||||||||||
| BALANCE, September 30, 2003 | 1,792,086 | $ | 17,921 | $ | 8,131,746 | $ | (2,568,716 | ) | $ | 14,108,384 | $ | (430,868 | ) | $ | 19,258,467 | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
PINNACLE BANCSHARES, INC,
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 1,870,211 | $ | 1,430,566 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 350,116 | 397,876 | ||||||||||
| Provision for loan losses | 882,000 | 380,300 | ||||||||||
| Amortization, net | (148,449 | ) | (298,039 | ) | ||||||||
| Increase in cash surrender value of Bank owned life insurance | (214,216 | ) | (211,024 | ) | ||||||||
| Net gain on sale or write down of: | ||||||||||||
| Loans held for sale | (783,604 | ) | (381,132 | ) | ||||||||
| Securities available-for-sale | (390,303 | ) | (37,941 | ) | ||||||||
| Real estate owned and other assets | (6,948 | ) | (4,566 | ) | ||||||||
| Premises and equipment | (13,500 | ) | 0 | |||||||||
| Proceeds from sale of loans | 63,920,515 | 37,533,472 | ||||||||||
| Loans originated for sale | (61,259,720 | ) | (34,120,778 | ) | ||||||||
| Decrease in accrued interest receivable | 167,720 | 34,343 | ||||||||||
| (Increase) decrease in other assets | (201,920 | ) | 285,992 | |||||||||
| Decrease in accrued interest payable | (82,248 | ) | (215,564 | ) | ||||||||
| (Decrease) increase in other liabilities | (15,607 | ) | 226,316 | |||||||||
| Net cash provided by operating activities | 4,074,047 | 5,019,821 | ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Net loan repayments | 10,623,095 | 8,700,378 | ||||||||||
| Proceeds from payments received on securities available-for-sale | 4,607,363 | 2,654,155 | ||||||||||
| Net change in interest bearing deposits at other banks | (1,182,441 | ) | 386,412 | |||||||||
| Purchase of securities available-for-sale | (83,990,000 | ) | (54,163,622 | ) | ||||||||
| Proceeds from maturing and called securities available-for-sale | 34,990,000 | 36,620,000 | ||||||||||
| Proceeds from the sale of securities available-for-sale | 40,632,903 | 3,037,941 | ||||||||||
| Purchase of premises and equipment | (390,385 | ) | (112,783 | ) | ||||||||
| Proceeds from sales of premises and equipments | 26,210 | 0 | ||||||||||
| Proceeds from sales of real estate owned | 1,312,306 | 1,693,106 | ||||||||||
| Net cash provided by (used in) investing activities | 6,629,051 | (1,184,413 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Net decrease in passbook, NOW and money market deposit accounts | 1,676,643 | 382,904 | ||||||||||
| Proceeds from sales of time deposits | 14,481,290 | 20,687,664 | ||||||||||
| Payments on maturing time deposits | (23,144,604 | ) | (24,512,940 | ) | ||||||||
| Payments on borrowed funds | (63,225,000 | ) | (17,535,000 | ) | ||||||||
| Proceeds from borrowed funds | 61,550,000 | 17,375,000 | ||||||||||
| (Decrease) increase in official checks outstanding | (655,180 | ) | 280,710 | |||||||||
| Repurchase of common stock | (1,070,939 | ) | 0 | |||||||||
| Payments of cash dividends | (478,406 | ) | (532,615 | ) | ||||||||
| Net cash used in financing activities | (10,866,196 | ) | (3,854,277 | ) | ||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (163,098 | ) | (18,869 | ) | ||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,862,956 | 3,342,141 | ||||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 3,699,858 | $ | 3,323,272 | ||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||
| Cash payments for interest on deposits and borrowed funds | $ | 3,143,504 | 4,930,274 | |||||||||
| Cash payments for income taxes | 1,110,938 | 545,000 | ||||||||||
| Real estate acquired through foreclosure | 687,607 | 784,788 | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
PINNACLE BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | BASIS OF PRESENTATION: |
The accompanying unaudited condensed consolidated financial statements include the accounts of Pinnacle Bancshares, Inc. (the “Company”) and Pinnacle Bank (the “Bank”), the Company’s wholly owned subsidiary. All significant intercompany transactions and accounts have been eliminated in consolidation.
In the opinion of management, all adjustments (none of which are other than normal recurring accruals) necessary for a fair presentation of the results of such interim periods have been included. The results of operations for the three and nine month periods ended September 30, 2003, are not necessarily indicative of the results of operations which may be expected for the entire year.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002. The accounting policies followed by the Company are set forth in the summary of Significant Accounting Policies in the Company’s audited consolidated financial statements.
7
| 2. | EARNINGS PER SHARE: |
The following table represents the earnings per share calculations for the three and nine month periods ended September 30, 2003 and 2002:
| Per | |||||||||||||
| Share | |||||||||||||
| For The Three Months Ended | Net Income | Shares | Amount | ||||||||||
September 30, 2003 | |||||||||||||
| Basic earnings per share | $ | 571,207 | 1,565,684 | $ | 0.36 | ||||||||
| Dilutive securities | 40,374 | ||||||||||||
| Diluted earnings per share | $ | 571,207 | 1,606,058 | $ | 0.36 | ||||||||
| Per | |||||||||||||
| Share | |||||||||||||
| For The Three Months Ended | Net Income | Shares | Amount | ||||||||||
September 30, 2002 | |||||||||||||
| Basic earnings per share | $ | 473,025 | 1,775,384 | $ | 0.27 | ||||||||
| Dilutive securities | 8,385 | ||||||||||||
| Diluted earnings per share | $ | 473,025 | 1,783,769 | $ | 0.27 | ||||||||
| Per | |||||||||||||
| Share | |||||||||||||
| For The Nine Months Ended | Net Income | Shares | Amount | ||||||||||
September 30, 2003 | |||||||||||||
| Basic earnings per share | $ | 1,870,211 | 1,593,823 | $ | 1.17 | ||||||||
| Dilutive securities | 29,655 | ||||||||||||
| Diluted earnings per share | $ | 1,870,211 | 1,623,478 | $ | 1.15 | ||||||||
| Per | |||||||||||||
| Share | |||||||||||||
| For The Nine Months Ended | Net Income | Shares | Amount | ||||||||||
September 30, 2002 | |||||||||||||
| Basic earnings per share | $ | 1,430,566 | 1,775,384 | $ | 0.81 | ||||||||
| Dilutive securities | 4,304 | ||||||||||||
| Diluted earnings per share | $ | 1,430,566 | 1,779,688 | $ | 0.80 | ||||||||
8
| 3. | STOCK BASED COMPENSATION: |
In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, the Company has elected to recognize compensation cost under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and accordingly does not recognize compensation cost due to the fact that all options granted were priced at the fair market value of the underlying stock on the date of grant. Had compensation cost been determined, consistent with SFAS No. 123, the Company’s net income would have reflected the following pro forma amounts:
| Three | Three | Nine | Nine | |||||||||||||
| Months | Months | Months | Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| Net Income —as reported | $ | 571,207 | $ | 473,025 | $ | 1,870,211 | $ | 1,430,566 | ||||||||
| Stock-based compensation expense | 0 | (2,106 | ) | 0 | (6,318 | ) | ||||||||||
| Net Income —pro forma | $ | 571,207 | $ | 471,919 | $ | 1,870,211 | $ | 1,424,248 | ||||||||
| Basic earnings per share—as reported | $ | 0.36 | $ | 0.27 | $ | 1.17 | $ | 0.81 | ||||||||
| Basic earnings per share—pro forma | 0.36 | 0.27 | 1.17 | 0.81 | ||||||||||||
| Diluted earnings per share—as reported | $ | 0.36 | $ | 0.27 | $ | 1.15 | $ | 0.80 | ||||||||
| Diluted earnings per share—pro forma | 0.36 | 0.27 | 1.15 | 0.80 | ||||||||||||
| 4. | RECENT ACCOUNTING PRONOUNCEMENTS: |
In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments, including certain derivatives instruments embedded in other contracts, and for hedging activities under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this Statement did not have a material impact on the Company’s financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, the FASB deferred indefinitely the classification and measurement provisions related to mandatory redeemable non controlling interest. The adoption of this Statement and the amendment did not have a material impact on the Company’s financial position or results of operations.
9
Item 2. Management’s Discussion and Analysis
Forward-Looking Statements:This Quarterly Report on Form 10-QSB contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission (“SEC”) or otherwise. The words “believe,” “expect,” “seek” and “intend,” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risk and uncertainties, some of which cannot be predicted or qualified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Critical Accounting Policies:The accounting principles followed by the Company and the methods of applying these principles conform with United States generally accepted accounting principles and with general practices within the banking industry. The Company’s critical accounting policies relate to the allowance for loan losses and real estate owned. These policies require the use of estimates, assumptions and judgments and are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect difference estimates, assumptions and judgments. Certain policies inherently have a greater result on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. These policies require the use of subjective and complex estimates, assumptions and judgments that are important to the portrayal of the Company’s financial condition and results.
The allowance for loan losses is maintained at a level which management considers to be adequate to absorb losses inherent in the loan portfolio. Management’s estimation of the amount of the allowance is based on a continuing evaluation of the loan portfolio and includes such factors as economic conditions, analysis of individual loans, overall portfolio characteristics, delinquencies and the balance of any impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans).
Management reviews the adequacy of the allowance for loan losses on a continuous basis by assessing the quality of the loan portfolio and adjusting the allowance when appropriate. Management’s evaluation of certain specifically identified loans includes a review of the financial condition and capacity of the borrower, the value of the collateral, current economic trends, historical losses, workout and collection arrangements, and possible concentrations of credit. The loan review process also includes a collective evaluation of credit quality within the mortgage and installment loan portfolios. In establishing the allowance, loss percentages are applied to groups of loans with similar risk characteristics. These loss percentages are determined by historical experience, portfolio mix, regulatory influence, and other economic factors. Each quarter this review is quantified in a report to management, which uses it to determine whether an appropriate allowance is being maintained. This report is then submitted to the Board of Directors and to the appropriate Board committee quarterly.
Changes in the allowance can result from changes in economic events, changes in the creditworthiness of the borrowers, or changes in collateral values. The effect of these changes is reflected when known. Though management believes the allowance for loan losses to be adequate as of September 30, 2003, ultimate losses may vary from estimations.
Real estate owned acquired through foreclosure is carried at the lower of cost or fair value less expected selling costs. Any excess of the recorded investment over fair value, less estimated costs of disposition of the property, is charged to the allowance for loan losses at the time of foreclosure. Subsequent to foreclosure, real estate owned is evaluated on an individual basis for changes in fair value. Declines in fair value of the asset, less costs of disposition below its carrying amount, require an increase in the valuation allowance account. Future increases in fair value of the asset, less cost of disposition, may cause a reduction in the valuation allowance account, but not below zero. Increases or decreases in the valuation allowance account are charged or credited to income. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed.
10
The recognition of gains and losses on the sale of real estate owned is dependent upon whether the nature and terms of the sale and future involvement of the Bank in the property meet certain requirements. If the transaction does not meet these requirements, income recognition is deferred and recognized under an alternative method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 66,Accounting for Sales of Real Estate.
Comparison of Financial Condition as of September 30, 2003 and December 31, 2002.Total assets were $207.7 million at September 30, 2003, compared to $218.3 million at December 31, 2002. Net loans receivable decreased approximately $12.0 million, from $119.4 million at December 31, 2002 to $107.4 million at September 30, 2003, primarily due to refinancing activities and principal repayments. Total securities available-for-sale were $78.1 million at September 30, 2003, compared to $75.3 million at December 31, 2002.
At September 30, 2003, the investment portfolio of $78.1 million consisted primarily of U. S. agency securities and mortgage-backed securities. The entire investment portfolio is classified as “available-for-sale,” which is carried at fair value with the unrealized gains/losses reflected directly in stockholders’ equity, net of taxes. During the nine months ended September 30, 2003, the Bank had $35.0 million in agency securities called. Also during the nine month period ended September 30, 2003, the Bank sold $40.6 million in agency securities. Gross gains of $390,000 were realized on these sales. The proceeds from these calls, and sales of securities available-for-sale, combined with the proceeds from loan principal repayments and Federal Home Loan Bank (“FHLB”) of Atlanta advances, were used by the Bank to purchase $84.0 million in agency securities with an average yield of 3.56%.
Total deposits decreased approximately $7.0 million, from $189.0 million at December 31, 2002 to $182.0 million at September 30, 2003. This decrease was primarily due to a decrease in rates paid on deposits, from 2.40% at December 31, 2002 to 1.80% at September 30, 2003.
The maximum amount of FHLB advances outstanding during the nine-month period ended September 30, 2003, was $13.5 million.
Results of Operations-Comparison of the Three and Nine-Months Ended September 30, 2003 and 2002. For the three-months ended September 30, 2003 net income was $571,000, compared with net income of $473,000 for the three-months ended September 30, 2002. For the nine-months ended September 30, 2003, net income was $1,870,000, compared with net income of $1,431,000 for the nine-months ended September 30, 2002. Net interest income after the provision for loan losses for the three-months ended September 30, 2003, was $1,495,000, compared with $1,738,000 for the three-months ended September 30, 2002. Net interest income after the provision for loan losses for the nine-months ended September 30, 2003, was $4,649,000, compared with $4,909,000 for the nine-months ended September 30, 2002. Approximately 1.9 % of the higher net income was related to non-interest income, which increased from $1,526,000 for the nine-months ended September 30, 2002 to $2,362,000 for the nine months ended September 30, 2003. This increase was primarily attributable to increases in net gains on the sale of loans held for sale and available-for-sale securities of $402,000 and $352,000, respectively.
The net interest margin was 3.73% and 3.68% for the three and nine-months ended September 30, 2003, respectively, compared to 3.63% and 3.40% for the three and nine-months ended September 30, 2002, respectively. As market rates continued to stabilize at lower levels during the nine-month period ended September 30, 2003, the Company’s cost of funds decreased more rapidly than rates on loans and investments, contributing to the improved margin. The yield on interest-earning assets decreased from approximately 6.50% and 6.42% in the three and nine-month periods ended September 30, 2002, respectively, to approximately 5.60% and 5.71% in the three and nine-month periods ended September 30, 2003. These decreases were due to decreases in market interest rates. The cost of funds decreased from approximately 2.79% at September 30, 2002, to approximately 1.86% at September 30, 2003, due to decreases in market deposit rates.
Provisions for loan losses are made to maintain the allowance for loan losses at adequate levels. The allowance for loan losses reflects management’s estimates, which take into account historical experience, the amount of non-performing loans, collateral values and general economic conditions. The provision for loan losses was $347,000 and $882,000 for the three and nine-months ended September 30, 2003, compared to $120,000 and $380,000 for the three and nine-months ended September 30, 2002, respectively. The increase in the provision for loan losses for the three and nine-month periods ended September 30, 2003, as compared to the prior year periods, was primarily the result of an increase in charge-offs as well as an increase in non-accrual loans. It is management’s opinion that the allowance for loan losses at September 30, 2003 was adequate to absorb losses related to the portfolio of loans. Management will continue to analyze the Bank’s exposure to losses. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the initial determinations.
Non-interest income, which includes fees and service charges, income from real estate operations, the sale of loans, bank owned life insurance and other income, increased $264,000 in the three-month period ended September 30, 2003, as compared to the three-month period ended September 30, 2002. The increase was due primarily to an increase in net gain on sale of loans held for sale of $164,000, an increase in net gain on sale of real estate owned of $73,000, an increase in fees and service charges on deposit accounts of $17,000, and an increase in all other non-interest income of $10,000. Non-interest income increased $835,000 in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002. The increase was due primarily to an increase in net gain on sale of securities available for sale of $352,000, an increase in the net gain on sale of loans held for sale of $402,000, an increase in fees and service charges on deposit accounts of $73,000, and an increase in all other non-interest income of $8,000.
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Non-interest expense decreased $134,000 in the three-month period ended September 30, 2003, as compared to the corresponding prior year period. This was primarily a result of a decrease in occupancy expense of $190,000. This decrease was offset by an increase in compensation and benefits of $34,000 and an increase in all other non-interest expense of $22,000. Non-interest expense decreased $123,000 in the nine-month period ended September 30, 2003, as compared to the corresponding prior year period. This was primarily a result of a decrease in occupancy expense of $263,000. This decrease was offset by an increase in compensation and benefits of $114,000, an increase in all other non-interest expense of $26,000. The decrease in occupancy expense for the three and nine months ended September 30, 2003, as compared to the prior year periods, was primarily the result of a property tax assessment that had not been received by the Company from the tax assessor until the period ended September 30, 2002, on a branch location amounting to approximately $160,000.
Asset Liability Management: The modeling techniques used by the Company simulate net interest income and impact on fair values under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed rate assets and liabilities, and the scheduled, as well as expected, re-pricing and maturing volumes and rates of the existing balance sheet. Under a scenario simulating a hypothetical 100, 200 and 300 basis point rate increase applied to all fixed rate interest earning assets and interest-bearing liabilities, the Company would expect a net loss in fair value of the underlying instruments of approximately $781,000, $1,566,000, and $2,404,000, respectively. Under a scenario simulating a hypothetical 100, 200 and 300 basis point rate decrease applied to all fixed rate interest earning assets and interest-bearing liabilities, the Company would expect a net loss in fair value of the underlying instruments of approximately $4,000, $870,000, and $1,702,000, respectively. This hypothetical is not a precise indicator of future events. Instead, it is a reasonable estimate of the results anticipated if the assumptions used in the modeling techniques were to occur.
Stock Repurchase Program:In 2002, the Company announced a stock repurchase program to acquire up to 178,000 shares of common stock, or approximately 10% of the Company’s currently outstanding shares. As of December 31, 2002 the Company had repurchased 122,700 shares at an average price of $11.16 per share. As of March 17, 2003 the Company had repurchased an additional 54,000 shares of common stock at an average price of $11.58 per share, which completed this stock repurchase program.
On April 25, 2003, the Company announced a supplemental stock repurchase program to acquire up to an additional 5% of the Company’s currently outstanding shares. The repurchase program will be dependent upon market conditions and other requirements, and there is no guarantee as to the exact number of shares to be repurchased by the Company. As of September 30, 2003, the Company had repurchased 33,000 shares at an average price of $13.50 per share.
Had these purchases not occurred, basic and diluted earnings per share would have been $0.04 less for the nine-months ended September 30, 2003.
Capital Resources:Historically, funds provided by operations, mortgage loan principal repayments, deposits and short-term borrowings have been the Bank’s principal sources of funds. In addition, the Bank has the ability to obtain funds through the sale of mortgage loans, through borrowings from the FHLB of Atlanta and other borrowing sources. At September 30, 2003, the Bank’s total loan commitments, including construction loans in process, unused lines of credit and letter of credits, were approximately $22.2 million. Management believes that the Bank’s liquidity and other sources of funds are sufficient to fund all commitments outstanding and other cash needs. The Company and the Bank are required to maintain certain levels of regulatory capital. At September 30, 2003, the Company and the Bank exceeded all regulatory capital requirements.
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Item 3. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2003. Based upon that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in alerting him in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
In addition, the Company reviewed its internal controls. There has been no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Principal Executive Officer and Principal Financial Officer to allow timely decisions regarding required disclosures. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported.
Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls’ cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
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PART II – OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1- Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 24, 2003, furnishing under Item 9 (pursuant to Item 12) announcement of the Company’s results of operations for the quarter ended June 30, 2003.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PINNACLE BANCSHARES, INC | ||||||||
| DATE: | November 14, 2003 | BY: | /s/ Robert B. Nolen Jr. | |||||
| Robert B. Nolen, Jr. | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer and Principal Financial Officer) | ||||||||
| /s/ Marie Guthrie | ||||||||
| Marie Guthrie | ||||||||
| Treasurer | ||||||||
| (Principal Accounting Officer) |
