U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
(Mark one)
þQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
oTransition 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. | ||
| (Exact Name of Small Business Issuer as Specified in Its Charter) |
| Delaware | 72-1370314 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 1811 Second Avenue, Jasper, Alabama 35502-1388 | ||
| (Address of Principal Executive Offices) |
| (205) 221-4111 | ||
| (Issuer’s Telephone Number, Including Area Code) |
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.
Yesþ Noo
The number of shares outstanding of each of the issuer’s classes of common equity, as of May 14, 2005: 1,549,778 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yeso Noþ
CONTENTS
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| EX-31.1 SECTION 302 CERTIFICATION OF THE CEO & CFO | ||||||||
| EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO | ||||||||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE BANCSHARES, INC.
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 2,929,078 | $ | 3,451,046 | ||||
| Interest-bearing deposits in other banks | 1,232,939 | 484,958 | ||||||
| Securities available-for-sale | 94,271,637 | 89,025,401 | ||||||
| FHLB stock | 415,500 | 417,000 | ||||||
| Loans held for sale | 861,699 | 1,206,322 | ||||||
| Loans receivable, net of allowances for loan losses of $1,243,358 and $1,167,263 respectively | 99,639,220 | 99,599,999 | ||||||
| Real estate owned, net | 558,680 | 598,642 | ||||||
| Premises and equipment | 5,650,109 | 5,723,120 | ||||||
| Goodwill | 306,488 | 306,488 | ||||||
| Bank owned life insurance | 4,872,358 | 4,797,758 | ||||||
| Accrued interest receivable | 1,191,027 | 1,254,307 | ||||||
| Other assets | 1,834,605 | 967,308 | ||||||
| Total assets | $ | 213,763,340 | $ | 207,832,349 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| Deposits | $ | 187,293,323 | $ | 179,965,635 | ||||
| Subordinated debt | 3,093,000 | 3,093,000 | ||||||
| Borrowed funds | 2,375,000 | 2,580,000 | ||||||
| Official checks outstanding | 1,082,056 | 1,103,521 | ||||||
| Accrued interest payable | 527,745 | 498,656 | ||||||
| Other liabilities | 774,139 | 677,107 | ||||||
| Total liabilities | 195,145,263 | 187,917,919 | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Common stock, par value $.01 per share; 2,400,000 authorized; 1,821,780 issued at March 31, 2005 and December 31, 2004, respectively; 1,549,778 and 1,553,778 outstanding at March 31, 2005 and December 31, 2004, respectively. | 18,218 | 18,218 | ||||||
| Additional paid-in capital | 8,418,897 | 8,418,897 | ||||||
| Treasury shares, at cost (272,002 shares and 268,002 shares at March 31, 2005 and December 31, 2004, respectively) | (3,282,335 | ) | (3,220,730 | ) | ||||
| Retained earnings | 15,726,625 | 15,571,155 | ||||||
| Accumulated other comprehensive loss, net of tax | (2,263,328 | ) | (873,110 | ) | ||||
| Total stockholders’ equity | 18,618,077 | 19,914,430 | ||||||
| Total liabilities and stockholders’ equity | $ | 213,763,340 | $ | 207,832,349 | ||||
See accompanying notes to these condensed consolidated financial statements.
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PINNACLE BANCSHARES, INC.
| Three Months ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| INTEREST REVENUE: | ||||||||
| Interest on loans | $ | 1,760,278 | $ | 1,856,306 | ||||
| Interest and dividends on securities | 896,098 | 750,377 | ||||||
| Other interest | 33,482 | 10,646 | ||||||
| 2,689,858 | 2,617,329 | |||||||
| INTEREST EXPENSE: | ||||||||
| Interest on deposits | 922,800 | 777,890 | ||||||
| Interest on borrowed funds | 43,106 | 37,065 | ||||||
| Interest on subordinated debentures | 36,236 | 41,648 | ||||||
| 1,002,142 | 856,603 | |||||||
| NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES | 1,687,716 | 1,760,726 | ||||||
| PROVISION FOR LOAN LOSSES | 156,000 | 147,000 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,531,716 | 1,613,726 | ||||||
| NONINTEREST INCOME: | ||||||||
| Fees and service charges on deposit accounts | 188,424 | 228,944 | ||||||
| Service fee income, net | 39,548 | 40,893 | ||||||
| Fees and charges on loans | 31,019 | 53,378 | ||||||
| Bank owned life insurance | 74,600 | 70,714 | ||||||
| Net gain (loss) on sale or write-down of: | ||||||||
| Loans held for sale | 113,857 | 135,555 | ||||||
| Real estate owned | 3,737 | (9,835 | ) | |||||
| Securities available-for-sale | (3,750 | ) | (78,304 | ) | ||||
| 447,435 | 441,345 | |||||||
| NONINTEREST EXPENSE: | ||||||||
| Compensation and benefits | 862,709 | 856,445 | ||||||
| Occupancy | 275,319 | 255,974 | ||||||
| Marketing and professional | 89,334 | 58,078 | ||||||
| Other | 283,673 | 256,956 | ||||||
| 1,511,035 | 1,427,453 | |||||||
| INCOME BEFORE INCOME TAXES | 468,116 | 627,618 | ||||||
| INCOME TAX EXPENSE | 142,061 | 208,939 | ||||||
| NET INCOME | $ | 326,055 | $ | 418,679 | ||||
| Basic earnings per share | $ | 0.21 | $ | 0.27 | ||||
| Diluted earnings per share | $ | 0.21 | $ | 0.26 | ||||
| Cash dividends per share | $ | 0.11 | $ | 0.10 | ||||
| Weighted average basic shares outstanding | 1,552,078 | 1,565,929 | ||||||
| Weighted average diluted shares outstanding | 1,586,786 | 1,612,176 | ||||||
See accompanying notes to these condensed consolidated financial statements.
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PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | (Loss) Income | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2003 | ||||||||||||||||||||||||||||
| Comprehensive income: | 1,800,813 | $ | 18,008 | $ | 8,219,941 | $ | (2,743,245 | ) | $ | 14,508,277 | $ | (571,785 | ) | $ | 19,431,196 | |||||||||||||
| Net income | 0 | 0 | 0 | 0 | 418,679 | 0 | 418,679 | |||||||||||||||||||||
| Change in fair value of securities available- for-sale, net of tax | 0 | 0 | 0 | 0 | 0 | 541,744 | 541,744 | |||||||||||||||||||||
| Comprehensive income | 960,423 | |||||||||||||||||||||||||||
| Exercise of stock options | 10,967 | 110 | 110,931 | 0 | 0 | 0 | 111,041 | |||||||||||||||||||||
| Repurchase of common stock (9,900 shares at cost) | 0 | 0 | 0 | (176,715 | ) | 0 | 0 | (176,715 | ) | |||||||||||||||||||
| Cash dividends declared ($.10 per share) | 0 | 0 | 0 | 0 | (156,368 | ) | 0 | (156,368 | ) | |||||||||||||||||||
| BALANCE, March 31, 2004 | 1,811,780 | $ | 18,118 | $ | 8,330,872 | $ | (2,919,960 | ) | $ | 14,770,588 | $ | (30,041 | ) | $ | 20,169,577 | |||||||||||||
| BALANCE, December 31, 2004 | 1,821,780 | $ | 18,218 | $ | 8,418,897 | $ | (3,220,730 | ) | $ | 15,571,155 | $ | (873,110 | ) | $ | 19,914,430 | |||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | 0 | 0 | 0 | 0 | 326,055 | 0 | 326,055 | |||||||||||||||||||||
| Change in fair value of securities available- For-sale, net of tax | 0 | 0 | 0 | 0 | 0 | (1,390,218 | ) | (1,390,218 | ) | |||||||||||||||||||
| Comprehensive income | (1,064,163 | ) | ||||||||||||||||||||||||||
| Repurchase of common stock (4,000 shares at cost) | 0 | 0 | 0 | (61,605 | ) | 0 | 0 | (61,605 | ) | |||||||||||||||||||
| Cash dividends declared ($.11 per share) | 0 | 0 | 0 | 0 | (170,585 | ) | 0 | (170,585 | ) | |||||||||||||||||||
| BALANCE, March 31, 2005 | 1,821,780 | $ | 18,218 | $ | 8,418,897 | $ | (3,282,335 | ) | $ | 15,726,625 | $ | (2,263,328 | ) | $ | 18,618,077 | |||||||||||||
See accompanying notes to these condensed consolidated financial statements.
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PINNACLE BANCSHARES, INC,
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | 326,055 | $ | 418,679 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 122,731 | 120,863 | ||||||
| Provision for loan losses | 156,000 | 147,000 | ||||||
| Accretion, net | (28,394 | ) | (290,424 | ) | ||||
| Increase in cash surrender value of Bank owned life insurance | (74,600 | ) | (70,714 | ) | ||||
| Net (gain) loss on sale or write down of: | ||||||||
| Loans held for sale | (113,857 | ) | (135,555 | ) | ||||
| Securities available-for-sale | 3,750 | 78,304 | ||||||
| Real estate owned and other assets | (3,737 | ) | 9,835 | |||||
| Proceeds from sale of loans | 9,150,868 | 8,036,329 | ||||||
| Loans originated for sale | (8,692,388 | ) | (8,848,462 | ) | ||||
| Decrease in accrued interest receivable | 63,280 | 380,874 | ||||||
| (Increase) decrease in other assets | (14,728 | ) | 363,939 | |||||
| Increase (decrease) in accrued interest payable | 29,089 | (10,728 | ) | |||||
| Increase (decrease) in other liabilities | 97,032 | (396,050 | ) | |||||
| Net cash provided by (used in) operating activities | 1,021,101 | (196,110 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net loan originations | (229,069 | ) | (481,094 | ) | ||||
| Net change in interest bearing deposits in other banks | (747,981 | ) | (6,607,348 | ) | ||||
| Purchase of securities available-for-sale | (13,191,025 | ) | (39,670,854 | ) | ||||
| Proceeds from the sale of securities available-for-sale | 4,000,000 | 34,905,702 | ||||||
| Proceeds from payments received on securities available-for-sale | 1,661,110 | 11,713,167 | ||||||
| Proceeds from sale of Federal Home Loan Bank stock | 1,500 | 174,900 | ||||||
| Purchase of premises and equipment | (49,720 | ) | (162,254 | ) | ||||
| Proceeds from sales of real estate owned | 143,083 | 289,678 | ||||||
| Net cash (used in) provided by investing activities | (8,412,102 | ) | 161,897 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net increase in passbook, NOW and money market deposit accounts | 1,174,772 | 1,021,266 | ||||||
| Proceeds from sales of time deposits | 9,313,132 | 7,073,504 | ||||||
| Payments on maturing time deposits | (3,160,216 | ) | (6,455,378 | ) | ||||
| Decrease in borrowed funds | (205,000 | ) | (885,000 | ) | ||||
| Decrease in official checks outstanding | (21,465 | ) | (200,194 | ) | ||||
| Proceeds from the exercise of stock options | 0 | 111,041 | ||||||
| Repurchase of common stock | (61,605 | ) | (176,715 | ) | ||||
| Payments of cash dividends | (170,585 | ) | (156,368 | ) | ||||
| Net cash provided by financing activities | 6,869,033 | 332,156 | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (521,968 | ) | 297,943 | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,451,046 | 3,519,377 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,929,078 | $ | 3,817,320 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash payments for interest on deposits and borrowed funds | $ | 973,053 | $ | 867,331 | ||||
| Cash payments for income taxes | 100,000 | 0 | ||||||
| Real estate acquired through foreclosure | 99,384 | 262,366 | ||||||
See accompanying notes to these condensed consolidated financial statements.
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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 month periods ended March 31, 2005, 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, 2004. 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.
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2.EARNINGS PER SHARE:
The following table represents the earnings per share calculations for the three period ended March 31, 2005 and 2004:
| Per | ||||||||||||
| Share | ||||||||||||
| For The Three Months Ended | Net Income | Shares | Amount | |||||||||
March 31, 2005 | ||||||||||||
| Basic earnings per share | $ | 326,055 | 1,552,078 | $ | 0.21 | |||||||
| Dilutive securities | 34,708 | |||||||||||
| Diluted earnings per share | $ | 326,055 | 1,586,786 | $ | 0.21 | |||||||
| Per | ||||||||||||
| Share | ||||||||||||
| For The Three Months Ended | Net Income | Shares | Amount | |||||||||
March 31, 2004 | ||||||||||||
| Basic earnings per share | $ | 418,679 | 1,565,929 | $ | 0.27 | |||||||
| Dilutive securities | 46,247 | |||||||||||
| Diluted earnings per share | $ | 418,679 | 1,612,176 | $ | 0.26 | |||||||
3.STOCK BASED COMPENSATION:
In accordance with the provision of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, the Company has elected to continue to record compensation cost under 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 impact on the Company’s net income would not have been material.
8
4. RECENT ACCOUNTING PRONOUNCEMENTS:
In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final rule delayed, the Company is not able to determine whether the adoption of these new provisions will have a material impact on its consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS No. 123R”), which revised SFAS No. 123, (Accounting for Stock-Based Compensation). This statement supercedes APB Opinion No. 25,Accounting for Stock Issued to Employees. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first interim period beginning after December 15, 2005. The Company is currently evaluating the provisions of SFAS No. 123R and will adopt it on January 1, 2006 as required.
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Item 2. Management’s Discussion and Analysis or Plan of Operation
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 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 different estimates, assumptions and judgments. Certain policies inherently have a greater reliance 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 Audit Committee and to the Board of Directors 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 March 31, 2005, 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
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the asset, less cost of disposition, may cause a reduction in the valuation allowance account, but not below zero. Increases or decreases in the valuation allowance account are charged or credited to income. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed.
The recognition of gains and losses on the sale of real estate owned is dependent upon whether the nature and terms of the sale and future involvement of the Bank in the property meet certain requirements. If the transaction does not meet these requirements, income recognition is deferred and recognized under an 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 December 31, 2004 and March 31, 2005:Total assets were $213.8 million at March 31, 2005, compared to $207.8 million at December 31, 2004. Net loans receivable were $99.6 million at March 31, 2005 and December 31, 2004. Total securities available-for-sale increased $5.3 million, to $94.3 million March 31, 2005,compared to $89.0 million at December 31, 2004.
At March 31, 2005, the investment portfolio of $94.3 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 three months ended March 31, 2005, the Bank sold $4.0 million in agency securities. Net losses of $3,750 were realized on these sales. The proceeds from these sales of securities available-for-sale, combined with the proceeds from loan principal repayments and proceeds from sales of deposits, were used by the Bank to purchase $13.2 million in agency securities with an average yield of 4.34%.
Total deposits increased $7.3 million, to $187.3 million at March 31, 2005, from $180.0 million at December 31, 2004. This increase was primarily due to an increase in time deposits of $6.1 million and an increase in NOW and money market deposit accounts of $1.2 million.
On December 22, 2003, the Company established Pinnacle Capital Trust I (the “Trust”), a wholly-owned statutory business trust. The Company is the sole sponsor of the trust and owns $93,000 of the Trust’s common securities. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $3,000,000 and using proceeds from the issuance of the common and preferred securities to purchase $3,093,000 of junior subordinated debentures (“Subordinated Debentures”) issued by the Company. The sole assets of the Trust are the Subordinated Debentures. The Company’s investment in the Trust is included in other assets in the accompanying consolidated balance sheet at March 31, 2005 and the $3,093,000 obligation of the Company is included in subordinated debt.
Stockholders’ equity decreased from $19.9 million at December 31, 2004, to $18.6 million at March 31, 2005. This decrease was primarily attributable to a $1.4 million decrease in the market value of the Company’s available-for-sale securities portfolio, which is marked to fair value based on prevailing interest rates. The interest rate risk in the Company’s portfolio is monitored closely.
Results of Operations-Comparison of the Three-Months Ended March 31, 2005 and 2004:For the three-months ended March 31, 2005, net income was $326,000, compared with net income of $419,000 for the three months ended March 31, 2004. The decrease in net income for the three months ended March 31, 2005 was primarily attributable to an increase in interest expense on deposits of approximately $145,000. This increase was primarily attributable to an increase in the average balance of interest bearing deposits of $4.7 million.
The net interest margin was 3.40% for the three-months ended March 31, 2005, compared to 3.70% for the three- months ended March 31, 2004, respectively.The yield on interest-earning assets increased from approximately 5.46% in the three-month periods ended March 31, 2004 to approximately 5.47% in the three-month period ended at March 31, 2005. These increases were due to increases in market interest rates as well as an increase in the average balance of interest earning assets. The cost of funds was 2.18% at March 31, 2005, compared to 1.77% at March 31, 2004.
Net interest income before the provision for loan losses for the three months ended March 31, 2005, was $1,687,716 compared with $1,760,726 in the same period last year. The decrease was primarily due to increases in interest
11
expense on deposits and borrowed funds of $146,000. This increase was offset by a increase in interest revenue of $73,000 for the three months ended March 31, 2005, respectively, compared with the same periods last year.
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 $156,000 for the three-months ended March 31, 2005, compared to $147,000 for the three-months ended March 31, 2004. It is management’s opinion that the allowance for loan losses at March 31, 2005 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.
Net interest income after the provision for loan losses for the three months ended March 31, 2005, was $1,531,716 compared with $1,613,726 in the same period last year.
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 $6,000 in the three-month period ended March 31, 2005, as compared to the three-month period ended March 31, 2004. This increase was due primarily to a decrease in the loss on sale of securities available-for-sale and other real estate owned of $88,000. These increases were off set by a decrease in net gain on sale of loans held for sale of $22,000, a decrease in fees and service charges on deposit accounts of $41,000 and a decrease in all other non-interest income of $19,000.
Non-interest expense increased $84,000 in the three-month period ended March 31, 2005, as compared to the corresponding prior year period. This was primarily a result of an increase in occupancy expense of $19,000, an increase in marketing and professional expense of $31,000, and an increase in all other non-interest expense of $34,000.
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, repricing and maturing volumes and rates of the existing balance sheet. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate increase applied to all interest- earning assets and interest-bearing liabilities, the Company would expect net losses in fair value of the equity in the underlying instruments of approximately ($505,000), ($1,009,000) and ($2,074,000) respectively. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate decrease, the Company would expect net changes in projected net income for the first year of approximately $727,000, $1,371,000 and $1,255,000, 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.
The rate environment is a function of the monetary policy of the Federal Reserve Board (“FRB”). The principal tools of the FRB for implementing monetary policy are open market operations, or the purchases and sales of U.S. Treasury and federal agency securities. The FRB’s objective for open market operations has varied over the years, but the focus has gradually shifted toward attaining a specified level of the federal funds rate to achieve the long-run goals of price stability and sustainable economic growth. The federal funds rate is the basis for overnight funding and drives the short end of the yield curve. Longer maturities are influenced by FRB purchases and sales and also expectations of monetary policy going forward. The FRB began to increase the targeted level for the federal funds rate in June 2004 after reaching an all-time low of 1.00% in mid-2003. The targeted fed funds rate increased at each Federal Open Market Committee meeting by 25 basis points and ended the first quarter of 2005 at 2.80%. Although each FRB rate increase becomes more challenging to offset, the ability to delay deposit rate increases and less aggressive repricing of the maturing certificate of deposit portfolio has allowed the Company to offset the negative impact of recent FRB rate movements. Although management believes that the Company’s operating results are not significantly affected by changes in interest rates over an extended period of time, the continued flattening of the yield curve is expected to exert downward pressure on the net interest margin and net interest income. The Company is most impacted at this time by the increase in short term interest rates which continues to put upward pressure on transaction deposit rates and short term borrowings from the Federal Home Loan Bank (FHLB”) of Atlanta. Under traditional measures of interest rate gap positions, the Company is moderately liability sensitive in the short-term.
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Changes in interest rates can affect loans and other interest-earning assets, including the Bank’s investment portfolio. A significant change in interest rates could have a negative impact on the Company’s operating income and portfolio market value.
Stock Repurchases:The following table details purchases under the Company’s stock repurchase program during the three-months ended March 1, 2005.
| Total | Total Number of | Maximum Number | ||||||||||||||
| Number | Shares Purchased | of Shares that May | ||||||||||||||
| of Shares | Average Price | As Part of Publicly | Yet Be Purchased | |||||||||||||
| Period | Purchased | Paid per Share | Announced Programs | Under the Programs | ||||||||||||
| January 1-31, 2005 | 3,000 | $ | 15.47 | 3,000 | 2,400 | |||||||||||
| February 1-28, 2005 | 0 | 0 | 0 | 0 | ||||||||||||
| March 1-31, 2005 | 1,000 | $ | 15.19 | 1,000 | 1,400 | |||||||||||
Total | 4,000 | $ | 15.40 | 4,000 | 1,400 | |||||||||||
On April 25, 2003, the Company announced a stock repurchase program to acquire up to 80,000 shares of common stock. As of March 31, 2005, the Company had repurchased 78,600 shares at an average price of $14.75 per share. On June 10, 2004, the Company announced a supplemental stock repurchase program to acquire an additional 5% of the Company’s outstanding shares outstanding upon completion of its current repurchase program, or 77,169 shares. This program supplements the Company’s current repurchase program. The repurchase programs are 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.
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 March 31, 2005, the Bank’s total loan commitments, including construction loans in process, unused lines of credit and letter of credits, were approximately $24.9 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 March 31, 2005, 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 March 31, 2005. 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 under the supervision of the audit committee. 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.
Pursuant to Section 404 of the Sarbanes-Oxley Act, the Holding Company will be required under rules adopted by the SEC to include in its annual reports a report by management on the Holding Company’s internal control over financial reporting and an accompanying auditor’s report. In March 2005, the SEC extended the Section 404 compliance date for the Company and other non-accelerated filers. Under the extension, the Holding Company must begin to comply with these requirements for its fiscal year ending December 31, 2006. The Company expects that Section 404 compliance will significantly increase its regulatory compliance costs.
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PART II – OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding the Company’s purchases of equity securities is described on pages 12 and 13 under Item 2. “Management’s Discussion and Analysis or Plan of Operation.”
ITEM 6. 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
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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: May 16, 2005 | 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) | ||||
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