U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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 June 30, 2002
[ ] 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.
-------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 72-1370314
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1811 Second Avenue, Jasper, Alabama 35502-1388
----------------------------------------------
(Address of Principal Executive Offices)
(205) 221-4111
--------------
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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 August 14, 2002: 1,775,384 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Condition at June 30, 2002
and December 31, 2001. (Unaudited) 3
Condensed Consolidated Statements of Operations for the three-months ended June
30, 2002 and 2001 and for the six-months ended June 30, 2002
and 2001 (Unaudited). 4
Condensed Consolidated Statements of Stockholders' Equity for the six-months
ended June 30, 2002 and June 30, 2001 (Unaudited). 5
Condensed Consolidated Statements of Cash Flows for six-months ended
June 30, 2002 and June 30, 2001 (Unaudited). 6
Notes to Unaudited Condensed Consolidated Financial Statements. 7
The Condensed Consolidated Financial Statements furnished have not been audited
by independent certified public accountants, but reflect, in the opinion of
management, all adjustments necessary for a fair presentation of financial
condition and the results for the periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 11
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. EXHIBIT AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS:
Cash on hand and in banks $ 3,340,503 $ 3,342,141
Interest-bearing deposits in other banks 2,483,342 2,466,389
Securities available-for-sale 80,462,489 61,837,748
Loans held for sale 1,215,577 3,874,627
Loans receivable, net of allowance for loan losses
of $1,273,911 and $1,308,186, respectively 123,141,870 131,284,423
Real estate owned, net 1,533,209 2,345,440
Premises and equipment, net 5,811,731 6,036,065
Goodwill 306,488 306,488
Bank owned life insurance 4,087,968 3,947,286
Accrued interest receivable 1,505,204 1,676,215
Other assets 526,294 903,289
------------- -------------
Total assets $ 224,414,675 $ 218,020,111
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 193,903,977 $ 193,498,008
Borrowed funds 7,340,000 3,100,000
Official checks outstanding 1,172,561 910,181
Accrued interest payable 838,486 952,447
Other liabilities 927,352 547,609
------------- -------------
204,182,376 199,008,245
============= =============
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, no shares issued,
100,000 authorized 0 0
Common stock, par value $.01 per share, 1,792,086 shares issued,
1,775,384 outstanding, 2,400,000 shares authorized 17,921 17,921
Additional paid-in capital 8,131,746 8,131,746
Treasury stock, at cost (16,702 shares at June 30, 2002 and (128,075) (128,075)
December 31, 2001)
Retained earnings 12,016,410 11,413,945
Accumulated other comprehensive income (loss), net of tax 194,297 (423,671)
------------- -------------
Total stockholders' equity 20,232,299 19,011,866
------------- -------------
Total liabilities and stockholders' equity $ 224,414,675 $ 218,020,111
============= =============
See accompanying notes to condensed consolidated financial statements.
3
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
INTEREST REVENUES:
Interest on loans $ 2,379,163 $ 3,145,662 $ 4,898,131 $ 6,539,510
Interest and dividends on securities 894,694 844,470 1,703,676 1,631,004
Other interest 28,509 28,684 56,767 155,254
----------- ----------- ----------- -----------
3,302,366 4,018,816 6,658,574 8,325,768
INTEREST EXPENSE:
Interest on deposits 1,517,771 2,320,750 3,141,848 4,735,856
Interest on borrowed funds 42,841 62,034 85,946 293,026
----------- ----------- ----------- -----------
1,560,612 2,382,784 3,227,794 5,028,882
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,741,754 1,636,032 3,430,780 3,296,886
PROVISION FOR LOAN LOSSES 120,000 670,000 260,300 790,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,621,754 966,032 3,170,480 2,506,886
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Fees and service charges 253,882 210,757 501,374 396,317
Service fee income, net 39,384 40,096 78,656 80,869
Bank owned life insurance 70,342 5,157 140,682 5,157
Real estate operations, net 32,031 34,151 39,463 69,480
Net gain (loss) on sale or write-down of:
Loans held for sale 140,039 164,757 254,109 311,796
Securities available-for-sale 20,156 0 20,156 60,313
Real estate owned and other assets (7,104) (5,598) 20,275 (1,210)
----------- ----------- ----------- -----------
548,730 449,320 1,054,715 922,722
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits 761,831 749,238 1,503,504 1,488,834
Occupancy 319,678 300,380 634,446 619,365
Marketing and professional 54,244 46,281 104,007 81,032
Other 254,982 231,250 541,875 526,501
----------- ----------- ----------- -----------
1,390,735 1,327,149 2,783,832 2,715,732
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEM 779,749 88,203 1,441,363 713,876
INCOME TAX EXPENSE 263,999 (17,368) 483,822 170,490
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 515,750 105,571 957,541 543,386
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $62,903 0 0 0 107,587
----------- ----------- ----------- -----------
NET INCOME $ 515,750 $ 105,571 $ 957,541 $ 435,799
=========== =========== =========== ===========
Basic and diluted earnings per share before extraordinary item $ 0.29 $ 0.06 $ 0.54 $ 0.31
Basic and diluted earnings per share extraordinary item $ 0.00 $ 0.00 $ 0.00 $ (0.06)
Basic and diluted earnings per share $ 0.29 $ 0.06 $ 0.54 $ 0.25
Cash Dividend per share $ 0.10 $ 0.10 $ 0.20 $ 0.20
Weighted average basic shares outstanding 1,775,384 1,775,384 1,775,384 1,775,384
Weighted average diluted shares outstanding 1,784,214 1,775,384 1,777,591 1,775,384
See accompanying notes to condensed consolidated financial statements.
4
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2002
Common Stock Additional
-------------------- Paid-in Treasury
Shares Amount Capital Stock
========== ======= ========== ==========
BALANCE, December 31, 2000 1,775,384 $17,921 $8,131,746 $ (128,075)
Comprehensive Income:
Net income 0 0 0 0
Change in fair value of securities
available-for-sale, net of tax 0 0 0 0
Comprehensive Income
Cash dividends declared ($.20 per share) 0 0 0 0
------------------------------------------------
BALANCE, June 30, 2001 1,775,384 $17,921 $8,131,746 $ (128,075)
========== ======= ========== ==========
BALANCE, December 31, 2001 1,775,384 $17,921 $8,131,746 $ (128,075)
Comprehensive Income:
Net income 0 0 0 0
Change in fair value of securities
available-for-sale, net of tax 0 0 0 0
Comprehensive Income
Cash dividends declared ($.20 per share) 0 0 0 0
------------------------------------------------
BALANCE June 30, 2002 1,775,384 $17,921 $ 8,131,746 $ (128,075)
================================================
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income (Loss) Equity
============ ------------- --===========
BALANCE, December 31, 2000 $11,440,810 $ (232,077) $19,230,325
-----------
Comprehensive Income:
Net income 435,799 0 435,799
Change in fair value of securities
available-for-sale, net of tax 0 343,440 343,440
-----------
Comprehensive Income 779,239
Cash dividends declared ($.20 per share) (355,077) 0 (355,077)
------------------------------------------
BALANCE, June 30, 2001 $ 11,521,532 $ 111,363 $19,654,487
============ ========== ===========
BALANCE, December 31, 2001 $ 11,413,945 $ (423,671) $19,011,866
-----------
Comprehensive Income:
Net income 957,541 0 957,541
Change in fair value of securities
available-for-sale, net of tax 0 617,968 617,968
-----------
Comprehensive Income 1,575,509
Cash dividends declared ($.20 per share) (355,076) 0 (355,076)
------------------------------------------
BALANCE June 30, 2002 $ 12,016,410 $ 194,297 $20,232,299
==========================================
See accompanying notes to condensed consolidated financial statements.
5
PINNACLE BANCSHARES, INC,
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 957,541 $ 435,799
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation 267,866 290,103
Provision for loan losses 260,300 790,000
Amortization, net (217,354) (166,136)
Increase in cash surrender value of Bank owned life insurance (140,682) (5,157)
Net (gain) loss sale or write down of:
Loans held for sale (254,109) (311,796)
Securities available-for-sale (20,156) (60,313)
Real estate owned and other assets (20,275) 1,210
Proceeds from sale of loans 25,596,888 27,130,419
Loans originated for sale (22,683,729) (28,246,884)
Decrease in accrued interest receivable 171,011 528,046
Decrease in accrued interest payable (113,961) (110,100)
Decrease in other assets 376,995 134,584
Increase in other liabilities (40,890) (100,349)
------------- -------------
Net cash provided by operating activities 4,139,445 309,426
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans and securities 45,263,217 49,941,252
Loans originated for portfolio (36,227,145)
(39,406,384)
Net change in interest bearing deposits at other banks (16,953) (1,252,786)
Purchase of Bank owned life insurance 0 (3,814,502)
Purchase of securities available-for-sale (31,163,622) (28,000,000)
Proceeds from maturing and called securities 9,000,000 27,000,000
Proceeds from the sale of securities available-for-sale 3,020,156 3,060,313
Purchase of premises and equipment (43,532) (67,907)
Sales of premises and equipment 0 5,500
Proceeds from sales of real estate owned 1,473,523 582,343
------------- -------------
Net cash (used in) provided by investing activities (8,694,356) 8,047,829
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in passbook, NOW and money market deposit accounts 868,549 2,134,528
Proceeds from sales of time deposits 11,843,231 11,814,499
Payments on maturing time deposits (12,305,811) (11,378,251)
Payments on borrowed funds (160,000) (25,000,000)
Proceeds from borrowed funds 4,400,000 14,300,000
Increase in official checks outstanding 262,380 590,883
Payments of cash dividends (355,076) (355,077)
------------- -------------
Net cash provided by (used in) financing activities 4,553,273 (7,893,418)
------------- -------------
NET (DECREASE) INCREASE IN CASH (1,638) 463,837
CASH AT BEGINNING OF PERIOD 3,342,141 3,480,036
------------- -------------
CASH AT END OF PERIOD $ 3,340,503 $ 3,943,873
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds 3,341,755 $ 5,138,983
Cash payments for income taxes 285,000 361,281
Real estate acquired through foreclosure 651,722 661,336
See accompanying notes to condensed consolidated financial statements.
6
PINNACLE BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited interim 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 six month periods ended June 30, 2002, are not necessarily indicative of the
results of operations which may be expected for the entire year.
These 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, 2001. The
accounting policies followed by the Company are set forth in the summary of
Significant Accounting Policies in the Company's audited financial statements.
7
2. EARNINGS PER SHARE:
The following table represents the earnings per share calculations for the three
and six month periods ended June 30, 2002 and 2001:
PER
SHARE
FOR THE THREE MONTHS ENDED NET INCOME SHARES AMOUNT
---------- --------- ------
JUNE 30, 2002
Basic earnings per share $ 515,750 1,775,384 $0.29
Dilutive securities 0 8,830 0
--------- --------- -----
Diluted earnings per share 515,750 1,784,214 $0.29
========= ========= =====
PER
SHARE
FOR THE THREE MONTHS ENDED NET INCOME SHARES AMOUNT
---------- --------- ------
JUNE 30, 2001
Basic earnings per share $ 105,750 1,775,384 $0.06
Dilutive securities 0 0 0
--------- --------- -----
Diluted earnings per share $ 105,750 1,775,884 $0.06
========= ========= =====
PER
SHARE
FOR THE SIX MONTHS ENDED NET INCOME SHARES AMOUNT
---------- --------- -----
JUNE 30, 2002
Basic earnings per share $ 957,541 1,775,384 $0.54
Dilutive securities 0 2,207 0
--------- --------- -----
Diluted earnings per share 957,541 1,777,591 $0.54
========= ========= =====
PER
SHARE
FOR THE SIX MONTHS ENDED NET INCOME SHARES AMOUNT
---------- --------- -----
JUNE 30, 2001
Basic earnings per share before extraordinary item 543,386 1,775,384 $0.31
Basic (loss) per share extraordinary item (107,587) 1,775,384 (0.06)
--------- --------- -----
Basic earnings per share 435,799 1,775,384 0.25
Dilutive securities 0 0 0
Diluted earnings per share before extraordinary item 543,386 1,775,384 0.31
Diluted (loss) per share extraordinary item (107,587) 1,775,384 (0.06)
--------- --------- -----
Diluted earnings per share $ 435,799 1,775,384 $0.25
========= ========= =====
Options to purchase 45,500 shares of common stock at $10.125 per share and
options to purchase 54,560 shares of common stock at $8.8125 per share were
outstanding during the three and six months ended June 30, 2002 and 2001,
respectively. The options, which expire on August 28, 2006 and May 26, 2009,
respectively, were anti-dilutive during the three and six month periods ended
June 30, 2001.
8
3. NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No.
141, Business Combinations. SFAS No. 141 addresses financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
("APB") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. This statement eliminates
the pooling of interests method for accounting for business combinations and
requires intangible assets that meet certain criteria to be reported separately
from goodwill. The provisions of this statement apply to all business
combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. This statement requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. This statement also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and also be reviewed for
impairment. Impairment losses resulting from the initial application of this
statement are to be reported as a change in accounting principle. This statement
is effective for fiscal years beginning after December 15, 2001, and must be
applied to all goodwill and other intangible assets recognized in the financial
statements. The Company adopted this statement effective January 1, 2002 and
ceased amortization of goodwill.
Goodwill recognized in business combinations is not amortized, but is tested for
impairment under the provisions of SFAS 142 at a level of reporting referred to
as a reporting unit. To the extent a reporting unit's carrying amount exceeds it
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform a second step of the impairment test. In
the second step, if the carrying amount of reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. Goodwill of a reporting unit is tested for
impairment on an annual basis and between annual tests in certain circumstances.
The first step of the initial goodwill impairment test was completed by June 30,
2002 as required by SFAS 142. After performing this initial step, no goodwill
impairment was indicated.
The Company had no changes in the carrying amount of goodwill from December 31,
2001 to June 30, 2002. Also, the company has no intangible assets other than
goodwill.
The following table is a reconciliation of net income, basic earnings per share,
and diluted earnings per share with and without goodwill amortization:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------
Reported net income $515,750 $105,750 $957,541 $435,799
Add back: goodwill amortization 0 10,217 0 20,433
-------- -------- -------- --------
Adjusted net income $515,750 $115,967 $957,541 $456,232
======== ======== ======== ========
Basic earnings per share:
Reported net income $ 0.29 $ 0.06 $ 0.54 $ 0.25
Goodwill amortization 0 0.01 0 0.01
-------- -------- -------- --------
Adjusted net income $ 0.29 $ 0.07 $ 0.54 $ 0.26
======== ======== ======== ========
Diluted earnings per share:
Reported net income $ 0.29 $ 0.06 $ 0.54 $ 0.25
Goodwill amortization 0 0.01 0 0.01
-------- -------- -------- --------
Adjusted net income $ 0.29 $ 0.07 $ 0.54 $ 0.26
======== ======== ======== ========
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
9
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. This statement also amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The effects of this statement did not
have a material impact on the Company's financial position or results of
operations upon adoption on January 1, 2002.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS
No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. This statement also amends SFAS No.
113, "Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this statement are effective for fiscal years beginning after May
15, 2002. The effects of this statement are not expected to have a material
impact on the Company's consolidated financial position or results of
operations; however, the statement will cause the Company to reclassify its loss
on early extinguishment of debt during fiscal 2001 as a component of ordinary
income.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The provisions of
this statement are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The effects of this statement are not
expected to have a material impact on the Company's financial position or
results of operations upon adoption on January 1, 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PINNACLE BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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.
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 2002 AND DECEMBER 31, 2001.
Total assets were $224.4 million, at June 30, 2002, as compared to $218.0
million at December 31, 2001. Total loans receivable, net decreased
approximately $8.2 million primarily due to refinancing activities and principal
repayments. Available-for-sale securities increased approximately $18.6 million
due to purchases exceeding calls and maturities. During the six-month period
ended June 30, 2002 the Bank had $6.0 million in agency securities called and
$3.0 million to mature. Also, during the six-month period ending June 30, 2002,
the Bank sold $3.0 million in agency securities. Gross gains of $20,000 were
realized on these sales and no losses were realized on these sales. With the
proceeds from these calls, maturities and sales of
securities-available-for-sale, combined with the proceeds from loan principal
repayments and FHLB advances, the Bank purchased $23.0 million in agency
securities and $8.2 million in mortgage-backed securities during the six-months
ended June 30, 2002.
At June 30, 2002 the Company's investment portfolio of $80.5 million consisted
primarily of U. S. agency securities and mortgage-backed securities. The entire
investment portfolio is classified as "available-for-sale," which is
marked-to-market with the unrealized gains/losses reflected directly in
stockholders' equity, net of taxes.
Total real estate owned decreased $812,000 to $1.5 million at June 30, 2002 as
compared to $2.3 million at December 31, 2001. This decrease was due to sales of
real estate owned of $1.4 million exceeding foreclosures of $652,000.
Total deposits increased $400,000 to $193.9 million at June 30, 2002 as compared
to $193.5 million at December 31, 2001. This relatively slight increase was
primarily due to rate competition.
During the six-month period ended June 30, 2002 the Bank increased it borrowed
funds by $4.2 million. The proceeds from borrowed funds were used to purchase
agency securities due to favorable spread.
RESULTS OF OPERATIONS-COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
AND 2001. For the three-months ended June 30, 2002, net income was $516,000,
compared with net income of $106,000 for the three-months
11
ended June 30, 2001. Net interest income after the provision for loan losses for
the three-months ended June 30, 2002, was $1,622,000, compared with $966,000 in
the same period last year. For the six-months ended June 30, 2002, net income
was $957,000, compared with net income of $436,000 for the six-months ended June
30, 2001. This increase in net income for the six-months ended June 30, 2002 was
achieved despite a decrease in interest income of $1,667,000 primarily due to
lower prevailing interest rates on the Company's various funding sources. Net
interest income after the provision for loan losses for the six-months ended
June 30, 2002, was $3,170,000, compared with $2,507,000 in the same period last
year. The Company's net interest margin increased to 3.45% for the three-months
ended June 30, 2002, from 3.20% for the three-months ended June 30, 2001. The
Company's net interest margin increased to 3.42% for the six-months ended June
30, 2002, from 3.15% for the six-months ended June 30, 2001. The Company's net
interest margin increased as market interest rates stabilized at lower levels.
The provision for loan losses decreased from $670,000 to $120,000 and from
$790,000 to $260,300 for the three and six-month periods ended June 30, 2002 as
compared with June 30, 2001, respectively. This was the result of a decline in
non-performing loans.
If rates were to rise rapidly, net income may be adversely affected. Under a
scenario simulating a hypothetical 100 basis point rate increase applied to all
fixed rate interest-earning assets and interest-bearing liabilities, the Company
would expect a net loss in the fair value of the underlying instruments of
approximately $1,054,000. This hypothetical loss is not a precise indicator of
future events. Instead, it is a reasonable estimate of the results anticipated
if the assumptions used in the modeling techniques were to occur.
Economic conditions in most of the Company's principal market areas are
currently weak. Further weakness in these conditions could cause an increase in
the Company's non-performing assets and a deterioration in the company's asset
quality.
The Bank's yield on interest-earning assets decreased from approximately 7.84%
in the three-month period ended June 30, 2001 to approximately 6.53% in the
current year period. This decrease was due to a decrease in interest rates as
well as a decrease in the average balance of interest-earning assets of
approximately $3.0 million driven by a decrease in loans. The Bank's yield on
interest-earning assets decreased from approximately 7.97% in the six-month
period ended June 30, 2001 to approximately 6.62% in the current year period.
This decrease was due to a decrease in interest rates as well as a decrease in
the average balance of interest-earning assets of approximately $8.0 million
driven mainly by a decrease in loans. The Bank's cost of funds decreased from
approximately 4.75% at June 30, 2001 to approximately 3.02% in the current year
period. This decrease was due to a decrease in interest rates as well as a
decrease in the average balance of interest bearing liabilities of approximately
$3.2 million.
Non-interest income, which includes fees and service charges, real estate
operations, net gain (loss) on sale of loans, Bank owned life insurance and
other income increased $99,000 in the three-month period ended June 30, 2002, as
compared to the three-month period ended June 30, 2001. The increase was due
primarily to an increase in the cash surrender value of Bank owned life
insurance of $65,000, an increase in fees and service charges of $43,000, and an
increase in the gain on sale of securities available-for-sale of $20,000. These
combined increases were offset by a decrease in the gain on sale of mortgage
loans of $25,000 as well as slight decrease in all other non-interest income.
Non-interest income increased $132,000 in the six-month period ended June 30,
2002, as compared to the six-month period ended June 30, 2001. The increase was
due primarily to an increase in the cash surrender value of Bank owned life
insurance of $136,000, an increase in fees and service charges of $105,000, and
an increase in the gain on sale of real estate owned of $24,000. These combined
increases were offset by a decrease in the gain on sale of mortgage loans of
$58,000, a decrease in real estate operations, net of $30,000, a decrease in the
gain on sale of securities available-for sale of $40,000 as well as slight
decrease in all other non-interest income.
Provisions for loan losses are made to maintain the allowance for loan losses at
an adequate level. The allowance for loan losses reflects management's
estimates, which take into account historical experience, the amount of
non-performing assets, and general economic conditions. The Bank determined an
additional $670,000 was required for the three-month period ended June 30, 2001
and an additional $790,000 was required for the six-month period ended June 30,
2001. The Bank determined an additional $120,000 was required for the
three-month period ended June 30, 2002 and an additional $260,000 was required
for the six-month period ended June 30, 2002. The decrease in the provision for
loan losses for the three and six-month period ended
12
June 30, 2002 was the result of improvements in non-performing assets. It is
management's opinion that the allowance for loan losses at June 30, 2002 was
adequate to absorb losses related to the portfolio of loans. Management will
continue to analyze the Bank's exposure to losses and may adjust the allowance
for loan losses in the future if it deems necessary.
Non-interest expense increased $64,000 in the three-month period ended June 30,
2002, respectively, as compared to the corresponding prior year period. This was
primarily a result of an increase in compensation and benefits of $13,000, an
increase in occupancy expense of $19,000, an increase in marketing and
professional expense of $8,000, and an increase all other non-interest expense
of $24,000. Non-interest expense increased $68,000 in the six-month periods
ended June 30, 2002, respectively, as compared to the corresponding prior year
period. This increase was primarily a result of an increase in compensation and
benefits of $15,000, an increase in occupancy expense of $15,000, an increase in
marketing and professional expense of $23,000, and an increase in all other
non-interest expense of $15,000. These increases in non-interest expenses for
both the three and six months ended June 30, 2002 were not the result of any
single significant factor.
EXTRAORDINARY EXPENSE. In the first quarter of 2001, the Company incurred an
extraordinary expense, net of tax benefit, of $108,000 due to penalties on the
prepayment of Federal Home Loan Bank advances totaling $16.5 million. The Bank
determined to use a portion of its excess liquidity to prepay these advances,
which would have matured in July, November and December of 2001.
CAPITAL RESOURCES: Historically, funds provided by operations, mortgage loan
principal repayments, savings 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
Federal Home Bank of Atlanta and other borrowing sources. At June 30, 2002, the
Bank's total loan commitments, including construction loans in process and
unused lines of credit, were approximately $22.0 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 June 30, 2002, the
Company and the Bank exceeded all regulatory capital requirements.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 22, 2002, the Company held its Annual Meeting of Stockholders at
which the following matter was considered voted on.
PROPOSAL I- ELECTION OF DIRECTORS
NOMINEES FOR WITHHELD TERM
-------- --- -------- ----
O. H. Brown 1,413,627 192,236 3 Years
Sam W. Murphy 1,411,327 194,536 3 Years
Al. H. Simmons 1,413,627 192,236 3 Years
There were no abstentions or broker non-votes.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1- Certification 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: August 14, 2002 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)
15