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 March 31, 2003
| | 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 May 14, 2003: 1,565,684 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
1
CONTENTS
Page
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Financial Condition at March 31, 2003
and December 31, 2002. 3
Unaudited Condensed Consolidated Statements of Financial Operations for the three-months ended
March 31, 2003 and March 31, 2002 4
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the three-months
ended March 31, 2003 and March 31, 2002. 5
Unaudited Condensed Consolidated Statements of Cash Flows for the three-months ended
March 31, 2003 and March 31, 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
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS:
Cash and cash equivalents $ 3,853,346 $ 3,862,956
Interest-bearing deposits in other banks 1,130,830 357,467
Securities available-for-sale 84,967,724 75,301,227
FHLB stock 975,000 975,000
Loans held for sale 4,643,225 4,968,715
Loans receivable, net of allowance for loan losses
of $1,365,745 and $1,322,380, respectively 118,480,144 119,375,036
Real estate owned, net 1,617,457 1,608,710
Premises and equipment, net 5,595,913 5,654,823
Goodwill 306,488 306,488
Bank owned life insurance 4,300,685 4,229,280
Accrued interest receivable 1,323,452 1,318,060
Other assets 272,099 332,439
------------ ------------
Total assets $227,466,363 $218,290,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $191,200,504 $188,954,730
Borrowed funds 13,765,000 5,940,000
Official checks outstanding 1,295,443 1,504,293
Accrued interest payable 604,705 614,320
Other liabilities 947,655 1,321,380
------------ ------------
207,813,307 198,334,723
------------ ------------
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, 1,598,684 and 1,652,684 outstanding, at March 31, 2003 and
December 31, 2002, respectively. 17,921 17,921
Additional paid-in capital 8,131,746 8,131,746
Treasury stock, at cost (193,402 and 139,402 shares at March 31, 2003 and
December 31, 2002) (2,123,217) (1,497,777)
Retained earnings 13,254,988 12,716,579
Accumulated other comprehensive income, net of tax 371,618 587,009
------------ ------------
Total stockholders' equity 19,653,056 19,955,478
------------ ------------
Total liabilities and stockholders' equity $227,466,363 $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
MARCH 31,
----------------------------
2003 2002
----------- ----------
INTEREST REVENUES:
Interest on loans $ 2,205,045 $2,518,968
Interest and dividends on securities 708,130 808,982
Other interest 10,255 28,258
----------- ----------
2,923,430 3,356,208
INTEREST EXPENSE:
Interest on deposits 1,063,370 1,624,077
Interest on borrowed funds 49,682 43,105
----------- ----------
1,113,052 1,667,182
----------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 1,810,378 1,689,026
PROVISION FOR LOAN LOSSES 267,500 158,300
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,542,878 1,530,726
----------- ----------
NON-INTEREST INCOME:
Fees and service charges on deposit accounts 211,037 189,906
Service fee income, net 39,520 39,272
Fees and service charges on loans 49,526 57,586
Bank owned life insurance 71,405 70,341
Net gain (loss) on sale or write-down of:
Loans held for sale 247,743 114,070
Securities available-for-sale 285,186 0
Real estate owned and other assets (5,806) 27,379
898,611 498,554
----------- ----------
NON-INTEREST EXPENSE:
Compensation and benefits 795,466 741,673
Occupancy 253,200 314,768
Marketing and professional 53,126 49,763
Other 261,627 261,462
----------- ----------
1,363,419 1,367,666
----------- ----------
INCOME BEFORE INCOME TAX EXPENSE 1,078,070 661,614
----------- ----------
INCOME TAX EXPENSE 374,393 219,823
----------- ----------
NET INCOME $ 703,677 $ 441,791
=========== ==========
Basic earnings per share $ 0.43 $ 0.25
Diluted earnings per share $ 0.42 $ 0.25
Cash dividends per share $ 0.10 $ 0.10
Weighted average basic shares outstanding 1,640,773 1,775,384
Weighted average diluted shares outstanding 1,659,669 1,775,384
See accompanying notes to unaudited condensed consolidated financial statements.
4
PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
COMMON STOCK ADDITIONAL
---------------------- PAID-IN TREASURY
SHARES AMOUNT CAPITAL STOCK
--------- ------- ---------- -----------
BALANCE, December 31, 2001 1,792,086 $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 ($.10 per share) 0 0 0 0
--------- ------- ---------- -----------
BALANCE, March 31, 2002 1,792,086 $17,921 $8,131,746 $ (128,075)
========= ======= ========== ===========
BALANCE, December 31, 2002 1,792,086 $17,921 $8,131,746 $(1,497,777
Comprehensive income:
Net income 0 0 0 0
Change in fair value of securities available-
for-sale, net of tax 0 0 0 0
Comprehensive income
Repurchase of common stock (54,000 shares at cost) 0 0 0 (625,440)
Cash dividends declared ($.10 per share)
--------- ------- ---------- -----------
BALANCE, March 31, 2003 1,792,086 $17,921 $8,131,746 $(2,123,217)
========= ======= ========== ===========
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS INCOME EQUITY
----------- ------------- -------------
BALANCE, December 31, 2001 $11,413,945 $(423,671) $19,011,866
Comprehensive income:
Net income 441,791 0 441,791
Change in fair value of securities available-
for-sale, net of tax 0 (152,844) (152,844)
-----------
Comprehensive income 288,947
Cash dividends declared ($.10 per share) (177,538) (177,538)
----------- --------- -----------
BALANCE, March 31, 2002 $11,678,198 $(576,515) $19,123,275
=========== ========= ===========
BALANCE, December 31, 2002 $12,716,579 $ 587,009 $19,955,478
Comprehensive income:
Net income 703,677 0 703,677
Change in fair value of securities available-
for-sale, net of tax 0 (215,391) (215,391)
-----------
Comprehensive income 488,286
Repurchase of common stock (54,000 shares at cost) 0 (625,440)
Cash dividends declared ($.10 per share) (165,268) (165,268)
----------- --------- -----------
BALANCE, March 31, 2003 $13,254,988 $ 371,618 $19,653,056
=========== ========= ===========
See accompanying notes to unaudited condensed consolidated financial statements.
5
PINNACLE BANCSHARES, INC,
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 703,677 $ 441,791
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 114,398 135,294
Provision for loan losses 267,500 158,300
Amortization, net (45,333) (92,706)
Increase in cash surrender value of Bank owned life insurance (71,405) (70,341)
Net (gain) loss sale or write down of:
Loans held for sale (247,743) (114,070)
Securities available-for-sale (285,186) 0
Real estate owned and other assets 5,806 (27,379)
Proceeds from sale of loans 19,032,551 13,803,721
Loans originated for sale (18,459,318) (11,096,965)
Increase in accrued interest receivable (5,392) (100,549)
Decrease in other assets 60,340 52,484
Decrease in accrued interest payable (9,615) (159,060)
(Decrease) increase in other liabilities (262,767) 188,254
------------ ------------
Net cash provided by operating activities 797,513 3,118,774
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net loan repayments 602,934 5,415,476
Proceeds from payments received on securities available-for-sale 1,477,501 743,706
Net change in interest bearing deposits at other banks (773,363) (3,197,595)
Purchase of securities available-for-sale (43,000,000) (12,371,881)
Proceeds from maturing and called securities available-for-sale 11,500,000 6,000,000
Proceeds from the sale of securities available-for-sale 20,285,186 0
Purchase of premises and equipment (55,488) (15,750)
Proceeds from sales of real estate owned 84,891 645,083
------------ ------------
Net cash used in investing activities (9,878,339) (2,780,961)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in passbook, NOW and money market deposit accounts 726,054 1,014,032
Proceeds from sales of time deposits 8,328,779 5,598,685
Payments on maturing time deposits (6,809,059) (7,213,237)
Payments on borrowed funds (15,775,000) (160,000)
Proceeds from borrowed funds 23,600,000 0
(Decrease) increase in official checks outstanding (208,850) 307,518
Repurchase of common stock (625,440) 0
Payments of cash dividends (165,268) (177,538)
------------ ------------
Net cash provided by (used in) financing activities 9,071,216 (630,540)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,610) (292,727)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,862,956 3,342,141
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,853,346 $ 3,049,414
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds $ 1,122,667 $ 1,826,242
Real estate acquired through foreclosure 99,444 32,226
See accompanying notes to unaudited 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
month periods ended March 31, 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 financial
statements.
2. EARNINGS PER SHARE:
The following table represents the earnings per share calculations for the
three-month periods ended March 31, 2003 and 2002:
PER
SHARE
FOR THE THREE MONTHS ENDED NET INCOME SHARES AMOUNT
-------------------------- ---------- --------- --------
MARCH 31, 2003
Basic earnings per share $703,677 1,640,773 $ 0.43
-------- --------- --------
Dilutive securities 18,896
---------
Diluted earnings per share $703,677 1,659,669 $ 0.42
======== ========= ========
PER
SHARE
FOR THE THREE MONTHS ENDED NET INCOME SHARES AMOUNT
-------------------------- ---------- --------- --------
MARCH 31, 2002
Basic earnings per share $441,791 1,775,384 $ 0.25
--------- --------
Dilutive securities 0
---------
Diluted earnings per share $441,791 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-months ended March 31, 2003 and were included in
the computation of diluted EPS because the options' exercise price was less than
the average market price of common shares. These options were not included in
the computation of diluted EPS during the three-months ended March 31, 2002
because the option exercise price was greater that the average market price of
common shares.
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 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
7
compensation cost been determined, consistent with SFAS No. 123, the Company's
net income would have reflected the following pro forma amounts:
Three Three
Months Months
Ended Ended
March 31, March 31,
---------- ----------
2003 2002
---------- ----------
Net Income--as reported $703,677 $441,791
Stock-based compensation expense 0 (2,106)
-------- --------
Net Income--pro forma $703,677 $439,685
Basic earnings per share--as reported $ 0.43 $ 0.25
Basic earnings per share--pro forma 0.43 0.25
Diluted earnings per share--as reported $ 0.42 $ 0.25
Diluted earnings per share--pro forma 0.42 0.25
4. RECENT ACCOUNTING PRONOUNCEMENTS:
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 Correction. 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 Company adopted this
statement on January 1, 2003 and it did not have a material impact on
the Company's consolidated financial position or results of operations.
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 Company adopted this statement on January 1, 2003
and it did not have a material impact on the Company's consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock Based
Compensation--Transition and Disclosure, which provides alternative
methods of transition for a voluntary change to fair value based method
of accounting for stock-based compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results.. The Company adopted the
disclosure requirements of this statement on December 31, 2002.
In November 2002, The FASB issued FIN 45, Guarantor's Accounting
Disclosure Requirements for Guarantees, Including Indirect Guarantee of
Indebtedness of Others, which elaborates on the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception
of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provision of this interpretation are applied
prospectively to guarantees issued or modified after December 31, 2002.
The adoption of these recognition provisions will result in recording
liabilities associated with certain guarantees provided by the Company.
These currently include standby letters of credit and first loss
guarantees on securitizations. The disclosure requirements of this
Interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The effects of this
interpretation did not have a material impact on the consolidated
financial statements.
8
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, which clarifies the application of ARB 51, to
certain entities (called variable interest entities) in which equity
investors do not have the characteristics of controlling financial
interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of this
interpretation are effective for all financial statements issued after
January 31, 2003. The consolidation requirements apply to all variable
interest entities created after January 31, 2003. In addition public
companies must apply the consolidated requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence
as of the beginning of annual or interim periods beginning after June
15, 2003. Management does not expect this interpretation to have any
impact to the consolidated financial statements. Adoption of the
disclosure requirements of FIN 46 did not have a material impact on the
consolidated financial statements.
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 will 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 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 or changes
in the creditworthiness of the borrowers. The effect of these changes is
reflected when known. Though management believes the allowance for loan losses
to be adequate, 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
10
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 MARCH 31, 2003 AND DECEMBER 31, 2002.
Total assets were $227.5 million, at March 31, 2003, compared to $218.3 million
at December 31, 2002. Net loans receivable decreased approximately $895,000
primarily due to refinancing activities and principal repayments. Total
securities available-for-sale increased approximately $9.7 million, to $85.0
million at March 31, 2003 from $75.3 million at December 31, 2002. This increase
was due to purchases exceeding calls and sales. The Bank had $11.5 million in
agency securities to be called. Also during the three month period ended March
31, 2003, the Bank sold $20.0 million in agency securities in order to
reposition its investment portfolio. Gross gains of $285,000 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 $43 million in agency securities during the three-months
ended March 31, 2003.
At March 31, 2003, the investment portfolio of $85.0 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.
Total deposits increased $2.2 million to $191.2 million at March 31, 2003 as
compared to $189.0 million at December 31, 2002. This increase was primarily due
to rate competition.
During the three-month period ended March 31, 2003, the Bank periodically
borrowed funds on a short term basis from the FHLB of Atlanta. The proceeds from
borrowed funds were used to purchase agency securities due to favorable spreads.
The maximum amount outstanding during the three months period ending March 31,
2003 was $7.3 million.
RESULTS OF OPERATIONS--COMPARISON OF THE MONTHS ENDED MARCH 31, 2003 AND 2002.
For the three-months ended March 31, 2003, net income was $704,000 compared with
net income of $442,000 for the three-months ended March 31, 2002, an increase of
59%. A significant portion of the increase in net income was related to an
increase in non-interest income, which increased from $499,000 in the first
quarter of 2002 to $899,000 for the three months ended March 31, 2003. This
increase was primarily attributable to increases in net gains on sales of loans
held for sale and available-for-sale securities of $134,000 and $285,000,
respectively. The increase in net income was also attributable to an increase in
net interest income. Net interest income after the provision for loan losses for
the three months ended March 31, 2003, was $1,543,000, compared with $1,531,000
in the same period last year.
The net interest margin increased to 3.60% for the three-months ended March 31,
2003, from 3.40% for the three-months ended March 31, 2002. As market rates
continued to stabilize at lower levels during the first quarter of 2003, the
Company's cost of funds decreased more rapidly than asset values, contributing
to the improved margin. The yield on interest-earning assets decreased from
approximately 6.71% in the three-month period ended March 31, 2002 to
approximately 5.82% in the current year period. This decrease was due to a
decrease in market interest rates. The cost of funds decreased from
approximately 3.4% at March 31, 2002 to approximately 2.3% in the current year
period. This decrease was due to a decrease in interest rates.
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 a
provision of $268,000 was required for the three-month period ended March 31,
2003 and a provision of $158,000 was required for three-month period ended March
31, 2002. The increase in the provision for loan losses for the three-month
period ended March 31, 2003 as compared to the prior year period was the result
of an increase in charge-offs, from $81,000 at March 31, 2002 to $231,000 in the
current year period. It is management's opinion that the allowance for loan
losses at March 31, 2003 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.
11
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 $400,000 in the three-month period ended March 31, 2003,
as compared to the three-month period ended March 31, 2002. The increase was due
primarily to an increase in net gain on sale of loans held for sale of $134,000,
an increase in the net gain on sale of securities available-for-sale of
$285,000, and an increase in fees and service charges on deposit accounts of
$21,000. This increase was offset by a decrease in gain on sale of real estate
owned of $33,000 and slight decrease in all other non-interest income of $7,000.
Non-interest expense decreased $4,000 in the three-month period ended March 31,
2003 as compared to the corresponding prior year period. This was primarily a
result of a decrease in occupancy expense of $61,000. This decrease was offset
by an increase in compensation and benefits of $54,000 and an increase in
marketing and professional expense of $3,000.
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 $644,000, $1,434,000, and $2,279,000, 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 $427,000, $1,425,000, and $2,383,000, respectively
This hypothetical gain or 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.
STOCK REPURCHASE PROGRAM: In 2002, the Company announced a stock repurchase
program to acquire up to 178,000 shares of common stock, or approximately 5% 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 stock repurchase program to acquire
up to 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 April 29, 2003 the Company had repurchased 33,000 shares at an average price
of $13.45 per share.
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, 2003, the Bank's total loan
commitments, including construction loans in process, unused lines of credit and
letter of credits, were approximately $21.6 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, 2003,
the Company and the Bank exceeded all regulatory capital requirements.
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ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, 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 pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's Principal Executive Officer
and Principal Financial Officer concluded that the Company's disclosure controls
and procedures 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. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date the
Company conducted its evaluation.
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
Exhibit 99.1- Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
14
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 15, 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)
15
CERTIFICATIONS
I, Robert B. Nolen, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Pinnacle Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant and material
weaknesses.
DATE: May 15, 2003
------------
BY: /s/ Robert B. Nolen Jr.
--------------------------------
Robert B. Nolen, Jr.
President & Chief Executive Officer
(Chief Executive Officer and
Chief Financial Officer)
16