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PINNACLE BANKSHARES CORP - Quarter Report: 2011 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-23909

 

 

PINNACLE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   54-1832714

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

622 Broad Street

Altavista, Virginia 24517

(Address of principal executive offices) (Zip Code)

(434) 369-3000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At November 10, 2011, 1,496,589 shares of Pinnacle Bankshares Corporation’s common stock, $3 par value, were outstanding.

 

 

 


Table of Contents

PINNACLE BANKSHARES CORPORATION

FORM 10-Q

September 30, 2011

INDEX

 

          Page Number  

Part I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets

     3   
  

Consolidated Statements of Income

     4-5   
  

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income

     6   
  

Consolidated Statements of Cash Flows

     7   
  

Notes to Consolidated Financial Statements

     8-20   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21-39   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     39   

Item 4.

  

Controls and Procedures

     39-40   

Part II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     40   

Item 6.

  

Exhibits

     40-42   

SIGNATURES

     43   


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars, except for share amounts)

 

      September 30, 2011
(Unaudited)
    December 31, 2010*  

Assets

    

Cash and cash equivalents (note 2):

    

Cash and due from banks

   $ 43,252      $ 32,533   

Securities (note 3):

    

Available-for-sale, at fair value

     18,180        22,048   

Held-to-maturity, at amortized cost

     5,998        4,469   

Federal Reserve Bank stock, at cost

     137        135   

Federal Home Loan Bank stock, at cost

     541        579   

Loans, net (note 4)

     264,843        265,030   

Bank premises and equipment, net

     6,661        6,932   

Accrued interest receivable

     942        1,077   

Prepaid FDIC Insurance

     1,061        1,376   

Goodwill

     539        539   

Foreclosed Assets

     743        474   

Other assets

     2,349        1,921   
  

 

 

   

 

 

 

Total assets

   $ 345,246      $ 337,113   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Demand

   $ 35,075      $ 31,184   

Savings and NOW accounts

     131,737        117,944   

Time

     147,088        157,826   
  

 

 

   

 

 

 

Total deposits

     313,900        306,954   

Note payable under line of credit

     2,000        2,000   

Accrued interest payable

     412        500   

Other liabilities

     1,338        1,177   
  

 

 

   

 

 

 

Total liabilities

     317,650        310,631   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,496,589 shares at September 30, 2011 and 1,495,589 at December 31, 2010

     4,471        4,462   

Capital surplus

     907        850   

Retained earnings

     22,759        21,918   

Accumulated other comprehensive loss, net

     (541     (748
  

 

 

   

 

 

 

Total stockholders’ equity

     27,596        26,482   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 345,246      $ 337,113   
  

 

 

   

 

 

 

 

* Derived from audited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars, except for per share amounts)

 

     Three Months
Ended
September 30, 2011
     Three Months
Ended
September 30, 2010
 

Interest income:

     

Interest and fees on loans

   $ 3,979       $ 3,929   

Interest on securities:

     

U.S. government corporations and agencies

     107         112   

States and political subdivisions (taxable)

     29         36   

States and political subdivisions (tax exempt)

     41         25   

Other

     15         21   

Interest on federal funds sold

     1         1   
  

 

 

    

 

 

 

Total interest income

     4,172         4,124   
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits:

     

Savings and NOW accounts

     155         327   

Time - under $100

     571         764   

Time - $100 and over

     340         379   
  

 

 

    

 

 

 

Total interest expense

     1,066         1,470   
  

 

 

    

 

 

 

Net interest income

     3,106         2,654   

Provision for loan losses

     309         191   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,797         2,463   
  

 

 

    

 

 

 

Noninterest income:

     

Service charges and fees on deposit accounts

     372         391   

Fees on originations of mortgage loans

     160         206   

Commissions and fees from investments and insurance sales

     147         129   

Other

     179         129   
  

 

 

    

 

 

 

Total noninterest income

     858         855   
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries and employee benefits

     1,459         1,523   

Occupancy expense

     184         186   

Furniture and equipment

     265         234   

Office supplies and printing

     53         61   

Federal deposit insurance premiums

     69         118   

Capital stock tax

     57         56   

Advertising expense

     26         31   

Other

     637         555   
  

 

 

    

 

 

 

Total noninterest expense

     2,750         2,764   
  

 

 

    

 

 

 

Income before income tax expense

     905         554   

Income tax expense

     297         180   
  

 

 

    

 

 

 

Net income

   $ 608       $ 374   
  

 

 

    

 

 

 

Basic net income per share (note 5)

   $ 0.40       $ 0.25   

Diluted net income per share (note 5)

   $ 0.40       $ 0.25   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars, except for per share amounts)

 

     Nine Months
Ended
September 30, 2011
     Nine Months
Ended
September 30, 2010
 

Interest income:

     

Interest and fees on loans

   $ 11,802       $ 11,754   

Interest on securities:

     

U.S. government corporations and agencies

     336         303   

Corporate

     —           3   

States and political subdivisions (taxable)

     88         120   

States and political subdivisions (tax exempt)

     126         75   

Other

     56         58   

Interest on federal funds sold

     2         3   
  

 

 

    

 

 

 

Total interest income

     12,410         12,316   
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits:

     

Savings and NOW accounts

     584         996   

Time - under $100

     1,800         2,357   

Time - $100 and over

     1,016         1,142   
  

 

 

    

 

 

 

Total interest expense

     3,400         4,495   
  

 

 

    

 

 

 

Net interest income

     9,010         7,821   

Provision for loan losses

     1,691         963   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     7,319         6,858   

Noninterest income:

     

Service charges and fees on deposit accounts

     1,075         1,108   

Fees on originations of mortgage loans

     289         362   

Commissions and fees from investments and insurance sales

     574         366   

Other

     454         404   
  

 

 

    

 

 

 

Total noninterest income

     2,392         2,240   
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries and employee benefits

     4,540         4,449   

Occupancy expense

     538         542   

Furniture and equipment

     785         737   

Office supplies and printing

     167         225   

Federal deposit insurance premiums

     338         374   

Capital stock tax

     172         169   

Advertising expense

     73         98   

Other

     1,880         1,590   
  

 

 

    

 

 

 

Total noninterest expense

     8,493         8,184   
  

 

 

    

 

 

 

Income before income tax expense

     1,218         914   

Income tax expense

     377         290   
  

 

 

    

 

 

 

Net income

   $ 841       $ 624   
  

 

 

    

 

 

 

Basic net income per share (note 5)

   $ 0.56       $ 0.42   

Diluted net income per share (note 5)

   $ 0.56       $ 0.42   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

(Amounts in thousands of dollars, except for share amounts)

 

                                 Accumulated        
                                 Other        
     Common Stock      Capital
Surplus
     Retained
Earnings
     Comprehensive
Income (Loss)
    Total  
     Shares      Par Value             

Balances, December 31, 2009

     1,485,089      $ 4,455       $ 787       $ 21,306       $ (697   $ 25,851   

Net income

     —           —           —           624        —          624  

Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $96

     —           —           —           —           164       164  

Restricted stock expense

     10,500        5        10             15  

Stock option expense

           29             29  

Balances, September 30, 2010

     1,495,589      $ 4,460       $ 826       $ 21,930       $ (533   $ 26,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                                 Accumulated        
                                 Other        
     Common Stock      Capital
Surplus
     Retained
Earnings
     Comprehensive
Income (Loss)
    Total  
     Shares      Par Value             

Balances, December 31, 2010

     1,495,589      $ 4,462       $ 850       $ 21,918       $ (748   $ 26,482   

Net income

     —           —           —           841        —          841  

Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $107

     —           —           —           —           207       207  

Restricted stock expense

     1,000        9        21             30  

Stock option expense

           36             36  

Balances, September 30, 2011

     1,496,589      $ 4,471       $ 907       $ 22,759       $ (541   $ 27,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands of dollars)

 

     Nine Months
Ended
September 30, 2011
    Nine Months
Ended
September 30, 2010
 

Cash flows from operating activities:

    

Net income

   $ 841      $ 624   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of bank premises and equipment

     407        385   

Accretion of unearned fees, net

     —          (20

Net amortization of premiums and discounts on securities

     44        47   

Provision for loan losses

     1,691        949   

Accrual of stock based compensation

     66        29   

Net decrease (increase) in:

    

Accrued interest receivable

     135        58   

Prepaid FDIC insurance

     315        347   

Other assets

     (475     392   

Net increase (decrease) in:

    

Accrued interest payable

     (88     (71

Other liabilities

     161        325   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,097        3,065   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (8,770     (13,325

Purchases of held-to-maturity securities

     (1,550     (4,342

Proceeds from maturities and calls of held-to-maturity securities

     —          1,000   

Proceeds from maturities and calls of available-for-sale securities

     12,645        8,899   

Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities

     286        233   

Purchase of Federal Reserve Bank stock

     (2     (30

Sale of Federal Home Loan Bank stock

     38        —     

Net decrease (increase) in loans made to customers

     (1,835     4,092   

Purchases of bank premises and equipment

     (136     (67
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     676        (3,540
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in demand, savings and NOW deposits

     17,684        6,260   

Net decrease in time deposits

     (10,738     (4,862
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,946        1,398   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     10,719        923   

Cash and cash equivalents, beginning of period

     32,533        32,060   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 43,252      $ 32,983   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

    

Supplemental disclosure of noncash activities

    

Net change in other assets acquired in settlement of loans

   $ 331      $ 194   

 

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Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2011 (Unaudited)

(Amounts in thousands of dollars, except share and per share data)

 

(1) General

The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary, First National Bank (the “Bank”), (collectively the “Company”). All material intercompany accounts and transactions have been eliminated. The unaudited consolidated financial statements conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general banking industry practices. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature, necessary to present fairly the financial position as of September 30, 2011, the results of operations for the three months and nine months ended September 30, 2011 and 2010, and changes in stockholders’ equity and comprehensive income and cash flows for the nine months ended September 30, 2011 and 2010.

These interim period consolidated financial statements and financial information should be read in conjunction with the consolidated financial statements and notes thereto included in Bankshares’ 2010 Annual Report to Shareholders and additional information supplied in the 2010 Annual Report on Form 10-K.

The results of operations for the interim periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

The Company has a single reportable segment for purposes of segment reporting.

 

(2) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits, and federal funds sold. At September 30, 2011 and December 31, 2010, the Company had no federal funds sold.

 

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Table of Contents
(3) Securities

The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities at September 30, 2011 and December 31, 2010, are shown in the table below. As of September 30, 2011, securities with amortized costs of $4,318 and fair values of $4,447 were pledged as collateral for public deposits and securities with amortized costs of $495 and fair values of $536 were pledged as collateral with the Federal Reserve Bank.

 

     September 30, 2011                

Available-for-Sale:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Values
 

Obligations of U.S. government corporations and agencies

   $ 13,558       $ 203       $ —         $ 13,761   

Obligations of states and political subdivisions

     3,173         135         —           3,308   

Mortgage-backed securities- government

     923         78         —           1,001   

Other securities

     110         —           —           110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 17,764       $ 416       $ —         $ 18,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Held-to-Maturity:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Values
 

Obligations of states and political subdivisions

   $ 5,998       $ 176       $ —         $ 6,174   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010               

Available-for-Sale:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Values
 

Obligations of U.S. government corporations and agencies

   $ 17,247       $ 168       $ (219   $ 17,196   

Obligations of states and political subdivisions

     3,381         90         —          3,471   

Mortgage-backed securities-government

     1,211         60         —          1,271   

Other securities

     110         —           —          110   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 21,949       $ 318       $ (219   $ 22,048   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

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Table of Contents

Held-to-Maturity:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Values
 

Obligations of states and political subdivisions

   $ 4,469       $ 34       $ 103       $ 4,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company evaluates securities in a loss position for other-than-temporary impairment, considering such factors as the length of time and the extent to which the market value has been below cost, the credit standing of the issuer and the Company’s ability and intent to hold the security until its market value recovers. Activity related to the credit loss component of other-than-temporary impairment is recognized in earnings. For debt securities, the portion of other-than-temporary impairment related to all other factors is recognized in other comprehensive income. The primary cause of the temporary impairments in the Company’s investments in debt securities was fluctuations in interest rates. Because the Company intends to hold these investments to maturity and it is more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011 and no impairment has been recognized. The Company had no other-than-temporary impairments in its securities portfolios as of September 30, 2011.

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $541 at September 30, 2011. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

FHLB and Federal Reserve stock are shown as separate line items on the balance sheet and are not part of the available for sale securities portfolio.

 

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(4) Allowance for Loan Losses

Activity in the allowance for loan losses for the nine months ended September 30, 2011 and 2010, and for the year ended December 31, 2010 is as follows:

 

     September 30,
2011
    December 31,
2010
    September 30,
2010
 

Balance at January 1,

   $ 4,037      $ 3,723      $ 3,723   

Provision for loan losses

     1,691        1,878        964   

Loans charged off

     (1,832     (1,765     (1,061

Recoveries

     176        201        127   
  

 

 

   

 

 

   

 

 

 

Balance at end of period,

   $ 4,072      $ 4,037      $ 3,753   
  

 

 

   

 

 

   

 

 

 

 

(5) Net Income Per Share

Basic net income per share excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the nine months ended September 30, 2011 and 2010, there were no potentially dilutive securities or other contracts to issue common stock outstanding.

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods indicated:

 

Three months Ended September 30, 2011

   Net Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Basic net income per share

   $ 608         1,496,589       $ 0.40   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 608         1,496,589       $ 0.40   
  

 

 

    

 

 

    

 

 

 

Three months Ended September 30, 2010

        

Basic net income per share

   $ 374         1,495,589       $ 0.25   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 374         1,495,589       $ 0.25   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Nine months Ended September 30, 2011

   Net Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Basic net income per share

   $ 841         1,496,149       $ 0.56   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 841         1,496,149       $ 0.56   
  

 

 

    

 

 

    

 

 

 

Nine months Ended September 30, 2010

        

Basic net income per share

   $ 624         1,490,974       $ 0.42   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 624         1,490,974       $ 0.42   
  

 

 

    

 

 

    

 

 

 

 

(6) Comprehensive Income

The following table presents comprehensive income for the interim periods indicated below:

 

     Three months Ended  
     September 30, 2011      September 30, 2010  

Net income

   $ 609       $ 374   

Change in net unrealized gains on available-for-sale securities, net of deferred income taxes

     47         44   
  

 

 

    

 

 

 

Total comprehensive income

   $    656       $ 418   
  

 

 

    

 

 

 

 

     Nine months Ended  
     September 30, 2011      September 30, 2010  

Net income

   $ 841       $ 624   

Change in net unrealized gains on available-for-sale securities, net of deferred income taxes

     207         164   
  

 

 

    

 

 

 

Total comprehensive income

   $ 1,048       $ 788   
  

 

 

    

 

 

 

 

(7) Fair Value Measurement

Effective January 1, 2008, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820, which was issued in September 2006, establishes a framework for using fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In accordance with ASC 820, the Company groups its financial assets and financial liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The most significant instruments that the Company measures at fair value

 

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include securities available-for-sale. At December 31, 2010 and September 30, 2011, all securities available-for-sale fall into Level 2 of the fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange, are the quoted prices for identical assets and liabilities. The Company had no Level 1 assets or liabilities on September 30, 2011 or December 31, 2010.

Level 2 – Valuations for assets and liabilities are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets and valuations are based on observable market data in those markets. Level 2 securities include U.S. government corporation and agency obligations, state and municipal bonds, mortgage-backed securities and corporate debt obligations.

Level 3 – Valuations for assets and liabilities are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining fair value assigned to such assets and liabilities. Level 3 assets consisted of goodwill on September 30, 2011 and December 31, 2010. The Company had no Level 3 liabilities on September 30, 2011 and December 31, 2010.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-Sale Securities

Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available, and would in such case be included as a Level 1 asset. The Company currently carries no Level 1 securities. If quoted prices are not available, valuations are obtained from readily available pricing sources from independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets, and valuations are based on observable market data in those markets. These would be classified as Level 2 assets. The Company’s entire available-for-sale securities portfolio is classified as Level 2 securities. The Company currently carries no Level 3 securities for which fair value would be determined using unobservable inputs.

 

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Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of a similar debt, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans at which fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011 and December 31, 2010, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC 820, impaired loans for which an allowance is established based on the fair value of the collateral or those that are written-down to the fair value of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 asset. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as a nonrecurring Level 3 asset. Impaired loans totaled $5,440 at September 30, 2011, all of which were Level 3 assets.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on observable market price or a current appraised value, the Company records the foreclosed asset as a nonrecurring Level 2 asset. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as a nonrecurring Level 3 asset. Foreclosed assets totaled $743 at September 30, 2011, all of which were Level 3 assets.

 

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Below is a table that presents information about certain assets and liabilities measured at fair value:

Fair Value Measurements on September 30, 2011

 

Description

   Total Carrying
Amount in the
Consolidated
Balance Sheet
9/30/2011
     Assets/Liabilities
Measured at Fair
Value 9/30/2011
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Available-for-sale securities

   $ 18,180       $ 18,180         —         $ 18,180         —     

Impaired loans (nonrecurring)

   $ 5,440       $ 5,440         —           —         $ 5,440   

Foreclosed assets (nonrecurring)

   $ 743       $ 743         —           —         $ 743   

 

(8) Fair Value of Financial Instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments are disclosed in the Company’s 2010 Annual Report on Form 10-K. The carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying      Approximate      Carrying      Approximate  
     amounts      fair values      amounts      fair values  

Financial assets:

           

Cash and due from banks

   $ 43,252       $ 43,252       $ 32,533       $ 32,533   

Securities:

           

Available-for-sale

     18,180         18,180         22,048         22,048   

Held-to-maturity

     5,998         6,174         4,469         4,400   

Federal Reserve Bank stock

     137         137         135         135   

Federal Home Loan Bank stock

     541         541         579         579   

Loans, net of unearned income and fees

     264,843         274,609         265,030         270,488   

Accrued interest receivable

     942         942         1,077         1,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 333,893       $ 343,835       $ 325,871       $ 331,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Deposits

   $ 313,900       $ 319,740       $ 306,954       $ 312,863   

Accrued interest payable

     412         412         500         500   

Line of credit

     2,000         2,000         2,000         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 316,312       $ 322,152       $ 309,454       $ 315,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(9) Stock-Based Compensation

The Company has two incentive stock-based plans. The 1997 Incentive Stock Plan (the “1997 Plan”), pursuant to which Bankshares’ Board of Directors could grant stock options to officers and key employees, became effective as of May 1, 1997. The 1997 Plan authorized grants of options to purchase up to 50,000 shares of the Company’s authorized but unissued common stock. Accordingly, 50,000 shares of authorized but unissued common stock were reserved for use in the 1997 Plan. All stock options were granted with an exercise price equal to the stock’s fair market value at the date of grant. At September 30, 2011, there were no additional shares available for grant under the 1997 Plan as the plan expired on May 1, 2007.

A summary of stock option activity under the 1997 Plan follows:

 

     Number of
Shares
     Range
of Per
Option Price
   Weighted-
Aggregate
Per Share
Price
     Aggregate
Option
Price
 

Outstanding at December 31, 2010

     17,000       $14.00-14.75    $ 14.33       $ 244   

Outstanding at September 30, 2011

     7,500       $14.00-14.00    $ 14.00       $ 105   

The 2004 Incentive Stock Plan (the “2004 Plan”), pursuant to which Bankshares’ Board of Directors may grant stock options and other equity awards to officers and key employees, was approved by shareholders on April 13, 2004 and became effective as of May 1, 2004. On February 9, 2010, Bankshares’ Board of Directors amended the 2004 Plan to expand the types of awards that can be granted under the plan. As amended, the 2004 Plan authorizes the issuance of up to 100,000 shares of the Company’s authorized but unissued common stock through awards of stock options, restricted stock, restricted stock units, stock appreciation rights and stock awards.

Accordingly, 100,000 shares of authorized but unissued common stock have been reserved for use in the 2004 Plan. All stock options are granted with an exercise price equal to or greater than the stock’s fair market value at the date of grant. The options will expire ten years from the date of grant. At September 30, 2011, 11,500 shares of restricted stock and 37,500 incentive stock options with tandem stock appreciation rights had been granted under the 2004 Plan and 51,000 shares were available for grant under the 2004 Plan.

A summary of stock option activity under the 2004 Plan follows:

 

     Number of
Shares
     Range
of Per
Option Price
   Weighted-
Aggregate
Per Share
Price
     Aggregate
Option
Price
 

Outstanding at December 31, 2010

     37,500       $9.00–9.00    $ 9.00       $ 338   

Outstanding at September 30, 2011

     37,500       $9.00-9.00    $ 9.00       $ 338   

 

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A summary of restricted stock activity under the 2004 Plan follows:

 

     Number of
Shares
     Weighted-
Average
Grant Date
Fair Value
 

Outstanding at December 31, 2010

     10,500       $ 9.00   

Outstanding at September 30, 2011

     11,500       $ 8.96   

Effective January 1, 2006, the Company adopted ASC 718, Stock Compensation (formerly SFAS No. 123(R), Share-Based Payment), using the modified prospective method and, accordingly, did not restate the consolidated statements of operations for periods prior to January 1, 2006. Under ASC 718, the Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense in the consolidated statements of income over the service period for which the awards are expected to vest. The stock-based compensation expensed to salaries and employee benefits was $65 in the first nine months of 2011 and $18 in the third quarter of 2011.

 

(10) Impact of Recently Issued and Adopted Accounting Standards

In July 2010, the Receivables topic of the ASC was amended by Accounting Standards Update (“ASU”) No. 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements. Disclosures about troubled debt restructurings (“TDRs”) required by ASU 2010-20 were deferred by the FASB in ASU 2011-01 issued in January 2011. In April 2011, the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 are effective for reporting periods beginning after June 15, 2011. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in

 

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the future. FASB ASC Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other

 

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comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements other than the change in presentation of comprehensive income when this ASU is adopted.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

The Company adopted the amendments in ASU No. 2011-02 during the current period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption for the Company (September 30, 2011), the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and

 

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are now impaired under Section 310-10-35 was $3,789 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $172 (310-40-65-1(b)).

As of November 10, 2011, there are no other new accounting standards issued, but not yet adopted by the Company, which are expected to be applicable to the Company’s financial position, operating results or financial statement disclosures.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands of dollars, except as otherwise indicated)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The following discussion is qualified in its entirety by the more detailed information and the unaudited consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-Q.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are not statements of historical fact and are based on current assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will” or similar expressions. Forward-looking statements in this report include, without limitation, statements regarding asset quality, possible future actions to manage the credit quality of the loan portfolio, adequacy of the allowance for loan losses, adequacy of liquidity and capital levels, and expectations regarding the future economic and employment environment. Although we believe our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results, performance or achievements could differ materially from those contemplated in such statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in interest rates; declining collateral values, especially in the real estate market; general economic conditions, including continued deterioration in general business conditions and in the financial markets; unemployment levels; deterioration in the value of securities held in our investment securities portfolio; the legislative/regulatory climate, including the effect the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and regulations adopted thereunder may have on the Company; regulatory compliance costs; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; the quality or composition of the loan and/or investment portfolios; the level of net loan charge-offs and adequacy of the allowance for loan losses; demand for loan products; deposit flows and funding costs; competition; demand for financial services in our market area; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking

 

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statements contained herein. We base our forward-looking statements on management’s beliefs and assumptions based on information available as of the date of this report. You should not place undue reliance on such statements; forward-looking statements are not guarantees of future performance and a variety of factors could cause actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements. We undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

In addition, we experienced increases in loan losses during the difficult economic climate from 2008 through 2011. Future difficulties in portions of the domestic and global financial markets could further impact our performance, both directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting our counterparties and the economy generally. Dramatic declines in the residential and commercial real estate markets in recent years have resulted in significant write-downs of asset values by financial institutions in the United States. Concerns about the condition of the U.S. financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility. There can be no assurance that the actions taken by the federal government and regulatory agencies will alleviate the industry or economic factors that may adversely affect the Company’s business and financial performance. It also is not clear what effects the Dodd-Frank Act and related regulations or other future regulatory reforms may have on financial markets, the financial services industry and depositary institutions, and consequently on the Company’s business and financial performance.

THE COMPANY

Pinnacle Bankshares Corporation, a Virginia corporation (“Bankshares”), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares is headquartered in Altavista, Virginia, and conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, First National Bank (the “Bank”). Bankshares exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish.

The following discussion supplements and provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Bankshares and the Bank (collectively the “Company”). This discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes.

 

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OVERVIEW AND RESULTS OF OPERATIONS

Total assets at September 30, 2011 were $345,246 up 2.41% from $337,113 at December 31, 2010. The principal components of the Company’s assets at the end of the period were $264,843 in net loans, $43,252 in cash and cash equivalents and $24,178 in securities. During the nine-month period ended September 30, 2011, net loans decreased 0.07% or $187 from $265,030 at December 31, 2010. Cash and cash equivalents increased 32.95% or $10,719 due mainly to an increase in deposits and maturities and calls of securities as securities decreased 8.82% or $2,339 from December 31, 2010.

Total liabilities at September 30, 2011 were $317,650, up 2.26% from $310,631 at December 31, 2010, primarily as a result of an increase in savings and NOW accounts of $13,793 or 11.69% and an increase in demand deposits of $3,891 or 12.48% partially offset by a decrease in time deposits of $10,738 or 6.80% from December 31, 2010. The decrease in time deposits was a result of management’s interest rate management strategy and a migration of certificate of deposit customers to our KaChing! interest checking account. The Company’s deposits are provided by individuals and businesses located within the communities the Company serves.

Total stockholders’ equity at September 30, 2011 was $27,596 including $22,759 in retained earnings and $541 of accumulated other comprehensive losses net of the related deferred tax asset, which represents net unrealized gains on available-for-sale securities and the funded status of the Company’s defined benefit postretirement plan. At December 31, 2010, total stockholders’ equity was $26,482.

The Company had net income of $841 for the nine months ended September 30, 2011, compared with net income of $624 for the nine months ended September 30, 2010. The Company had net income of $608 for the three months ended September 30, 2011, compared with net income of $374 for the three months ended September 30, 2010. The increase in net income for the nine months ended September 30, 2011 was primarily due to an increase in net interest income, stemming from an improvement in net interest margin, as well as an increase in noninterest income. These improvements were partially offset by increases in our provision for loan losses and noninterest expense.

Profitability as measured by the Company’s return on average assets (“ROA”) was 0.33% for the nine months ended September 30, 2011, up from 0.25% for the same period of 2010. Another key indicator of performance, the return on average equity (“ROE”), for the nine months ended September 30, 2011 was 4.17%, up from 3.17% for the nine months ended September 30, 2010.

 

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The results of operations for the three-month and nine-month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

NET INTEREST INCOME

Net interest income represents the principal source of earnings for the Company. Changes in the amounts and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.

Net interest income was $9,010 for the nine months ended September 30, 2011 compared to $7,821 for the nine months ended September 30, 2010 and is attributable to interest income from loans and securities exceeding the cost associated with interest paid on deposits. Net interest income was $3,106 for the three months ended September 30, 2011 compared to $2,654 for the three months ended September 30, 2010.

The net interest margin increased to 3.73% for the nine months ended September 30, 2011, from 3.34% for the nine months ended September 30, 2010, and was 3.80% versus 3.34% for the third quarter of 2011 and 2010, respectively. Over the past twelve months, rates paid to fund earning assets have fallen at a faster pace than the yield received on earning assets, resulting in improved net interest margin and net interest income.

Interest income increased 0.76% and 1.16% for the nine and three months ended September 30, 2011, respectively, compared to the same periods of 2010 as total loans increased by $4,473 since September 30, 2010 while the yield on interest-earning assets decreased by 13 basis points in the same time period. The decrease in yield on interest earning assets is due mainly to the lower interest rate environment.

Interest and fees on loans was $11,802 for the nine-month period ended September 30, 2011, up from $11,754 for the same period in 2010. Interest and fees on loans was $3,979 for the three-month period ended September 30, 2011, up from $3,929 for the same period in 2010. The slight increases in interest and fees on loans for the nine months and three months ended September 30, 2011 were due to an increase in total loans over the past year. Interest from securities and federal funds sold was $608 for the nine months ended September 30, 2011, up from $562 for the nine months ended September 30,

 

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2010. Interest from securities and federal funds sold was $193 for the three months ended September 30, 2011, down from $195 for the three months ended September 30, 2010. Interest from securities and federal funds sold for the nine months ended September 30, 2011 increased largely due to the Company’s increased securities portfolio in 2011 compared to 2010.

Interest expense was $3,400 for the nine months ended September 30, 2011, down from $4,495 for the nine months ended September 30, 2010. Interest expense was $1,066 for the three months ended September 30, 2011, down from $1,470 for the three months ended September 30, 2010.

Interest expense decreased 24.36% for the nine months ended September 30, 2011 and decreased 27.48% for the three months ended September 30, 2011, compared to the same periods of 2010. Deposits have increased by $10,383 in the past twelve months; however, the rate paid for deposits has fallen by 51 basis points in the same time period. The decrease in cost of deposits is due mainly to deposit repricing strategies employed by management in the lower interest rate environment.

NONINTEREST INCOME

Noninterest income increased $152 or 6.79% for the nine months ended September 30, 2011 compared to the same period of 2010. Noninterest income increased $3 or 0.35% for the three months ended September 30, 2011 compared to the same period of 2010. The Company’s principal sources of noninterest income are service charges and fees on deposit accounts, particularly transaction accounts, mortgage loan fees, and commissions and fees on the sale of investment products. The increase from the nine-month period in 2010 was due mainly to 56.83% increase in commissions and fees from the sales of investment products.

NONINTEREST EXPENSE

Noninterest expense increased $309 or 3.78% for the nine months ended September 30, 2011 compared to the same period of 2010. Noninterest expense decreased $14 or 0.51% for the three months ended September 30, 2011 compared to the same period of 2010. The increase in noninterest expense for the nine-month period is attributed primarily to a $91 increase in salaries and employee benefits due to higher commissions paid in connection with investment product sales. Noninterest expense also increased due to increased debit card costs and an increase in losses associated with foreclosed properties. These increases in expenses were partially offset by decreases in FDIC premiums, office supplies and advertising expenses. The decrease in noninterest expenses for the three-month period is attributed primarily to lower salary and FDIC premium costs.

 

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ALLOWANCE AND PROVISION FOR LOAN LOSSES

The Company expensed a provision for loan losses of $1,691 in the first nine months of 2011 and $309 in the third quarter of 2011 in recognition of management’s estimate of losses inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, nonperforming loans, and current and anticipated economic conditions in making its estimate of risk. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance. The allowance for loan losses was $4,072 as of September 30, 2011, representing approximately 1.51% of total loans outstanding, compared to an allowance of $4,037 as of December 31, 2010, or 1.50% of total loans then outstanding, and $3,753 as of September 30, 2010, or 1.42% of total loans then outstanding. At September 30, 2011 the allowance for loan losses was equal to 74.85% of the Company’s nonperforming loans.

The allowance for loan losses has been adjusted as management recognized weaknesses in the loan portfolio due to the economic downturn, depressed collateral values and an increased risk to some customers’ ability to service their loans due to job losses. Management believes the allowance was adequate as of September 30, 2011 to provide for probable loan losses inherent in the Company’s loan portfolio. The allowance was calculated in adherence to regulatory guidelines. However, no assurance can be given that unforeseen adverse economic conditions or other circumstances will not result in increased provisions in the future. Additionally, regulatory examiners may require the Company to recognize additions to the allowance based upon their judgment about information available to them at the time of their examinations. The Company expects to continue to experience some weaknesses in its loan portfolio throughout 2011 and is working to minimize its losses from nonaccrual and past due loans. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision and allowance as deemed appropriate.

The following table presents charged off loans, provisions for loan losses, recoveries on loans previously charged off and the amount of the allowance for the periods indicated.

 

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ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 

     Nine Months
Ended
9/30/2011
    Nine Months
Ended
9/30/2010
 

Balance at beginning of period

   $ 4,037      $ 3,723   

Loan charge-offs:

    

Residential

     (957     (470

Commercial real estate

     (394     (275

Commercial

     (81     (32

Consumer

     (400     (284
  

 

 

   

 

 

 

Total loan charge-offs

     (1,832     (1,061
  

 

 

   

 

 

 

Loan recoveries:

    

Residential

     7        6   

Commercial real estate

     3        2   

Commercial

     31        4   

Consumer

     135        115   
  

 

 

   

 

 

 

Total recoveries

     176        127   
  

 

 

   

 

 

 

Net loan charge-offs

     (1,656     (934
  

 

 

   

 

 

 

Provision for loan losses

     1,691        964   
  

 

 

   

 

 

 

Balance at end of period

   $ 4,072      $ 3,753   
  

 

 

   

 

 

 

The following table presents information on the Company’s allowance for loan losses and evaluations for impairment:

Allowance for Loan Losses and Recorded Investment in Loans

For the Nine Months Ended September 30, 2011

 

     Commercial     Commercial
Real
Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning balance

   $ 258      $ 1,126      $ 424      $ 2,229      $ 4,037   

Charge-offs

     (81     (394     (400     (957     (1,832

Recoveries

     31        3        135        7        176   

Provision for loan losses

     200        352        233        906        1,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 408      $ 1,087      $ 392      $ 2,185      $ 4,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     —          —          —          —          —     

Ending balance: collectively evaluated for impairment

     408        1,087        392        2,185        4,072   

Loans:

          

Total loans ending balance

   $ 22,929      $ 51,602      $ 46,355      $ 148,029      $ 268,915   

Ending balance: loans individually evaluated for impairment

     80        170        51        5,139        5,440   

Ending balance: loans collectively evaluated for impairment

   $ 22,849      $ 51,432      $ 46,304      $ 142,890      $ 263,475   

 

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For the Year Ended December 31, 2010

 

     Commercial      Commercial
Real
Estate
     Consumer      Residential      Total  

Ending balance: individually evaluated for impairment

     —           —           —           29         29   

Ending balance: collectively evaluated for impairment

     258         264         424         3,062         4,008   

Loans:

              

Total loans ending balance

   $ 22,794       $ 53,885       $ 47,807       $ 144,700       $ 269,186   

Ending balance: individually evaluated for impairment

     13         292         52         6,716         7,073   

Ending balance: collectively evaluated for impairment

   $ 22,781       $ 53,593       $ 47,755       $ 137,984       $ 262,113   

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Pass. Loans classified as pass may have some level of potential weakness in some instances but repayment prospects are good and the loan is not to the level of deterioration to warrant management’s special attention.

 

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Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Loss. Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean that loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

The following tables illustrate the Company’s credit quality indicators:

Credit Quality Indicators

As of September 30, 2011

 

Credit Exposure    Commercial      Commercial
Real Estate
     Consumer      Residential      Total  

Pass

   $ 19,809       $ 43,277       $ 46,176       $ 134,630       $ 243,892   

Special Mention

     2,714         5,924         —           2,892         11,530   

Substandard

     406         2,401         179         10,507         13,493   

Doubtful

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,929       $ 51,602       $ 46,355       $ 148,029       $ 268,915   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit Quality Indicators

As of December 31, 2010

 

Credit Exposure    Commercial      Commercial
Real Estate
     Consumer      Residential      Total  

Pass

   $ 21,978       $ 44,553       $ 47,621       $ 127,343       $ 241,495   

Special Mention

     678         7,224         67         7,005         14,974   

Substandard

     138         2,108         119         9,969         12,334   

Doubtful

     —           —           —           383         383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,794       $ 53,885       $ 47,807       $ 144,700       $ 269,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no loans included in the “Loss” category as of September 30, 2011 or December 31, 2010.

The following table presents information on the Company’s impaired loans and their related allowance, average recorded investment and interest income recognized:

Impaired Loans

As of and for the Nine Months Ended September 30, 2011

 

                   Average      Interest  
     Recorded      Related      Recorded      Income  
     Investment      Allowance      Investment      Recognized  

With no allowance recorded:

           

Commercial

   $ 80         —         $ 95         —     

Commercial real estate

     170         —           115         —     

Consumer

     51         —           77         —     

Residential

     5,139         —           6,122         47   
  

 

 

    

 

 

    

 

 

    

 

 

 

With allowance recorded:

           

Commercial

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Consumer

     —           —           —           —     

Residential

     —           —           74         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Commercial

     80         —           95         —     

Commercial real estate

     170         —           115         —     

Consumer

     51         —           77         —     

Residential

   $ 5,139       $ —         $ 6,196       $ 47   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Impaired Loans

As of and for the Year Ended December 31, 2010

 

                   Average      Interest  
     Recorded      Related      Recorded      Income  
     Investment      Allowance      Investment      Recognized  

Commercial

   $ 13         —         $ 14         —     

Commercial real estate

     292         —           298         —     

Consumer

     52         —           109         1   

Residential

     6,636         —           6,012         306   

With allowance recorded:

           

Commercial

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Consumer

     —           —           —           —     

Residential

     80         29         80         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Commercial

     13         —           14         —     

Commercial real estate

     292         —           298         —     

Consumer

     52         —           109         1   

Residential

   $ 6,716       $ 29       $ 6,092       $ 306   
  

 

 

    

 

 

    

 

 

    

 

 

 

NONPERFORMING ASSETS AND IMPAIRED LOANS

The economic downturn that started in late 2007 and the stagnant economy that followed has led a heightened level in the Company’s nonperforming assets although the Company’s nonperforming assets have decreased from December 31, 2010 to September 30, 2011. Some commercial borrowers have struggled to service their loans due to the increasingly difficult business climate, lower revenues, tightening of credit markets and challenges to their business operations. Some noncommercial borrowers have experienced job losses and other economic challenges, as well. The Company is continuing to monitor the situation and is taking steps necessary to mitigate losses in its loan portfolio, such as increased early monitoring of its portfolio to identify “problem” loans and continued counseling of customers to discuss options available to them. Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and foreclosed properties, were $6,183 at September 30, 2011 and $8,317 at December 31, 2010. Eleven foreclosed properties were held as of September 30, 2011 totaling $743 compared to five foreclosed properties held on December 31, 2010 totaling $474. Nonaccrual loans were $5,440 at September 30, 2011 and $7,073 at December 31, 2010. Nonaccrual loans at September 30, 2011 related to both large and small credit relationships, a majority of which were residential loans. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the

 

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process of collection. A loan is considered an impaired loan when, based on then current information and facts, it is probable that the Company will not be able to collect all amounts when due according to the contractual terms of the loan agreement.

The following table summarizes the Company’s asset quality as of the dates indicated.

 

     September 30,     December 31,  
     2011     2010  
Asset Quality Highlights     

Nonaccrual loans

   $ 5,440      $ 7,073   

Loans 90 days or more past due

     —          770   

Total nonperforming loans

     5,440        7,843   

Foreclosed assets

     743        474   

Total nonperforming assets

     6,183        8,317   

Nonperforming loans to total loans

     2.02     2.91

Nonperforming assets to total assets

     1.79     2.47

Allowance for loan losses

   $ 4,072      $ 4,037   

Allowance for loan losses to total loans

     1.51     1.50

Allowance for loan losses to nonperforming loans

     74.85     51.47

The following table represents an age analysis of the Company’s past due loans:

Age Analysis of Past Due Loans

As of September 30, 2011

 

     30-59
Days
Past
Due
     60-89
Days
Past
Due
     Greater
Than
90 Days
     Total
Past
Due
     Current      Total
Loans
     Recorded
Investment>
90 Days and
Accruing
 

Commercial

   $ 56       $ —         $ 80       $ 136       $ 22,793       $ 22,929       $ —     

Commercial real estate

     —           —           170         170         51,432         51,602         —     

Consumer

     232         17         51         300         46,055         46,355         —     

Residential

     751         68         5,139         5,958         142,071         148,029         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,039       $ 85       $ 5,440       $ 6,564       $ 262,351       $ 268,915       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Age Analysis of Past Due Loans

As of December 31, 2010

 

     30-59
Days
Past
     60-89
Days
Past
     Greater
Than
     Total
Past
            Total      Recorded
Investment>
90 Days and
 
     Due      Due      90 Days      Due      Current      Loans      Accruing  

Commercial

   $ 96       $ 51       $ 13       $ 160       $ 22,634       $ 22,794       $ —     

Commercial real estate

     —           377         292         669         53,216         53,885         —     

Consumer

     394         144         90         628         47,179         47,807         38   

Residential

     2,235         415         7,448         10,098         134,602         144,700         732   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,725       $ 987       $ 7,843       $ 11,555       $ 257,631       $ 269,186       $ 770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the balance of accruing loans 90 days or more past due by type as of the dates indicated.

 

     September 30, 2011      December 31, 2010  

Loans 90 days or more past due by type:

     

Real estate loans

   $ —         $ 732   

Loans to individuals

     —           38   

Commercial loans

     —           —     
  

 

 

    

 

 

 

Total accruing loans 90 days or more past due

   $ —         $ 770   
  

 

 

    

 

 

 

The following presents information on the Company’s nonaccrual loans:

Loans in Nonaccrual Status

 

     September 30,
2011
     December 31,
2010
 

Commercial

   $ 80       $ 13   

Commercial real estate

     170         292   

Consumer

     51         52   

Residential

     5,139         6,716   
  

 

 

    

 

 

 

Total

   $ 5,440       $ 7,073   
  

 

 

    

 

 

 

LOAN MODIFICATIONS AND TROUBLED DEBT RESTRUCTURINGS

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories.

 

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Table of Contents

Rate Modification with a modification in which the interest rate is changed.

Term Modification with a modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification with a modification in which the loan is converted to interest only payments for a period of time.

Payment Modification with a modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification with any other type of modification, including the use of multiple categories above.

There were no available commitments for troubled debt restructurings outstanding as of September 30, 2011 or September 30, 2010.

The following tables present troubled debt restructurings as of September 30, 2011 and 2010:

 

     September 30, 2011  
     Accrual      Non-Accrual      Total  
     Status      Status      Modifications  

Commercial

   $ —         $ —         $ —     

Commercial real estate

     679         —           679   

Consumer

     —           —           —     

Residential

     557         2,553         3,110   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,236       $ 2,553       $ 3,789   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Accrual      Non-Accrual      Total  
     Status      Status      Modifications  

Commercial

   $ —         $ —         $ —     

Commercial real estate

     687         —           687   

Consumer

     39         —           39   

Residential

     558         1,978         2,536   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,284       $ 1,978       $ 3,262   
  

 

 

    

 

 

    

 

 

 

The Company’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively

 

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certain. The Company’s policy generally deems to six months of payment performance as sufficient to warrant a return to accrual status.

The following tables present newly restructured loans that occurred during the three and nine months ended September 30, 2011 and 2010, respectively:

 

     Three months ended September 30, 2011  
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Pre-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —           —           —           —           —           —     

Residential

     —           —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —            $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  

 

 

 
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Post-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —           —           —           —           —           —     

Residential

     —           —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —            $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three months ended September 30, 2010  
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Pre-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           1         780         1         780   

Consumer

     —           —           —           —           —           —           —           —           1         40         1         40   

Residential

     —           —           —           —           —           —           —           —           2         2,407         2         2,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           4       $ 3,227         4       $ 3,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  

 

 

 
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Post-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           1         800         1         800   

Consumer

     —           —           —           —           —           —           —           —           1         40         1         40   

Residential

     —           —           —           —           —           —           —           —           2         2,682         2         2,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           4       $ 3,522         4       $ 3,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

35


Table of Contents
     Nine months ended September 30, 2011  
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Pre-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —           —           —           —           —           —     

Residential

     —           —           —           —           —           —           —           —           1         500         1         500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           1       $ 500         1       $ 500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  

 

 

 
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Post-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —           —           —           —           —           —     

Residential

     —           —           —           —           —           —           —           —           1         555         1         555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           1       $ 555         1       $ 555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended September 30, 2010  
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Pre-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           1         780         1         780   

Consumer

     —           —           —           —           —           —           —           —           1         40         1         40   

Residential

     —           —           —           —           —           —           —           —           2         2,407         2         2,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           4       $ 3,227         4       $ 3,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  

 

 

 
     #      Rate
Modifications
     #      Term
Modifications
     #      Interest-Only
Modifications
     #      Payment
Modifications
     #      Combination
Modifications
     #      Total
Modifications
 

Post-Modification Outstanding Recorded Investment

                                   

Commercial

     —         $ —           —         $ —           —         $ —           —         $ —           —         $ —           —         $ —     

Commercial real estate

     —           —           —           —           —           —           —           —           1         800         1         800   

Consumer

     —           —           —           —           —           —           —           —           1         40         1         40   

Residential

     —           —           —           —           —           —           —           —           2         2,682         2         2,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —         $ —           —         $ —           —         $ —           4       $ 3,522         4       $ 3,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

36


Table of Contents

The following tables represent financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring (i) within 12 months of the restructure date (ii) during the three and nine month periods ended September 30, 2011 and 2010, respectively:

 

     Three months ended  
     September 30, 2011      September 30, 2010  
     #     

 

     #     

 

 

Commercial real estate

     —         $ —           —         $ —     

Consumer

     —           —           —           —     

Residential

     —           —           —           —     

Total

     1         554         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     1       $ 554         —         $ —     

 

     Nine months ended  
     September 30, 2011      September 30, 2010  
     #     

 

     #     

 

 

Commercial real estate

     —         $ —           —         $ —     

Consumer

     1         39         —           —     

Residential

     —           —           —           —     

Total

     1         554         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     2       $ 593         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

LIQUIDITY

Liquidity measures the ability of the Company to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. The Company’s liquidity is provided by cash and due from banks, federal funds sold, investments available for sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Company’s ability to obtain deposits and purchase funds at favorable rates also affects its liquidity. As a result of the Company’s management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes that the Bank maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet customers’ credit needs. The Company’s ratio of liquid assets to deposits and short-term borrowings was 18.60% as of September 30, 2011 and 16.96% as of December 31, 2010. Additional sources of liquidity available to the Company include its capacity to borrow additional funds through three correspondent banks and the Federal Home Loan Bank. The total amount available for borrowing to the Company for liquidity purposes was $65,740 on September 30,

 

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Table of Contents

2011. The Company currently has no borrowings against these available lines. The Company also has a $5,000 holding company line of credit with a correspondent bank for bank capital purposes with an outstanding balance of $2,000 on September 30, 2011 and December 31, 2010. The Company had no borrowings with the Federal Home Loan Bank at September 30, 2011.

CAPITAL

The Company believes that its financial position at September 30, 2011 reflects liquidity and capital levels adequate to fund anticipated funding needs. Capital ratios are above required regulatory minimums for a well-capitalized institution. The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

Stockholders’ equity totaled $27,596 at September 30, 2011 compared to $26,482 at December 31, 2010. At September 30, 2011, the Bank’s leverage ratio (Tier 1 capital divided by quarterly average assets) was 8.59% compared to 8.36% at December 31, 2010. The Bank’s risk-based Tier 1 capital ratio was 10.56% at September 30, 2011 compared to 10.10% at December 31, 2010 and the Bank’s risk-based total capital ratio was 11.81% at September 30, 2011 compared to 11.36% at December 31, 2010. The Company and the Bank are “well-capitalized” under the Office of the Comptroller of the Currency’s regulatory framework.

OFF-BALANCE SHEET ARRANGEMENTS

There were no material changes in the Company’s off-balance sheet arrangements and commitments from the information provided in Bankshares’ 2010 Annual Report to Shareholders. The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of September 30, 2011 equaled $946. Other commitments include commitments to extend credit. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of September 30, 2011, the Company had unused loan commitments of $52,052, including $29,489 in unused commitments with an original maturity exceeding one year.

 

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Table of Contents

CRITICAL ACCOUNTING POLICIES

Certain critical accounting policies represent the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, as has been the case in recent quarters with some of the Company’s borrowers, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses could be required, as has been the case in recent quarters. Further information regarding the estimates used in determining the allowance for loan losses is contained in the discussions of “Allowance and Provision for Loan Losses” on pages 26 through 30 herein and “Loans and Allowance for Loan Losses” on page 32 of Bankshares’ 2010 Annual Report to Shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recently adopted accounting pronouncements and recently issued pronouncements which are not yet effective and the impact, if any, on our financial statements, see Note 10, “Impact of Recently Issued and Adopted Accounting Standards” of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

 

Item 4. CONTROLS AND PROCEDURES

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management,

 

39


Table of Contents

including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information required to be set forth in the Company’s periodic reports.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There was no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

In the normal course of business, the Company is involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial position, liquidity or results of operations.

 

Item 6. EXHIBITS

 

Exhibit
Number

 

Description

    3.1   Amended and Restated Articles of Incorporation, effective April 29, 1997 (incorporated by reference to Exhibit 3.1 to registrant’s quarterly report on Form 10-Q filed on November 13, 2008)
    3.1(a)   Articles of Amendment to the Articles of Incorporation, effective May 1, 2009 (incorporated by reference to Exhibit 3.1(a) to registrant’s current report on Form 8-K filed on May 4, 2009)
    3.2   Bylaws (incorporated by reference to Exhibit 3(ii) to registrant’s registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)
  10.1*   1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrant’s registration statement on Form S-8 filed on September 14, 1998)

 

40


Table of Contents
  10.3*    VBA Directors’ Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (incorporated by reference to Exhibit 10.3 to registrant’s annual report on Form 10-KSB filed on March 25, 2003)
  10.4*    Pinnacle Bankshares Corporation 2004 Incentive Stock Plan, as amended February 9, 2010 (incorporated by reference to Exhibit 10.4 to registrant’s current report on Form 8-K filed on February 16, 2010)
  10.5*    Directors’ Annual Compensation (incorporated by reference to Exhibit 10.5 to registrant’s quarterly report on Form 10-Q filed on May 16, 2011)
  10.6*    Base Salaries of Executive Officers of the Registrant (incorporated by reference to Exhibit 10.6 to registrant’s annual report on Form 10-K filed on March 28, 2011)
  10.7*    Amended and Restated Change in Control Agreement between Pinnacle Bankshares Corporation and Bryan M. Lemley, dated December 31, 2008 (incorporated by reference to Exhibit 10.7 to registrant’s annual report on Form 10-K filed on March 27, 2009)
  10.8*    Amended and Restated Change in Control Agreement between Pinnacle Bankshares Corporation and Carroll E. Shelton, dated December 31, 2008 (incorporated by reference to Exhibit 10.8 to registrant’s annual report on Form 10-K filed on March 27, 2009)
  10.9    Pinnacle Bankshares Corporation Promissory Note, effective December 31, 2008, delivered to Community Bankers’ Bank (incorporated by reference to Exhibit 10.9 to registrant’s current report on Form 8-K filed on January 7, 2009)
  10.10*    Form of Restricted Stock Agreement under Pinnacle Bankshares Corporation 2004 Incentive Stock Plan, as amended February 9, 2010 (incorporated by reference to Exhibit 10.10 to registrant’s current report on Form 8-K filed on April 19, 2010)
  10.11*    Form of Restricted Stock Agreement (with non-competition and consulting provision) under Pinnacle Bankshares Corporation 2004 Incentive Stock Plan, as amended February 9, 2010 (incorporated by reference to Exhibit 10.11 to registrant’s current report on Form 8-K filed on April 19, 2010)

 

41


Table of Contents
  10.12*    Form of Incentive Stock Option Agreement with Tandem Stock Appreciation Right under Pinnacle Bankshares Corporation 2004 Incentive Stock Plan, as amended February 9, 2010 (incorporated by reference to Exhibit 10.12 to registrant’s current report on Form 8-K filed on April 19, 2010)
  10.13*    Change in Control Agreement between Pinnacle Bankshares Corporation and Aubrey H. Hall, III, effective July 1, 2011 (incorporated by reference to Exhibit 10.13 to registrant’s current report on Form 8-K filed on July 7, 2011)
  31.1    CEO Certification Pursuant to Rule 13a-14(a)
  31.2    CFO Certification Pursuant to Rule 13a-14(a)
  32.1    CEO/CFO Certification Pursuant to § 906 of the Sarbanes- Oxley Act of 2002 (18 U.S.C. § 1350)
101    The following materials from Pinnacle Bankshares Corporation’s quarterly report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements

 

* Denotes management contract

 

42


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      PINNACLE BANKSHARES CORPORATION
     

(Registrant)

NOVEMBER 10, 2011

     

/s/ Aubrey H. Hall, III

Date       Aubrey H. Hall, III, President and
      Chief Executive Officer
      (principal executive officer)

NOVEMBER 10, 2011

     

/s/ Bryan M. Lemley

Date       Bryan M. Lemley, Secretary,
      Treasurer and Chief Financial Officer
      (principal financial & accounting officer)

 

43