Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR1.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR7.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR3.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR4.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR8.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR9.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR5.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR2.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR6.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR10.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR17.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR12.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR16.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR11.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR15.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR13.htm
XML - IDEA: XBRL DOCUMENT - PINNACLE BANKSHARES CORPR14.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PINNACLE BANKSHARES CORPd332724dex312.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - PINNACLE BANKSHARES CORPd332724dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PINNACLE BANKSHARES CORPd332724dex311.htm
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 March 31, 2012

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 May 11, 2012, 1,507,589 shares of Pinnacle Bankshares Corporation’s common stock, $3 par value, were outstanding.

 

 

 


Table of Contents

PINNACLE BANKSHARES CORPORATION

FORM 10-Q

March 31, 2012

INDEX

 

     Page Number  

Part I. FINANCIAL INFORMATION

  
 

Item 1.

  

Financial Statements (Unaudited)

  
    

  Condensed Consolidated Balance Sheets

     3   
    

  Condensed Consolidated Statements of Income

     4   
    

  Condensed Consolidated Statements of Comprehensive Income

     5   
    

  Condensed Consolidated Statement of Changes in Stockholders’ Equity

     6   
    

  Condensed Consolidated Statements of Cash Flows

     7   
    

  Notes to Consolidated Financial Statements

     8-24   
 

Item 2.

  

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

     25-33   
 

Item 3.

  

  Quantitative and Qualitative Disclosures About Market Risk

     34   
 

Item 4.

  

  Controls and Procedures

     34   
Part II. OTHER INFORMATION   
 

Item 1.

  

  Legal Proceedings

     35   
 

Item 6.

  

  Exhibits

     35-37   
SIGNATURES      38   


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars, except share data)

 

     March 31, 2012
(Unaudited)
    12/31/2011*  
Assets     

Cash and cash equivalents (note 2):

    

Cash and due from banks

   $ 37,721      $ 37,547   

Securities (note 3):

    

Available-for-sale, at fair value

     21,506        18,780   

Held-to-maturity, at amortized cost

     6,302        5,989   

Federal Reserve Bank stock, at cost

     137        137   

Federal Home Loan Bank stock, at cost

     528        528   

Loans, net (note 4)

     267,827        267,123   

Bank premises and equipment, net

     6,505        6,537   

Accrued interest receivable

     968        1,009   

Prepaid FDIC Insurance

     921        991   

Goodwill

     539        539   

Other assets

     3,641        3,304   
  

 

 

   

 

 

 

Total assets

   $ 346,595      $ 342,484   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits:

    

Demand

   $ 36,535      $ 33,432   

Savings and NOW accounts

     135,371        132,501   

Time

     142,527        144,460   
  

 

 

   

 

 

 

Total deposits

     314,433        310,393   
  

 

 

   

 

 

 

Note payable under line of credit

     2,000        2,000   

Accrued interest payable

     405        419   

Other liabilities

     2,339        2,725   
  

 

 

   

 

 

 

Total liabilities

   $ 319,177      $ 315,537   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,496,589 shares in 2012 and 1,495,589 shares in 2011

   $ 4,476      $ 4,473   

Capital surplus

     938        923   

Retained earnings

     23,459        22,981   

Accumulated other comprehensive loss, net

     (1,455     (1,430
  

 

 

   

 

 

 

Total stockholders’ equity

     27,418        26,947   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 346,595      $ 342,484   
  

 

 

   

 

 

 

 

* Derived from audited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

     Three Months
Ended

March 31,  2012
     Three Months
Ended

March 31,  2011
 

Interest income:

     

Interest and fees on loans

   $ 3,782       $ 3,921   

Interest on securities:

     

U.S. Government agencies

     76         110   

States and political subdivisions (taxable)

     23         29   

States and political subdivisions (tax exempt)

     42         39   

Other

     19         16   

Interest on federal funds sold

     1         1   
  

 

 

    

 

 

 

Total interest income

     3,943         4,116   
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits:

     

Savings and NOW accounts

     144         246   

Time – under $100

     529         633   

Time – $100 and over

     328         338   
  

 

 

    

 

 

 

Total interest expense

     1,001         1,217   
  

 

 

    

 

 

 

Net interest income

     2,942         2,899   

Provision for loan losses

     168         673   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,774         2,226   

Noninterest income:

     

Service charges and fees on deposit accounts

     356         345   

Fees on sales of mortgage loans

     126         72   

Commissions and fees

     161         176   

Other operating income

     134         131   
  

 

 

    

 

 

 

Total noninterest income

     777         724   
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries and employee benefits

     1,533         1,519   

Occupancy expense

     178         182   

Furniture and equipment

     270         266   

Office supplies and printing

     59         54   

Federal deposit insurance premiums

     75         130   

Capital stock tax

     57         57   

Advertising expense

     51         18   

Other operating expenses

     616         553   
  

 

 

    

 

 

 

Total noninterest expense

     2,839         2,779   
  

 

 

    

 

 

 

Income before income tax expense

     712         171   

Income tax expense

     234         45   
  

 

 

    

 

 

 

Net income

   $ 478       $ 126   
  

 

 

    

 

 

 

Basic net income per share (note 5)

   $ 0.32       $ 0.08   
  

 

 

    

 

 

 

Diluted net income per share (note 5)

   $ 0.32       $ 0.08   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in thousands of dollars)

 

     Three Months
Ended

March 31,  2012
    Three Months
Ended

March 31,  2011
 

Net Income

   $ 478      $ 126   

Other Comprehensive Income, net of tax:

    

Unrealized gains (losses) on securities

     (25     28   
  

 

 

   

 

 

 

Comprehensive Income

   $ 453      $ 154   
  

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

5


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2012 and 2011

(Unaudited)

(Amounts in thousands of dollars, except share data)

 

    

 

Common Stock

     Capital
Surplus
     Retained
Earnings
     Accumulated
Other

Comprehensive
Income (Loss)
    Total  
     Shares      Par Value             

Balances, December 31, 2010

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

Net income

     —           —           —           126        —          126  

Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $16

     —           —           —           —           28       28  

Restricted stock expense

     —           3        6        —           —          9  

Stock option expense

     —           —           18        —           —          18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balances, March 31, 2011

     1,495,589      $ 4,465       $ 874       $ 22,044       $ (720   $ 26,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

    

 

Common Stock

     Capital
Surplus
     Retained
Earnings
     Accumulated
Other

Comprehensive
Income (Loss)
    Total  
     Shares      Par Value             

Balances, December 31, 2011

     1,496,589      $ 4,473       $ 923       $ 22,981       $ (1,430   $ 26,947   

Net income

     —           —           —           478        —          478  

Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $13

     —           —           —           —           (25 )     (25 )

Restricted stock expense

     —           3        6        —           —          9  

Stock option expense

     —           —           9        —           —          9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balances, March 31, 2012

     1,496,589      $ 4,476       $ 938       $ 23,459       $ (1,455   $ 27,418   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands of dollars)

 

     Three Months
Ended

March 31,  2012
    Three Months
Ended

March 31,  2011
 

Cash flows from operating activities:

    

Net income

   $ 478      $ 126   

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

    

Depreciation of bank premises and equipment

     121        142   

Accretion of unearned fees, net

     11        —     

Net amortization of premiums and discounts on securities

     16        11   

Provision for loan losses

     168        673   

Accrual of stock based compensation

     18        27   

Net decrease (increase) in:

    

Accrued interest receivable

     41        80   

Prepaid FDIC insurance

     70        120   

Other assets

     140        (292

Net increase (decrease) in:

    

Accrued interest payable

     (14     (39

Other liabilities

     (386     (37
  

 

 

   

 

 

 

Net cash provided by operating activities

     663        811   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (9,005     (3,777

Purchases of held-to-maturity securities

     (322     —     

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

     6,190        68   

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

     43        80   

Net (increase) decrease in loans made to customers

     (1,346     1,233   

Purchases of bank premises and equipment

     (89     (31
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,529     (2,427
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in demand, savings and NOW deposits

     5,973        8,360   

Net decrease in time deposits

     (1,933     (4,992
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,040        3,368   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     174        1,752   

Cash and cash equivalents, beginning of period

     37,547        32,533   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 37,721      $ 34,285   
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities

    

Net change in other assets acquired in settlement of loans

   $ 463      $ 432   

See accompanying notes to unaudited consolidated financial statements.

 

7


Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

March 31, 2012 (Unaudited)

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

 

(1) General

The condensed 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 condensed 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 March 31, 2012, and the results of operations, changes in stockholders’ equity and comprehensive income and cash flows for the three months ended March 31, 2012 and 2011.

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’ 2011 Annual Report to Shareholders and additional information supplied in the 2011 Annual Report on Form 10-K.

The results of operations for the interim periods ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

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 March 31, 2012 and December 31, 2011, the Company had no federal funds sold.

 

8


Table of Contents
(3) Securities

The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities at March 31, 2012 and December 31, 2011, are shown in the table below. As of March 31, 2012, securities with amortized costs of $4,688 and fair values of $4,820 were pledged as collateral for public deposits and securities with amortized costs of $441 and fair values of $482 were pledged as collateral with the Federal Reserve Bank.

 

March 31, 2012  

Available-for-Sale:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Values
 

Obligations of U.S. government corporations and agencies

   $ 17,396       $ 171       $ (58   $ 17,509   

Obligations of states and political subdivisions

     2,819         161         —          2,980   

Mortgage-backed securities-government

     832         75         —          907   

Other securities

     110         —           —          110   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 21,157       $ 407       $ (58   $ 21,506   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Held-to-Maturity:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Values
 

Obligations of states and political subdivisions

   $   6,302       $ 180       $ (4   $   6,478   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2011  

Available-for-Sale:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Values
 

Obligations of U.S. government corporations and agencies

   $ 14,567       $ 174       $ (3   $ 14,738   

Obligations of states and political subdivisions

     2,841         139         —          2,980   

Mortgage-backed securities-government

     875         77         —          952   

Other securities

     110         —           —          110   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 18,393       $ 390       $ (3   $ 18,780   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Held-to-Maturity:

   Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Values
 

Obligations of states and political subdivisions

   $   5,989       $ 176         —         $   6,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

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 March 31, 2012 and no impairment has been recognized. The Company had no other-than-temporary impairments in its securities portfolios as of March 31, 2012.

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $528 at March 31, 2012. 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. The Company does not consider its investment in FHLB stock to be other than temporarily impaired on March 31, 2012, and no impairment has been recognized.

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.

 

10


Table of Contents
(4) Loans and Allowance for Loan Losses

A summary of loans at March 31, 2012 and December 31, 2011 follows:

 

     March 31, 2012     December 31, 2011  

Commercial

   $ 21,750        21,756   

Commercial Real Estate

     88,344        86,293   

Consumer

     47,272        47,192   

Residential

     114,603        116,006   
  

 

 

   

 

 

 

Total loans, gross

     271,969       271,247  

Less unearned income and fees

     (95 )     (109 )
  

 

 

   

 

 

 

Loans, net of unearned income and fees

     271,874       271,138  

Less allowance for loan losses

     (4,047 )     (4,015 )
  

 

 

   

 

 

 

Loans, net

   $ 267,827       267,123  
  

 

 

   

 

 

 

Activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011, and for the year ended December 31, 2011 is as follows:

 

     March 31,
2012
    December 31,
2011
    March 31,
2011
 

Balance at January 1,

   $ 4,015      $ 4,037      $ 4,037   

Provision for loan losses

     168        2,227        673   

Loans charged off

     (206     (2,487     (581

Recoveries

     70        238        52   
  

 

 

   

 

 

   

 

 

 

Balance at end of period,

   $ 4,047      $ 4,015      $ 4,181   
  

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

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 Three Months Ended March 31, 2012

 

     Commercial      Commercial
Real

Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

           

Beginning balance

   $ 448       $ 1,489      $ 394      $ 1,684      $ 4,015   

Charge-offs

     —           (45     (73     (88     (206

Recoveries

     —           12        41        17        70   

Provision for loan losses

     91         49        (6     34        168   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 539       $ 1,505      $ 356      $ 1,647      $ 4,047   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     25         105        —          20        150   

Ending balance: collectively evaluated for impairment

     514         1,399        356        1,628        3,897   

Loans:

           

Total loans ending balance

   $ 21,750       $ 88,344      $ 47,272      $ 114,603      $ 271,969   

Ending balance: loans individually evaluated for impairment

     151         1,491        76        4,442        6,160   

Ending balance: loans collectively evaluated for impairment

   $ 21,599       $ 86,853      $ 47,196      $ 110,161      $ 265,809   

For the Three Months Ended March 31, 2011

 

     Commercial     Commercial
Real

Estate
    Consumer     Residential     Total  

Allowance for Loan Losses:

          

Beginning balance

   $ 258      $ 264      $ 424      $ 3,091      $ 4,037   

Charge-offs

     (56     (62     (147     (316     (581

Recoveries

     1        1        47        3        52   

Provision for loan losses

     141        1,563        73        (1,104     673   

Ending Balance

   $ 344      $ 1,766      $ 397      $ 1,674      $ 4,181   

Ending balance: individually evaluated for impairment

     —          100        —          —          100   

Ending balance: collectively evaluated for impairment

     344        1,666        397        1,674        4,081   

Loans:

          

Total loans ending balance

   $ 21,915      $ 85,572      $ 46,456      $ 112,843      $ 266,786   

Ending balance: loans individually evaluated for impairment

     —          759        148        6,373        7,280   

Ending balance: loans collectively evaluated for impairment

   $ 21,915      $ 84,813      $ 46,308      $ 106,470      $ 259,506   

 

12


Table of Contents

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

Credit Quality Indicators

As of March 31, 2012

 

Credit Exposure    Commercial      Commercial
Real Estate
     Consumer      Residential      Total  

Pass

   $ 18,390       $ 78,918       $ 47,104       $ 105,300       $ 249,712   

Special Mention

     1,319         4,167         —           1,030         6,516   

Substandard

     2,041         5,259         168         8,273         15,741   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,750       $ 88,344       $ 47,272       $ 114,603       $ 271,969   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

As of December 31, 2011

 

Credit Exposure    Commercial      Commercial
Real Estate
     Consumer      Residential      Total  

Pass

   $ 17,752       $ 76,879       $ 47,058       $ 106,431       $ 248,120   

Special Mention

     3,636         5,754         —           1,549         10,939   

Substandard

     368         3,660         134         8,026         12,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,756       $ 86,293       $ 47,192       $ 116,006       $ 271,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no loans included in the “Doubtful” or “Loss” category as of March 31, 2012 or December 31, 2011.

 

13


Table of Contents

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

Impaired Loans

For the Year Ended March 31, 2012

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

   $ 151       $ 151         —         $ 115       $ —     

Commercial real estate

     1,086         1,086         —           1,026         —     

Consumer

     51         51         —           48         —     

Residential

     4,020         4,020         —           4,437         —     

With allowance recorded:

              

Commercial

     —           —           —           —           —     

Commercial real estate

     405         405         105         203         —     

Consumer

     25         25         25         13         —     

Residential

     422         422         20         211         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial

     151         151         —           115         —     

Commercial real estate

     1,491         1,491         105         1,229         —     

Consumer

     76         76         25         61         —     

Residential

   $ 4,442       $ 4,442       $ 20       $ 4,648       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

For the Year Ended December 31, 2011

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial

   $ 78       $ 78         —         $ 39       $ 1   

Commercial real estate

     965         965         —           945         12   

Consumer

     46         46         —           51         —     

Residential

     4,853         4,853         —           5,429         142   

With allowance recorded:

              

Commercial

     —           —           —           —           —     

Commercial real estate

     —           —           —           —           —     

Consumer

     —           —           —           —           —     

Residential

     —           —           —           40         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial

     78         78         —           39         1   

Commercial real estate

     965         965         —           945         12   

Consumer

     46         46         —           51         —     

Residential

   $ 4,853       $ 4,853       $ —         $ 5,469       $ 142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

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

Age Analysis of Past Due Loans

As of March 31, 2012

 

     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

   $ 322       $ 297       $ 151       $ 770       $ 20,980       $ 21,750       $ —     

Commercial real estate

     680       $ 1,129         1,491         3,300         85,044         88,344         —     

Consumer

     162         17         76         255         47,017         47,272         —     

Residential

     467         662         4,442         5,571         109,032         114,603         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,631       $ 2,105       $ 6,160       $ 9,896       $ 262,073       $ 271,969       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Age Analysis of Past Due Loans

As of December 31, 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

   $ 188       $ 5       $ 77       $ 270       $ 21,486       $ 21,756       $ —     

Commercial real estate

     66         24         288         378         85,915         86,293         —     

Consumer

     417         93         49         559         46,633         47,192         3   

Residential

     668         93         4,297         5,058         110,948         116,006         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,339       $    215       $ 4,711       $ 6,265       $ 264,982       $ 271,247       $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Loans in Nonaccrual Status

 

     March 31,
2012
     December 31,
2011
 

Commercial

   $ 151       $ 78   

Commercial real estate

     1,491         288   

Consumer

     76         46   

Residential

     4,442         4,296   
  

 

 

    

 

 

 

Total

   $ 6,160       $ 4,708   
  

 

 

    

 

 

 

 

15


Table of Contents

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

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 March 31, 2012 or March 31, 2011.

The following tables present troubled debt restructurings as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012  
     Accrual
Status
     Nonaccrual
Status
     Total
Modifications
 

Commercial

   $ —         $ —         $ —     

Commercial real estate

     674         —           674   

Consumer

     —           —           —     

Residential

     557         2,532         3,089   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,231       $ 2,532       $ 3,763   
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     December 31, 2011  
     Accrual
Status
     Nonaccrual
Status
     Total
Modifications
 

Commercial

   $ —         $ —         $ —     

Commercial real estate

     677         —           677   

Consumer

     —           —           —     

Residential

     557         2,532         3,089   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,234       $ 2,532       $ 3,766   
  

 

 

    

 

 

    

 

 

 

The Company’s policy is that loans placed on nonaccrual status will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Company’s policy generally deems six months of payment performance as sufficient to warrant a return to accrual status.

During the three months ended March 31, 2012, there were no newly restructured loans. For the three months ended March 31, 2011, there was one residential loan that was considered a combination modification that had pre-modification balance of $490 and post-modification balance of $555 as of March 31, 2011.

The following table represents, during the three month periods ended March 31, 2012 and 2011, respectively, financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date:

 

     Three months ended  
     March 31, 2012      March 31, 2011  
     #             #         

Commercial real estate

     —         $ —           —         $ —     

Consumer

     —           —           —           —     

Residential

     1         534         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 534         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
(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 three months ended March 31, 2012 and 2011, 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 March 31, 2012

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

Basic net income per share

   $ 478         1,496,589       $ 0.32   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 478         1,496,589       $ 0.32   
  

 

 

    

 

 

    

 

 

 

Three months Ended March 31, 2011

                    

Basic net income per share

   $ 126         1,495,589       $ 0.08   
        

 

 

 

Effect of dilutive stock options

     —           —        
  

 

 

    

 

 

    

Diluted net income per share

   $ 126         1,495,589       $ 0.08   
  

 

 

    

 

 

    

 

 

 

 

(6) Fair Value Measurement

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

 

18


Table of Contents

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.

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 March 31, 2012 and December 31, 2011, 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 $6,160 at March 31, 2012, all of which were Level 3 assets. For substantially all of the Company ‘s impaired loans as of March 31, 2012 and December 31, 2011, the valuation methodology utilized by the Company was collateral based measurements such as a real estate appraisal and the discount to reflect current market conditions and ultimately collectability ranged from 0% to 20% for each of the respective periods.

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

 

19


Table of Contents

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 $1,237 at March 31, 2012, all of which were Level 3 assets. For substantially all of the Company’s foreclosed assets as of March 31, 2012 and December 31, 2011, the valuation methodology utilized by the Company was collateral based measurements such as a real estate appraisal and the discount to reflect current market conditions ranged from 0% to 20% for each of the respective periods.

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

Fair Value Measurements on March 31, 2012

 

Description

   Total Carrying
Amount in the
Condensed
Consolidated
Balance Sheet
3/31/2012
     Assets/Liabilities
Measured at Fair
Value 3/31/2012
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Recurring

              

Available-for-sale securities

   $ 21,506       $ 21,506         —         $ 21,506         —     

Nonrecurring

              

Held-to-maturity securities

   $ 6,302       $ 6,478          $ 6,478      

Impaired loans

   $ 6,160       $ 6,160         —           —         $ 6,160   

Foreclosed assets

   $ 1,237       $ 1,237         —           —         $ 1,237   

 

20


Table of Contents
(7) 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 2011 Annual Report on Form 10-K. The carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 are as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
amounts
     Approximate
fair values
     Carrying
amounts
     Approximate
fair values
 

Financial assets:

           

Cash and due from banks

   $ 37,721       $ 37,721       $ 37,547       $ 37,547   

Securities:

           

Available-for-sale

     21,506         21,506         18,780         18,780   

Held-to-maturity

     6,302         6,478         5,989         6,165   

Federal Reserve Bank stock

     137         137         137         137   

Federal Home Loan Bank stock

     528         528         528         528   

Loans, net of unearned income and fees

     271,874         276,461         267,123         276,862   

Accrued interest receivable

     968         968         1,009         1,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 339,036       $ 343,799       $ 331,113       $ 341,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Deposits

   $ 314,433       $ 319,000       $ 310,393       $ 315,578   

Accrued interest payable

     405         405         419         419   

Line of credit

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

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 316,838       $ 321,405       $ 312,812       $ 317,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(8) 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 issuance under 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 March 31, 2012, 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, 2011

     7,500       $ 14.75 - 14.75       $ 14.75       $ 111   

Outstanding at March 31, 2012

     7,500       $ 14.75 - 14.75       $ 14.75       $ 111   

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

 

21


Table of Contents

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 issuance under 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 March 31, 2012, 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, 2011

     37,500       $ 9.00 - 9.00       $ 9.00       $ 338   

Outstanding at March 31, 2012

     37,500       $ 9.00 - 9.00       $ 9.00       $ 338   

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

 

     Number of
Shares
     Weighted-
Average
Grant Date
Fair Value
 

Outstanding at December 31, 2011

     11,500       $ 8.96   

Outstanding at March 31, 2012

     11,500       $ 8.96   

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 $18 in the first three months of 2012.

 

(9) Impact of Recently Issued and Adopted Accounting Standards

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets. The ASU also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value

 

22


Table of Contents

measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The implementation of the provisions of ASU No. 2011-04 did not have a significant impact on the Company’s consolidated financial statements as of and for the period ended March 31, 2012.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU amends current guidance to allow a company the option of presenting 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. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive must to reclassified to net income. The ASU does not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The ASU does not affect how earnings per share is calculated or presented. The Company implemented the provisions of ASU No. 2011-05 by reporting a separate statement of comprehensive income for the periods ended March 31, 2012 and 2011.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the Update, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU requires an entity

 

23


Table of Contents

to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.

As of May 11, 2012, 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.

 

24


Table of Contents
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 weaknesses in the loan portfolio, 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, the effectiveness of management’s efforts to minimize losses related to nonperforming loans; 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

 

25


Table of Contents

services in our market area; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking 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 have experienced increases in loan losses since the difficult economic climate began in 2008. 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

 

26


Table of Contents

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.

OVERVIEW AND RESULTS OF OPERATIONS

Total assets at March 31, 2012 were $346,595 up 1.20% from $342,484 at December 31, 2011. The principal components of the Company’s assets at the end of the period were $267,827 in net loans, $37,721 in cash and cash equivalents and $27,808 in securities. During the three-month period ended March 31, 2012, net loans increased 0.26% or $704 from $267,123 at December 31, 2011. During the three-month period ended March 31, 2012, cash and cash equivalents increased 0.46% or $174 from $37,547 at December 31, 2011, securities increased 12.27% or $3,039 from $24,769 at December 31, 2011 as $9,327 in securities were purchased, which was partially offset by $6,233 in calls and pay downs.

Total liabilities at March 31, 2012 were $319,177, up 1.15% from $315,537 at December 31, 2011, primarily as a result of an increase in demand deposits of $3,103 or 9.28% and an increase in savings and NOW accounts of $2,870 or 2.17%. These increases were partially offset by a decrease in time deposits of $1,933 or 1.34% from December 31, 2011. 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 March 31, 2012 was $27,418 including $23,459 in retained earnings and $1,455 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 post retirement plan. At December 31, 2011, total stockholders’ equity was $26,947.

The Company had net income of $478 for the three months ended March 31, 2012, compared with net income of $126 for the comparable period in 2011. The increase in net income was due to a decrease in provision for loan losses, 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 an increase in the Company’s noninterest expense.

Profitability as measured by the Company’s return on average assets (“ROA”) was 0.56% for the three months ended March 31, 2012, up from 0.15% for the same period of 2011. Another key indicator of performance, the return on average equity (“ROE”), for the three months ended March 31, 2012 was 7.03%, up from 1.90% for the three months ended March 31, 2011.

 

27


Table of Contents

The results of operations for the three-month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

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 $2,942 for the three months ended March 31, 2012 compared to $2,899 for the three months ended March 31, 2011. The modest increase is attributable to interest income from loans and securities exceeding the cost associated with interest paid on deposits.

The net interest margin increased to 3.66% for the three months ended March 31, 2012, from 3.65% for the three months ended March 31, 2011. Over the past twelve months, cost to fund earning assets have fallen 28 basis points to 1.24% while yield on earning assets has fallen 27 basis points to 4.90%, resulting in a slightly improved net interest margin and net interest income.

Interest income decreased 4.20% or $173 to $3,943 for the three months ended March 31, 2012, as compared to $4,116 for the same period of 2011. Interest and fees on loans totaled $3,782 for the three-month period ended March 31, 2012, down from $3,921 for the same period in 2011. This decrease in interest and fees on loans was due to a 26 basis point decrease in loan yield, which decreased to 5.71%. Interest from securities and other interest bearing funds was $161 for the three months ended March 31, 2012, down from $195 for the three months ended March 31, 2011. Interest from securities and other interest bearing funds for the three months ended March 31, 2012 decreased due to a 25 basis point drop in yield for the three months ended March 31, 2012, when compared to the same period of 2011.

Interest expense was $1,001 for the three months ended March 31, 2012, down 17.75% from $1,217 for the three months ended March 31, 2011. Deposits have increased by $4,111 in the past twelve months; however, the rate paid for deposits has fallen by 30 basis points in the same period. The decrease in cost of deposits is primarily due to deposit repricing strategies employed by the Company’s management in the current lower interest rate environment.

 

28


Table of Contents

NONINTEREST INCOME

Noninterest income increased $53 or 7.32% to $777 for the three months ended March 31, 2012 compared to $724 for the same period of 2011. The Company’s principal sources of noninterest income are service charges and fees on deposit accounts, particularly transaction accounts, fees on sales of mortgage loans, and commissions and fees on the sale of investment products. This increase in noninterest income from 2011 was due to a 75.00% or $54 increase in mortgage loan fees.

NONINTEREST EXPENSE

Noninterest expense increased $60 or 2.16% to $2,839 for the three months ended March 31, 2012 compared to $2,779 for the same period of 2011. This increase in noninterest expense was attributed primarily to a $33 increase in advertising expense, a $96 increase in losses associated with nonperforming assets and a $14 increase in salaries and employee benefits due to higher commissions paid in connection with mortgage sales. These increases were partially offset by a $55 decrease in FDIC premiums.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

The Company expensed a provision for loan losses of $168 in the first three months of 2012 in recognition of management’s estimate of losses inherent in the Company’s 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 $4,047 as of March 31, 2012, representing approximately 1.49% of total loans outstanding, compared to an allowance of $4,015 as of December 31, 2011, or 1.48% of total loans then outstanding. At March 31, 2012 the allowance for loan losses was equal to 65.69% 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

 

29


Table of Contents

downturn, current economic stagnation, 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 March 31, 2012 to provide for probable loan losses inherent in the Company’s loan portfolio. The allowance was calculated in adherence to generally accepted accounting principles and 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 2012 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.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 

     Three Months
Ended
3/31/2012
    Three Months
Ended
3/31/2011
 

Balance at beginning of period

   $ 4,015      $ 4,037   

Loan charge-offs:

    

Residential

     (88     (316

Commercial real estate

     (45     (62

Commercial

     —          (56

Consumer

     (73     (147
  

 

 

   

 

 

 

Total loan charge-offs

     (206     (581
  

 

 

   

 

 

 

Loan recoveries:

    

Residential

     17        3   

Commercial real estate

     12        1   

Commercial

     —          1   

Consumer

     41        47   
  

 

 

   

 

 

 

Total recoveries

     70        52   
  

 

 

   

 

 

 

Net loan charge-offs

     (136     (529
  

 

 

   

 

 

 

Provision for loan losses

     168        673   
  

 

 

   

 

 

 

Balance at end of period

   $ 4,047      $ 4,181   
  

 

 

   

 

 

 

ASSET QUALITY

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. 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

 

30


Table of Contents

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 $7,397 at March 31, 2012 and $5,356 at December 31, 2011. Sixteen foreclosed properties were held as of March 31, 2012, totaling $1,237, compared to eight foreclosed properties held on December 31, 2011 totaling $645. Nonaccrual loans were $6,160 at March 31, 2012 and $4,708 at December 31, 2011. Nonaccrual loans at March 31, 2012 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 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.

 

Asset Quality Highlights    March 31,
2012
    December 31,
2011
 

Nonaccrual loans

   $ 6,160      $ 4,708   

Loans 90 days or more past due

     —          3   

Total nonperforming loans

     6,160        4,711   

Foreclosed assets

     1,237        645   

Total nonperforming assets

     7,397        5,356   

Nonperforming loans to total loans

     2.27     1.74

Nonperforming assets to total assets

     2.13     1.56

Allowance for loan losses

   $ 4,047      $ 4,015   

Allowance for loan losses to total loans

     1.49     1.48

Allowance for loan losses to nonperforming loans

     65.69     85.23

 

31


Table of Contents

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 18.05% as of March 31, 2012 and 17.33% as of December 31, 2011. 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 $64,640 on March 31, 2012. 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 March 31, 2012 and December 31, 2011. The Company had no borrowings with the Federal Home Loan Bank at March 31, 2012.

CAPITAL

The Company believes that its financial position at March 31, 2012 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 $27,418 at March 31, 2012 compared to $26,947 at December 31, 2011. At March 31, 2012, the Bank’s

 

32


Table of Contents

leverage ratio (Tier 1 capital divided by quarterly average assets) was 8.75% compared to 8.56% at December 31, 2011. The Bank’s risk-based Tier 1 capital ratio was 10.69% at March 31, 2012 compared to 10.53% at December 31, 2011 and the Bank’s risk-based total capital ratio was 11.95% at March 31, 2012 compared to 11.79% at December 31, 2011. 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’ 2011 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 March 31, 2012 equaled $1,063. 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 March 31, 2012, the Company had unused loan commitments of $51,827, including $28,038 in unused commitments with an original maturity exceeding one year.

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 29 and 30 herein and “Loans and Allowance for Loan Losses” on page 33 of Bankshares’ 2011 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.

 

33


Table of Contents
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, 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.

 

34


Table of Contents

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)
  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 annual report on Form 10-K filed on March 28, 2012)
  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, 2012)

 

35


Table of Contents
  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)
  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)

 

36


Table of Contents

 

  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 March 31, 2012, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity, (iv) Unaudited Condensed Consolidated Statements of Comprehensive Income, (v) Unaudited Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements

 

* Denotes management contract

 

37


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)

MAY 11, 2012

   

/s/ Aubrey H. Hall, III

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

MAY 11, 2012

   

/s/ Bryan M. Lemley

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

 

38