U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
(Mark One)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x |
No o |
Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x
The issuer’s revenues for the fiscal year ended December 31, 2002: $13,812,000
The aggregate market value of the issuer’s Common Stock held by nonaffiliates as of February 7, 2003: $23,105,928
The number of shares outstanding of the issuer’s Common Stock as of March 11, 2003: 1,453,203 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2002 Annual Report to Shareholders are incorporated by reference in Part II of this report, which is attached hereto as Exhibit 13. Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 8, 2003 are incorporated by reference in Part III of this report.
Transitional small business disclosure format:
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Yes o |
No x . |
PINNACLE BANKSHARES CORPORATION
2002 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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Item 1. |
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Item 2. |
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Item 5. |
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Item 8. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9. |
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Item 10. |
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Item 11. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
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Item 14. |
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Item 1. Description of Business.
General Development of Business
Pinnacle Bankshares Corporation, a Virginia corporation (the “Company”), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Altavista, Virginia. The Company conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, The First National Bank of Altavista (the “Bank”). The Company 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 Company’s administrative offices are located at 622 Broad Street, Altavista, Virginia.
The Bank was organized as a national bank in 1908 and commenced its general banking operations in December of that year, providing services to commercial and agricultural businesses and individuals in the Altavista area. With an emphasis on personal service, the Bank today offers a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, merchant bankcard processing, residential and commercial mortgages, home equity loans, consumer installment loans, agricultural loans, investment loans, small business loans, commercial lines of credit and letters of credit.
The Bank serves a trade area consisting primarily of Campbell County, northern Pittsylvania County, southeastern Bedford County, and the city of Lynchburg from facilities located in the town of Altavista and the city of Lynchburg, Virginia. In October 1998, the Company opened a mortgage loan production office in Forest, Virginia. In addition, in June 1999 the Company opened The Airport facility, located just outside the Lynchburg city limits. In August 2000, the Company opened the Old Forest Road facility, located on Old Forest Road in Lynchburg, and the Brookville Plaza facility, located on Timberlake Road in Lynchburg. The Company opened these offices to better serve the Lynchburg and northern Campbell County areas.
The Bank has two wholly-owned subsidiaries. FNB Property Corp., which is a Virginia Corporation, was formed to hold title to Bank premises real estate. First Properties, Inc., also a Virginia corporation, was formed to hold title to other real estate owned.
In general, the banking business in central Virginia is highly competitive with respect to both loans and deposits and is dominated by a number of major banks that have offices operating throughout the state and in the Company’s market area. The Company actively competes for all types of deposits and loans with other banks and with nonbank financial institutions, including savings and loan associations, finance companies, credit unions, mortgage companies, insurance companies and other lending institutions.
Institutions such as brokerage firms, credit card companies and even retail establishments offer alternative investment vehicles such as money market funds as well as traditional banking services. Other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity securities also represent a source of competition for the Company with respect to acquisition of deposits. Among the advantages that the major banks have over the Company is their ability to finance extensive advertising campaigns and to allocate their investment assets to regions of highest yield and demand, over a more diverse geographic area. Although major banks have these competitive advantages over small independent banks, the Bank has actively tried to turn the loss of local independent banks to its competitive advantage by soliciting customers who prefer the personal service offered by a small independent bank.
The Company does not depend upon a single customer or industry, the loss of which would have a material adverse effect on the Company’s financial condition. The Company believes that its prompt response to lending requests is a key factor to the Company’s competitive position in its primary service area. In addition, the accessibility of senior management to customers and local decision-making also distinguish the Company from other area financial institutions.
In order to compete with the other financial institutions in its primary service area, the Company relies principally upon local promotional activities, personal contact
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by its officers, directors, employees and stockholders and offering specialized services to customers. The Company’s promotional activities emphasize the advantages of dealing with a local bank attuned to the particular needs of the community.
Set forth below is a brief description of the material laws and regulations that affect the Company. The description of these statutes and regulations is only a summary and does not purport to be complete. This discussion is qualified in its entirety by reference to the statutes and regulations summarized below. No assurance can be given that these statutes or regulations will not change in the future.
General. The Company is subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Company is directly affected by the recently enacted Sarbanes-Oxley Act of 2002 (the “SOX”), which is aimed at improving corporate governance and reporting procedures and requires expanded disclosure of the Company’s corporate operations and internal controls. The Company is already complying with new SEC and other rules and regulations implemented pursuant to the SOX and intends to comply with any applicable rules and regulations implemented in the future. Although the Company anticipates that it will incur additional expense in complying with the provisions of the SOX and the resulting regulations, management does not expect that such compliance will have a material impact on the Company’s financial condition or results of operations.
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and is registered as such with, and subject to the supervision of, the Federal Reserve Bank of Richmond (the “FRB”). Generally, a bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5% of the voting shares of such bank. The FRB’s approval is also required for the merger or consolidation of bank holding companies.
The Company is required to file periodic reports with the FRB and provide any additional information as the FRB may require. The FRB also has the authority to examine the Company and the Bank, as well as any arrangements between the Company and the Bank, with the cost of any such examinations to be borne by the Company.
Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by Federal law in dealings with their holding companies and other affiliates. Subject to certain restrictions set forth in the Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the aggregate amount of such transactions of a bank and its subsidiaries with its affiliates does not exceed 10% of the capital stock and surplus of the bank on a per affiliate basis or 20% of the capital stock and surplus of the bank on an aggregate affiliate basis. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. Additionally, the Company and its subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services.
A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in nonbanking activities. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the FRB has determined by regulation or order are so closely related to banking as to be a proper incident to banking. In making these determinations, the FRB considers whether the performance of such activities by a bank holding company would offer advantages to the public that outweigh possible adverse effects.
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As a national bank, the Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency (the “Comptroller”). Each depositor’s account with the Bank is insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law, which is currently $100,000 for each depositor. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted by Federal banking law.
The regulations of the FDIC, the Comptroller and FRB govern most aspects of the Company’s business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, deposit interest rate ceilings and numerous other matters. As a consequence of the extensive regulation of commercial banking activities in the United States, the Company’s business is particularly susceptible to changes in state and Federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.
Governmental Policies and Legislation. Banking is a business that depends primarily on interest rate differentials. In general, the difference between the interest rates paid by the Company on its deposits and its other borrowings and the interest rates received by the Company on loans extended to its customers and securities held in its portfolio, comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond the Company’s control. Accordingly, the Company’s growth and earnings are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is affected not only by general economic conditions, but is also influenced by the monetary and fiscal policies of the Federal government and the policies of its regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in U.S. Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of bank holding companies, banks and other financial institutions are frequently made in Congress, in the Virginia Legislature and brought before various bank holding company and bank regulatory agencies. The likelihood of any major changes and the impact such changes might have are impossible to predict. Certain of the potentially significant changes that have been enacted recently by Congress or various regulatory or professional agencies are discussed below.
Dividends. There are regulatory restrictions on dividend payments by both the Bank and the Company that may affect the Company’s ability to pay dividends on its Common Stock. See “Item 5. Market for Common Equity and Related Stockholder Matters.”
Capital Requirements. The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks. These capital adequacy regulations are based upon a risk-based capital determination, whereby a bank holding company’s capital adequacy is determined in light of the risk, both on- and off-balance sheet, contained in the company’s assets. Different categories of assets are assigned risk weightings and are counted at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a bank holding company, Tier 1 capital consists primarily of common stock, related surplus, noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of qualifying cumulative preferred securities. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease losses up
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to a maximum of 1.25% of risk weighted assets, limited other types of preferred stock not included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The guidelines generally require banks to maintain a total qualifying capital to weighted risk assets level of 8% (the “Risk-based Capital Ratio”). Of the total 8%, at least 4% of the total qualifying capital to weighted risk assets (the “Tier 1 Risk-based Capital Ratio”) must be Tier 1 capital.
The FRB, the Comptroller and the FDIC have adopted leverage requirements that apply in addition to the risk-based capital requirements. Banks and bank holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets (the “Leverage Ratio”) of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum Leverage Ratio of at least 4.0% for all other banks. The FDIC and the FRB define Tier 1 capital for banks in the same manner for both the Leverage Ratio and the Risk-based Capital Ratio. However, the FRB defines Tier 1 capital for bank holding companies in a slightly different manner. An institution may be required to maintain Tier 1 capital of at least 4% or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors deemed material by regulatory authorities. As of December 31, 2002, the Company and Bank both met all applicable capital requirements imposed by regulation.
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). There are five capital categories applicable to insured institutions, each with specific regulatory consequences. If the appropriate Federal banking agency determines, after notice and an opportunity for hearing, that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition. The Comptroller has issued regulations to implement these provisions. Under these regulations, the categories are:
a. Well Capitalized -- The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a Risk-based Capital Ratio of 10% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 6% or greater, (iii) having a Leverage Ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
b. Adequately Capitalized -- The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a Risk-based Capital Ratio of 8% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 4% or greater and (iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating system.
c. Undercapitalized -- The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 8% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 4% or (iii) having a Leverage Ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a Leverage Ratio of less than 3%.
d. Significantly Undercapitalized -- The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 6% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 3% or (iii) having a Leverage Ratio of less than 3%.
e. Critically Undercapitalized -- The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.
An institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution must provide a limited guarantee that the
6
institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate Federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to the Company.
As of December 31, 2002, both the Company and the Bank were considered “well capitalized.”
Deposit Insurance Assessments. FDICIA also requires the FDIC to implement a risk-based assessment system in which the insurance premium relates to the probability that the deposit insurance fund will incur a loss and directs the FDIC to set semi-annual assessments in an amount necessary to increase the reserve ratio of the Bank Insurance Fund to at least 1.25% of insured deposits or a higher percentage as determined to be justified by the FDIC.
The FDIC has promulgated implementing regulations that base an institution’s risk category partly upon whether the institution is well capitalized (“1”), adequately capitalized (“2”) or less than adequately capitalized (“3”), as defined under the Prompt Corrective Action Regulations described above. In addition, each insured depository institution is assigned to one of three “supervisory subgroups.” Subgroup “A” institutions are financially sound institutions with few minor weaknesses, subgroup “B” institutions demonstrate weaknesses which, if not corrected, could result in significant deterioration, and subgroup “C” institutions are those as to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on the current capital levels the Company is categorized as a well-capitalized institution.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) implemented major changes to the statutory framework for providing banking and other financial services in the United States. The GLBA, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms and other financial service providers. A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incident or complimentary to financial activities. The activities that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the CRA (discussed below). In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company. While the Company satisfies these requirements, the Company has not elected for various reasons to be treated as a financial holding company under the GLBA.
We do not believe that the GLBA will have a material adverse impact on the Company’s or the Bank’s operations. To the extent that it allows banks, securities firms and
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insurance firms to affiliate, the financial services industry may experience further consolidation. The GLBA may have the result of increasing competition that we face from larger institutions and other companies offering financial products and services, many of which may have substantially greater financial resources.
The GLBA and certain new regulations issued by federal banking agencies also provide new protections against the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.
Community Reinvestment Act. The Bank is subject to the requirements of the Community Reinvestment Act (the “CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community credit needs currently is evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility.
USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA PATRIOT Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. Interim rules implementing the USA PATRIOT Act were issued effective March 4, 2002. The USA PATRIOT Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Although it does create a reporting obligation, the Bank does not expect the USA PATRIOT Act to materially affect its products, services or other business activities.
Reporting Terrorist Activities. The Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC. The Bank has been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
As of December 31, 2002, the Company had 78 full-time employees. The Company’s Management believes that its employee relations are good.
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Executive Officers of the Registrant
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Name (Age) |
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Principal Occupation During Past Five Years |
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Robert H. Gilliam, Jr. (57) |
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President & ChiefExecutive Officer of Pinnacle Bankshares Corporation and The First National Bank of Altavista; Director, Pinnacle Bankshares Corporation |
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Carroll E. Shelton (52) |
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Senior Vice President of Pinnacle Bankshares Corporation and The First National Bank of Altavista; Director, Pinnacle Bankshares Corporation |
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Bryan M. Lemley (31) |
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Secretary, Treasurer and Chief Financial Officer of Pinnacle Bankshares Corporation and Vice President, Cashier and Chief Financial Officer of The First National Bank of Altavista since June 2000; Internal Auditor of The First National Bank of Altavista from March through June 2000; Senior Auditor for One Valley Bancorp. from August 1994 through February 2000 |
Item 2. Description of Property.
The Company’s main office and corporate headquarters, located at 622 Broad Street in downtown Altavista, Virginia, is owned and occupied principally by the Bank.
The Vista Office, located at 1301 N. Main Street in Altavista, Virginia, consists of a single-story building owned by the Bank.
First National Mortgage, located at 17841 Forest Road in Forest, Virginia, consists of a single-story building leased by the Bank.
The Airport Office, located at 14580 Wards Road in Campbell County, Virginia, consists of a single-story building owned by the Bank.
The Old Forest Road Office, located at 3309 Old Forest Road in Lynchburg, Virginia, consists of a single-story building owned by the Bank.
The Brookville Plaza Office, located at 7805 Timberlake Road in Lynchburg, Virginia, consists of office space leased by the Bank in a local supermarket.
All of these properties are in good operating condition and are adequate for the Company’s present and anticipated future needs. The Company maintains comprehensive general liability and casualty loss insurance covering its properties and activities conducted in or about its properties. The Company believes such insurance provides adequate protection for liabilities or losses that might arise out of the ownership and use of such properties.
Neither the Company nor any of its properties is involved in any pending legal proceedings, nor are any such proceedings threatened, other than nonmaterial proceedings arising in the ordinary course of the Company’s business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the Company’s fiscal year ended December 31, 2002.
Item 5. Market for Common Equity and Related Stockholder Matters.
The information contained on page 45 of the 2002 Annual Report to Shareholders, under the caption, “Market for Common Equity and Related Stockholder Matters”, is
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incorporated herein by reference.
Item 6. Management’s Discussion and Analysis or Plan of Operation.
The information presented under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 6 through 20 of the 2002 Annual Report to Shareholders is incorporated herein by reference.
The consolidated financial statements of the Company and its subsidiary and independent auditors’ report thereon, contained on pages 21 through 44 of the 2002 Annual Report to Shareholders, are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Except as otherwise indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders (“Proxy Statement”) mailed to Shareholders on or about March 7, 2003.
Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act.
In response to this item, the Company hereby incorporates by reference the section entitled “Election of Directors,” at pages 3 through 6 of the Proxy Statement. The Company hereby incorporates by reference the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” on page 9 of the Proxy Statement. The information concerning the executive officers of the Company required by this item is included in Part I of this Form 10-KSB under the caption “Executive Officers of the Registrant.”
Item 10. Executive Compensation.
Information on Executive Compensation is contained on pages 6 through 9 of the Proxy Statement and is incorporated herein by reference. Information on compensation of directors is contained on page 5 of the Proxy Statement and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information on Security Ownership of Certain Beneficial Owners and Management is contained on pages 2 and 3 of the Proxy Statement and is incorporated herein by reference.
The following table sets forth information as of
Equity Compensation Plan Information
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Plan Category
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Number of securities to
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Weighted-average
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Number of securities
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| Equity compensation plans approved by shareholders |
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45,000 |
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$ |
11.92 |
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5,000 |
(1) |
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| Equity compensation plans not approved by shareholders |
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0 |
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$ |
0.00 |
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0 |
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Total
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45,000 |
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$ |
11.92 |
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5,000 |
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(1) |
Includes 5,000 shares available to be granted in the form of options, restricted stock or stock appreciation rights under the 1997 Incentive Stock Plan. |
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Item 12. Certain Relationships and Related Transactions.
Information on Certain Relationships and Related Transactions is contained on pages 5 and 6 of the Proxy Statement and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits Index
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Exhibit Number |
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Description |
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3.1 |
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Amended and Restated Articles of Incorporation (incorporated by reference to Appendix 1 to registrant’s amended registration statement on Form S-4 (File No. 333-20399) filed on January 30, 1997) |
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3.2 |
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Bylaws (incorporated by reference to Exhibit 3.2 to registrant’s registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997) |
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10.1 |
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1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrant’s registration statement on Form S-8 filed September 14, 1998) |
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10.2 |
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Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 12, 1998 (filed herewith) |
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10.3 |
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VBA Director’s Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (filed herewith) |
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13 |
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2002 Annual Report to Shareholders |
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21 |
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Subsidiaries |
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Consent of KPMG LLP |
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99.1 |
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CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) |
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(b) |
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Reports on Form 8-K |
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No reports on Form 8-K were filed during the fourth quarter of the Company’s fiscal year ended December 31, 2002. |
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Item 14. Controls and Procedures.
Pursuant to provisions of the Securities Exchange Act of 1934, Robert H. Gilliam, Jr., President and Chief Executive Officer (principal executive officer), and Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer (principal financial officer), of the Company are responsible for establishing and maintaining disclosure controls and procedures for the Company. They have designed such disclosure controls and procedures to ensure that material information relating to the Company, is made known to them by others within the Company, particularly during the periods when the Company’s quarterly and annual reports are being prepared. They have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date (“Evaluation Date”) of this annual report on Form 10-KSB, and based on their evaluation of these controls and procedures, concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their most recent evaluation.
12
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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P INNACLE B ANK S HARES C ORPORATION |
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MARCH 11, 2003
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/s/ R OBERT H. G ILLIAM , J R .. |
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Date
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Robert H. Gilliam Jr., President
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MARCH 11, 2003
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/s/ B RYAN M. L EMLEY |
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Date
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Bryan M. Lemley, Secretary,
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In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature
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/s/ A. W ILLARD A RTHUR |
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Director |
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March 11, 2003 |
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A. Willard Arthur |
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/s/ J AMES E. B URTON , IV |
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Director |
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March 11, 2003 |
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James E. Burton, IV |
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/s/ J OHN P. E RB |
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Director |
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March 11, 2003 |
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John P. Erb |
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/s/ R OBERT H. G ILLIAM , J R . |
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President, Chief Executive |
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March 11, 2003 |
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Officer and Director |
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Robert H. Gilliam, Jr. |
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/s/ R.B. H ANCOCK , J R . |
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Director |
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March 11, 2003 |
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R.B. Hancock, Jr. |
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/s/ J AMES P. K ENT , J R . |
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Director |
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March 11, 2003 |
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James P. Kent, Jr. |
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/s/ W ARREN G. L OWDER |
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Director |
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March 11, 2003 |
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Warren G. Lowder |
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/s/ P ERCY O. M OORE |
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Director |
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March 11, 2003 |
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Percy O. Moore |
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/s/ W ILLIAM F. O VERACRE |
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Director |
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March 11, 2003 |
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William F. Overacre |
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/s/ H ERMAN P. R OGERS , J R . |
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Director |
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March 11, 2003 |
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Herman P. Rogers, Jr. |
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/s/ C ARROLL E. S HELTON |
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Vice President and Director |
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March 11, 2003 |
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Carroll E. Shelton |
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/s/ J OHN L. W ALLER |
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Director |
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March 11, 2003 |
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John L. Waller |
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13
I, Robert H. Gilliam, Jr., certify that:
1. I have reviewed this annual report on Form 10-KSB of Pinnacle Bankshares Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: March 24, 2003 |
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/s/ R OBERT H. G ILLIAM , J R . |
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Robert H. Gilliam, Jr., President and Chief
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I, Bryan M. Lemley, certify that:
1. I have reviewed this annual report on Form 10-KSB of Pinnacle Bankshares Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: March 24, 2003 |
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/s/ B RYAN M. L EMLEY |
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Bryan M. Lemley, Secretary,
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15
EXHIBIT 10.2
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is entered into as of the 12th day of May, 1998 by and between Pinnacle Bankshares Corporation, a Virginia corporation (the “Company”), and Robert H. Gilliam, Jr. (the “Executive”).
RECITALS
I. The Executive currently serves as Chief Executive Officer of the Company, and is a key member of management of the Company and its affiliates, and his services and knowledge are valuable to the Company and its affiliates.
II. The Board (as defined below) has determined that it is in the best interests of the Company and its shareholders to assure that the Company and its affiliates will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage the Executive’s full attention and dedication to the Company and its affiliates currently and in the event of any threatened or pending Change in Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, it is hereby agreed as follows:
CERTAIN DEFINITIONS .
“Agreement Effective Date” means May 12, 1998.
The “Agreement Term” means the period commencing on the Agreement Effective Date and ending on the earlier of (i) the Agreement Regular Termination Date or (ii) the date this Agreement terminates pursuant to Section 7. The “Agreement Regular Termination Date” means the third anniversary of the Agreement Effective Date, provided, however, that commencing on the first anniversary of the Agreement Effective Date, and on each subsequent anniversary (such date and each subsequent anniversary shall be hereinafter referred to as the “Renewal Date”), unless this Agreement is previously terminated, the Agreement Regular Termination Date shall be automatically extended for three years from the latest Renewal Date, unless at least one month prior to the latest Renewal Date the Company shall give notice to the Executive in accordance with Section 10(c) of this Agreement that the Agreement Regular Termination Date shall not be so extended.
“Board” means the Board of Directors of the Company.
“Cause” means:
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the willful and continued failure of the Executive to substantially perform his duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board, pursuant to a vote of a majority of the “Outside Directors” (as defined below), which specifically identifies the manner in which the Outside Directors of the Board believe that the Executive has not substantially performed his duties, or |
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the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. |
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for
the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the members of the Board who are not and have never been employed by the Company or its subsidiaries (the “Outside Directors”) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive in accordance with Section 10(c) of this Agreement and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has engaged in the conduct described in paragraph (i) or (ii) above, and specifying the particulars thereof in detail.
The “Change in Control Date” means the first date during the Agreement Term on which a Change in Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment either (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the “Change in Control Date” shall mean the date immediately prior to the date of such termination of employment.
“Company” means Pinnacle Bankshares Corporation, a Virginia corporation.
“Coverage Period” means the period of time beginning with the Change in Control Date and ending on the earliest to occur of (i) the Executive’s death and (ii) the sixty-first day after the second anniversary of the Change in Control Date.
“Disability” means the absence of the Executive from his duties with the Company on a full-time basis for six months as a result of incapacity to serve as the Chief Executive Officer of the Company, including substantially all duties normally considered a part thereof, due to mental or physical illness or injury which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative. If the Company determines in good faith that the Disability of the Executive has occurred, it may give to the Executive written notice in accordance with Section 10(c) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of his duties.
“Good Reason” means any good faith determination made by the Executive (which determination shall be conclusive) that any of the following has occurred:
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the occurrence, on or after the Agreement Effective Date and during the Coverage Period, of any of the following: |
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the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change in Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive in accordance with Section 10(c) of this Agreement; |
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a reduction by the Company in the Executive’s rate of annual base salary, benefits (including, without limitation, incentive or bonus pay arrangements, stock plan benefit arrangements, and retirement and welfare plan coverage) and perquisites as in effect immediately prior to the Change in Control or as the same may be increased from time to time |
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thereafter, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive in accordance with Section 10(c) of this Agreement; |
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the Company’s requiring the Executive to be based at any office or location more than 35 miles from the facility where the Executive is located at the time of the Change in Control or the Company’s requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Change in Control Date (but determined without regard to travel necessitated by reason of any anticipated Change in Control); |
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any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; |
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any failure by the Company to comply with and satisfy Section 9(c) of this Agreement by obtaining satisfactory agreement from any successor to assume and perform this Agreement; or |
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so long as no Cause for Executive’s termination by the Company exists (or would exist assuming the Board made a determination of Cause), a voluntary cessation by the Executive of his employment for any reason during any Window Period. |
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any event or condition described in paragraph (i) of this Section 1(i) which occurs on or after the Agreement Effective Date, but prior to a Change in Control, but was at the request of a third party who effectuates the Change in Control, notwithstanding that it occurred prior to the Change in Control, but such event or condition shall not be considered to actually have occurred until the Change in Control Date. |
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“Covered Termination” means a termination of Executive’s employment during the Coverage Period (i) by the Company for any reason other than Cause or the Executive’s Disability or death, or (ii) by the Executive for Good Reason.
“Noncovered Termination” means a cessation of Executive’s employment which is not a Covered Termination.
“Window Period” means any of (i) the 60-day period commencing on the Change in Control Date, (ii) the 60-day period commencing on the first anniversary of the Change in Control Date, and (iii) the 60-day period commencing on the second anniversary of the Change in Control Date.
CHANGE IN CONTROL . “Change in Control” means the occurrence, during the Agreement Term, of either an “Acquisition of Controlling Ownership” (as defined in Section 2(a) below), a “Change in the Incumbent Board” (as defined in Section 2(b) below), a “Business Combination” (as defined in Section 2(c) below), or a “Liquidation or Dissolution” (as defined in Section 2(d) below).
“Acquisition of Controlling Ownership” means the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”). Notwithstanding the foregoing, for purposes of this Section 2(a), the following acquisitions shall not constitute a Change in Control:
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any acquisition directly from the Company, |
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any acquisition by the Company, |
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any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or |
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any acquisition by any corporation pursuant to a transaction which complies with paragraphs (i), (ii) and (iii) of) of this Section 2(c). |
“Change in the Incumbent Board” means that individuals who, as of May 12, 1998, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board. For this purpose, any individual who becomes a director subsequent to May 12, 1998, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be thereupon considered a member of the Incumbent Board (with his predecessor thereafter ceasing to be a member), but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board.
“Business Combination” means the consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”) unless all of the following occur:
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all or substantially all of the individuals and entities who were the beneficial owners respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries, in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, |
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no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and |
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at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. |
“Liquidation or Dissolution” means the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
OBLIGATIONS OF THE EXECUTIVE TO REMAIN EMPLOYED . The Executive agrees that in the event any person or group attempts a Change in Control, he shall not voluntarily leave the employ of the Company without Good Reason (i) until such attempted Change in Control terminates or (ii) if a Change in Control shall occur, until the Change in Control Date. For purposes of the foregoing clause (i), Good Reason shall be determined as if a Change in Control had occurred when such attempted Change in Control became known to the Board.
OBLIGATIONS UPON THE EXECUTIVE’S TERMINATION .
Notice of Termination . Any termination of the Executive’s employment by the
Company or by the Executive, other than by reason of death, shall be communicated by Notice of Termination to the other party hereto given. For purposes hereof:
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“Notice of Termination” means a written notice given in accordance with Section 10(c) of this Agreement which (A) states whether such termination is for Cause, Good Reason or Disability, (B) indicates the specific termination provision in this Agreement relied upon, if any, (C) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (D) if the Date of Termination is other than the date of receipt of such notice, specifies the termination date. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Cause or Disability shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder. |
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“Date of Termination” means (A) if the Executive’s employment is terminated by reason of Disability, the Disability Effective Date, (B) if the Executive’s employment is terminated by the Company for any reason other than Disability, the date of the Executive’s receipt of the Notice of Termination or any later date specified therein, as the case may be, and (C) if the Executive’s employment is terminated by the Executive for any reason, the date of the Company’s receipt of the Notice of Termination or any later date specified therein, as the case may be. |
Obligations of the Company in a Covered Termination . If the Executive’s employment shall cease by reason of a Covered Termination, then the following shall be paid or provided (the payments and benefits described in (i), (ii) and (iii) below may hereinafter sometimes be referred to as the “Change in Control Benefit” or “Change in Control Benefits”):
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the Company shall pay or cause to be paid in cash to the Executive in twelve (12) consecutive quarterly installments, with interest at the applicable federal rate (as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended (the “Code”)) determined at the Change in Control Date on the unpaid balance paid at the same time on each installment payment other than the first payment, with the first of such installments being paid not later than 30 days after the Date of Termination, (or if the Executive requests and the Company agrees in a lump sum within 30 days after the Date of Termination) and with the aggregate payments (excluding interest) totaling an amount equal to the product of (A) two and one-half and (B) the sum of the Executive’s (1) highest aggregate annual base salary from the Company and its affiliated companies in effect at any time during the 24 month period ending on the Change in Control Date and (2) highest aggregate annual bonuses (including any deferrals thereof) from the Company and its affiliated companies payable for the Company’s three fiscal years immediately preceding the fiscal year which includes the Change in Control Date; |
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for three years after the Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue or cause to be continued benefits to the Executive and/or the Executive’s family at least equal to those under the Welfare Benefit Plans. If the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for any retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period. For purposes hereof, the term “Welfare Benefit Plan” means the welfare benefit plans, practices, policies and programs provided by the Company and its affiliates (including, without limitation, any medical, prescription, dental, |
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vision, disability, life, accidental death and travel accident insurance plans and split dollar insurance programs) to the extent applicable generally to other peer executives of the Company and its affiliates, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the one year period immediately preceding the Change in Control Date or, if more favorable to the Executive, those provided generally at any time after the Change in Control Date to other peer executives of the Company and its affiliated companies; |
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if the Executive so requests in writing within one year after the Date of Termination, the Company shall purchase the residence which the Executive was using as his primary residence at the Change in Control Date, or such later date to which the Company consents in writing in its sole discretion, for an amount equal to its appraised fair market value at the time of purchase, where the appraisal is performed by an appraiser who is mutually agreeable to the Executive and the Company or otherwise is selected by the Executive from a list of not less than five appraisers selected by the Company and not doing any substantial business with the Company; and |
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to the extent not theretofore paid or provided, the Company shall timely pay or cause to be paid or provide or cause to be provided to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any compensation arrangement, plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”). |
Obligations of the Company in a Noncovered Termination . If the Executive’s employment shall cease by reason of a Noncovered Termination, this Agreement shall terminate without further obligations to the Executive other than the obligation timely to pay or cause to be paid or provide or cause to be provided to the Executive his Other Benefits.
FULL SETTLEMENT .
No Offset or Mitigation . The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment.
Executive’s Expenses in Dispute Resolution . The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of a contest (in which the Executive substantially prevails) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the lower of (i) the Crestar Bank Prime Rate or (ii) the applicable Federal mid-term rate provided for in Section 1274(d), compounded semi-annually, of the Code.
Payment prior to Dispute Resolution . If there shall be any dispute between the Company and the Executive in the event of any termination of Executive’s employment, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was a Noncovered Termination, that the determination by the Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to the Executive and his dependents or other beneficiaries, as the case may be, under Section 4(b), the Company shall pay all amounts, and provide all benefits, to the Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 4(b) as though such termination were not a Noncovered Termination. Notwithstanding the foregoing, the Company shall not be required to pay any
disputed amounts pursuant to this Section 5(c) except upon receipt of an adequate bond, letter of credit or undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled.
PAYMENT LIMITATIONS .
Excise Tax Payment Limitation . Notwithstanding anything contained in this Agreement or any other agreement or plan to the contrary, the payments and benefits provided to, or for the benefit of, the Executive under this Agreement or under any other plan or agreement which became payable or are taken into account as a result of the Change in Control (the “Payments”) shall be reduced (but not below zero) to the extent necessary so that no payment to be made, or benefit to be provided, to the Executive or for his benefit under this Agreement or any other plan or agreement shall be subject to the imposition of an excise tax under Section 4999 of the Code (such reduced amount is hereinafter referred to as the “Limited Payment Amount”). Unless the Executive and the Company shall otherwise agree, the Company shall reduce or eliminate the Payments to the Executive by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing Executive’s rights and entitlements to any benefits or compensation.
Excise Tax Payment Limitation Determinations . All determinations required to be made under this Section 6 shall be made by the Company’s public accounting firm (the “Accounting Firm”). The Accounting Firm shall provide its calculations, together with detailed supporting documentation, both to the Company and the Executive within fifteen days after the receipt of notice from the Company that there has been a Payment (or at such earlier times as is requested by the Company) and, with respect to any Limited Payment Amount, a reasonable opinion to the Executive that he is not required to report any excise tax on his federal income tax return with respect to the Limited Payment Amount (collectively, the “Determination”). In the event that the Accounting Firm is serving as an accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determination required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The Determination by the Accounting Firm shall be binding upon the Company and the Executive (except as provided in Section 6(c) below).
Excise Tax Excess Payments Considered a Loan . If it is established pursuant to a final determination of a court or an Internal Revenue Service (the “IRS”) proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, the Executive by the Company, which are in excess of the limitations provided in Section 6(a) (hereinafter referred to as an “Excess Payment”), such Excess Payment shall be deemed for all purposes to be a loan to the Executive made on the date the Executive received the Excess Payment and the Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive’s receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Payments which will not have been made by the Company should have been made (an “Underpayment”), consistent with the calculations required to be made under this Section 6. In the event that it is determined (i) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (ii) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to the Executive within ten days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to the Executive until the date of payment.
Banking Payment Limitation . Notwithstanding anything contained in this Agreement or any other agreement or plan to the contrary, the payments and benefits provided
to, or for the benefit of, the Executive under this Agreement or under any other plan or agreement shall be reduced (but not below zero) to the extent necessary so that no payment to be made, or benefit to be provided, to the Executive or for his benefit under this Agreement or any other plan or agreement shall be in violation of the golden parachute and indemnification payment limitations and prohibitions of 12 CFR Section 359.
TERMINATION OF AGREEMENT . This Agreement shall be effective as of the Agreement Effective Date and shall normally continue until the later of the Agreement Regular Termination Date or, if a Change in Control has occurred, until the end of the Coverage Period. Notwithstanding the foregoing, this Agreement shall terminate in any event upon the Executive’s cessation of employment in a Noncovered Termination.
CONFIDENTIAL INFORMATION .
No Disclosure by Executive . The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.
Remedies for Breach . It is recognized that damages in the event of breach of Section 8(a) above by the Executive would be difficult, if not impossible, to ascertain, and it is therefore specifically agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which it may have.
Breach Not Basis to Withhold Payment . In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
BENEFIT AND SUCCESSORS .
Executive’s Benefit . This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die and any amount remains payable hereunder after his death, any such amount, unless otherwise agreed by the Company or provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee or other designee of such payment or, if there is no such designee, the Executive’s estate.
Company’s Benefit . This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
Assumption by Successor to Company . The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
MISCELLANEOUS .
Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.
Amendment . This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
Notices . All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
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Robert H. Gilliam, Jr. |
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185 Dearing Ford Road |
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Lynch Station, Virginia 24571 |
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If to the Company: |
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Pinnacle Bankshares Corporation |
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622 Broad Street |
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P. O. Box 29 |
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Altavista, Virginia 24517 |
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
Severability . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
Tax Withholding . The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
Waiver . The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
Executive’s Employment . The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to paragraph (ii) of Section 1(i) hereof deeming a termination to have occurred on or after the occurrence of a Change in Control Date, the Executive’s employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Change in Control Date, in which case the Executive shall have no further rights under this Agreement.
Nonexclusivity of Rights . Except as expressly provided in Section 6, nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Executive’s termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
Statutory References . Any reference in this Agreement to a specific statutory provision shall include that provision and any comparable provision or provisions of future legislation amending, modifying, supplementing or superseding the referenced provision.
Nonassignability . This Agreement is personal to the Executive, and without the prior written consent of the Company, no right, benefit or interest hereunder shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, except by will or the laws of descent and distribution, and any attempt thereat shall be void; and no right, benefit or interest hereunder shall, prior to receipt of payment, be in any manner liable for or subject to the recipient’s debts, contracts, liabilities, engagements or torts.
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be considered an original and all of which together shall constitute one agreement.
Employment with Affiliates . Employment with the Company for purposes of this Agreement shall include employment with any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of such corporation or other entity entitled to vote generally in the election of directors or which has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
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/s/ |
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R OBERT H. G ILLIAM , J R ., Executive |
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/s/ |
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P INNACLE B ANKSHARES C ORPORATION |
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EXHIBIT 10.3
VIRGINIA BANKERS ASSOCIATION
MODEL DEFERRED COMPENSATION PLAN
FOR
DIRECTORS
(January, 1998)
ADOPTION AGREEMENT
If the Corporation completing this document has any questions about the adoption of the Plan, the provisions of the Plan, its representative should contact Bette J. Albert, C.L.U. at the Virginia Bankers Association Benefits Corporation, 700 East Main Street, Suite 1411, Post Office Box 462, Richmond, Virginia 23203, telephone number (804) 643-7469 during business hours.
Each Corporation named below hereby adopts the Plan through this Adoption Agreement (the “Adoption Agreement”), to be effective as of the date(s) specified below, and elects the following specifications and provides the following information relating thereto:
In completing this Adoption Agreement, if additional space is required insert additional sheets.
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Adoption Agreement Contents |
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Option 1
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Corporation(s) Adopting Plan Named In Paragraph 1.9 of the Plan |
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Option 2
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Option 3
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Option 4
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Option 5
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Option 6
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1.
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(a)
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Name of Corporation: |
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Corporation’s telephone Number |
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Pinnacle Bankshares Corporation |
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(804) 369-3000 |
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Address of Corporation: |
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Corporation’s EIN: |
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Post Office Box 29 |
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54-1832714 |
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Altavista, VA 24517-0029 |
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(e) |
Corporation’s Tax Year End: |
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12/31 |
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Name, Address and Identifying Information of Other Participating Corporations Adopting the Plan: |
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(a) |
Name of Plan: |
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VBA Director’s Deferred Compensation Plan for Pinnacle Bankshares Corporation |
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(b) |
Name, Address and E.I.N. of Plan Administrator(s): (If other than Plan Sponsor, appointment must be by resolution.] |
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(a) |
Effective Date of Plan : The Effective Date of the Plan is December 1, 1997. |
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(b) |
Plan Status . The adoption of the Plan through this Adoption Agreement is: |
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Initial Establishment . The initial adoption and establishment of the Plan. |
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(2) |
Restated Plan . An amendment and restatement of the Plan (a Restated Plan). |
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(A) |
Effective Date of this Restatement . The Effective Date of this Restatement of the Plan is ___________, 19__. |
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(B) |
Prior Plan . The Plan was last maintained under document dated ______, 19___ and was known as the |
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(C) |
Transitional or Special Provisions . [Enter any transitional or special provisions relating to a Rollover Account and the Plan as restated.] |
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(c) |
Adoption of Plan by Additional Corporations after Effective Date of Plan . The Effective Date(s) of the Plan with respect to |
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[Enter name(s) of additional Corporations adopting Plan] is (are)____________________________________ [Enter (date(s) Plan is first effective as to additional Corporation(s).] |
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(a) |
Compensation
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Compensation is used throughout the basic plan document for different purposes. The following specific rules apply. |
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The earlier of a date certain or his termination as a Director of the Corporation. |
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(v) |
Describe other options to be available: |
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(B) |
Timing of Participant Election . Participant shall elect Benefit Commencement Date at the following time: |
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At Time Deferral Election is Made . The Participant election of the Benefit Commencement Date shall be made at the time his first Deferred Contribution Election is filed under the Plan. |
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In Plan Year Prior to Date Elected . The Participant election of the Benefit Commencement Date shall be made no later than the earlier of (a) the end of the Plan Year prior to the Benefit Commencement Date selected and (b) at least 90 days before the selected date. |
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(b)
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Form of Payment
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The form of benefit payments available to the Participant shall be determined in accordance with the following rules: |
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Selected By Corporation . The Corporation selects the following form of payment: |
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Lump Sum Payment . Deferral Benefits will be paid in the form of a lump sum payment. |
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Periodic Installments . Deferral Benefits will be paid in the form of periodic installment payments made: |
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(i) |
Frequency : |
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Monthly. |
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Quarterly. |
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(c) |
Semi-Annually. |
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Annually. |
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7
8
IN WITNESS WHEREOF, each Corporation, by its duly authorized representatives, has executed this instrument this 1st day of April, 1998.
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P INNACLE B ANKSHARE s C ORPORATION |
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[Enter Name of Corporation] |
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By |
/s/ R OBERT H. G ILLIAM J R . |
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Its |
President |
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[SEAL]
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ATTEST:
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/s/
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Its
Secretary, Treasurer & CFO
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[Enter Name of Corporation] |
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ATTEST:
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9
EXHIBIT 13
PINNACLE BANKSHARES CORPORATION
2002 Annual Report
[PHOTO]
Front Row:
Herman P. Rogers, Jr., Percy O. Moore, James P. Kent, Jr., Carroll E. Shelton, William
F. Overacre
Back Row:
Robert H. Gilliam Jr., James E. Burton, IV, John P. Erb, A. Willard Arthur, John L. Waller, R.B. Hancock, Jr.
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BOARD OF DIRECTORS |
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A. Willard Arthur |
Warren G. Lowder |
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Chairman and Secretary |
Vice President |
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Marvin V. Templeton & Sons, Inc. |
Classic Design Furnishings, Inc. |
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James E. Burton, IV |
Percy O. Moore |
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Vice President, Operations |
Retired |
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Marvin V. Templeton & Sons, Inc. |
Customer Service Supervisor |
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John P. Erb |
William F. Overacre |
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Assistant Superintendent |
President & Owner |
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Campbell County Schools |
Overacre, Inc. d/b/a RE/MAX 1st Olympic |
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Robert H. Gilliam, Jr. |
Herman P. Rogers, Jr. |
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President & CEO |
Plant Manager |
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The First National Bank of Altavista |
BGF Industries, Inc. |
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Pinnacle Bankshares Corporation |
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R. B. Hancock Jr. |
Carroll E. Shelton |
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President & Owner |
Senior Vice President |
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R.B.H., Inc. d/b/a Napa Auto Parts |
The First National Bank of Altavista |
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Pinnacle Bankshares Corporation |
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James P. Kent, Jr. |
John L. Waller |
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Partner |
Owner & Operator |
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Kent & Kent |
Waller Farms, Inc. |
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
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Officers and Managers |
1 |
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Office Locations |
2 |
|
|
Selected Consolidated Financial Information |
3 |
|
|
President’s Letter |
4 |
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
6 |
|
|
Consolidated Balance Sheets |
21 |
|
|
Consolidated Statements of Income |
22 |
|
|
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income |
23 |
|
|
Consolidated Statements of Cash Flows |
24 |
|
|
Notes to Consolidated Financial Statements |
26 |
|
|
Independent Auditors’ Report |
44 |
|
|
Shareholder Information |
45 |
|
Officers |
||
|
Pinnacle Bankshares Corporation |
||
|
Robert H. Gilliam, Jr. |
President & Chief Executive Officer |
|
|
Carroll E. Shelton |
Vice President |
|
|
Bryan M. Lemley |
Secretary, Treasurer & Chief Financial Officer |
|
|
Officers and Managers |
||
|
The First National Bank of Altavista |
||
|
Robert H. Gilliam, Jr. |
President, Chief Executive Officer & Trust Officer |
|
|
Carroll E. Shelton |
Senior Vice President & Chief Lending Officer |
|
|
Bryan M. Lemley |
Vice President, Cashier & Chief Financial Officer |
|
|
William J. Sydnor, II |
Vice President & Branch Administration Officer |
|
|
Betty S. Adkins |
Vice President & Deposit Services Manager |
|
|
Lucy H. Johnson |
Vice President & Data Processing Manager |
|
|
Judith A. Clements |
Vice President & Director of Human Resources |
|
|
Frank R. Chrzanowski |
Vice President & Mortgage Division Manager |
|
|
Pamela R. Adams |
Vice President & Mortgage Operations Manager |
|
|
Cecilia L. Doyle |
Vice President & Loan Administration Officer |
|
|
Thomas R. Burnett, Jr. |
Vice President & Commercial Lending Officer |
|
|
Aubrey H. Hall, III |
Vice President & Business Development Officer |
|
|
Albert N. Fariss |
Assistant Vice President & Facilities/Purchasing Manager |
|
|
Ronald C. Clay |
Assistant Vice President & Recovery Manager |
|
|
Brenda M. Eades |
Assistant Vice President & Real Estate Loan Officer |
|
|
Tarry R. Pribble |
Assistant Vice President & Collection Manager |
|
|
Tony J. Bowling |
Assistant Vice President, Network Administrator & Security Officer |
|
|
Marian E. Marshall |
Assistant Vice President & Branch Manager |
|
|
Daniel R. Wheeler |
Assistant Vice President & Branch Manager |
|
|
Shawn D. Stone |
Assistant Vice President & Branch Manager |
|
|
Cynthia V. Dunnavant |
Loan Officer, Assistant Branch Manager, Compliance & Bank Secrecy Act Officer |
|
|
J. Mark Cook |
Loan Officer & Assistant Branch Manager |
|
|
Terri C. Harris |
Loan Officer & Dealer Finance Manager |
|
|
Doris N. Trent |
Loan Officer |
|
|
Vicki G. Greer |
Internal Auditor |
|
|
Cynthia I. Gibson |
Bookkeeping Manager |
|
|
Barbara H. Caldwell |
Deposit Administration Manager |
|
|
Marion E. Clark |
Loan Administration Manager |
1
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Office Locations
ALTAVISTA
MAIN OFFICE
622 Broad Street
Altavista, Virginia 24517
Telephone: (434) 369-3000
VISTA OFFICE
1301 N. Main Street
Altavista, Virginia 24517
Telephone: (434) 369-3001
LYNCHBURG
AIRPORT OFFICE
14580 Wards Road
Lynchburg, Virginia 24502
Telephone: (434) 237-3788
BROOKVILLE PLAZA OFFICE
7805 Timberlake Road
Lynchburg, Virginia 24502
Telephone: (434) 237-7936
OLD FOREST ROAD OFFICE
3309 Old Forest Road
Lynchburg, Virginia 24501
Telephone: (434) 385-4432
FOREST
FIRST NATIONAL MORTGAGE
Route 221, Graves Mill Center
Forest, Virginia 24551
Telephone: (434) 385-8494
2
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Selected Consolidated Financial Information
(In thousands, except ratios, share and per share data)
|
Years ended December 31, |
||||||||||||||||
|
2002 |
2001 |
2000 |
1999 |
1998 |
||||||||||||
|
Income Statement Data: |
||||||||||||||||
|
Net interest income |
$ |
7,096 |
|
6,100 |
|
6,260 |
|
5,392 |
|
5,073 |
|
|||||
|
Provision for loan losses |
|
429 |
|
380 |
|
360 |
|
340 |
|
300 |
|
|||||
|
Noninterest income |
|
1,756 |
|
1,632 |
|
1,208 |
|
892 |
|
650 |
|
|||||
|
Noninterest expenses |
|
5,814 |
|
5,401 |
|
4,713 |
|
3,863 |
|
3,358 |
|
|||||
|
Income tax expense |
|
723 |
|
488 |
|
637 |
|
526 |
|
548 |
|
|||||
|
Net income |
|
1,886 |
|
1,463 |
|
1,758 |
|
1,555 |
|
1,517 |
|
|||||
|
Per Share Data: |
||||||||||||||||
|
Basic net income |
$ |
1.30 |
|
1.01 |
|
1.22 |
|
1.08 |
|
1.06 |
|
|||||
|
Diluted net income |
|
1.29 |
|
1.00 |
|
1.21 |
|
1.07 |
|
1.05 |
|
|||||
|
Cash dividends |
|
0.41 |
|
0.40 |
|
0.39 |
|
0.36 |
|
0.35 |
|
|||||
|
Book value |
|
14.02 |
|
12.72 |
|
11.97 |
|
10.83 |
|
10.53 |
|
|||||
|
Weighted-Average Shares Outstanding: |
||||||||||||||||
|
Basic |
|
1,453,013 |
|
1,449,681 |
|
1,442,422 |
|
1,439,298 |
|
1,438,050 |
|
|||||
|
Diluted |
|
1,461,300 |
|
1,456,905 |
|
1,451,261 |
|
1,451,754 |
|
1,448,570 |
|
|||||
|
Balance Sheet Data: |
||||||||||||||||
|
Assets |
$ |
199,899 |
|
199,966 |
|
179,736 |
|
153,956 |
|
142,458 |
|
|||||
|
Loans, net |
|
129,999 |
|
122,502 |
|
118,962 |
|
100,737 |
|
90,532 |
|
|||||
|
Securities |
|
42,731 |
|
45,070 |
|
39,426 |
|
37,260 |
|
35,072 |
|
|||||
|
Cash and cash equivalents |
|
19,963 |
|
24,183 |
|
12,352 |
|
8,130 |
|
10,682 |
|
|||||
|
Deposits |
|
178,243 |
|
179,841 |
|
160,593 |
|
136,389 |
|
125,187 |
|
|||||
|
Stockholders’ equity |
|
20,372 |
|
18,460 |
|
17,300 |
|
15,590 |
|
15,142 |
|
|||||
|
Performance Ratios: |
||||||||||||||||
|
Return on average assets |
|
0.94 |
% |
0.77 |
% |
1.07 |
% |
1.03 |
% |
1.12 |
% |
|||||
|
Return on average equity |
|
9.79 |
% |
8.18 |
% |
10.62 |
% |
10.10 |
% |
10.40 |
% |
|||||
|
Dividend payout |
|
31.54 |
% |
39.60 |
% |
31.97 |
% |
33.33 |
% |
33.18 |
% |
|||||
|
Asset Quality Ratios: |
||||||||||||||||
|
Allowance for loan losses to total loans, net of unearned income and fees |
|
0.99 |
% |
0.95 |
% |
0.89 |
% |
0.92 |
% |
0.96 |
% |
|||||
|
Net charge-offs to average loans, net of unearned income and fees |
|
0.24 |
% |
0.22 |
% |
0.21 |
% |
0.29 |
% |
0.20 |
% |
|||||
|
Capital Ratios: |
||||||||||||||||
|
Leverage |
|
9.44 |
% |
8.92 |
% |
9.43 |
% |
10.47 |
% |
10.66 |
% |
|||||
|
Risk-based: |
||||||||||||||||
|
Tier 1 capital |
|
12.37 |
% |
12.28 |
% |
13.30 |
% |
14.87 |
% |
15.30 |
% |
|||||
|
Total capital |
|
13.21 |
% |
13.10 |
% |
14.15 |
% |
15.75 |
% |
16.20 |
% |
|||||
|
Average equity to average assets |
|
9.62 |
% |
9.37 |
% |
10.11 |
% |
10.24 |
% |
10.76 |
% |
|||||
3
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
The financial performance of Pinnacle Bankshares, the parent company for The First National Bank of Altavista, showed marked improvement for 2002 when compared with 2001. Net income increased 28.91% in 2002 to $1,886,000, an all-time high for the Company. On the other hand, returns on assets and equity in 2002 fell short of levels achieved in 2000. Return on average assets was 0.94% for 2002, while return on average equity was 9.79%.
As reported to you previously, in the course of the dramatic decline in interest rates in 2001 our loans and investments repriced more rapidly than did our deposits. The repricing of a large portion of our liabilities in 2002 resulted in a reduction in our cost of funds and was primarily responsible for the improvement in earnings for the year. Whereby our net interest income declined from 2000 to 2001, 2002 saw an increase in net interest income of 16.33%.
With lower deposit pricing occurring in 2002, it was difficult to attract new deposits and even maintaining existing deposit levels was a challenge. Total deposits fell 0.89% for 2002 and ended the year at $178,243,000. In spite of the stagnant economy, net loans outstanding grew by 6.12% and amounted to $129,999,000 at the end of 2002. Expansion of our market area and the addition of an experienced commercial lender to our staff helped enable us to expand our loan portfolio. Total assets remained virtually unchanged at just under $200,000,000.
Stockholders’ equity as of December 31, 2002 was $20,372,000, an increase of 10.36% for the year. Book value per share was $14.02 as of the end of 2002. Average equity to average assets for the year was 9.62% and the Company continues to be “well capitalized” by all standard measurements. The cash dividend rate increased to $0.41 per share in 2002 from $0.40 per share in 2001 and the dividend payout ratio for 2002 was 31.54%.
The Bank evaluated its personal checking account offerings in 2002 and as a result revamped and streamlined these offerings to make them more easily understood by the consumer and more easily sold by the Bank’s staff. A new “no service charge” account coupled with “Overdraft Privilege” was introduced in December. “Overdraft Privilege” provides for the payment of insufficient funds items, within limits and at a fee, rather than automatically returning such items. This service, which has been well received, is offered as a convenience to our customers and serves as a source of additional income for the Bank.
The Board of Directors and senior management collectively spent a great deal of time and effort in 2002 toward the development of a strategic plan. This plan will serve as a guide in the management of the future direction of your Company. The first obvious result of the plan is the pursuit of a site for a new retail branch operation within the greater Lynchburg market. Acquisition and development of a site is anticipated in 2003.
4
William F. Overacre, President and owner of Overacre, Inc. doing business as RE/MAX lst Olympic, was newly elected to the boards of Pinnacle and First National in 2002. 2002 also saw the end of service on our boards for Alvah Bohannon who has moved out of the area. Mr. Bohannon provided diligent and faithful service to this Company over a span of seventeen years. His lasting contributions are appreciated and his participation in the affairs of our Company is missed.
Your board and management are dedicated to enhancing the value of your investment in this Company. Thank you for your ongoing support of our efforts and for the business you share with First National Bank.
We look forward to the pleasure of your participation in our annual meeting which is scheduled to take place at 11:30 a.m., Tuesday, April 8, 2003 in the Fellowship Hall of Altavista Presbyterian Church, 707 Broad Street, Altavista, Virginia.
|
/s/ Robert H. Gilliam, Jr. Robert H. Gilliam, Jr. President and Chief Executive Officer |
February 26, 2003
5
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Years ended December 31, 2002 and 2001
(In thousands, except ratios, share and per share data)
Management’s Discussion and Analysis
The following discussion is qualified in its entirety by the more detailed information and the consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report. In addition to the historical information contained herein, this Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will” or similar expressions. 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. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates; general economic conditions; the legislative/regulatory climate; 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 or investment portfolios; demand for loan products; deposit flows; 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 statements contained herein, and you should not place undue reliance on such statements, which reflect our position as of the date of this report.
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. Bankshares conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, The First National Bank of Altavista (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 its subsidiary (collectively the Company). This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes.
Overview
Total assets at December 31, 2002 were $199,899, down 0.03% from $199,966 at December 31, 2001. The principal components of the Company’s assets at the end of the year were $19,963 in cash and cash equivalents, $42,731 in securities and $129,999 in net loans. During the year ended December 31, 2002, gross loans increased 6.14% or $7,599. The Company’s lending activities are a principal source of income.
Total liabilities at December 31, 2002 were $179,527, down 1.09% from $181,506 at December 31, 2001, with the decrease reflective of a slight decrease in total deposits of $1,598 or 0.89%. Noninterest-bearing demand deposits decreased $94 or 0.65% and represented 8.12% of total deposits at December 31, 2002, compared to 8.10% at December 31, 2001. Time deposits represented the largest portion of the decrease in deposits with a decrease of $1,916 or 1.81% at December 31, 2002. The Company’s deposits are provided by individuals and businesses located within the communities served.
6
Total stockholders’ equity at December 31, 2002 was $20,372 compared to $18,460 at December 31, 2001.
The Company had net income of $1,886 for the year ended December 31, 2002, compared to net income of $1,463 for the year ended December 31, 2001, an increase of 28.91%.
Profitability as measured by the Company’s return on average assets (ROA) was 0.94% in 2002, up from 0.77% in 2001. Another key indicator of performance, the return on average equity (ROE), was 9.79% for 2002, compared to 8.18% for 2001.
Results of Operations
Net Interest Income . Net interest income represents the principal source of earnings for the Company. Net interest income is the amount by which interest and fees generated from loans, securities and other interest-earning assets exceed the interest expense associated with funding those assets. 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. Changes in the interest rate environment and the Company’s cost of funds also affect net interest income.
The net interest spread increased to 3.51% for the year ended December 31, 2002 from 3.00% for the year ended December 31, 2001. Net interest income was $7,096 ($7,354 on a tax-equivalent basis) for the year ended December 31, 2002, compared to $6,100 ($6,416 on a tax-equivalent basis) for the year ended December 31, 2001, and is attributable to interest income from loans, federal funds sold and securities exceeding the cost associated with interest paid on deposits and other borrowings. In the course of the dramatic decline in interest rates in 2001, our loans and investments repriced at lower rates more rapidly than did our deposits during 2001. The increase in the interest rate spread in 2002 is due primarily to the repricing of a large portion of our interest-bearing liabilities resulting in a reduction in our cost of funds. The Bank’s yield on interest-earning assets for the year ended December 31, 2002 was 1.08% lower than the year ended December 31, 2001 due to the lower interest rate environment in 2002; however, the Bank’s cost of funds rate on interest-bearing liabilities in 2002 was 1.59% lower compared to the same period in 2001.
The following table presents the major categories of interest-earning assets, interest-earning liabilities and stockholders’ equity with corresponding average balances, related interest income or interest expense and resulting yield and rates for the periods indicated.
ANALYSIS OF NET INTEREST INCOME
|
Years ended December 31, |
|||||||||||||||||
|
2002 |
2001 |
||||||||||||||||
|
Average balance(1) |
Interest income/ expense |
Rate earned/ paid |
Average balance(1) |
Interest income/ expense |
Rate earned/ paid |
||||||||||||
|
Assets |
|||||||||||||||||
|
Interest-earning assets: |
|||||||||||||||||
|
Loans (2)(3) |
$ |
130,233 |
|
9,315 |
7.15 |
% |
121,587 |
|
10,368 |
8.53 |
% |
||||||
|
Investment securities: |
|||||||||||||||||
|
Taxable |
|
33,302 |
|
1,949 |
5.85 |
% |
26,525 |
|
1,690 |
6.37 |
% |
||||||
|
Tax-exempt (4) |
|
11,912 |
|
828 |
6.95 |
% |
12,852 |
|
929 |
7.23 |
% |
||||||
|
Interest-earning deposits |
|
73 |
|
1 |
1.37 |
% |
76 |
|
3 |
3.95 |
% |
||||||
|
Federal funds sold |
|
13,452 |
|
221 |
1.64 |
% |
19,007 |
|
689 |
3.62 |
% |
||||||
|
|
|
|
|
|
|
|
|||||||||||
|
Total interest-earning assets |
|
188,972 |
|
12,314 |
6.52 |
% |
180,047 |
|
13,679 |
7.60 |
% |
||||||
|
Other assets: |
|||||||||||||||||
|
Allowance for loan losses |
|
(1,219 |
) |
(1,142 |
) |
||||||||||||
|
Cash and due from banks |
|
4,419 |
|
3,901 |
|
||||||||||||
|
Other assets, net |
|
7,949 |
|
8,062 |
|
||||||||||||
|
|
|
|
|
|
|||||||||||||
|
Total assets |
$ |
200,121 |
|
190,868 |
|
||||||||||||
|
|
|
|
|
|
|||||||||||||
7
ANALYSIS OF NET INTEREST INCOME, Continued
|
Years ended December 31, |
|||||||||||||||||
|
2002 |
2001 |
||||||||||||||||
|
Average balance(1) |
Interest income/expense |
Rate earned/paid |
Average balance(1) |
Interest income/expense |
Rate earned/paid |
||||||||||||
|
Liabilities and Stockholders’ Equity |
|||||||||||||||||
|
Interest-bearing liabilities: |
|||||||||||||||||
|
Savings and NOW |
$ |
59,905 |
|
676 |
1.13 |
% |
55,226 |
|
1,390 |
2.52 |
% |
||||||
|
Time |
|
104,240 |
|
4,249 |
4.08 |
% |
102,040 |
|
5,832 |
5.72 |
% |
||||||
|
Other borrowings |
|
560 |
|
35 |
6.25 |
% |
662 |
|
41 |
6.19 |
% |
||||||
|
|
|
|
|
|
|
|
|||||||||||
|
Total interest-bearing liabilities |
|
164,705 |
|
4,960 |
3.01 |
% |
157,928 |
|
7,263 |
4.60 |
% |
||||||
|
Noninterest-bearing liabilities: |
|||||||||||||||||
|
Demand deposits |
|
15,087 |
13,689 |
||||||||||||||
|
Other liabilities |
|
1,071 |
1,364 |
||||||||||||||
|
|
|
|
|||||||||||||||
|
Total liabilities |
|
180,863 |
172,981 |
||||||||||||||
|
Stockholders’ equity |
|
19,258 |
17,887 |
||||||||||||||
|
|
|
|
|||||||||||||||
|
Total liabilities and stockholders’ equity |
$ |
200,121 |
190,868 |
||||||||||||||
|
|
|
|
|||||||||||||||
|
|
|
|
|
||||||||||||||
|
Net interest income |
$ |
7,354 |
$ |
6,416 |
|||||||||||||
|
|
|
|
|
||||||||||||||
|
Net interest margin (5) |
3.89 |
% |
3.56 |
% |
|||||||||||||
|
|
|
|
|
||||||||||||||
|
Net interest spread (6) |
3.51 |
% |
3.00 |
% |
|||||||||||||
|
|
|
|
|
||||||||||||||
| (1) | Averages are daily averages. |
| (2) | Loan interest income includes accretion of loan fees of $40 and $156 for 2002 and 2001, respectively. |
| (3) | For the purpose of these computations, nonaccrual loans are included in average loans. |
| (4) | Tax-exempt income from investment securities is presented on a tax-equivalent basis assuming a 34% U.S. Federal tax rate for 2002 and 2001. |
| (5) | The net interest margin is calculated by dividing net interest income by average total interest-earning assets. |
| (6) | The net interest spread is calculated by subtracting the interest rate paid on interest-bearing liabilities from the interest rate earned on interest-earning assets. |
As discussed above, the Company’s net interest income is affected by the change in the amounts and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change,” as well as by changes in yields earned on interest-earning assets and rates paid on deposits and other borrowed funds, referred to as “rate change.” The following table presents, for the periods indicated, a summary of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities and the amounts of change attributable to variations in volumes and rates.
8
RATE/VOLUME ANALYSIS
|
Years ended December 31, |
|||||||||||||||||||
|
2002 compared to 2001 Increase (decrease) |
2001 compared to 2000 Increase (decrease) |
||||||||||||||||||
|
Volume |
Rate |
Net |
Volume |
Rate |
Net |
||||||||||||||
|
Interest earned on interest-earning assets: |
|||||||||||||||||||
|
Loans (1) |
$ |
449 |
|
(1,502 |
) |
(1,053 |
) |
814 |
|
(475 |
) |
339 |
|
||||||
|
Investment securities: |
|||||||||||||||||||
|
Taxable |
|
342 |
|
(83 |
) |
259 |
|
167 |
|
(78 |
) |
89 |
|
||||||
|
Tax-exempt (2) |
|
(66 |
) |
(35 |
) |
(101 |
) |
(7 |
) |
(3 |
) |
(10 |
) |
||||||
|
Interest-earning deposits |
|
— |
|
(2 |
) |
(2 |
) |
— |
|
(1 |
) |
(1 |
) |
||||||
|
Federal funds sold |
|
(163 |
) |
(305 |
) |
(468 |
) |
473 |
|
(60 |
) |
413 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total interest earned on interest-earning assets |
|
562 |
|
(1,927 |
) |
(1,365 |
) |
1,447 |
|
(617 |
) |
830 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Interest paid on interest-bearing liabilities: |
|||||||||||||||||||
|
Savings and NOW |
|
129 |
|
(843 |
) |
(714 |
) |
122 |
|
(87 |
) |
35 |
|
||||||
|
Time |
|
128 |
|
(1,711 |
) |
(1,583 |
) |
800 |
|
198 |
|
998 |
|
||||||
|
Other borrowings |
|
(6 |
) |
— |
|
(6 |
) |
(36 |
) |
(4 |
) |
(40 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total interest paid on interest-bearing liabilities |
|
251 |
|
(2,554 |
) |
(2,303 |
) |
886 |
|
107 |
|
993 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Change in net interest income |
$ |
311 |
|
627 |
|
938 |
|
561 |
|
(724 |
) |
(163 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
| (1) | Nonaccrual loans are included in the average loan totals used in the calculation of this table. |
| (2) | Tax-exempt income from investment securities is presented on a tax equivalent basis assuming a 34% U.S. Federal tax rate for 2002 and 2001. |
Provision for Loan Losses . The provision for loan losses is based upon the Company’s evaluation of the quality of the loan portfolio, total outstanding and committed loans, previous loan losses and current and anticipated economic conditions. The amount of the provision for loan losses is a charge against earnings. Actual loan losses are charges against the allowance for loan losses.
The Company’s allowance for loan losses is typically maintained at a level deemed adequate to provide for known and inherent losses in the loan portfolio. 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 provisions for loan losses for the years ended December 31, 2002 and 2001 were $429 and $380, respectively. See “Allowance for Loan Losses” for further discussion.
Noninterest Income . Total noninterest income for the year ended December 31, 2001 increased $124, or 7.60% to $1,756 from $1,632 in 2001. The Company’s principal source of noninterest income is service charges and fees on deposit accounts, particularly transaction accounts, fees on sales of mortgage loans, and fees from other bank products. The increase in 2002 is attributed to fees on the sales of mortgage loans. Fees from these sales increased $62 for the year ended December 31, 2002, compared to 2001.
Noninterest Expense . Total noninterest expense for the year ended December 31, 2002 increased $413 or 7.65% to $5,814 from $5,401 in 2001. The increase in noninterest expense is attributed to the effect of overall growth of the Company on personnel expenses, fixed asset costs associated with bank premises additions and other operating expenses. The Company has added three new branches to its operations since June 1999.
Income Tax Expense . Applicable income taxes on 2002 earnings amounted to $723, resulting in an effective tax rate of 27.71% compared to $488, or 25.01%, in 2001. The effective tax rate for 2002 is higher primarily because the level of pretax income for 2002 was higher than 2001; however, the level of tax-exempt interest income for 2002 was lower compared to 2001.
9
Liquidity and Asset/Liability Management
Effective asset/liability management includes maintaining adequate liquidity and minimizing the impact of future interest rate changes on net interest income. The responsibility for monitoring the Company’s liquidity and the sensitivity of its interest-earning assets and interest-bearing liabilities lies with the Asset Liability Committee of the Bank which meets at least quarterly to review liquidity and the adequacy of funding sources.
Cash Flows . The Company derives cash flows from its operating, investing and financing activities. Cash flows of the Company are primarily used to fund loans and securities and are provided by the deposits and borrowings of the Company.
The Company’s operating activities for the year ended December 31, 2002 resulted in net cash provided of $3,054 primarily due to net income of $1,886 adjusted for depreciation of $400, a provision for loan losses of $429, a decrease in accrued income receivable of $118, and a decrease in other assets of $481, and partially offset by amortization of unearned fees, net of $40, a decrease in accrued interest payable of $200, a decrease in other liabilities of $81 and a deferred income tax benefit of $11. The Company’s operating activities for the year ended December 31, 2001 resulted in net cash provided of $2,630 primarily due to net income of $1,463 adjusted for depreciation of $394, a provision for loan losses of $380, a decrease in accrued income receivable of $293, and a decrease in other assets of $251, and partially offset by amortization of unearned fees, net of $156, a decrease in accrued interest payable of $30, a decrease in other liabilities of $48 and a deferred income tax benefit of $21.
The Company’s cash flows from investing activities used net cash of $5,011 for the year ended December 31, 2002 compared to net cash used of $9,445 for 2001. In 2002, cash was used primarily to fund the net increase in loans to customers in the aggregate amount of $10,269, partially offset by collections on loan participations of $2,216, and for purchases of bank premises and equipment of $116. In 2001, cash was used primarily to fund loan participation purchases and the net increase in loans to customers in the aggregate amount of $5,902, partially offset by collections on loan participations of $1,899, and for purchases of bank premises and equipment of $217. Investing activities representing net proceeds from investment securities purchases, maturities, paydowns and calls generated cash inflows of $3,173 in 2002 compared to cash outflows of $5,379 in 2001.
Net cash used in financing activities for the year ended December 31, 2002 totaled $2,263 compared to net cash provided by financing activities of $18,646 for the year ended December 31, 2001. The net decrease in deposits totaled $1,598 in 2002 compared to an increase of $19,248 in 2001. The Company borrowed $1,000 during 1997 under a note payable to the Federal Home Loan Bank and made principal repayments of $100 during each of 2002 and 2001. Cash dividends paid to stockholders were $596 and $579 in 2002 and 2001, respectively. During 2002 and 2001, the Company sold 2,237 and 5,813 shares of common stock to the Company’s dividend reinvestment plan, respectively.
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 ratio of liquid assets to deposits and short-term borrowings was 29.24% as of December 31, 2002 as compared to 31.41% as of December 31, 2001. The Company sells excess funds as overnight federal funds sold to provide an immediate source of liquidity. Federal funds sold as of December 31, 2002 was $15,447 compared to $19,094 as of December 31, 2001. The decrease in federal funds sold in 2002 was primarily related to the net increase in loans made to customers and the net decrease in deposits in 2002.
10
Cash and due from banks of $4,516 as of December 31, 2002 was $573 lower when compared to the December 31, 2001 balance of $5,089.
The level of deposits may fluctuate significantly due to seasonal business cycles of depository customers. Similarly, the level of demand for loans may vary significantly and at any given time may increase or decrease substantially. However, unlike the level of deposits, management has more direct control over lending activities and maintains the level of those activities according to the amounts of available funds.
As a result of the Company’s management of liquid assets and the ability to generate liquidity through alternative funding sources, management believes that the Company maintains overall liquidity which is sufficient to satisfy its depositors’ requirements and to meet customers’ credit needs. Additional sources of liquidity available to the Company include its capacity to borrow funds through correspondent banks and the Federal Home Loan Bank.
Interest Rates
While no single measure can completely identify the impact of changes in interest rates on net interest income, one gauge of interest rate sensitivity is to measure, over a variety of time periods, the differences in the amounts of the Company’s rate-sensitive assets and rate-sensitive liabilities. These differences or “gaps” provide an indication of the extent to which net interest income may be affected by future changes in interest rates. A “positive gap” exists when rate-sensitive assets exceed rate-sensitive liabilities and indicates that a greater volume of assets than liabilities will reprice during a given period. This mismatch may enhance earnings in a rising interest rate environment and may inhibit earnings in a declining interest rate environment Conversely, when rate-sensitive liabilities exceed rate-sensitive assets, referred to as a “negative gap,” it indicates that a greater volume of liabilities than assets will reprice during the period. In this case, a rising interest rate environment may inhibit earnings and a declining interest rate environment may enhance earnings. The cumulative one-year gap as of December 31, 2002 was $38,264, representing 19.14% of total assets. This negative gap falls within the parameters set by the Company.
The following table illustrates the Company’s interest rate sensitivity gap position at December 31, 2002.
REPRICING GAP POSITION
|
Repricing period at December 31, 2002 |
||||||||||||
|
1 year |
1-3 years |
3-5 years |
5-15 years |
|||||||||
|
ASSET/(LIABILITY): |
||||||||||||
|
Cumulative interest rate sensitivity gap |
$ |
(38,264 |
) |
(14,242 |
) |
(372 |
) |
42,037 |
||||
As of December 31, 2002, the Company was liability-sensitive in periods up to five years and asset-sensitive beyond five years. The foregoing table does not necessarily indicate the impact of general interest rate movements on the Company’s net interest yield, because the repricing of various categories of assets and liabilities is discretionary and is subject to competition and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may in fact price at different times and at different rate levels. Management attempts to mitigate the impact of changing interest rates in several ways, one of which is to manage its interest rate-sensitivity gap. At December 31, 2002, all fluctuations fell within Company policy limitations. In addition to managing its asset/liability position, the Company has taken steps to mitigate the impact of changing interest rates by generating noninterest income through service charges, and offering products which are not interest rate-sensitive.
Effects of Inflation
The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price level indices. Impacts of inflation on interest rates, loan demand and deposits are reflected in the consolidated financial statements.
11
Investment Portfolio
The Company’s investment portfolio is used primarily for investment income and secondarily for liquidity purposes. The Company invests funds not used for capital expenditures or lending purposes in securities of the U.S. Government and its agencies, mortgage-backed securities, and taxable and tax-exempt municipal bonds, corporate securities or certificates of deposit. Obligations of the U.S. Government and its agencies include treasury notes and callable or noncallable agency bonds. Mortgage-backed securities include collateralized mortgage obligations and mortgage-backed security pools. The collateralized mortgage obligations in the Company’s investment securities portfolio are “low risk” as defined by applicable bank regulations and are diverse as to collateral and interest rates of the underlying mortgages. The mortgage-backed securities are diverse as to interest rates and guarantors. The Company does not invest in derivatives or other high-risk type securities.
Investment securities available-for-sale as of December 31, 2002 were $32,158, a decrease of $153 or 0.47% from $32,311 as of December 31, 2001. Investment securities held-to-maturity decreased to $10,573 as of December 31, 2002 from $12,759 as of December 31, 2001, a decrease of $2,186 or 17.13%.
The following table presents the composition of the Company’s investment portfolios as of the dates indicated.
|
December 31, |
|||||||||
|
2002 |
2001 |
||||||||
|
Available-for-Sale |
Amortized costs |
Fair values |
Amortized costs |
Fair values |
|||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
4,484 |
4,602 |
6,476 |
6,662 |
||||
|
Obligations of states and political subdivisions |
|
6,732 |
7,085 |
6,982 |
7,071 |
||||
|
Corporate securities |
|
8,590 |
8,944 |
5,294 |
5,425 |
||||
|
Mortgage-backed securities—government |
|
11,038 |
11,477 |
13,140 |
13,103 |
||||
|
Other securities |
|
50 |
50 |
50 |
50 |
||||
|
|
|
|
|
|
|||||
|
Total available-for-sale |
$ |
30,894 |
32,158 |
31,942 |
32,311 |
||||
|
|
|
|
|
|
|||||
|
December 31, |
|||||||||
|
2002 |
2001 |
||||||||
|
Held-to-Maturity |
Amortized costs |
Fair values |
Amortized costs |
Fair values |
|||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
56 |
57 |
175 |
177 |
||||
|
Obligations of states and political subdivisions |
|
10,517 |
11,182 |
12,584 |
12,855 |
||||
|
|
|
|
|
|
|||||
|
Total held-to-maturity |
$ |
10,573 |
11,239 |
12,759 |
13,032 |
||||
|
|
|
|
|
|
|||||
The following table presents the maturity distribution based on fair values and amortized costs of the investment portfolios as of the dates indicated.
12
INVESTMENT PORTFOLIO – MATURITY DISTRIBUTION
|
December 31, 2002 |
||||||||
|
Available-for-Sale |
Amortized Costs |
Fair Values |
Yield |
|||||
|
U.S. Treasury securities and obligations of U.S. |
||||||||
|
Government corporations: |
||||||||
|
Within one year |
$ |
1,996 |
2,044 |
6.29 |
% |
|||
|
After one but within five years |
|
1,994 |
2,053 |
5.40 |
% |
|||
|
After five years through ten years |
|
494 |
505 |
5.99 |
% |
|||
|
Obligations of states and subdivisions: |
||||||||
|
Within one year |
|
885 |
895 |
6.45 |
% |
|||
|
After one but within five years |
|
3,678 |
3,873 |
6.31 |
% |
|||
|
After five years through ten years |
|
1,854 |
1,982 |
6.68 |
% |
|||
|
After ten years |
|
315 |
335 |
6.89 |
% |
|||
|
Corporate securities: |
||||||||
|
Within one year |
|
500 |
501 |
6.22 |
% |
|||
|
After one but within five years |
|
8,090 |
8,443 |
5.93 |
% |
|||
|
Mortgage-backed securities—government |
|
11,038 |
11,477 |
5.65 |
% |
|||
|
Other securities (1) |
|
50 |
50 |
— |
|
|||
|
|
|
|
||||||
|
Total available-for-sale |
$ |
30,894 |
32,158 |
|||||
|
|
|
|
||||||
|
Held-to-Maturity |
||||||||
|
U.S. Treasury securities and obligations of U.S. |
||||||||
|
Government corporations: |
||||||||
|
After one but within five years |
$ |
56 |
57 |
7.09 |
% |
|||
|
Obligations of states and subdivisions: |
||||||||
|
Within one year |
|
937 |
950 |
7.36 |
% |
|||
|
After one but within five years |
|
7,453 |
7,929 |
6.65 |
% |
|||
|
After five years through ten years |
|
2,127 |
2,303 |
7.15 |
% |
|||
|
|
|
|
||||||
|
Total held-to-maturity |
$ |
10,573 |
11,239 |
|||||
|
|
|
|
||||||
| (1) | Equity securities assume a life greater than ten years. |
Loan Portfolio
The Company’s net loans were $129,999 as of December 31, 2002, an increase of $7,497 or 6.12% from $122,502 as of December 31, 2001. This increase resulted primarily from increased volume of loan originations during 2002 due to the lower interest rate environment.
The Company’s ratio of net loans to total deposits was 72.93% as of December 31, 2002 compared to 68.12% as of December 31, 2001. Typically, the Company maintains a ratio of loans to deposits of between 65% and 80%. The loan portfolio primarily consists of commercial, real estate (including real estate term loans, construction loans and other loans secured by real estate), and loans to individuals for household, family and other consumer expenditures. However, the Company adjusts its mix of lending and the terms of its loan programs according to market conditions and other factors. The Company’s loans are typically made to businesses and individuals located within the Company’s market area, most of whom have account relationships with the Bank. There is no concentration of loans exceeding 10% of total loans which is not disclosed in the categories presented below. The Company has not made any loans to any foreign entities including governments, banks, businesses or individuals. Commercial and construction loans in the Company’s portfolio are primarily variable rate loans and have little interest rate risk.
13
The following table presents the composition of the Company’s loan portfolio as of the dates indicated.
LOAN PORTFOLIO
|
December 31, |
|||||||
|
2002 |
2001 |
||||||
|
Real estate loans: |
|||||||
|
Residential |
$ |
51,134 |
|
48,169 |
|
||
|
Other |
|
18,542 |
|
13,273 |
|
||
|
Loans to individuals for household, family and other consumer expenditures |
|
44,948 |
|
44,527 |
|
||
|
Commercial and industrial loans |
|
16,672 |
|
17,614 |
|
||
|
All other loans |
|
146 |
|
260 |
|
||
|
|
|
|
|
|
|||
|
Total loans, gross |
|
131,442 |
|
123,843 |
|
||
|
Less unearned income and fees |
|
(145 |
) |
(165 |
) |
||
|
|
|
|
|
|
|||
|
Loans, net of unearned income and fees |
|
131,297 |
|
123,678 |
|
||
|
Less allowance for loan losses |
|
(1,298 |
) |
(1,176 |
) |
||
|
|
|
|
|
|
|||
|
Loans, net |
$ |
129,999 |
|
122,502 |
|
||
|
|
|
|
|
|
|||
Commercial Loans . Commercial and industrial loans accounted for 12.68% of the Company’s loan portfolio as of December 31, 2002 compared to 14.22% as of December 31, 2001. Such loans are generally made to provide operating lines of credit, to finance the purchase of inventory or equipment, and for other business purposes. Commercial loans are primarily made at rates that adjust with changes in the prevailing prime interest rate, are generally made for a maximum term of five years (unless they are term loans), and generally require interest payments to be made monthly. The creditworthiness of these borrowers is reviewed, analyzed and evaluated on a periodic basis. Most commercial loans are collateralized with business assets such as accounts receivable, inventory and equipment. Even with substantial collateralization such as all of the assets of the business and personal guarantees, commercial lending involves considerable risk of loss in the event of a business downturn or failure of the business.
Real Estate Loans . Real estate loans accounted for 53.01% of the Company’s loan portfolio as of December 31, 2002 compared to 49.61% as of December 31, 2001. The Company makes commercial and industrial real estate term loans that are typically secured by a first deed of trust. As of December 31, 2002, 73.39% of the real estate loans were secured by 1-4 family residential properties compared to 78.40% at December 31, 2001, and 3.98% of total real estate loans were construction loans at December 31, 2002 compared to 7.73% at December 31, 2001. Real estate lending involves risk elements when there is lack of timely payment and/or a decline in the value of the collateral.
Installment Loans . Installment loans are represented by loans to individuals for household, family and other consumer expenditures. Installment loans accounted for 34.20% of the Company’s loan portfolio as of December 31, 2002 compared to 35.95% as of December 31, 2001.
Loan Maturity and Interest Rate Sensitivity . The following table presents loan portfolio information related to maturity distribution of commercial and industrial loans and real estate construction loans based on scheduled repayments at December 31, 2002.
LOAN MATURITY
|
Due within one year |
Due one to five years |
Due after five years |
Total |
||||||
|
Commercial and industrial loans |
$ |
9,776 |
5,816 |
1,080 |
16,672 |
||||
|
Real estate – construction |
|
2,773 |
— |
— |
2,773 |
||||
14
The following table presents the interest rate sensitivity of commercial and industrial loans and real estate construction loans maturing after one year as of December 31, 2002.
INTEREST RATE SENSITIVITY
|
Fixed interest rates |
$ |
2,602 |
|
|
Variable interest rates |
|
4,294 |
|
|
|
|
||
|
Total maturing after one year |
$ |
6,896 |
|
|
|
|
Nonperforming Assets . Interest on loans is normally accrued from the date a disbursement is made and recognized as income as it is accrued. Generally, the Company reviews any loan on which payment has not been made for 90 days for potential nonaccrual. The loan is examined and the collateral is reviewed to determine loss potential. If the loan is placed on nonaccrual, any prior accrued interest which remains unpaid is reversed. Loans on nonaccrual amounted to $347 and $302 as of December 31, 2002 and 2001, respectively. Interest income that would have been earned on nonaccrual loans if they had been current in accordance with their original terms and the recorded interest that was included in income on these loans was not significant for 2002 and 2001. There were no commitments to lend additional funds to customers whose loans were on nonaccrual status at December 31, 2002.
The following tables present information with respect to the Company’s nonperforming assets and accruing loans 90 days or more past due by type as of
NONPERFORMING ASSETS
|
December 31, |
|||||
|
2002 |
2001 |
||||
|
Nonperforming loans |
$ |
347 |
302 |
||
|
Foreclosed properties |
|
— |
— |
||
|
|
|
|
|||
|
Total nonperforming assets |
$ |
347 |
302 |
||
|
|
|
|
|||
Nonperforming assets totaled $347 or 0.26% of total gross loans as of December 31, 2002, compared to $302 or 0.24% as of December 31, 2001. The following table presents the balance of accruing loans 90 days or more past due by type as of the dates indicated.
ACCRUING LOANS 90 DAYS OR MORE
PAST DUE BY TYPE
|
December 31, |
|||||
|
2002 |
2001 |
||||
|
Loans 90 days or more past due by type: |
|||||
|
Real estate loans |
$ |
227 |
150 |
||
|
Loans to individuals |
|
104 |
110 |
||
|
Commercial loans |
|
24 |
172 |
||
|
|
|
|
|||
|
Total accruing loans 90 days or more past due |
$ |
355 |
432 |
||
|
|
|
|
|||
Allowance for Loan Losses . The Company maintains an allowance for loan losses which it considers adequate to cover the risk of losses in the loan portfolio. The allowance is based upon management’s ongoing evaluation of the quality of the loan portfolio, total outstanding and committed loans, previous charges against the allowance and current and anticipated economic conditions. 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 Company’s management believes that as of December 31, 2002 and 2001, the allowance is adequate. The amount of the provision for loan losses is a charge against earnings. Actual loan losses are charged against the allowance for loan losses.
As of December 31, 2002, the allowance for loan losses totaled $1,298 or 0.99% of total loans, net of unearned income and fees, compared to $1,176 or 0.95% as of December 31, 2001. The provision for loan losses for the years ended December 31, 2002 and 2001 was $429 and $380, respectively. Net charge-offs for the Company were $307 and $273 for the years ended December 31, 2002 and 2001, respectively. The ratio of net loan charge-
15
offs during the period to average loans outstanding for the period was 0.24% and 0.22% for the years ended December 31, 2002 and 2001, respectively. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision as deemed necessary.
The following table presents charged off loans, provisions for loan losses, recoveries on loans previously charged off, allowance adjustments and the amount of the allowance for the dates indicated.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
|
Years ended December 31, |
|||||||
|
2002 |
2001 |
||||||
|
Balance at beginning of year |
$ |
1,176 |
|
1,069 |
|
||
|
Loan charge-offs: |
|||||||
|
Real estate loans – residential |
|
— |
|
(18 |
) |
||
|
Real estate loans – commercial |
|
(37 |
) |
— |
|
||
|
Commercial and industrial loans |
|
(20 |
) |
— |
|
||
|
Loans to individuals for household, family and other consumer expenditures |
|
(360 |
) |
(399 |
) |
||
|
|
|
|
|
|
|||
|
Total loan charge-offs |
|
(417 |
) |
(417 |
) |
||
|
|
|
|
|
|
|||
|
Loan recoveries: |
|||||||
|
Loans to individuals for household, family and other consumer expenditures |
|
110 |
|
144 |
|
||
|
|
|
|
|
|
|||
|
Net loan charge-offs |
|
(307 |
) |
(273 |
) |
||
|
Provisions for loan losses |
|
429 |
|
380 |
|
||
|
|
|
|
|
|
|||
|
Balance at end of year |
$ |
1,298 |
|
1,176 |
|
||
|
|
|
|
|
|
|||
The primary risk element considered by management with respect to each installment and conventional real estate loan is lack of timely payment and the value of the collateral. The primary risk elements with respect to real estate construction loans are fluctuations in real estate values in the Company’s market areas, inaccurate estimates of construction costs, fluctuations in interest rates, the availability of conventional financing, the demand for housing in the Company’s market area and general economic conditions. The primary risk elements with respect to commercial loans are the financial condition of the borrower, general economic conditions in the Company’s market area, the sufficiency of collateral, the timeliness of payment and, with respect to adjustable rate loans, interest rate fluctuations. Management has a policy of requesting and reviewing annual financial statements from its commercial loan customers and periodically reviews the existence of collateral and its value. Management also has a reporting system that monitors all past due loans and has adopted policies to pursue its creditor’s rights in order to preserve the Company’s position.
Loans are charged against the allowance when, in management’s opinion, they are deemed uncollectible, although the Bank continues to aggressively pursue collection. Although management believes that the allowance for loan losses is adequate to absorb losses as they arise, there can be no assurance that (i) the Company will not sustain losses in any given period which could be substantial in relation to the size of the allowance for loan losses, (ii), the Company’s level of nonperforming loans will not increase, (iii) the Company will not be required to make significant additional provisions to its allowance for loan losses, or (iv) the level of net charge-offs will not increase and possibly exceed applicable reserves.
16
The following table presents the allocation of the allowance for loan losses as of the dates indicated. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any category of loans.
|
December 31, 2002 |
December 31, 2001 |
||||||||||
|
Allowance for loan losses |
Percent of loans in each category to total loans |
Allowance for loan losses |
Percent of loans in each category to total loans |
||||||||
|
Real estate loans: |
|||||||||||
|
Residential |
$ |
137 |
38.90 |
% |
95 |
38.90 |
% |
||||
|
Other |
|
133 |
14.11 |
% |
152 |
10.72 |
% |
||||
|
Loans to individuals for household, family and other consumer expenditures |
|
210 |
34.20 |
% |
206 |
35.95 |
% |
||||
|
Commercial and industrial loans |
|
721 |
12.68 |
% |
651 |
14.22 |
% |
||||
|
All other loans |
|
— |
0.11 |
% |
— |
0.21 |
% |
||||
|
Unallocated |
|
97 |
— |
|
72 |
— |
|
||||
|
|
|
|
|
|
|
|
|||||
|
Totals |
$ |
1,298 |
100.00 |
% |
1,176 |
100.00 |
% |
||||
|
|
|
|
|
|
|
|
|||||
Credit Risk Management . The risk of nonpayment of loans is an inherent aspect of commercial banking. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and various types of loans. The Company strives to minimize its credit risk exposure by its credit underwriting standards and loan policies and procedures. Management continually evaluates the credit risks of such loans and believes it has provided adequately for the credit risks associated with these loans. The Company has implemented and expects to continue to implement and update new policies and procedures to maintain its credit risk management systems.
Bank Premises and Equipment
Bank premises and equipment decreased 6.78% in 2002 compared to a decrease of 4.05% in 2001 due to depreciation charges, partially offset by purchases of bank premises and equipment.
Deposits
Average deposits were $179,232 for the year ended December 31, 2002, an increase of $8,277 or 4.84% from $170,955 of average deposits for the year ended December 31, 2001. As of December 31, 2002, total deposits were $178,243 representing a decrease of $1,598 or 0.89% from $179,841 in total deposits as of December 31, 2001. The change in deposits during 2002 was primarily due to changes in previously existing accounts, as well as new accounts opened as a result of relationship changes, new products offered and more favorable pricing of certificates of deposit during 2002.
For the year ended December 31, 2002, average noninterest-bearing demand deposits were $15,087 or 8.42% of average deposits. For the year ended December 31, 2001, average noninterest-bearing demand deposits were $13,689 or 8.00% of average deposits. Average interest-bearing deposits were $164,145 for the year ended December 31, 2002, representing an increase of $6,879 or 4.37% over the $157,266 in average interest-bearing deposits for the year ended December 31, 2001.
The levels of noninterest-bearing demand deposits (including retail accounts) are influenced by such factors as customer service, service charges and the availability of banking services. No assurance can be given that the Company will be able to maintain its current level of noninterest-bearing deposits. Competition from other banks and thrift institutions as well as money market funds, some of which offer interest rates substantially higher than the Company, makes it difficult for the Company to maintain the current level of noninterest-bearing deposits. Management continually works to implement pricing and marketing strategies designed to control the cost of interest-bearing deposits and to maintain a stable deposit mix.
The following table presents the Company’s average deposits and the average rate paid for each category of deposits for the periods indicated.
17
AVERAGE DEPOSIT INFORMATION
|
Year ended December 31, 2002 |
Year ended December 31, 2001 |
||||||||||
|
Average amount of deposits(1) |
Average rate paid |
Average amount of deposits(1) |
Average rate paid |
||||||||
|
Noninterest-bearing demand deposits |
$ |
15,087 |
N/A |
|
13,689 |
N/A |
|
||||
|
Interest-bearing demand deposits |
|
24,910 |
1.00 |
% |
21,329 |
2.18 |
% |
||||
|
Savings deposits |
|
34,995 |
1.21 |
% |
33,897 |
2.73 |
% |
||||
|
Time deposits: |
|||||||||||
|
Under $100,000 |
|
81,204 |
4.99 |
% |
80,323 |
5.83 |
% |
||||
|
$100,000 and over |
|
23,036 |
3.80 |
% |
21,717 |
5.30 |
% |
||||
|
|
|
|
|||||||||
|
Total average time deposits |
|
104,240 |
102,040 |
||||||||
|
|
|
|
|||||||||
|
Total average deposits |
$ |
179,232 |
170,955 |
||||||||
|
|
|
|
|||||||||
| (1) | Averages are daily averages. |
The following table presents the maturity schedule of time certificates of deposit of $100,000 and over and other time deposits of $100,000 and over as of
TIME DEPOSITS OF $100,000 AND OVER
|
Certificates of deposit |
Other time deposits |
Total |
|||||
|
Three months or less |
$ |
5,006 |
161 |
5,167 |
|||
|
Over three through six months |
|
2,147 |
1,525 |
3,672 |
|||
|
Over six through 12 months |
|
6,200 |
363 |
6,563 |
|||
|
Over 12 months |
|
5,438 |
2,919 |
8,357 |
|||
|
|
|
|
|
||||
|
Total time deposits of $100,000 and over |
$ |
18,791 |
4,968 |
23,759 |
|||
|
|
|
|
|
||||
Financial Ratios
The following table presents certain financial ratios for
RETURN ON EQUITY AND ASSETS
|
Years ended December 31, |
||||||
|
2002 |
2001 |
|||||
|
Return on average assets |
0.94 |
% |
0.77 |
% |
||
|
Return on average equity |
9.79 |
% |
8.18 |
% |
||
|
Dividend payout ratio |
31.54 |
% |
39.60 |
% |
||
|
Average equity to average assets |
9.62 |
% |
9.37 |
% |
||
Capital Resources
The Company’s financial position at December 31, 2002 reflects liquidity and capital levels currently adequate to fund anticipated future business expansion. Capital ratios are well in excess of 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.
The Company’s capital position continues to exceed regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier I capital, total risk-based capital and leverage ratios. Tier I capital consists of common and qualifying preferred stockholders’ equity less goodwill. Total capital consists of Tier I capital, qualifying subordinated debt and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk weighted assets. The Company’s Tier I capital ratio was
18
12.37% at December 31, 2002, compared to 12.28% at December 31, 2001. The total capital ratio was 13.21% at December 31, 2002, compared to 13.10% at December 31, 2001.
These ratios are in excess of the mandated minimum requirements of 4% and 8%, respectively. As of December 31, 2002 and 2001, the Company met all regulatory capital ratio requirements and was considered “well capitalized” in accordance with FDICIA.
Stockholders’ equity reached $20,372 at December 31, 2002 compared to $18,460 at December 31, 2001. The leverage ratio consists of Tier I capital divided by quarterly average assets. At December 31, 2002, the Company’s leverage ratio was 9.44% compared to 8.92% at December 31, 2001. Each of these exceeds the required minimum leverage ratio of 4%. The dividend payout ratio was 31.54% and 39.60% in 2002 and 2001, respectively. During 2002, the Company paid dividends of $0.41 per share, up 2.50% from $0.40 per share paid in 2001.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s single 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, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses may be required. Further discussion of the estimates used in determining the allowance for loan losses is contained in the discussion on “Allowance for Loan Losses” on page 15 and “Loans and Allowance for Loan Losses” on page 27 of this Annual Report.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations , which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, an entity would recognize a gain or loss on settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for
19
transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 will be effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between SFAS No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. In contrast, under Issue 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities.
The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
The application of the transition provisions of SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The application of the disclosure requirements is effective for financial reports for interim periods beginning after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others . This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. This Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others , which is being superseded.
The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year end. Management is currently evaluating the impact of this Interpretation on the financial position, results of operations and liquidity of the Company.
As of December 31, 2002, 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.
20
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)
|
2002 |
2001 |
||||
| Assets | |||||
|
Cash and cash equivalents: |
|||||
|
Cash and due from banks (note 2) |
$ |
4,516 |
5,089 |
||
|
Federal funds sold |
|
15,447 |
19,094 |
||
|
|
|
|
|||
|
Total cash and cash equivalents |
|
19,963 |
24,183 |
||
|
Securities (note 3): |
|||||
|
Available-for-sale, at fair value |
|
32,158 |
32,311 |
||
|
Held-to-maturity, at amortized cost (fair value of $11,239 in 2002 and $13,032 in 2001) |
|
10,573 |
12,759 |
||
|
Federal Reserve Bank stock, at cost (note 1(c)) |
|
75 |
75 |
||
|
Federal Home Loan Bank stock, at cost (note 1(c)) |
|
565 |
440 |
||
|
Loans, net (notes 4, 9 and 10) |
|
129,999 |
122,502 |
||
|
Bank premises and equipment, net (note 5) |
|
3,906 |
4,190 |
||
|
Accrued income receivable |
|
1,019 |
1,137 |
||
|
Other assets (notes 5, 8 and 15) |
|
1,641 |
2,369 |
||
|
|
|
|
|||
|
Total assets |
$ |
199,899 |
199,966 |
||
|
|
|
|
|||
|
Liabilities and Stockholders’ Equity |
|||||
|
Liabilities: |
|||||
|
Deposits (note 6): |
|||||
|
Demand |
$ |
14,468 |
14,562 |
||
|
Savings and NOW accounts |
|
59,684 |
59,272 |
||
|
Time |
|
104,091 |
106,007 |
||
|
|
|
|
|||
|
Total deposits |
|
178,243 |
179,841 |
||
|
Note payable to Federal Home Loan Bank (note 1(c)) |
|
500 |
600 |
||
|
Accrued interest payable |
|
496 |
696 |
||
|
Other liabilities (note 7) |
|
288 |
369 |
||
|
|
|
|
|||
|
Total liabilities |
|
179,527 |
181,506 |
||
|
|
|
|
|||
|
Stockholders’ equity (notes 11 and 14): |
|||||
|
Common stock, $3 par value. Authorized 3,000,000 shares; issued and outstanding 1,453,203 in 2002 and 1,450,966 in 2001 |
|
4,360 |
4,353 |
||
|
Capital surplus |
|
503 |
479 |
||
|
Retained earnings |
|
14,675 |
13,385 |
||
|
Accumulated other comprehensive income, net |
|
834 |
243 |
||
|
|
|
|
|||
|
Total stockholders’ equity |
|
20,372 |
18,460 |
||
|
Commitments, contingencies and other matters (notes 9, 10 and 11) |
|||||
|
|
|
|
|||
|
Total liabilities and stockholders’ equity |
$ |
199,899 |
199,966 |
||
|
|
|
|
|||
See accompanying notes to consolidated financial statements.
21
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 2002 and 2001
(In thousands, except per share data)
|
2002 |
2001 |
||||
|
Interest income: |
|||||
|
Interest and fees on loans |
$ |
9,315 |
10,368 |
||
|
Interest on securities: |
|||||
|
U.S. Treasury |
|
64 |
79 |
||
|
U.S. Government agencies |
|
1,027 |
878 |
||
|
Corporate |
|
446 |
288 |
||
|
States and political subdivisions (taxable) |
|
402 |
409 |
||
|
States and political subdivisions (tax-exempt) |
|
547 |
613 |
||
|
Other |
|
34 |
39 |
||
|
Interest on federal funds sold |
|
221 |
689 |
||
|
|
|
|
|||
|
Total interest income |
|
12,056 |
13,363 |
||
|
|
|
|
|||
|
Interest expense: |
|||||
|
Interest on deposits: |
|||||
|
Savings and NOW accounts |
|
676 |
1,390 |
||
|
Time – under $100,000 |
|
3,373 |
4,682 |
||
|
Time – $100,000 and over |
|
876 |
1,150 |
||
|
Other interest expense |
|
35 |
41 |
||
|
|
|
|
|||
|
Total interest expense |
|
4,960 |
7,263 |
||
|
|
|
|
|||
|
Net interest income |
|
7,096 |
6,100 |
||
|
Provision for loan losses (note 4) |
|
429 |
380 |
||
|
|
|
|
|||
|
Net interest income after provision for loan losses |
|
6,667 |
5,720 |
||
|
|
|
|
|||
|
Noninterest income: |
|||||
|
Service charges on deposit accounts |
|
747 |
646 |
||
|
Net realized gain on securities (note 3) |
|
2 |
3 |
||
|
Commissions and fees |
|
220 |
333 |
||
|
Fees on sales of mortgage loans |
|
416 |
354 |
||
|
Other operating income |
|
371 |
296 |
||
|
|
|
|
|||
|
Total noninterest income |
|
1,756 |
1,632 |
||
|
|
|
|
|||
|
Noninterest expense: |
|||||
|
Salaries and employee benefits (note 7) |
|
3,303 |
2,887 |
||
|
Occupancy expense |
|
312 |
332 |
||
|
Furniture and equipment |
|
547 |
522 |
||
|
Office supplies and printing |
|
142 |
158 |
||
|
Other operating expenses |
|
1,510 |
1,502 |
||
|
|
|
|
|||
|
Total noninterest expense |
|
5,814 |
5,401 |
||
|
|
|
|
|||
|
Income before income tax expense |
|
2,609 |
1,951 |
||
|
Income tax expense (note 8) |
|
723 |
488 |
||
|
|
|
|
|||
|
Net income |
$ |
1,886 |
1,463 |
||
|
|
|
|
|||
|
Basic net income per share (note 1(m)) |
$ |
1.30 |
1.01 |
||
|
|
|
|
|||
|
Diluted net income per share (note 1(m)) |
$ |
1.29 |
1.00 |
||
|
|
|
|
|||
See accompanying notes to consolidated financial statements.
22
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income
Years ended December 31, 2002 and 2001
(In thousands, except share and per share data)
|
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total |
|||||||||||
|
Shares |
Par Value |
||||||||||||||
|
Balances, December 31, 2000 |
1,445,153 |
$ |
4,335 |
420 |
12,501 |
|
44 |
17,300 |
|
||||||
|
Net income |
— |
|
— |
— |
1,463 |
|
— |
1,463 |
|
||||||
|
Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $103 |
— |
|
— |
— |
— |
|
199 |
199 |
|
||||||
|
|
|
||||||||||||||
|
Comprehensive income |
1,662 |
|
|||||||||||||
|
|
|
||||||||||||||
|
Cash dividends declared by Bankshares ($0.40 per share) |
— |
|
— |
— |
(579 |
) |
— |
(579 |
) |
||||||
|
Issuance of common stock – dividend reinvestment plan |
5,813 |
|
18 |
59 |
— |
|
— |
77 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|||||||
|
Balances, December 31, 2001 |
1,450,966 |
|
4,353 |
479 |
13,385 |
|
243 |
18,460 |
|
||||||
|
Net income |
— |
|
— |
— |
1,886 |
|
— |
1,886 |
|
||||||
|
Change in net unrealized gains on available-for-sale securities, net of deferred income tax expense of $304 |
— |
|
— |
— |
— |
|
591 |
591 |
|
||||||
|
|
|
||||||||||||||
|
Comprehensive income |
2,477 |
|
|||||||||||||
|
|
|
||||||||||||||
|
Cash dividends declared by Bankshares ($0.41 per share) |
— |
|
— |
— |
(596 |
) |
— |
(596 |
) |
||||||
|
Issuance of common stock – dividend reinvestment plan |
2,237 |
|
7 |
24 |
— |
|
— |
31 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|||||||
|
Balances, December 31, 2002 |
1,453,203 |
$ |
4,360 |
503 |
14,675 |
|
834 |
20,372 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
23
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2002 and 2001
(In thousands)
|
2002 |
2001 |
||||||
|
Cash flows from operating activities: |
|||||||
|
Net income |
$ |
1,886 |
|
1,463 |
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
|
Depreciation of bank premises and equipment |
|
400 |
|
394 |
|
||
|
Amortization of intangible assets |
|
11 |
|
51 |
|
||
|
Amortization of unearned fees, net |
|
(40 |
) |
(156 |
) |
||
|
Loss on sale of foreclosed properties |
|
— |
|
16 |
|
||
|
Net amortization of premiums and discounts on securities |
|
63 |
|
40 |
|
||
|
Provision for loan losses |
|
429 |
|
380 |
|
||
|
Provision for deferred income taxes |
|
(11 |
) |
(21 |
) |
||
|
Net realized gain on securities |
|
(2 |
) |
(3 |
) |
||
|
Net decrease (increase) in: |
|||||||
|
Accrued income receivable |
|
118 |
|
293 |
|
||
|
Other assets |
|
481 |
|
251 |
|
||
|
Net increase (decrease) in: |
|||||||
|
Accrued interest payable |
|
(200 |
) |
(30 |
) |
||
|
Other liabilities |
|
(81 |
) |
(48 |
) |
||
|
|
|
|
|
|
|||
|
Net cash provided by operating activities |
|
3,054 |
|
2,630 |
|
||
|
|
|
|
|
|
|||
|
Cash flows from investing activities: |
|||||||
|
Purchases of available-for-sale securities |
|
(6,055 |
) |
(8,602 |
) |
||
|
Purchases of available-for-sale mortgaged-backed securities |
|
(2,546 |
) |
(13,856 |
) |
||
|
Proceeds from maturities and calls of held-to-maturity securities |
|
2,166 |
|
2,452 |
|
||
|
Proceeds from paydowns and maturities of held-to-maturity mortgage-backed securities |
|
— |
|
1 |
|
||
|
Proceeds from maturities and calls of available-for-sale securities |
|
4,998 |
|
12,425 |
|
||
|
Proceeds from sale of available-for-sale mortgage-backed securities |
|
— |
|
382 |
|
||
|
Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities |
|
4,610 |
|
1,819 |
|
||
|
Purchase of Federal Home Loan Bank stock |
|
(125 |
) |
(13 |
) |
||
|
Purchase of loan participations |
|
— |
|
(4,508 |
) |
||
|
Collections on loan participations |
|
2,216 |
|
1,899 |
|
||
|
Net increase in loans made to customers |
|
(10,269 |
) |
(1,394 |
) |
||
|
Recoveries on loans charged off |
|
110 |
|
144 |
|
||
|
Purchases of bank premises and equipment |
|
(116 |
) |
(217 |
) |
||
|
Proceeds from sale and rental of foreclosed properties, net |
|
— |
|
23 |
|
||
|
|
|
|
|
|
|||
|
Net cash used in investing activities |
|
(5,011 |
) |
(9,445 |
) |
||
|
|
|
|
|
|
|||
(Continued)
24
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2002 and 2001
(In thousands)
|
2002 |
2001 |
||||||
|
Cash flows from financing activities: |
|||||||
|
Net increase in demand, savings and NOW deposits |
$ |
318 |
|
7,359 |
|
||
|
Net increase (decrease) in time deposits |
|
(1,916 |
) |
11,889 |
|
||
|
Repayments of note payable to Federal Home Loan Bank |
|
(100 |
) |
(100 |
) |
||
|
Proceeds from issuance of common stock to dividend reinvestment plan |
|
31 |
|
77 |
|
||
|
Cash dividends paid |
|
(596 |
) |
(579 |
) |
||
|
|
|
|
|
|
|||
|
Net cash provided by (used in) financing activities |
|
(2,263 |
) |
18,646 |
|
||
|
|
|
|
|
|
|||
|
Net increase (decrease) in cash and cash equivalents |
|
(4,220 |
) |
11,831 |
|
||
|
Cash and cash equivalents, beginning of year |
|
24,183 |
|
12,352 |
|
||
|
|
|
|
|
|
|||
|
Cash and cash equivalents, end of year |
$ |
19,963 |
|
24,183 |
|
||
|
|
|
|
|
|
|||
|
Supplemental disclosure of cash flows information: |
|||||||
|
Cash paid during the year for: |
|||||||
|
Income taxes |
$ |
670 |
|
570 |
|
||
|
Interest |
|
5,160 |
|
7,293 |
|
||
|
Supplemental schedule of noncash investing and financing activities: |
|||||||
|
Transfer of loans to repossessed properties |
$ |
57 |
|
95 |
|
||
|
Loans charged against the allowance for loan losses |
|
417 |
|
417 |
|
||
|
Unrealized gains on available-for-sale securities |
|
895 |
|
302 |
|
||
See accompanying notes to consolidated financial statements.
25
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)
| (1) | Summary of Significant Accounting Policies and Practices |
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. Bankshares conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, The First National Bank of Altavista (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 Company has a single reportable segment for purposes of segment reporting. Also see note 10.
The accounting and reporting policies of Bankshares and its wholly owned subsidiary (collectively, the Company), conform to accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of the more significant accounting policies and practices:
| (a) | Consolidation |
The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation and its wholly owned subsidiary. All material intercompany balances and transactions have been eliminated.
| (b) | Securities |
The Bank classifies its securities in three categories: (1) debt securities that the Bank has the positive intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in net income; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as “available-for-sale securities” and reported at fair value, with unrealized gains and losses excluded from net income and reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and accretion of discounts on a basis which approximates the level yield method. The Bank does not maintain trading account securities. Gains or losses on disposition are based on the net proceeds and adjusted carrying values of the securities called or sold, using the specific identification method. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to net income, resulting in the establishment of a new cost basis for the security.
| (c) | Required Investments and Note Payable to FHLB |
As members of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB) of Atlanta, the Bank is required to maintain certain minimum investments in the common stock of the FRB and FHLB, which are carried at cost. Required levels of investment are based upon the Bank’s capital and a percentage of qualifying assets.
In addition, the Bank is eligible to borrow from the FHLB with borrowings collateralized by qualifying assets, primarily residential mortgage loans, and the Bank’s capital stock investment in the FHLB. At December 31, 2002, the Bank’s available borrowing limit was approximately $31,569.
26
The Bank had $500 and $600 in borrowings outstanding at December 31, 2002 and 2001, respectively. The note payable, due in December 2007, is payable in annual installments of $100 and bears interest at a fixed rate of 6.13%. Maturities of the note payable for each of the five years subsequent to December 31, 2002 are as follows: $100 in 2003; $100 in 2004; $100 in 2005; $100 in 2006; and $100 in 2007.
| (d) | Loans and Allowance for Loan Losses |
Loans are stated at the amount of unpaid principal, reduced by unearned income and fees on loans, and an allowance for loan losses. Income is recognized over the terms of the loans using methods which approximate the level yield method. The allowance for loan losses is a valuation allowance consisting of the cumulative effect of the provision for loan losses, plus any amounts recovered on loans previously charged off, minus loans charged off. The provision for loan losses charged to operating expenses is the amount necessary in management’s judgment to maintain the allowance for loan losses at a level it believes sufficient to cover losses in the collection of the Bank’s loans. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, delinquencies, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.
Interest related to nonaccrual loans is recognized on the cash basis. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation relates to a consumer or residential real estate loan or is both well-secured and in the process of collection.
Impaired loans are required to be presented in the financial statements at the present value of the expected future cash flows or at the fair value of the loan’s collateral. Homogeneous loans such as real estate mortgage loans, individual consumer loans, home equity loans and bankcard loans are evaluated collectively for impairment. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans receivable are applied first to reduce interest on such loans to the extent of interest contractually due and any remaining amounts are applied to principal.
| (e) | Loan Origination and Commitment Fees and Certain Related Direct Costs |
Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.
| (f) | Bank Premises and Equipment |
Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed by the straight-line and declining-balance methods over the estimated useful lives of the assets. Depreciable lives include 15 years for land improvements, 39 years for buildings, and 7 years for equipment, furniture and fixtures. The cost of assets retired and sold and the related accumulated
27
depreciation are eliminated from the accounts and the resulting gains or losses are included in determining net income. Expenditures for maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized.
| (g) | Foreclosed Properties |
Foreclosed properties consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at the lower of cost or fair value less estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged to expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale.
| (h) | Impairment or Disposal of Long-Lived Assets |
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used, such as bank premises and equipment, is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, such as foreclosed properties, are reported at the lower of the carrying amount or fair value less costs to sell.
The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s consolidated financial statements. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived and for Long-Lived Assets to be Disposed Of .
| (i) | Reclassified Goodwill |
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9 . SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions , and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method , provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations , and SFAS No. 142, Goodwill and Other Intangible Assets . Thus, the requirement in paragraph 5 of SFAS No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used.
The provisions of SFAS No. 147 that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. The provisions of this Statement that relate to the application of SFAS No. 144 apply to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial
28
institution, including those acquired in transactions between mutual enterprises. This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, whereas a branch acquisition that does not should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill.
Paragraph 5 of SFAS No. 147, which relates to the application of the purchase method of accounting, is effective for acquisitions on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraph 8-14 are effective on October 1, 2002, with earlier application permitted.
The adoption of SFAS No. 147 as of October 1, 2002 had an impact on the Company’s consolidated financial statements because certain previous branch acquisitions met the definition of a business under criteria in Emerging Issues Task Force (EITF) Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or a Business . Accordingly, the carrying amount of the intangible assets related to certain previous branch acquisitions were reclassified to goodwill and are no longer being amortized over the assets’ remaining useful lives after October 1, 2002. The Company also retroactively restated its operating results for the first three quarters of 2002 to reverse amortization expense back to the beginning of 2002, and evaluated the reclassified goodwill for impairment as of October 1, 2002 in accordance with the provisions of SFAS No. 142.
In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Company performed an assessment of whether there was an indication that reclassified goodwill was impaired as of the date of adoption. Based on the Company’s assessment, it was not required to recognize any transitional impairment loss as a cumulative effect of a change in accounting principle in the Company’s 2002 consolidated statement of income.
Prior to January 1, 2002, intangible assets were amortized on a straight-line basis over 15 years (see also note 15).
| (j) | Pension Plan |
The Bank maintains a noncontributory defined benefit pension plan which covers substantially all of its employees. The net periodic pension expense includes a service cost component, interest on the projected benefit obligation, a component reflecting the actual return on plan assets, the effect of deferring and amortizing certain actuarial gains and losses, and the amortization of any unrecognized net transition obligation on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The Bank’s funding policy is to make annual contributions in amounts necessary to satisfy the Internal Revenue Service’s funding standards and to the extent that they are tax deductible.
| (k) | Income Taxes |
Income taxes are accounted for under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes the enactment date.
29
| (l) | Stock Options |
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25 , to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation , established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.
No compensation cost has been recognized for the Company’s stock options in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company’s net income, basic net income per share and diluted net income per share would have decreased to the pro forma amounts for the years ended December 31, 2002 and 2001 indicated below:
|
2002 |
2001 |
||||||
|
Net income, as reported |
|||||||
|
$ |
1,886 |
|
1,463 |
|
|||
|
Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects |
|
(7 |
) |
(13 |
) |
||
|
|
|
|
|
|
|||
|
Pro forma net income |
$ |
1,879 |
|
1,450 |
|
||
|
|
|
|
|
|
|||
|
Basic net income per share: |
|||||||
|
As reported |
$ |
1.30 |
|
1.01 |
|
||
|
Pro forma |
|
1.29 |
|
1.00 |
|
||
|
Diluted net income per share: |
|||||||
|
As reported |
$ |
1.29 |
|
1.00 |
|
||
|
Pro forma |
|
1.29 |
|
1.00 |
|
||
| (m) | Net Income Per Share |
Basic net income per share excludes dilution and is computed by dividing income available to common stockholders 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 earnings of the Company.
The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods indicated:
|
Year ended December 31, 2002 |
Net income (numerator) |
Shares (denominator) |
Per share amount |
|||||
|
Basic net income per share |
$ |
1,886 |
1,453,013 |
$ |
1.30 |
|||
|
|
|
|||||||
|
Effect of dilutive stock options |
|
— |
8,287 |
|||||
|
|
|
|
||||||
|
Diluted net income per share |
$ |
1,886 |
1,461,300 |
$ |
1.29 |
|||
|
|
|
|
|
|
||||
30
|
Year ended December 31, 2001 |
Net income (numerator) |
Shares (denominator) |
Per share amount |
|||||
|
Basic net income per share |
$ |
1,463 |
1,449,681 |
$ |
1.01 |
|||
|
|
|
|||||||
|
Effect of dilutive stock options |
|
— |
7,224 |
|||||
|
|
|
|
||||||
|
Diluted net income per share |
$ |
1,463 |
1,456,905 |
$ |
1.00 |
|||
|
|
|
|
|
|
||||
| (n) | Consolidated Statements of Cash Flows |
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks (with original maturities of three months or less), and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
| (o) | Comprehensive Income |
SFAS No. 130, Reporting Comprehensive Income , requires the Company to classify items of “Other Comprehensive Income” (such as net unrealized gains (losses) on available-for-sale securities) by their nature in a financial statement and present the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company’s comprehensive income consists of net income and net unrealized gains (losses) on securities available-for-sale, net of income taxes.
Effective in 2002, the Company changed its method of presentation concerning comprehensive income. Prior to 2002, comprehensive income was reflected as part of the consolidated statement of income and comprehensive income. Comprehensive income is now presented as a separate component of the Company’s consolidated statement of changes in stockholders’ equity and comprehensive income. Reclassification of prior year amounts have been made to conform with the current year presentation.
| (p) | Use of Estimates |
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and revenues and expenses for the years ended December 31, 2002 and 2001. Actual results could differ from those estimates.
| (2) | Restrictions on Cash |
To comply with Federal Reserve regulations, the Bank is required to maintain certain average reserve balances. The daily average reserve requirements were approximately $1,033 and $950 for the weeks including December 31, 2002 and 2001, respectively.
31
| (3) | Securities |
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities at December 31, 2002 and 2001 are as follows:
|
2002 |
||||||||||
|
Amortized costs |
Gross unrealized gains |
Gross unrealized losses |
Fair values |
|||||||
|
Available-for-Sale |
||||||||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
4,484 |
118 |
— |
|
4,602 |
||||
|
Obligations of states and political subdivisions |
|
6,732 |
353 |
— |
|
7,085 |
||||
|
Corporate securities |
|
8,590 |
372 |
(18 |
) |
8,944 |
||||
|
Mortgage-backed securities – government |
|
11,038 |
439 |
— |
|
11,477 |
||||
|
Other securities |
|
50 |
— |
— |
|
50 |
||||
|
|
|
|
|
|
|
|||||
|
Total available-for-sale |
$ |
30,894 |
1,282 |
(18 |
) |
32,158 |
||||
|
|
|
|
|
|
|
|||||
|
Amortized costs |
Gross unrealized gains |
Gross unrealized losses |
Fair values |
||||||
|
Held-to-Maturity |
|||||||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
56 |
1 |
— |
57 |
||||
|
Obligations of states and political subdivisions |
|
10,517 |
665 |
— |
11,182 |
||||
|
|
|
|
|
|
|||||
|
Total held-to-maturity |
$ |
10,573 |
666 |
— |
11,239 |
||||
|
|
|
|
|
|
|||||
|
2001 |
||||||||||
|
Amortized costs |
Gross unrealized gains |
Gross unrealized losses |
Fair values |
|||||||
|
Available-for-Sale |
||||||||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
6,476 |
187 |
(1 |
) |
6,662 |
||||
|
Obligations of states and political subdivisions |
|
6,982 |
118 |
(29 |
) |
7,071 |
||||
|
Corporate securities |
|
5,294 |
167 |
(36 |
) |
5,425 |
||||
|
Mortgage-backed securities – government |
|
13,140 |
48 |
(85 |
) |
13,103 |
||||
|
Other securities |
|
50 |
— |
— |
|
50 |
||||
|
|
|
|
|
|
|
|||||
|
Total available-for-sale |
$ |
31,942 |
520 |
(151 |
) |
32,311 |
||||
|
|
|
|
|
|
|
|||||
|
2001 |
||||||||||
|
Amortized costs |
Gross unrealized gains |
Gross unrealized losses |
Fair values |
|||||||
|
Held-to-Maturity |
||||||||||
|
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ |
175 |
2 |
— |
|
177 |
||||
|
Obligations of states and political subdivisions |
|
12,584 |
286 |
(15 |
) |
12,855 |
||||
|
|
|
|
|
|
|
|||||
|
Total held-to-maturity |
$ |
12,759 |
288 |
(15 |
) |
13,032 |
||||
|
|
|
|
|
|
|
|||||
32
The amortized costs and fair values of available-for-sale and held-to-maturity securities at December 31, 2002, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
2002 |
|||||||||
|
Available-for-Sale |
Held-to-Maturity |
||||||||
|
Amortized costs |
Fair values |
Amortized costs |
Fair values |
||||||
|
Due in one year or less |
$ |
3,381 |
3,440 |
937 |
950 |
||||
|
Due after one year through five years |
|
13,129 |
13,702 |
5,883 |
6,232 |
||||
|
Due after five years through ten years |
|
2,703 |
2,862 |
3,753 |
4,057 |
||||
|
Due after ten years |
|
643 |
677 |
— |
— |
||||
|
|
|
|
|
|
|||||
|
|
19,856 |
20,681 |
10,573 |
11,239 |
|||||
|
Mortgage-backed securities |
|
11,038 |
11,477 |
— |
— |
||||
|
|
|
|
|
|
|||||
|
Totals |
$ |
30,894 |
32,158 |
10,573 |
11,239 |
||||
|
|
|
|
|
|
|||||
Gross gains of $2 and $3 were realized in 2002 and 2001, respectively, from sale of available-for-sale securities.
Securities with amortized costs of approximately $2,686 and $2,065 (fair values of $2,844 and $2,105, respectively) as of December 31, 2002 and 2001, respectively, were pledged as collateral for public deposits.
| (4) | Loans |
A summary of loans at December 31, 2002 and 2001 follows:
|
2002 |
2001 |
||||||
|
Real estate loans: |
|||||||
|
Residential |
$ |
51,134 |
|
48,169 |
|
||
|
Other |
|
18,542 |
|
13,273 |
|
||
|
Loans to individuals for household, family and other consumer expenditures |
|
44,948 |
|
44,527 |
|
||
|
Commercial and industrial loans |
|
11,734 |
|
17,614 |
|
||
|
All other loans |
|
5,084 |
|
260 |
|
||
|
|
|
|
|
|
|||
|
Total loans, gross |
|
131,442 |
|
123,843 |
|
||
|
Less unearned income and fees |
|
(145 |
) |
(165 |
) |
||
|
|
|
|
|
|
|||
|
Loans, net of unearned income and fees |
|
131,297 |
|
123,678 |
|
||
|
Less allowance for loan losses |
|
(1,298 |
) |
(1,176 |
) |
||
|
|
|
|
|
|
|||
|
Loans, net |
$ |
129,999 |
|
122,502 |
|
||
|
|
|
|
|
|
|||
Nonaccrual loans amounted to approximately $347 and $302 at December 31, 2002 and 2001, respectively. Interest income that would have been earned on nonaccrual loans if they had been current in accordance with their original terms and the recorded interest that was included in income on these loans was not significant for 2002 and 2001. There were no commitments to lend additional funds to customers whose loans were on nonaccrual status at December 31, 2002.
In the normal course of business, the Bank has made loans to executive officers and directors. At December 31, 2002, loans to executive officers and directors were approximately $937 compared to $679 at December 31, 2001. During 2002, new loans to executive officers and directors amounted to approximately $583 and repayments amounted to approximately $325. Loans to companies in which executive officers and directors have an interest amounted to approximately $1,542 and $1,626 at December 31, 2002 and 2001, respectively.
33
Activity in the allowance for loan losses for the years ended December 31, 2002 and 2001 is summarized as follows:
|
2002 |
2001 |
||||||
|
Balances at beginning of year |
$ |
1,176 |
|
1,069 |
|
||
|
Provision for loan losses |
|
429 |
|
380 |
|
||
|
Loans charged off |
|
(417 |
) |
(417 |
) |
||
|
Loan recoveries |
|
110 |
|
144 |
|
||
|
|
|
|
|
|
|||
|
Balances at end of year |
$ |
1,298 |
|
1,176 |
|
||
|
|
|
|
|
|
|||
At December 31, 2002 and 2001, the recorded investment in loans for which an impairment has been identified totaled approximately $347 and $302, respectively, with corresponding valuation allowances of approximately $49 and $44, respectively. The average recorded investment in impaired loans receivable during 2002 and 2001 was approximately $258 and $265, respectively. Interest income recognized on a cash basis on impaired loans during 2002 and 2001 was approximately $17 and $12, respectively.
| (5) | Bank Premises and Equipment |
Bank premises and equipment, net were comprised of the following as of December 31, 2002 and 2001:
|
2002 |
2001 |
||||||
|
Land improvements |
$ |
376 |
|
364 |
|
||
|
Buildings |
|
3,347 |
|
3,339 |
|
||
|
Equipment, furniture and fixtures |
|
3,525 |
|
3,429 |
|
||
|
|
|
|
|
|
|||
|
|
7,248 |
|
7,132 |
|
|||
|
Less accumulated depreciation |
|
(4,069 |
) |
(3,669 |
) |
||
|
|
|
|
|
|
|||
|
|
3,179 |
|
3,463 |
|
|||
|
Land |
|
727 |
|
727 |
|
||
|
|
|
|
|
|
|||
|
Bank premises and equipment, net |
$ |
3,906 |
|
4,190 |
|
||
|
|
|
|
|
|
|||
Certain land acquired in connection with the construction of the Company’s Airport branch facility will not be used in operations and is currently listed for sale. Accordingly, the property’s carrying value of $329 is included in other assets on the consolidated balance sheets.
| (6) | Deposits |
A summary of deposits at December 31, 2002 and 2001 follows:
|
2002 |
2001 |
||||
|
Noninterest-bearing demand deposits |
$ |
14,468 |
14,562 |
||
|
Interest-bearing: |
|||||
|
Savings |
|
33,236 |
34,706 |
||
|
NOW accounts |
|
26,448 |
24,566 |
||
|
Time deposits — under $100,000 |
|
80,332 |
83,281 |
||
|
Time deposits — $100,000 and over |
|
23,759 |
22,726 |
||
|
|
|
|
|||
|
Total interest-bearing deposits |
|
163,775 |
165,279 |
||
|
|
|
|
|||
|
Total deposits |
$ |
178,243 |
179,841 |
||
|
|
|
|
|||
At December 31, 2002, the scheduled maturity of time deposits are as follows: $27,397 in 2003; $42,691 in 2004; $13,835 in 2005; $9,295 in 2006; and $10,873 in 2007.
| (7) | Employee Benefit Plans |
The Bank maintains a noncontributory defined benefit pension plan which covers substantially all of its employees. Benefits are computed based on employees’ average final compensation and years of credited service. Pension expense amounted to approximately $183 and $130 in 2002 and 2001, respectively.
34
The change in benefit obligation, change in plan assets and funded status of the pension plan at September 30, 2002 and 2001 (most recent information available) and pertinent assumptions are as follows:
|
Pension Benefits |
|||||||
|
2002 |
2001 |
||||||
|
Change in Benefit Obligation |
|||||||
|
Benefit obligation at beginning of year |
$ |
2,641 |
|
2,401 |
|
||
|
Service cost |
|
164 |
|
150 |
|
||
|
Interest cost |
|
198 |
|
181 |
|
||
|
Actuarial (gain) loss |
|
267 |
|
(59 |
) |
||
|
Benefits paid |
|
(14 |
) |
(32 |
) |
||
|
|
|
|
|
|
|||
|
Benefit obligation at end of year |
|
3,256 |
|
2,641 |
|
||
|
|
|
|
|
|
|||
|
Change in Plan Assets |
|||||||
|
Fair value of plan assets at beginning of year |
|
2,190 |
|
2,347 |
|
||
|
Actual return on plan assets |
|
(162 |
) |
(329 |
) |
||
|
Employer contribution |
|
252 |
|
204 |
|
||
|
Benefit paid |
|
(14 |
) |
(32 |
) |
||
|
|
|
|
|
|
|||
|
Fair value of plan assets at end of year |
|
2,266 |
|
2,190 |
|
||
|
|
|
|
|
|
|||
|
Funded status |
|
(990 |
) |
(451 |
) |
||
|
Unrecognized net actuarial loss |
|
786 |
|
169 |
|
||
|
Unrecognized prior service cost |
|
71 |
|
80 |
|
||
|
|
|
|
|
|
|||
|
Accrued pension benefit cost, included in other liabilities |
$ |
(133 |
) |
(202 |
) |
||
|
|
|
|
|
|
|||
|
Pension Benefits |
|||||||
|
2002 |
2001 |
||||||
|
Weighted Average Assumptions as of December 31: |
|||||||
|
Weighted average discount rate |
|
6.75 |
% |
7.50 |
% |
||
|
Expected return on plan assets |
|
9.00 |
% |
9.00 |
% |
||
|
Rate of compensation increase |
|
5.00 |
% |
5.00 |
% |
||
The components of net pension benefit cost under the plan for the years ended December 31, 2002 and 2001 is summarized as follows:
|
Pension Benefits |
|||||||
|
2002 |
2001 |
||||||
|
Service cost |
$ |
164 |
|
150 |
|
||
|
Interest cost |
|
198 |
|
181 |
|
||
|
Expected return on plan assets |
|
(188 |
) |
(206 |
) |
||
|
Net amortization |
|
9 |
|
9 |
|
||
|
Recognized net actuarial gain |
|
— |
|
(4 |
) |
||
|
|
|
|
|
|
|||
|
Net pension benefit cost |
$ |
183 |
|
130 |
|
||
|
|
|
|
|
|
|||
Plan assets consisted of cash equivalents, U.S. Government securities, mortgage-backed securities, corporate bonds and equities securities in a pooled pension fund administered by the Virginia Bankers Association.
The Company also has a 401(k) plan for which the Company does not currently match employee contributions to the plan.
35
| (8) | Income Taxes |
Total income taxes for the years ended December 31, 2002 and 2001 are allocated as follows:
|
2002 |
2001 |
||||
|
Income |
$ |
723 |
488 |
||
|
Stockholders’ equity for net unrealized gains on available-for-sale securities recognized for financial reporting purposes |
|
304 |
103 |
||
|
|
|
|
|||
|
Total income taxes |
$ |
1,027 |
591 |
||
|
|
|
|
|||
Income tax expense (benefit) attributable to income before income tax expense for the years ended December 31, 2002 and 2001 is summarized as follows:
|
2002 |
2001 |
||||||
|
Current |
$ |
734 |
|
509 |
|
||
|
Deferred |
|
(11 |
) |
(21 |
) |
||
|
|
|
|
|
|
|||
|
Total income tax expense |
$ |
723 |
|
488 |
|
||
|
|
|
|
|
|
|||
Included in income tax expense were tax expenses of approximately $1 for each of the years ended December 31, 2002 and 2001, related to net realized gains on securities.
Reported income tax expense for the years ended December 31, 2002 and 2001 differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the following:
|
2002 |
2001 |
||||||
|
Computed “expected” income tax expense |
$ |
887 |
|
663 |
|
||
|
Increase (reduction) in income tax expense resulting from: |
|||||||
|
Tax-exempt interest |
|
(189 |
) |
(213 |
) |
||
|
Disallowance of interest expense |
|
20 |
|
34 |
|
||
|
Other, net |
|
5 |
|
4 |
|
||
|
|
|
|
|
|
|||
|
Reported income tax expense |
$ |
723 |
|
488 |
|
||
|
|
|
|
|
|
|||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are as follows
|
2002 |
2001 |
||||||
|
Deferred tax assets: |
|||||||
|
Loans, principally due to allowance for loan losses |
$ |
332 |
|
304 |
|
||
|
Accrued pension, due to accrual for financial reporting purposes in excess of actual pension contributions |
|
131 |
|
138 |
|
||
|
Loans, due to unearned fees, net |
|
55 |
|
58 |
|
||
|
Other |
|
52 |
|
57 |
|
||
|
|
|
|
|
|
|||
|
Total gross deferred tax assets |
|
570 |
|
557 |
|
||
|
|
|
|
|
|
|||
|
Deferred tax liabilities: |
|||||||
|
Bank premises and equipment, due to differences in depreciation |
|
(97 |
) |
(100 |
) |
||
|
Net unrealized gains on available-for-sale securities |
|
(430 |
) |
(126 |
) |
||
|
Other |
|
(5 |
) |
— |
|
||
|
|
|
|
|
|
|||
|
Total gross deferred tax liabilities |
|
(532 |
) |
(226 |
) |
||
|
|
|
|
|
|
|||
|
Net deferred tax asset, included in other assets |
$ |
38 |
|
331 |
|
||
|
|
|
|
|
|
|||
36
The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary at December 31, 2002 and 2001, since realization of the entire gross deferred tax assets can be supported by the amounts of taxes paid during the carryback periods available under current tax laws.
| (9) | Financial Instruments with Off-Balance-Sheet Risk |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument fail to perform in accordance with the terms of the contract. The Bank’s maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The Bank requires collateral to support financial instruments when it is deemed necessary. The Bank evaluates such customers’ creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, real estate, accounts receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
|
Contract amounts at December 31, |
|||||
|
2002 |
2001 |
||||
|
Commitments to extend credit |
$ |
30,575 |
22,234 |
||
|
|
|
|
|||
|
Standby letters of credit |
$ |
73 |
100 |
||
|
|
|
|
|||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. Unless renewed, substantially all of the Bank’s credit commitments at December 31, 2002 will expire within one year. Management does not anticipate any material losses as a result of these transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
| (10) | Concentrations of Credit Risk |
The Bank grants commercial, residential, consumer and agribusiness loans to customers primarily in the central Virginia area. The Bank has a diversified loan portfolio which is not dependent upon any particular economic sector. As a whole, the portfolio could be affected by general economic conditions in the central Virginia region.
The Bank’s commercial loan portfolio is diversified, with no significant concentrations of credit. The real estate loan portfolio consists principally of 1-4 family residential property. The installment loan portfolio consists of consumer loans primarily for automobiles and other personal property. Overall, the Bank’s loan portfolio is not concentrated within a single industry or group of industries, the loss of any one or more of which would generate a materially adverse impact on the business of the Bank.
37
The Bank has established operating policies relating to the credit process and collateral in loan originations. Loans to purchase real and personal property are generally collateralized by the related property. Credit approval is principally a function of collateral and the evaluation of the creditworthiness of the borrower based on available financial information.
| (11) | Dividend Restrictions and Capital Requirements |
Bankshares’ principal source of funds for dividend payments is dividends received from its subsidiary Bank. For the years ended December 31, 2002 and 2001, dividends from the subsidiary Bank totaled $580 and $535, respectively.
Substantially all of Bankshares’ retained earnings consists of undistributed earnings of its subsidiary Bank, which are restricted by various regulations administered by federal banking regulatory agencies. Under applicable federal laws, the Comptroller of the Currency restricts, without prior approval, the total dividend payments of the Bank in any calendar year to the net profits of that year, as defined, combined with the retained net profits for the two preceding years. At December 31, 2002, retained net profits of the Bank which were free of such restriction approximated $2,306.
Bankshares and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bankshares’ consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Bankshares and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Bankshares and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that Bankshares and the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from Office of the Comptroller of the Currency categorized Bankshares and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” Bankshares and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed Bankshares and the Bank’s category.
Bankshares and the Bank’s actual capital amounts and ratios are presented in the table below.
|
Actual |
For Capital Adequacy Purposes |
To Be “Well Capitalized” Under Prompt Corrective Action Provisions |
|||||||||||||||
|
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||
|
As of December 31, 2002: |
|||||||||||||||||
|
Total Capital (to Risk Weighted Assets): |
|||||||||||||||||
|
Bankshares consolidated |
$ |
20,372 |
13.21 |
% |
$ |
12,269 |
8.0 |
% |
N/A |
N/A |
|
||||||
|
Bank |
|
20,175 |
13.16 |
% |
|
12,265 |
8.0 |
% |
15,331 |
10.0 |
% |
||||||
|
Tier I Capital (to Risk Weighted Assets): |
|||||||||||||||||
|
Bankshares consolidated |
|
18,968 |
12.37 |
% |
|
6,135 |
4.0 |
% |
N/A |
N/A |
|
||||||
|
Bank |
|
18,877 |
12.31 |
% |
|
6,133 |
4.0 |
% |
9,199 |
6.0 |
% |
||||||
|
Tier I Capital (Leverage) (to Average Assets): |
|||||||||||||||||
|
Bankshares consolidated |
|
18,968 |
9.44 |
% |
|
8,035 |
4.0 |
% |
N/A |
N/A |
|
||||||
|
Bank |
|
18,877 |
9.40 |
% |
|
8,035 |
4.0 |
% |
10,044 |
5.0 |
% |
||||||
38
|
To Be “Well |
||||||||||||||||||
|
Capitalized” Under |
||||||||||||||||||
|
For Capital |
Prompt Corrective |
|||||||||||||||||
|
Actual |
Adequacy Purposes |
Action Provisions |
||||||||||||||||
|
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||
|
As of December 31, 2001: |
||||||||||||||||||
|
Total Capital |
||||||||||||||||||
|
(to Risk Weighted Assets): |
||||||||||||||||||
|
Bankshares consolidated |
$ |
18,460 |
13.10 |
% |
$ |
11,486 |
8.0 |
% |
$ |
N/A |
N/A |
|
||||||
|
Bank |
|
18,695 |
13.03 |
% |
|
11,478 |
8.0 |
% |
|
14,348 |
10.0 |
% |
||||||
|
Tier I Capital |
||||||||||||||||||
|
(to Risk Weighted Assets): |
||||||||||||||||||
|
Bankshares consolidated |
|
17,632 |
12.28 |
% |
|
5,743 |
4.0 |
% |
|
N/A |
N/A |
|
||||||
|
Bank |
|
17,519 |
12.21 |
% |
|
5,739 |
4.0 |
% |
|
8,609 |
6.0 |
% |
||||||
|
Tier I Capital (Leverage) |
||||||||||||||||||
|
(to Average Assets): |
||||||||||||||||||
|
Bankshares consolidated |
|
17,632 |
8.92 |
% |
|
7,909 |
4.0 |
% |
|
N/A |
N/A |
|
||||||
|
Bank |
|
17,519 |
8.86 |
% |
|
7,909 |
4.0 |
% |
|
9,887 |
5.0 |
% |
||||||
| (12) | Disclosures About Fair Value of Financial Instruments |
SFAS No. 107, Disclosures about Fair Value of Financial Instruments , requires the Company to disclose estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the approximate fair value of each class of financial instrument for which it is practicable to estimate that value.
| (a) | Cash and Due from Banks and Federal Funds Sold |
The carrying amounts are a reasonable estimate of fair value.
| (b) | Securities |
The fair value of securities, except state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
| (c) | Loans |
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate – residential, real estate – other, loans to individuals and other loans. Each loan category is further segmented into fixed and adjustable rate interest terms.
The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan as well as estimates for prepayments. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.
| (d) | Deposits and Note Payable to Federal Home Loan Bank |
The fair value of demand deposits, NOW accounts, and savings deposits is the amount payable on demand. The fair value of fixed maturity time deposits, certificates of deposit and the note payable to the Federal Home Loan Bank is estimated using the rates currently offered for deposits or borrowings of similar remaining maturities.
| (e) | Commitments to Extend Credit and Standby Letters of Credit |
The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at December 31, 2002 and 2001, and as such, the related fair values have not been estimated.
39
The carrying amounts and approximate fair values of the Company’s financial instruments are as follows at December 31, 2002 and 2001:
|
2002 |
2001 |
||||||||
|
Carrying |
Approximate |
Carrying |
Approximate |
||||||
|
amounts |
fair values |
amounts |
fair values |
||||||
|
Financial assets: |
|||||||||
|
Cash and due from banks |
$ |
4,516 |
4,516 |
5,089 |
5,089 |
||||
|
Federal funds sold |
|
15,447 |
15,447 |
19,094 |
19,094 |
||||
|
Securities: |
|||||||||
|
Available-for-sale |
|
32,158 |
32,158 |
32,311 |
32,311 |
||||
|
Held-to-maturity |
|
10,573 |
11,239 |
12,759 |
13,032 |
||||
|
Federal Reserve Bank Stock |
|
75 |
75 |
75 |
75 |
||||
|
Federal Home Loan Bank Stock |
|
565 |
565 |
440 |
440 |
||||
|
Loans, net of unearned income and fees |
|
131,297 |
133,965 |
123,678 |
126,168 |
||||
|
|
|
|
|
|
|||||
|
Total financial assets |
$ |
194,631 |
197,965 |
193,446 |
196,209 |
||||
|
|
|
|
|
|
|||||
|
Financial liabilities: |
|||||||||
|
Deposits |
$ |
178,243 |
184,732 |
179,841 |
182,990 |
||||
|
Note payable to Federal Home Loan Bank |
|
500 |
589 |
600 |
618 |
||||
|
|
|
|
|
|
|||||
|
Total financial liabilities |
$ |
178,743 |
185,321 |
180,441 |
183,608 |
||||
|
|
|
|
|
|
|||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets and premises and equipment and other real estate owned. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
| (13) | Parent Company Financial Information |
Condensed financial information of Bankshares (Parent) is presented below:
Condensed Balance Sheets
|
December 31, |
|||||
|
2002 |
2001 |
||||
|
Assets |
|||||
|
Cash due from subsidiary |
$ |
8 |
49 |
||
|
Investment in subsidiary, at equity |
|
20,281 |
18,348 |
||
|
Other assets |
|
100 |
80 |
||
|
|
|
|
|||
|
Total assets |
$ |
20,389 |
18,477 |
||
|
|
|
|
|||
40
Condensed Balance Sheets, Continued
|
December 31, |
|||||
|
2002 |
2001 |
||||
|
Liabilities and Stockholders’ Equity |
|||||
|
Other liabilities |
$ |
17 |
17 |
||
|
|
|
|
|||
|
Stockholders’ equity (notes 11 and 14): |
|||||
|
Common stock of $3 par value. Authorized 3,000,000 shares; issued and outstanding 1,453,203 shares in 2002 and 1,450,966 shares in 2001 |
|
4,360 |
4,353 |
||
|
Capital surplus |
|
503 |
479 |
||
|
Retained earnings |
|
14,675 |
13,385 |
||
|
Accumulated other comprehensive income, net |
|
834 |
243 |
||
|
|
|
|
|||
|
Total stockholders’ equity |
|
20,372 |
18,460 |
||
|
Commitments, contingencies and other matters (notes 9, 10 and 11) |
|||||
|
|
|
|
|||
|
Total liabilities and stockholders’ equity |
$ |
20,389 |
18,477 |
||
|
|
|
|
|||
Condensed Statements of Income
|
Years ended December 31, |
|||||
|
2002 |
2001 |
||||
|
Income: |
|||||
|
Dividends from subsidiary (note 11) |
$ |
580 |
535 |
||
|
Expenses: |
|||||
|
Other expenses |
|
55 |
53 |
||
|
|
|
|
|||
|
Income before income tax benefit and equity in undistributed net income of subsidiary |
|
525 |
482 |
||
|
Applicable income tax benefit |
|
19 |
18 |
||
|
|
|
|
|||
|
Income before equity in undistributed net income of subsidiary |
|
544 |
500 |
||
|
Equity in undistributed net income of subsidiary |
|
1,342 |
963 |
||
|
|
|
|
|||
|
Net income |
$ |
1,886 |
1,463 |
||
|
|
|
|
|||
Condensed Statements of Cash Flows
|
Years ended December 31, |
|||||||
|
2002 |
2001 |
||||||
|
Cash flows from operating activities: |
|||||||
|
Net income |
$ |
1,886 |
|
1,463 |
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
|
Equity in undistributed net income of subsidiary |
|
(1,342 |
) |
(963 |
) |
||
|
Increase in other assets |
|
(20 |
) |
(16 |
) |
||
|
Increase in other liabilities |
|
— |
|
1 |
|
||
|
|
|
|
|
|
|||
|
Net cash provided by operating activities |
|
524 |
|
485 |
|
||
|
|
|
|
|
|
|||
|
Cash flows from financing activities: |
|||||||
|
Proceeds from issuance of common stock |
|
31 |
|
77 |
|
||
|
Cash dividends paid |
|
(596 |
) |
(579 |
) |
||
|
|
|
|
|
|
|||
|
Net cash used in financing activities |
|
(565 |
) |
(502 |
) |
||
|
|
|
|
|
|
|||
|
Net decrease in cash due from subsidiary |
|
(41 |
) |
(17 |
) |
||
|
Cash due from subsidiary, beginning of year |
|
49 |
|
66 |
|
||
|
|
|
|
|
|
|||
|
Cash due from subsidiary, end of year |
$ |
8 |
|
49 |
|
||
|
|
|
|
|
|
|||
41
| (14) | Stock Options |
The Company has an Incentive Stock Option Plan (the Plan) instituted on the effective date of May 1, 1997, pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees. The Plan authorizes 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 are reserved for use in the Plan. All stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. At December 31, 2002, there were 5,000 additional shares available for grant under the Plan.
Stock options generally have 10-year terms, vest at the rate of 20% per year, and become fully exercisable five years from the date of grant.
During 2002, options for 8,500 shares were granted to employees with an exercise price of $14.75 per share. During 2001, options for 11,500 shares were granted to employees with an exercise price of $14 per share. The per share weighted average fair value of stock options granted during 2002 and 2001 was $2.57 and $3.60, respectively, on the date of grant utilizing the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
Granted in 2002 |
Granted in 2001 |
|||||
|
Expected dividend yield |
4 |
% |
4 |
% |
||
|
Risk-free interest rate |
4.12 |
% |
5.0 |
% |
||
|
Expected life of options |
10 years |
|
9.5 years |
|
||
|
Expected volatility of stock price |
25 |
% |
29 |
% |
Stock option activity during the years ended December 31, 2002 and 2001 is as follows:
|
Number of shares |
Weighted average exercise price |
||||
|
Balance at December 31, 2000 |
25,000 |
$ |
10.00 |
||
|
Expired/forfeited/exercised |
— |
|
— |
||
|
Granted |
11,500 |
$ |
14.00 |
||
|
|
|||||
|
Balance at December 31, 2001 |
36,500 |
$ |
11.26 |
||
|
Expired/forfeited/exercised |
— |
|
— |
||
|
Granted |
8,500 |
$ |
14.75 |
||
|
|
|||||
|
Balance at December 31, 2002 |
45,000 |
$ |
11.92 |
||
|
|
|||||
At December 31, 2002, options for 25,000 shares were exercisable at an exercise price of $10.00 per share and options for 2,300 shares were exercisable at an exercise price of $14.00 per share.
| (15) | Reclassified Goodwill and Other Intangible Assets |
Amortization expense related to reclassified goodwill and other intangible assets was $51 in 2001. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 were in effect for the year ended December 31, 2001:
|
Reported net income |
$ |
1,463 |
|
|
|
Add back reclassified goodwill amortization |
|
40 |
|
|
|
Deduct related income tax effects |
|
(14 |
) |
|
|
|
|
|
||
|
Adjusted net income |
$ |
1,489 |
|
|
|
|
|
|
Included in other assets is reclassified goodwill of $539 as of December 31, 2002 and 2001, and other amortizing intangible assets of $35 and $46 as of December 31, 2002 and 2001, respectively. There was no change in the carrying amount of reclassified goodwill of $539 for the year ended December 31, 2002.
42
| (16) | Quarterly Results of Operations (Unaudited) |
As discussed in note 1(i), the Company has retroactively restated its operating results for the first three quarters of 2002 to reverse amortization expense related to reclassified goodwill back to the beginning of 2002, in accordance with SFAS No. 147. The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2002 (as restated) and 2001:
|
2002 |
|||||||||
|
First quarter |
Second quarter |
Third quarter |
Fourth quarter |
||||||
|
Income statement data: |
|||||||||
|
Interest income |
$ |
3,080 |
3,094 |
2,999 |
2,883 |
||||
|
Interest expense |
|
1,398 |
1,234 |
1,183 |
1,145 |
||||
|
|
|
|
|
|
|||||
|
Net interest income |
|
1,682 |
1,860 |
1,816 |
1,738 |
||||
|
Provision for loan losses |
|
105 |
105 |
105 |
114 |
||||
|
Noninterest income |
|
422 |
434 |
401 |
499 |
||||
|
Noninterest expense |
|
1,439 |
1,467 |
1,479 |
1,429 |
||||
|
Income tax expense |
|
151 |
194 |
171 |
207 |
||||
|
|
|
|
|
|
|||||
|
Net income |
$ |
409 |
528 |
462 |
487 |
||||
|
|
|
|
|
|
|||||
|
Per share data: |
|||||||||
|
Basic net income per share |
$ |
0.28 |
0.36 |
0.32 |
0.34 |
||||
|
Diluted net income per share |
|
0.28 |
0.36 |
0.32 |
0.33 |
||||
|
Cash dividends per share |
|
0.10 |
0.10 |
0.10 |
0.11 |
||||
|
Book value per share |
|
12.80 |
13.35 |
13.82 |
14.02 |
||||
|
2001 |
|||||||||
|
First quarter |
Second quarter |
Third quarter |
Fourth quarter |
||||||
|
Income statement data: |
|||||||||
|
Interest income |
$ |
3,404 |
3,395 |
3,367 |
3,197 |
||||
|
Interest expense |
|
1,863 |
1,903 |
1,841 |
1,656 |
||||
|
|
|
|
|
|
|||||
|
Net interest income |
|
1,541 |
1,492 |
1,526 |
1,541 |
||||
|
Provision for loan losses |
|
90 |
90 |
90 |
110 |
||||
|
Noninterest income |
|
389 |
407 |
382 |
454 |
||||
|
Noninterest expense |
|
1,348 |
1,334 |
1,355 |
1,364 |
||||
|
Income tax expense |
|
132 |
127 |
124 |
105 |
||||
|
|
|
|
|
|
|||||
|
Net income |
$ |
360 |
348 |
339 |
416 |
||||
|
|
|
|
|
|
|||||
|
Per share data: |
|||||||||
|
Basic net income per share |
$ |
0.25 |
0.24 |
0.23 |
0.29 |
||||
|
Diluted net income per share |
|
0.25 |
0.24 |
0.23 |
0.29 |
||||
|
Cash dividends per share |
|
0.10 |
0.10 |
0.10 |
0.10 |
||||
|
Book value per share |
|
12.28 |
12.41 |
12.73 |
12.72 |
||||
43
Independent Auditors’ Report
The Board of Directors and Stockholders
Pinnacle Bankshares Corporation:
We have audited the accompanying consolidated balance sheets of Pinnacle Bankshares Corporation and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Bankshares Corporation and subsidiary as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 1(i) to the consolidated financial statements, the Company changed its method of accounting for reclassified goodwill in 2002.
/s/ KPMG LLP
Roanoke, Virginia
January 31, 2003
44
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Shareholder Information
Annual Meeting
The 2003 Annual Meeting of Shareholders will be held on April 8, 2003, at 11:30 a.m. at the Fellowship Hall of Altavista Presbyterian Church, located at 707 Broad Street, Altavista, Virginia.
Market for Common Equity and Related Stockholder Matters
The Company’s Common Stock is quoted on the OTC Bulletin Board. The following table below presents the high and low bid prices per share of the Common Stock and dividend information of the Company for the quarters presented. The high and low bid prices of the Common Stock do not include retail markups, markdowns or commissions and may not represent actual transactions.
|
2002 |
2001 |
|||||||||||||||||
|
High |
Low |
Dividends |
High |
Low |
Dividends |
|||||||||||||
|
First Quarter |
$ |
14.25 |
$ |
13.25 |
$ |
0.10 |
$ |
18.00 |
$ |
12.125 |
$ |
0.10 |
||||||
|
Second Quarter |
$ |
15.20 |
$ |
13.75 |
$ |
0.10 |
$ |
14.00 |
$ |
12.00 |
$ |
0.10 |
||||||
|
Third Quarter |
$ |
15.00 |
$ |
14.55 |
$ |
0.10 |
$ |
15.25 |
$ |
13.00 |
$ |
0.10 |
||||||
|
Fourth Quarter |
$ |
16.00 |
$ |
14.82 |
$ |
0.11 |
$ |
14.00 |
$ |
13.25 |
$ |
0.10 |
||||||
Each share of Common Stock is entitled to participate equally in dividends, which are payable as and when determined by the Board of Directors after consideration of the earnings, general economic conditions, the financial condition of the business and other factors as might be appropriate. The Company’s ability to pay dividends is dependent upon its receipt of dividends from its subsidiary. National banks may use only capital surplus that represents retained earnings, not paid-in capital, when calculating permissible dividends.
As of December 31, 2002, there were approximately 408 Shareholders of record of the Common Stock.
Requests for Information
Requests for information about the Company should be directed to Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer, P.O. Box 29, Altavista, Virginia 24517, telephone (434) 369-3000. A copy of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002, will be furnished without charge to shareholders upon request after March 31, 2003.
Shareholders seeking information regarding lost certificates and dividends should contact Registrar and Transfer Company in Cranford, New Jersey, telephone (800) 368-5948. Please submit address changes in writing to:
Registrar and Transfer Company
Investor Relations Department
10 Commerce Drive
Cranford, New Jersey 07016-9982
45
[LOGO OF PINNACLE BANKSHARES CORPORATION]
622 Broad Street
Post Office Box 29
Altavista, Virginia 24517
(434) 369-3000
EXHIBIT 21
Subsidiaries of Registrant
|
Name |
|
Type and Jurisdiction of Organization |
||
|
|
|
|
||
|
The First National Bank of Altavista |
|
National banking association |
||
|
|
|
|
||
|
FNB Property Corp. |
|
Virginia corporation |
||
|
|
|
|
||
|
First Properties, Inc. |
|
Virginia corporation |
||
Exhibit 23
Independent Auditors’ Consent
The Board of Directors
Pinnacle Bankshares Corporation:
We consent to the incorporation by reference in Registration Statement No. 333-63361 on Form S-8 and Registration Statement No. 333-69321 on Form S-3 of Pinnacle Bankshares Corporation of our report dated January 31, 2003, with respect to the consolidated balance sheets of Pinnacle Bankshares Corporation and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for the years then ended, which report is incorporated by reference in the December 31, 2002 Annual Report on Form 10-KSB of Pinnacle Bankshares Corporation. Our report refers to a change in the method of accounting for reclassified goodwill.
|
|
/s/ KPMG LLP |
|
|
|
|
|
|
Roanoke, Virginia |
|
|
|
March 24, 2003 |
|
|
EXHIBIT 99.1
CEO/CFO Certification Pursuant to § 906 of
the
Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
The undersigned, as the Chief Executive Officer and Chief Financial Officer of Pinnacle Bankshares Corporation, respectively, certify that the Annual Report on Form 10-KSB for the period ended December 31, 2002, which accompanies this certification, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Pinnacle Bankshares Corporation and subsidiary at the dates and for the periods indicated.
|
March 24, 2003
|
|
|
/s/ R OBERT H. G ILLIAM , J R . |
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Robert H. Gilliam, Jr., President and
|
|
|
|
|
|
|
|
|
|
|
|
|
March 24, 2003
|
|
|
/s/ B RYAN M. L EMLEY |
|
|
|
|
|
|
|
|
|
||
|
Date
|
|
|
Bryan M. Lemley, Secretary,
|
|
|
|