Edgar Filing: PINNACLE BANKSHARES CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

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

For the transition period from to

Commission File Number: 000-23909

PINNACLE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA

54-1832714

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

622 Broad Street

Altavista, Virginia 24517

(Address of principal executive offices)(Zip Code)

(434) 369-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x

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

At July 11, 2006, 1,458,938 shares of Pinnacle Bankshares Corporation’s common stock, $3 par value, were outstanding.

PINNACLE BANKSHARES CORPORATION

FORM 10-Q

June 30, 2006

INDEX


			Page Number
Part I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statement of Changes in Stockholders’ Equity	6

		Consolidated Statements of Cash Flows	7

		Notes to Consolidated Financial Statements	8-13

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-21

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

	Item 4.	Controls and Procedures	22

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings	23

	Item 4.	Submission of Matters to a Vote of Security Holders	23

	Item 6.	Exhibits	24

SIGNATURES			25

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars)


	June 30, 2006			December 31, 2005
	(Unaudited)
Assets
Cash and cash equivalents (note 2):
Cash and due from banks	$	5,655		$	6,591
Federal funds sold		6,504			7,223

Total cash and cash equivalents		12,159			13,814

Securities (note 3):
Available-for-sale, at fair value		20,378			22,351
Held-to-maturity, at amortized cost		5,770			6,910
Federal Reserve Bank stock, at cost		75			75
Federal Home Loan Bank stock, at cost		481			454
Mortgage loans held for sale		894			—
Loans, net (note 4)		191,753			181,268
Bank premises and equipment, net		5,367			5,407
Accrued income receivable		1,075			1,075
Other assets		2,060			2,136

Total assets	$	240,012		$	233,490

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Demand	$	22,095		$	21,914
Savings and NOW accounts		68,285			64,661
Time		124,686			122,671

Total deposits		215,066			209,246

Note payable to Federal Home Loan Bank		150			200
Accrued interest payable		635			601
Other liabilities		381			231

Total liabilities		216,232			210,278

Stockholders’ equity:
Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,458,938 shares in 2006 and 1,458,706 in 2005		4,377			4,376
Capital surplus		586			577
Retained earnings		19,182			18,362
Accumulated other comprehensive income		(365	)		(103	)

Total stockholders’ equity		23,780			23,212

Total liabilities and stockholders’ equity	$	240,012		$	233,490

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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


	Three Months Ended June 30, 2006		Three Months Ended June 30, 2005
Interest income:
Interest and fees on loans	$	3,379	$	2,565
Interest on securities:
U.S. Government agencies		121		118
Corporate		57		107
States and political subdivisions (taxable)		67		66
States and political subdivisions (tax exempt)		67		105
Other		9		9
Interest on federal funds sold		81		91

Total interest income		3,781		3,061

Interest expense:
Interest on deposits:
Savings and NOW accounts		233		124
Time - under $100,000		967		719
Time - $100,000 and over		295		226
Other interest expense		3		5

Total interest expense		1,498		1,074

Net interest income		2,283		1,987

Provision for loan losses		81		82

Net interest income after provision for loan losses		2,202		1,905

Noninterest income:
Service charges on deposit accounts		367		338
Fees on sales of mortgage loans		62		70
Commissions and fees		106		99
Other operating income		131		130

Total noninterest income		666		637

Noninterest expense:
Salaries and employee benefits		1,103		1,027
Occupancy expense		104		93
Furniture and equipment		196		170
Office supplies and printing		67		40
Other operating expenses		479		451

Total noninterest expense		1,949		1,781

Income before income tax expense		919		761

Income tax expense		295		224

Net income	$	624	$	537

Net income per share (note 5):
Basic	$	0.43	$	0.37
Diluted	$	0.42	$	0.36

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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


	Six Months Ended June 30, 2006		Six Months Ended June 30, 2005
Interest income:
Interest and fees on loans	$	6,494	$	4,996
Interest on securities:
U.S. Government agencies		236		230
Corporate		131		213
States and political subdivisions (taxable)		137		136
States and political subdivisions (tax exempt)		142		221
Other		17		15
Interest on federal funds sold		202		183

Total interest income		7,359		5,994

Interest expense:
Interest on deposits:
Savings and NOW accounts		428		222
Time - under $100,000		1,893		1,437
Time - $100,000 and over		583		459
Other interest expense		6		9

Total interest expense		2,910		2,127

Net interest income		4,449		3,867

Provision for loan losses		146		142

Net interest income after provision for loan losses		4,303		3,725

Noninterest income:
Service charges on deposit accounts		663		643
Fees on sales of mortgage loans		107		120
Commissions and fees		188		153
Other operating income		269		270

Total noninterest income		1,227		1,186

Noninterest expense:
Salaries and employee benefits		2,197		2,014
Occupancy expense		200		188
Furniture and equipment		385		344
Office supplies and printing		112		94
Other operating expenses		878		840

Total noninterest expense		3,772		3,480

Income before income tax expense		1,758		1,431

Income tax expense		558		417

Net income	$	1,200	$	1,014

Net income per share (note 5):
Basic	$	0.82	$	0.70
Diluted	$	0.81	$	0.69

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2006 and 2005

(Unaudited)

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


	Common Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total
	Shares	Par Value		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances, December 31, 2004	1,457,406	$	4,372	$	562	$	16,970		$	303		$	22,207

Net income	—		—		—		1,014			—			1,014
Change in net unrealized gains on available-for-sale securities, net of deferred income tax benefit of $70	—		—		—		—			(138	)		(138	)
Cash dividends declared by Bankshares ($0.24 per share)	—		—		—		(350	)		—			(350	)
Issuance of common stock	1,400		4		15		—			—			19

Balances, June 30, 2005	1,458,806	$	4,376	$	577	$	17,634		$	165		$	22,752


	Common Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total
	Shares	Par Value		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances, December 31, 2005	1,458,706	$	4,376	$	577	$	18,362		$	(103	)	$	23,212
Net income	—		—		—		1,200			—			1,200
Change in net unrealized gains on available-for-sale securities, net of deferred income tax benefit of $135	—		—		—		—			(262	)		(262	)
Cash dividends declared by Bankshares ($0.26 per share)	—		—		—		(380	)		—			(380	)
Issuance of common stock	232		1		5		—			—			6
Accrual of stock option vesting	—		—		4		—			—			4

Balances, June 30, 2006	1,458,938	$	4,377	$	586	$	19,182		$	(365	)	$	23,780

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
Cash flows from operating activities:
Net income	$	1,200		$	1,014

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of bank premises and equipment		211			232
Amortization of intangible assets		3			6
Amortization of unearned fees, net		(18	)		19
Net amortization of premiums and discounts on securities		6			15
Provision for loan losses		146			142
Originations of mortgage loans held for sale		(4,834	)		(7,476	)
Sales of mortgage loans held for sale		4,397			7,476
Net decrease (increase) in:
Accrued income receivable		0			(47	)
Other assets		69			(91	)
Net increase (decrease) in:
Accrued interest payable		34			(9	)
Other liabilities		150			(31	)

Net cash provided by operating activities		1,364			1,250

Cash flows from investing activities:
Purchases of available-for-sale securities		(2,003	)		(2,520	)
Purchases of held-to-maturity securities		0			(500	)
Proceeds from maturities and calls of held-to-maturity securities		1,140			1,172
Proceeds from maturities and calls of available-for-sale securities		2,996			2,046
Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities		576			840
Purchase of Federal Home Loan Bank stock		(27	)		(25	)
Collections on loan participations		250			409
Net increase in loans made to customers		(11,255	)		(8,647	)
Recoveries on loans charged off		74			76
Purchases of bank premises and equipment		(171	)		(116	)

Net cash used in investing activities		(8,420	)		(7,265	)

Cash flows from financing activities:
Net increase in demand, savings and NOW deposits		3,805			4,625
Net increase (decrease) in time deposits		2,015			(5,386	)
Repayments of note payable to Federal Home Loan Bank		(50	)		(50	)
Proceeds from issuance of common stock		6			19
Accrual of stock option vesting		5
Cash dividends paid		(380	)		(350	)

Net cash provided by (used in) financing activities		5,401			(1,142	)

Net increase in cash and cash equivalents		(1,655	)		(7,157	)

Cash and cash equivalents, beginning of period		13,814			17,336

Cash and cash equivalents, end of period	$	12,159		$	10,179

See accompanying notes to unaudited consolidated financial statements.

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

June 30, 2006 (Unaudited)

(In thousands, except share and per share data)

(1) General

The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary, The First National Bank of Altavista (the “Bank”), (collectively the “Company”). All material intercompany accounts and transactions have been eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America and to general banking industry practices. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature, necessary to present fairly the financial position as of June 30, 2006 and the results of operations for the three months and six months ended June 30, 2006 and 2005 and cash flows for the six-month periods ended June 30, 2006 and 2005.

These interim period consolidated financial statements and financial information should be read in conjunction with the consolidated financial statements and notes thereto included in Pinnacle Bankshares Corporation’s 2005 Annual Report to Shareholders and additional information supplied in the 2005 Form 10-KSB.

The results of operations for the interim period ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

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

(2) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits, and federal funds sold.

(3) Securities

The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities at June 30, 2006 and December 31, 2005, are shown in the table below. As of June 30, 2006, securities with amortized costs of $2,960 and fair values of $2,931 were pledged as collateral for public deposits.


	June 30, 2006
Available-for-Sale:	Amortized Costs		Gross Unrealized Gains	Gross Unrealized Losses		Fair Values
Obligations of U.S.
Government corporations and agencies	$	4,937	—	(118	)	4,819
Obligations of states and political subdivisions		6,031	41	(163	)	5,909
Mortgage-backed securities- Government		5,408	9	(203	)	5,214
Corporate Issues		4,504	—	(118	)	4,386
Other securities		50	—	—		50

Totals	$	20,930	50	(602	)	20,378


Held-to-Maturity:	Amortized Costs		Gross Unrealized Gains	Gross Losses Unrealized		Fair Values
Obligations of states and political subdivisions	$	5,770	76	(96	)	5,750

	December 31, 2005
Available-for-Sale:	Amortized Costs		Gross Unrealized Gains	Gross Unrealized Losses		Fair Values
Obligations of U.S.
Government corporations and agencies	$	3,985	3	(67	)	3,921
Obligations of states and political subdivisions		6,922	97	(85	)	6,934
Mortgage-backed securities- Government		6,055	8	(78	)	5,985
Corporate Issues		5,494	54	(87	)	5,461
Other securities		50	—	—		50

Totals	$	22,506	162	(317	)	22,351


Held-to-Maturity:	Amortized Costs		Gross Unrealized Gains	Gross Unrealized Losses		Fair Values
Obligations of states and political subdivisions	$	6,910	125	(53	)	6,982

(4) Allowance for Loan Losses

Activity in the allowance for loan losses for the six months ended June 30, 2006 and 2005, and for the year ended December 31, 2005 are as follows:


	June 30, 2006			December 31, 2005			June 30, 2005
Balance at January 1,	$	1,508		$	1,502		$	1,502
Provision for loan losses		146			230			142
Loans charged off		(96	)		(380	)		(165	)
Recoveries		74			156			76

Balance at end of period,	$	1,632		$	1,508		$	1,555

(5) 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:


Three Months Ended June 30, 2006	Net Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	624	1,458,938	$	0.43

Effect of dilutive stock options		—	19,150

Diluted net income per share	$	624	1,478,088	$	0.42


Three Months Ended June 30, 2005
Basic net income per share	$	537	1,458,706	$	0.37

Effect of dilutive stock options		—	15,435

Diluted net income per share	$	537	1,474,141	$	0.36


Six Months Ended June 30, 2006	Net Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	1,200	1,458,869	$	0.82

Effect of dilutive stock options		—	19,375

Diluted net income per share	$	1,200	1,478,244	$	0.81


Six Months Ended June 30, 2005
Basic net income per share	$	1,014	1,458,524	$	0.70

Effect of dilutive stock options		—	15,286

Diluted net income per share	$	1,014	1,473,810	$	0.69

(6) Comprehensive Income

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


	Three Months Ended
	June 30, 2006			June 30, 2005
Net income	$	624		$	537
Change in net unrealized gains on available-for sale securities, net of deferred income taxes		(197	)		152

Total comprehensive income	$	427		$	689


	Six Months Ended
	June 30, 2006			June 30, 2005
Net income	$	1,200		$	1,014
Change in net unrealized gains on available-for sale securities, net of deferred income taxes		(262	)		(138	)

Total comprehensive income	$	938		$	876

(7) Stock Options

The Company has two incentive stock option plans. The 1997 Incentive Stock Plan (the “1997 Plan”), pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees, became effective as of May 1, 1997. The 1997 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 were reserved for use in the 1997 Plan. All stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. The options expire ten years from the date of grant. At June 30, 2006, there were 3,200 shares available for grant under the 1997 Plan. A summary of stock option information follows ($ in thousands, except share amounts):


	Number of Shares	Range of Per Option Price		Weighted- Aggregate Per Share Price		Aggregate Option Price
Outstanding at December 31, 2005 and June 30 2006	42,500	$	10.00 - 14.75	$	11.78	$	501

The 2004 Incentive Stock Plan (the “2004 Plan”), pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees, was approved by shareholders on April 13, 2004 and became effective as of May 1, 2004. The 2004 Plan authorizes grants of options to purchase up to 100,000 shares of the Company’s authorized, but unissued common stock. Accordingly, 100,000 shares of authorized, but unissued common stock were reserved for use in the 2004 Plan. All

stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. The options expire ten years from the date of grant. At June 30, 2006, no options had been granted under the plan and all 100,000 shares were available for grant under the 2004 Plan.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R under the “modified prospective” method effective January 1, 2006. The Company’s adoption of SFAS No. 123R resulted in an additional expense for the six months ended June 30, 2006 of approximately $4, net of tax, relating to the expensing of stock options. Future levels of compensation cost recognized related to share-based compensation awards may be impacted by new awards and/or modification, repurchases and cancellations of existing awards after the adoption of this standard.

Prior to January 1, 2006, the Company applied 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 was 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.

Compensation cost has been recognized for the Company’s stock options in the accompanying consolidated financial statements for 2006. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123 in 2005, 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 interim periods indicated below:


	Three Months Ended June 30 ,2005
Net income, as reported	$	537
Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects		(2	)

Pro forma net income	$	535

Basic net income per share:
As reported	$	0.37
Pro forma		0.37
Diluted net income per share:
As reported	$	0.36
Pro forma		0.36

	Six Months Ended June 30, 2005
Net income, as reported	$	1,014
Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects		(4	)

Pro forma net income	$	1,010

Basic net income per share:
As reported	$	0.70
Pro forma		0.69
Diluted net income per share:
As reported	$	0.69
Pro forma		0.69

(8) Subsequent Declaration of Cash Dividend

On July 11, 2006 the Board of Directors declared a quarterly cash dividend in the amount of $0.14 per common share payable to shareholders of record as of July 21, 2006.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in 000’s)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

THE COMPANY

Pinnacle Bankshares Corporation, a Virginia corporation (“Bankshares”), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares is headquartered in Altavista, Virginia, and conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, 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 AND RESULTS OF OPERATIONS

Total assets at June 30, 2006 were $240,012 up 2.79% from $233,490 at December 31, 2005. The principal components of the Company’s assets at the end of the period were $26,148 in securities and $191,753 in net loans. During the six-month period ended June 30, 2006, net loans increased 5.78% or $10,485 from $181,268 at December 31, 2005. The Company’s lending activities are a principal source of its income. Also during the six months, securities decreased 10.64% or $3,113 from December 31, 2005.

Total liabilities at June 30, 2006 were $216,232, up 2.83% from $210,278 at December 31, 2005, primarily as a result of an increase in savings and NOW accounts from December 31, 2005 of $3,624 or 5.60% and an increase in time deposits from December 31, 2005 of $2,015 or 1.64%. The Company’s deposits are provided by individuals and businesses located within the communities the Company serves.

Total stockholders’ equity at June 30, 2006 was $23,780 including $19,182 in retained earnings and $365 of accumulated other comprehensive losses, which represents net unrealized losses on available-for-sale securities. At December 31, 2005, total stockholders’ equity was $23,212.

The Company had net income of $1,200 for the six months ended June 30, 2006, compared with net income of $1,014 for the comparable period in 2005, an increase of 18.34%. The Company had net income of $624 for the three months ended June 30, 2006, compared with net income of $537 for the comparable period in 2005, an increase of 16.20%. The increase in net income when comparing the six months ended June 30, 2006 with the six months ended June 30, 2005 is attributable to a 15.52% increase in net interest income after provision for loan losses and a 3.46% increase in non-interest income. The increase in net income when comparing the three months ended June 30, 2006 with the three months end June 30, 2005 is attributable to an 15.59% increase in net interest income after provision for loan losses and a 4.55% increase in non-interest income. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

Profitability as measured by the Company’s return on average assets (ROA) was 1.02% for the six months ended June 30, 2006, compared to 0.91% for the same period of 2005. Another key indicator of performance, the return on average equity (ROE) for the six months ended June 30, 2006 was 10.21%, compared to 9.05% for the six months ended June 30, 2005.

NET INTEREST INCOME

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

Net interest income was $4,449 for the six months ended June 30, 2006 and is attributable to interest income from loans and securities exceeding the cost associated with interest incurred on deposits. Net interest income was $2,283 for the three months ended June 30, 2006. The net interest margin increased to 4.06% for the six months ended June 30, 2006, from 3.84% for the six months ended June 30, 2005. The increase was caused by an 84 basis point increase in yield on earning assets exceeding the 57 basis point increase in the cost paid for deposits.

Interest income on loans and securities increased 22.77% and 23.52% for the six and three months ended June 30, 2006, respectively, compared to the same periods of 2005 due to a higher volume of loans and loans repricing and being originated at higher interest rates in 2006 as a result of the overall higher interest rate environment.

Interest and fees from loans was $6,494 for the six months ended June 30, 2006, up from $4,996 for the six months ended June 30, 2005. Interest and fees from loans was $3,379 for the three months ended June 30, 2006, up from $2,565 for the three months ended June 30, 2005. Interest from securities and fed funds sold was $865 for the six months ended June 30, 2006, down from $998 for the six months ended June 30, 2005. Interest from securities and fed funds sold was $402 for the three months ended June 30, 2006, down from $496 for the three months ended June 30,2005.

Interest expense increased 36.81% and 39.48% for the six and three months ended June 30, 2006, respectively, compared to the same periods of 2005 due a higher volume of deposits and the impact of repricing of deposit liabilities at higher interest rates.

NONINTEREST INCOME

Noninterest income increased $41 or 3.46% for the six months ended June 30, 2006 compared to the same period of 2005. Noninterest income increased $29 or 4.55% when comparing the three months ended June 30, 2006 to the same period of 2005. The Company’s principal sources of noninterest income are service charges and fees on deposit accounts,

particularly transaction accounts, fees on sales of mortgage loans and commissions from investment and insurance sales. The increases from 2005 were primarily due to a 22.88% or $35 increase in commissions and fees consisting mainly of a $31 increase in commissions from investment sales during the first half of 2006. Fees on sales of mortgage loans decreased 10.83% or $13 when comparing the six months ended June 30, 2006 with the six months ended June 30, 2005, although production improved significantly in May and June of 2006 compared with January though April of 2006.

NONINTEREST EXPENSE

Noninterest expense increased $292 or 8.39%, for the six months ended June 30, 2006 compared to the same period of 2005. Noninterest expense increased $168 or 9.43% for the three months ended June 30, 2006 compared to the same period of 2005. The increase in noninterest expense when comparing these periods is primarily attributable to an increase in salary and benefits and other expenses associated with opening two new facilities. The full service Timberlake branch opened in May 2006 and the Smith Mountain Lake loan production office opened in May 2005.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

We expensed a provision for loan losses of $146 in the first six months of 2006 in recognition of management’s estimate of risks inherent with lending activities. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and current and anticipated economic conditions in making its estimate of risk. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance. The allowance for loan losses was $1,632 as of June 30, 2006, representing approximately 0.84% of total loans outstanding. Management believes the allowance was adequate as of June 30, 2006 to provide for loan losses inherent in the Company’s loan portfolio. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision as deemed appropriate.

NON-PERFORMING ASSETS AND IMPAIRED LOANS

Non-performing assets, which consist of nonaccrual loans and foreclosed properties, were $293 on June 30, 2006 and $571 at December 31, 2005. Foreclosed property consisted of one property totaling $150 on December 31, 2005. Non-accrual loans were $293 on June 30, 2006 and $421 at December 31, 2005. The Bank had no foreclosed properties as of June 30, 2006. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. A loan is considered an impaired loan when, based on the then current information and facts, it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans equaled nonaccrual loans at June 30, 2006.

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. The Company’s liquidity is provided by cash and due from banks, federal funds sold, investments available for sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Company’s ability to obtain deposits and purchase funds at favorable rates also affects it liquidity. As a result of the Company’s management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes that the Bank maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet customers’ credit needs. The Company’s ratio of liquid assets to deposits and short-term borrowings was 15.29% as of June 30, 2006 and 17.62% as of December 31, 2005. Additional sources of liquidity available to the Company include its capacity to borrow additional funds through correspondent banks. The Company has an established federal funds line with a regional correspondent bank of $11,890 that had no outstanding balance as of June 30, 2006 and an established line with the FHLB that had $150 outstanding under a total line of $31,202 as of June 30, 2006. 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.

CONTRACTUAL OBLIGATIONS

As of June 30, 2006, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in “Management’s Discussion and Analysis” in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

CAPITAL

The Company’s financial position at June 30, 2006 reflects liquidity and capital levels currently adequate to fund anticipated future business expansion. Capital ratios are well above required regulatory minimums for a well-capitalized institution. The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s capital is reviewed by management regularly. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

Stockholders’ equity reached $23,780 at June 30, 2006 compared to $23,212 at December 31, 2005. At June 30, 2006, the Company’s leverage ratio (Tier I capital divided by quarterly average assets) was 9.94% compared to 9.88% at December 31, 2005. Each of these ratios exceeded the required minimum leverage ratio of 4%.

OFF-BALANCE SHEET ARRANGEMENTS

There were no material changes in the Company’s off-balance sheet arrangements and commitments from the information provided in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005. The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of June 30, 2006 equaled $1,577. Other commitments include commitments to extend credit. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of June 30, 2006, the Company had unused loan commitments of $55,750, including $45,437 in unused commitments with an original maturity exceeding one year.

BRANCH RELOCATION

The Brookville Plaza Office located in a Kroger grocery store at 7805 Timberlake Road in Lynchburg, Virginia relocated approximately 1.5 miles to a full service branch operating as the Timberlake Office at 20865 Timberlake Road in Campbell County, Virginia on May 17, 2006.

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 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 could be required. Further information regarding the estimates used in determining the allowance for loan losses is contained in the discussions on “Allowance and Provision for Loan Losses” on page 17 herein and “Loans and Allowance for Loan Losses” on page 29 of the Company’s 2005 Annual Report to Shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123. This statement supersedes APB Opinion No. 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements using a fair value-based method. SFAS No. 123R permits companies to adopt the recognition requirements using either a “modified prospective” method or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123R for all unvested awards granted prior to the effective date of SFAS No. 123R. The “modified retrospective” method, has the same requirements as the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123.

The Company adopted SFAS No. 123R under the “modified prospective” method effective January 1, 2006. The Company estimates that the adoption of SFAS No. 123R will result in an additional expense in 2006 of approximately $9, net of tax, relating to the expensing of stock options. Future levels of compensation cost recognized related to share-based compensation awards may be impacted by new awards and/or modification, repurchases and cancellations of existing awards after the adoption of this standard.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and resolves issues in Statement No. 133 Implementation Issue No. D1, Application of Statement 133 to

Beneficial Interests in Securitized Financial Assets. The provisions of this Statement are effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 is not expected to have a material impact on the consolidated financial statements of the Company.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. This Statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125 with respect to the accounting for separately recognized servicing assets and servicing liabilities. The provisions of this Statement are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 is not expected to have a material impact on the consolidated financial statements of the Company.

As of August 11, 2006, 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes from the quantitative and qualitative disclosures about market risk made in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

Item 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.

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

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting and control of the Company’s assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There was no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting or control over its assets.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2006 Annual Meeting of Shareholders of Pinnacle Bankshares Corporation was held on April 11, 2006.

At the 2006 Annual Meeting, the following persons were elected to serve as Class III Directors, to serve until the 2009 Annual Meeting, having received the following votes:


Name	For	Withheld
Carroll E. Shelton	1,107,437	178
John L. Waller	1,107,437	178
Michael E. Watson	1,105,487	2,128

Class I and II directors continued in office after the 2006 meeting.


Class I		Class II
Serving until the 2007 Meeting		Serving until the 2008 Meeting
A. Willard Arthur		James E. Burton, IV
John P. Erb		James P. Kent, Jr.
Robert H. Gilliam, Jr.		William F. Overacre
R.B. Hancock, Jr.

No other matters were voted on during the meeting.

Item 6. EXHIBITS


Exhibit Number		Description

3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Appendix I to registrant’s amended registration statement on Form S-4 (File No. 333-20399) filed on January 30, 1997)

3.2		Bylaws (incorporated by reference to Exhibit 3(ii) to registrant’s registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)

10.1*		1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrant’s registration statement on Form S-8 filed September 14, 1998)

10.2*		Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 26, 2006 (incorporated by reference to Exhibit 10.2 to registrant’s current report on Form 8-K filed June 2, 2006)

10.3*		VBA Directors’ Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (incorporated by reference to Exhibit 10.3 to registrant’s annual report on Form 10-KSB filed March 25, 2003)

10.4*		2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to registrant’s quarterly report on Form 10-QSB filed on May 10, 2004)

10.5*		Directors’ Annual Compensation (incorporated by reference to Exhibit 10.5 to registrant’s quarterly report on Form 10-Q filed on May 11, 2006)

10.6*		Base Salaries of Named Executive Officers of the Registrant (incorporated by reference to Exhibit 10.6 to registrant’s annual report on Form 10-KSB filed March 24, 2006)

10.7*		Change in Control Agreement between Pinnacle Bankshares Corporation and Bryan M. Lemley, dated May 26, 2006 (incorporated by reference to Exhibit 10.7 to registrant’s current report on Form 8-K filed June 2, 2006)

10.8*		Change in Control Agreement between Pinnacle Bankshares Corporation and Carroll E. Shelton, dated May 26, 2006 (incorporated by reference to Exhibit 10.8 to registrant’s current report on Form 8-K filed June 2, 2006)

31.1		CEO Certification Pursuant to Rule 13a-14(a)

31.2		CFO Certification Pursuant to Rule 13a-14(a)

32.1		CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

*	Denotes management contract.

SIGNATURES

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


		PINNACLE BANKSHARES CORPORATION (Registrant)

AUGUST 11, 2006		/s/ Robert H. Gilliam, Jr.
Date		Robert H. Gilliam, Jr., President and Chief Executive Officer
		(principal executive officer)

AUGUST 11, 2006		/s/ Bryan M. Lemley
Date		Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer
		(principal financial & accounting officer)