UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-23909
PINNACLE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
| Virginia | 54-1832714 | |
| State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) |
| P.O. Box 29, Altavista, Virginia | 24517-0029 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (434) 369-3000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| n/a | n/a |
Securities registered pursuant to section 12(g) of the Act:
Common stock, par value $3.00
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. x
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. (Check one):
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 Act). Yes ¨ No x
The aggregate market value of the issuer’s common stock held by non-affiliates as of June 30, 2006 was $31,731,902.
There were 1,467,589 share of common stock of the issuer outstanding as of March 23, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2006 Annual Report to Shareholders, which is attached hereto as Exhibit 13, are incorporated by reference in Part II of this report. Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 10, 2007 are incorporated by reference in Part III of this report.
PINNACLE BANKSHARES CORPORATION
2006 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
| Item 1. | 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 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 also offers a full range of investment, insurance and annuity products through its association with Banker’s Investments, LLC, and Banker’s Insurance, LLC.
The Bank serves a trade area consisting primarily of Campbell County, northern Pittsylvania County, eastern Bedford County, northern Franklin County, Amherst County and the city of Lynchburg from facilities located in Campbell County, Bedford County, Franklin County, the town of Altavista, the town of Amherst and the city of Lynchburg, Virginia. In June 1999 the Company opened the Airport facility, located just outside the Lynchburg city limits, and in August 2000, opened the Old Forest Road facility, located on Old Forest Road in Lynchburg, and the Brookville Plaza facility, located on Timberlake Road in Lynchburg. In August 2004 the Company opened the Forest facility, located in Forest, Bedford County, Virginia. In July 2005 the Company opened the Smith Mountain Lake loan production facility, located in Moneta, Franklin County, Virginia. In May 2006 the Company relocated the Brookville Plaza facility to Timberlake Road in Campbell County. In November 2006, the Company opened the Amherst facility located in the town of Amherst. The Company opened these offices to better serve the Lynchburg, northern Campbell County, eastern Bedford County, Amherst County and the Smith Mountain Lake 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. FNB Property sold land held for sale in 2003 and purchased land in Forest, Virginia that was used to build the Forest facility. First Properties, Inc., also a Virginia corporation, was formed to hold title to other real estate owned. No property is being held in other real estate owned as of December 31, 2006.
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 the 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 actively tries 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.
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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. Two industries in the Company’s market area that have been adversely affected in recent years are the textile and furniture industry. Cheaper production costs overseas have led to job layoffs and a few plant closings in the immediate area but have not affected the Company’s overall profitability.
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 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 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 Sarbanes-Oxley Act of 2002 (the “SOX”), which is aimed at improving corporate governance and reporting procedures and requires additional corporate governance measures and expanded disclosure with respect to the Company’s corporate operations and internal controls. The Company is complying with the 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 has incurred and will continue to incur additional expense in complying with the provisions of the SOX and the resulting regulations, this compliance has not had, and is not expected to 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 Board of Governors of the Federal Reserve System (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 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
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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 the Bank 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.
As a national bank, the Bank is also 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 the 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.
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 Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
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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 as 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 losses up 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 ratio of 8% (the “Risk-based Capital Ratio”). 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, 2006, 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%.
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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 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, 2006, both the Company and the Bank were considered “well capitalized.”
Deposit Insurance Assessments. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC recently amended its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (FDIRA). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Unlike the other categories, Risk Category I, which contains the least risky depository institutions, contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points. FDIRA also provided for the possibility that the FDIC may pay dividends to insured institutions if the DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.
Mortgage Banking Regulation. The Bank’s mortgage banking operation is subject to the rules and regulations of, and examination by the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and state regulatory authorities with respect to originating, processing and selling mortgage loans. Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and fees. In addition to other Federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real
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Estate Settlement Procedures Act, and the Home Ownership Equity Protection Act, and the regulations promulgated thereunder. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.
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 and elects to be a financial holding company will be permitted to engage in activities that are financial in nature or incidental 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 and elect to be 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 FRB 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.
The GLBA has not had a material adverse impact on the Company’s or the Bank’s operations. To the extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry has experienced further consolidation. The GLBA probably has 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 other new regulations issued by Federal banking agencies also provide 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 and then given a rating of “Outstanding,” “Satisfactory,” “Needs to improve” or “Substantial noncompliance.” These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The Bank received a rating of “Satisfactory” in its most recent CRA performance evaluation as of July 8, 2003.
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. The USA PATRIOT Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Certain provisions of the USA Patriot Act impose the obligation to establish anti-money laundering programs, including the development of a customer identification program, and the screening of all customers against any government lists of
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known or suspected terrorists. 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 terrorism. 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.
Consumer Laws and Regulations. The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The Banks must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
As of December 31, 2006, the Company had 99 full-time employees. The Company’s management believes that its employee relations are good.
Executive Officers of the Registrant
| Name (Age) |
Principal Occupation During Past Five Years | |
| Robert H. Gilliam, Jr. (61) |
President & Chief Executive Officer of Pinnacle Bankshares Corporation and President, Chief Executive Officer and Trust Officer of The First National Bank of Altavista since 1980; Director, Pinnacle Bankshares Corporation since 1980. | |
| Carroll E. Shelton (56) |
Senior Vice President of Pinnacle Bankshares Corporation and Senior Vice President and Chief Lending Officer of The First National Bank of Altavista since 1990; Director, Pinnacle Bankshares Corporation since 1990. | |
| Bryan M. Lemley (35) |
Secretary, Treasurer and Chief Financial Officer of Pinnacle Bankshares Corporation since 2000 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. | |
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| Item 1A. | Risk Factors. |
Changes in economic conditions in the Company’s market area could adversely affect its financial condition and performance.
The Company’s business is subject to fluctuations due to economic conditions generally and in its market area especially, particularly economic slowdowns that may lead to an increase in the unemployment rate. This could lead to higher loan charge-offs and reduce the Company’s net income and growth. The Company cannot be certain when fluctuations in the economy may occur or the overall impact of the fluctuations on the profitability of the Company. A decline in economic conditions in the Company’s market area caused by inflation, recession, unemployment or other factors beyond the Company’s control could adversely affect the quality of the loan portfolio, loan and deposit pricing or the demand for banking products and services generally, all of which could adversely affect the Company’s financial condition and performance.
Changes in interest rates may have an adverse effect on the Company’s profitability.
Changes in interest rates could lead to a decrease in net interest margin, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings as a percentage of average total earning assets. Changes in rates will affect the Company’s net interest margin in diverse ways, including the pricing of loans and deposits, the levels of prepayments and asset quality. The Company’s net interest margin will be adversely affected if market interest rates change so that interest paid on deposits and borrowings increases faster than does the interest earned on loans and investments. Based on its current asset liability position the Company is vulnerable to increases in short term interest rates because of its liability-sensitive balance sheet profile. However, these liabilities consist almost entirely of deposits, the repricing of which historically lags behind the changes in short-term interest rates. Changes in interest rates could also affect the value of the Company’s loans, by affecting borrowers’ ability to pay the principal or interest on existing loans, prepayment rates and new loan origination rates. The Company tries to minimize its exposure to interest rate risk, but is unable to completely eliminate such risk. The Company cannot predict with certainty or control changes in interest rates but believes that the Company’s current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.
If the Company’s allowance for loan losses becomes inadequate, its results of operations may be adversely affected.
The Company maintains an allowance for loan losses that it believes is 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 actual amount of future losses may be affected by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company’s control, and these losses may exceed the Company’s current estimates.
Although the Company believes that the allowance for loan losses is adequate to cover the risk of losses in the loan portfolio, the Company cannot fully predict such losses or that its loan loss allowance will be adequate in the future. Excessive loan losses could have a material impact on the Company’s financial performance. Consistent with its loan loss reserve methodology, the Company expects to make additions to its loan loss reserve levels as a result of future loan growth, which may affect our short-term earnings.
The Company may be adversely affected by government regulation.
The Company is highly regulated under federal and state banking laws and regulations that are intended primarily for the protection of consumers, depositors and the banking system, not shareholders. Banking regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and many other aspects of its business. This regulation could limit the Company’s rate of growth or place the Company at a competitive disadvantage as compared to less heavily regulated competitors. New legislation or changes in banking regulations could create additional compliance costs that may increase our noninterest expense and decrease our net income. For example, costs to comply with legislation such as the Sarbanes- Oxley Act has directly led to an increase in our internal audit costs. The Company cannot predict legislative or regulatory changes or what effect such changes may have on the Company’s operations and profitability.
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The concentration in loans secured by real estate may increase our credit losses, which would negatively affect our net income
The Company offers a variety of secured loans including commercial lines of credit, commercial loans, real estate, construction, home equity, consumer and other loans. As of December 31, 2006, 61.47% of the Company’s loan portfolio was secured by real estate. Real estate lending involves risk elements when there is a lack of timely payment and/or a decline in the value of the collateral. A major change in the real estate market, such as a deterioration in value of real estate prices, or in the local economy, could adversely affect our customers’ ability to pay these loans, which in turn could impact the Company with loan losses and future increased provision expense for loan losses. Risk of loan defaults and foreclosures are unavoidable in the banking industry. The Company tries to limit this exposure by practicing good loan underwriting and carefully monitoring loan commitments. Furthermore, while the Company believes the local real estate market will continue to be strong in 2007, the Company cannot fully eliminate credit risk and credit losses that may occur in the future.
Demand for loan and deposit products
Lower demand for loan and deposit products may result in lower growth of the balance sheet and reduced profitability. For example, $910,000 of the $1,159,000 change in net interest income was due to growth in our loan and deposit portfolios. Without this growth, the Company’s 2006 net income would have been severely lower.
The Company’s future success will depend on its ability to compete effectively in the highly competitive financial services industry.
There is intense competition for both loans and deposits among banks in the Company’s market area. The Company also competes with non-bank financial institutions such as credit unions, insurance agencies and investment brokerage firms, some of which are subject to less extensive regulation and lower income tax rates than the Company. Banks and other institutions in which the Company competes may have larger branch networks, greater access to capital and other resources, have higher lending limits and may offer products and services not offered by the Company. For example the Bank would not be able to make an individual a loan greater than $3,831,000 as of December 31, 2006 due to its lending limit unless the Bank participates a portion of the loan out to another institution. In addition, larger competitors may be able to price loans and deposits more aggressively than the Company does. If the Company has to raise interest rates paid on deposits to compete effectively, the Company’s net interest margin and net income could both decrease. Failure to compete effectively to attract new, or to retain existing, customers may reduce or limit our net income and our market share and may adversely affect our results of operation and financial condition.
Changes in accounting standards could materially impact the Company’s financial statements.
From time to time, the Financial Accounting Standards Board (“the FASB”) changes the accounting and reporting standards that govern the preparation of the Company’s financial statements. For example, in September 2006 the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 required the Company to recognize the underfunded status of the Company’s defined benefit postretirement plan as a liability in the statement of financial position and to recognize the change in funded status in comprehensive income for 2006. Application of SFAS No. 158 decreased the Company’s total shareholders’ equity by $357 in 2006. Changes in accounting principles, policies and guidelines are hard to predict, as is the impact of such changes on the Company’s financial statements.
| Item 1B. | Unresolved Staff Comments. |
Not applicable.
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| Item 2. | Properties. |
The Company’s main office and corporate headquarters, located at 622 Broad Street in downtown Altavista, Virginia, is owned and principally occupied 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.
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 Timberlake Office, located at 20865 Timberlake Road in Campbell County, Virginia, consists of a single-story building leased for $4,042 per month through April 2011.
The Forest Office, located at 14417 Forest Road in Forest, Virginia, consists of a single-story building owned by the Bank.
The Amherst Office, located at 193 Richmond Highway in Amherst, Virginia, consists of a temporary trailer leased for $2,100 per month through March 2007 or until a permanent facility in Amherst is completed.
The Smith Mountain Lake loan production office, located at 74 Scruggs Road, Suite 102, in Moneta, Virginia, consists of office space leased for $1,485 per month through April 2007 by the Bank. The bank expects to renew the lease upon its expiration.
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 this insurance provides adequate protection for liabilities or losses that might arise out of the ownership and use of such properties.
| Item 3. | Legal Proceedings. |
Neither the Company nor the Bank nor any of their 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 and the Bank’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, 2006.
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The information contained on the inside back cover of the 2006 Annual Report to Shareholders, under the caption, “Market for Common Equity and Related Stockholder Matters,” is incorporated herein by reference.
| Item 6. | Selected Financial Data. |
The information presented under the caption “Selected Consolidated Financial Information” on page 6 of the 2006 Annual Report to Shareholders is incorporated herein by reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. |
The information presented under the caption “Management’s Discussion and Analysis” on pages 7 through 25 of the 2006 Annual Report to Shareholders is incorporated herein by reference.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The information presented under the caption “Quantitative and Qualitative Disclosures About Market Risk” on pages 26 through 27 of the 2006 Annual Report to Shareholders in incorporated herein by reference.
| Item 8. | Financial Statements and Supplementary Data. |
The consolidated financial statements of the Company and its subsidiary, including the accompanying notes, and independent auditors’ report thereon, contained on pages 28 through 57 of the 2006 Annual Report to Shareholders, are incorporated herein by reference.
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | 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 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
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statements for external purposes in accordance with generally accepted accounting principles. No changes in the Company’s internal control over financial reporting occurred during the fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. | Other Information. |
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 2007 Annual Meeting of Shareholders (“2007 Proxy Statement”) to be held on April 10, 2007.
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information with respect to the directors of the Company required by this item is contained on pages 3 through 7 of the 2007 Proxy Statement under the caption “Election of Directors,” and is incorporated herein by reference. The information regarding the Section 16(a) reporting requirements of the directors and executive officers is contained on page 15 of the 2007 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference. The information concerning the executive officers of the Company required by this item is included in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.” The information regarding the Company’s Audit Committee required by this item is contained on page 5 of the 2007 Proxy Statement under the caption “Meetings and Committees of the Board of Directors,” and is incorporated herein by reference.
The Company has adopted a Code of Conduct and Conflict of Interest Policy that applies to the directors, executives and employees of the Company and the Bank, including the Company’s Chief Executive Officer, Chief Financial Officer, Controller and other persons performing similar functions. See Exhibit 14 hereto.
| Item 11. | Executive Compensation. |
The information on executive compensation required by this item is contained on pages 7 through 15 of the 2007 Proxy Statement under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” and is incorporated herein by reference. Information on compensation of directors is contained on pages 6 and 7 of the 2007 Proxy Statement under the caption “Directors’ Fees” and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information on security ownership of certain beneficial owners and management required by this item is contained on page 2 of the 2007 Proxy Statement under the caption “Securities Ownership of Certain Beneficial Owners” and is incorporated herein by reference.
The following table sets forth information as of December 31, 2006 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance.
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Equity Compensation Plan Information
| Plan Category |
Number of (a) |
Weighted- (b) |
Number of securities remaining available for future issuance under equity | ||||
| Equity compensation plans approved by shareholders (1) |
42,500 | $ | 11.78 | 107,500 | |||
| Equity compensation plans not approved by shareholders |
— | — | — | ||||
| Total |
42,500 | $ | 11.78 | 107,500 | |||
| (1) | These shares are available to be granted in the form of options, restricted stock or stock appreciation rights under the Company’s 1997 Incentive Stock Plan and 2004 Incentive Stock Plan. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information on interest of management in certain transactions and certain committees of the board of directors required by this item is contained on pages 4, 5 and 7 of the 2007 Proxy Statement under the captions “Interest of Management in Certain Transactions” and “Meetings and Committees of the Board of Directors” and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information contained on pages 16 and 17 of the 2007 Proxy Statement under the captions “Principal Accountant Fees” and “Pre-Approval Policies” is incorporated herein by reference.
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| 21 | Subsidiaries of Registrant | |
| 23.1 | Consent of Cherry, Bekaert & Holland, L.L.P. | |
| 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. |
| (b) | Exhibits – See exhibit index included in Item 15(a)(3) above. |
| (c) | Financial Statement Schedules – See Item 15(a)(2) above. |
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Pursuant to the requirements of Section 13 or 15(d) 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) | ||
| MARCH 23, 2007 |
/s/ Robert H. Gilliam, Jr. | |
| Date | Robert H. Gilliam Jr., President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ Robert H. Gilliam, Jr. |
President, Chief Executive | March 23, 2007 | ||
| Robert H. Gilliam, Jr. | Officer and Director (principal executive officer) |
|||
| /s/ Bryan M. Lemley |
Secretary, Treasurer and Chief | March 23, 2007 | ||
| Bryan M. Lemley | Financial Officer (principal financial and accounting officer) |
|||
| /s/ A. Willard Arthur |
Director | March 23, 2007 | ||
| A. Willard Arthur | ||||
| /s/ James E. Burton, IV |
Director | March 23, 2007 | ||
| James E. Burton, IV | ||||
| /s/ John P. Erb |
Director | March 23, 2007 | ||
| John P. Erb | ||||
| /s/ R.B. Hancock, Jr. |
Director | March 23, 2007 | ||
| R.B. Hancock, Jr. | ||||
| /s/ James P. Kent, Jr. |
Director | March 23, 2007 | ||
| James P. Kent, Jr. | ||||
| /s/ William F. Overacre |
Director | March 23, 2007 | ||
| William F. Overacre | ||||
| /s/ Carroll E. Shelton |
Director | March 23, 2007 | ||
| Carroll E. Shelton | ||||
| /s/ John L. Waller |
Director | March 23, 2007 | ||
| John L. Waller | ||||
| /s/ Michael E. Watson |
Director | March 23, 2007 | ||
| Michael E. Watson | ||||
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