PLE Pinnacle Bancshares,

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark one)

þ		Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

o		Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from                      to                     

Commission file number 1-12707

Pinnacle Bancshares, Inc.

(Exact Name of Small Business Issuer as Specified in Its Charter)

1811 Second Avenue, Jasper, Alabama 35502-1388
(Address of Principal Executive Offices)

(205) 221-4111
(Issuer’s Telephone Number, Including Area Code)

     Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ         No o

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

     The number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2007: 1,462,359 shares of common stock.

     Transitional Small Business Disclosure Format (check one):
Yes o        No þ

 

 

CONTENTS

		Page
PART I     FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition at September 30, 2007 and December 31, 2006.		3
Unaudited Condensed Consolidated Statements of Operations for the three and nine-months ended September 30, 2007 and 2006.		4
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine-months ended September 30, 2007 and 2006.		5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006.		6
Notes to Unaudited Condensed Consolidated Financial Statements.		7
Item 2. Management’s Discussion and Analysis or Plan of Operation		10
Item 3. Controls and Procedures		15
Part II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and use of Proceeds		16
Item 6. Exhibits		16
Signatures		17
EX-31.1 Section 302 Certification of the CEO & CFO
EX-32.1 Section 906 Certification of the CEO & CFO

PART I – FINANCIAL INFORMATION

See accompanying notes to these condensed consolidated financial statements.

See accompanying notes to these condensed consolidated financial statements.

See accompanying notes to these condensed consolidated financial statements.

PINNACLE BANCSHARES, INC .

2. EARNINGS PER SHARE:

The following table represents the earnings per share calculations for the three and nine-month periods ended September 30, 2007 and 2006:

3. RECENT ACCOUNTING PRONOUNCEMENTS :

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value instruments. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measure attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, SFAS No. 157 will change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact SFAS No. 157 may have on its consolidated financial statements.  

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex

hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS No. 159 may have on its consolidated financial statements.

In June 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 with no material effect on its consolidated financial statements.

In November 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB No. 109). SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 also applies to any loan commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company is currently assessing the financial impact of adopting SAB No. 109.

4. SUBSQUENT EVENT :

On October 18, 2007, the Company announced that it had commenced a tender offer to purchase all shares of its common stock held by persons owning 99 share or fewer on the close of business as of October 10, 2007. The purpose of this tender offer is to allow the Company to deregister its common stock under the Securities and Exchange Act of 1934.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Forward-Looking Statements: This Quarterly Report on Form 10-QSB contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the SEC or otherwise. The words “believe,” “expect,” “seek” and “intend,” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risk and uncertainties, some of which cannot be predicted or qualified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies: The accounting principles followed by the Company and the methods of applying these principles conform with United States generally accepted accounting principles and with general practices within the banking industry. The Company’s critical accounting policies relate to the allowance for loan losses and real estate owned. These policies require the use of estimates, assumptions and judgments and are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. These policies require the use of subjective and complex estimates, assumptions and judgments that are important to the portrayal of the Company’s financial condition and results.

The allowance for loan losses is maintained at a level which management considers to be adequate to absorb losses inherent in the loan portfolio. Management’s estimation of the amount of the allowance is based on a continual evaluation of the loan portfolio and includes such factors as economic conditions, analysis of individual loans, overall portfolio characteristics, delinquencies and the balance of any impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans).

Management reviews the adequacy of the allowance for loan losses on a continual basis by assessing the quality of the loan portfolio and adjusting the allowance when appropriate. Management’s evaluation of certain specifically identified loans includes a review of the financial condition and capacity of the borrower, the value of the collateral, current economic trends, historical losses, workout and collection arrangements, and possible concentrations of credit. The loan review process also includes a collective evaluation of credit quality within the mortgage and installment loan portfolios. In establishing the allowance, loss percentages are applied to groups of loans with similar risk characteristics. These loss percentages are determined by historical experience, portfolio mix, regulatory influence, and other economic factors. Each quarter this review is quantified in a report to management, which uses it to determine whether an appropriate allowance is being maintained. This report is then submitted to the Audit Committee and to the Board of Directors quarterly.

Changes in the allowance can result from changes in economic events, changes in the creditworthiness of the borrowers, or changes in collateral values. The effect of these changes is reflected when known. Though management believes the allowance for loan losses to be adequate as of September 30, 2007, ultimate losses may vary from estimations.

Real estate owned acquired through foreclosure is carried at the lower of cost or fair value less expected selling costs. Any excess of the recorded investment over fair value, less estimated costs of disposition of the property, is charged to the allowance for loan losses at the time of foreclosure. Subsequent to foreclosure, real estate owned is evaluated on an individual basis for changes in fair value. Declines in fair value of the asset, less costs of disposition below its carrying amount, require an increase in the valuation allowance account. Future increases in fair value of

the asset, less cost of disposition, may cause a reduction in the valuation allowance account, but not below zero. Increases or decreases in the valuation allowance account are charged or credited to income. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed.

The recognition of gains and losses on the sale of real estate owned is dependent upon whether the nature and terms of the sale and future involvement of the Bank in the property meet certain requirements. If the transaction does not meet these requirements, income recognition is deferred and recognized under an alternative method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 66, Accounting for Sales of Real Estate.

Comparison of Financial Condition as of December 31, 2006 and September 30, 2007: Total assets were $239.5 million at September 30, 2007, compared to $232.2 million at December 31, 2006. Net loans increased $14.1 million, to $127.6 million at September 30, 2007, compared to $113.5 million at December 31, 2006. This increase was due primarily to an increase in construction loans of $3.4 million, an increase in commercial real estate loans of $8.0 million, an increase in commercial loans of $2.0 million and an increase in all other loans of $.7 million, primarily due to an increased lending staff. Total securities available-for-sale were $87.8 million at September 30, 2007, compared to $87.9 million at December 31, 2006.

Cash and cash equivalents and interest-bearing deposits in other banks at September 30, 2007 totaled $6.2 million, compared to $12.8 million at December 31, 2006. The Company is maintaining this level of liquidity in order to fund current loan commitments and other loan originations in 2007.

At September 30, 2007, the investment portfolio of $87.8 million consisted primarily of U. S. agency securities and mortgage-backed securities. The entire investment portfolio is classified as “available-for-sale,” which is carried at fair value with the unrealized gains/losses reflected directly in stockholders’ equity, net of taxes.

Total deposits were $207.4 million at September 30, 2007, compared to $206.6 million at December 31, 2006.

On December 22, 2003, the Company established Pinnacle Capital Trust I (the “Trust”), a wholly-owned statutory business trust. The Company is the sole sponsor of the trust and owns $93,000 of the Trust’s common securities. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $3,000,000 and using proceeds from the issuance of the common and preferred securities to purchase $3,093,000 of junior subordinated debentures (“Subordinated Debentures”) issued by the Company. The sole assets of the Trust are the Subordinated Debentures. The Company’s investment in the Trust is included in other assets in the accompanying consolidated balance sheet at September 30, 2007 and the $3,093,000 obligation of the Company is included in subordinated debt. Interest expense on Subordinated Debentures was $65,000 and $195,000 for the three and nine months ended September 30, 2007, compared to $67,000and $187,000 for the three and nine months ended September 30, 2006. The increase was due to an increase in the average rate paid from 8.1% for the nine months ended September 30, 2006 to 8.4% for the nine months ended September 30, 2007.

Stockholders’ equity increased from $19.4 million at December 31, 2006 to $20.6 million at September 30, 2007. This increase was primarily attributable to net income of $1,037,536 for the nine months ended September 30, 2007. This increase was offset by a cash dividend of $483,157 at $0.33 per share paid to the stockholders, a repurchase of 2,179 shares of common stock of $32,059 at an average price of $14.71 per share, and a decrease of $622,169 in unrealized losses in the Company’s available-for-sale securities portfolio, which is marked to fair value. The interest rate risk in the Company’s portfolio is monitored closely.

Results of Operations-Comparison of the Three and Nine-Months Ended September 30, 2007 and 2006: For the three months ended September 30, 2007, net income was $385,000, compared with net income of $325,000 for the three months ended September 30, 2006. For the nine months ended September 30, 2007, net income was $1,038,000, compared with net income of $992,000 for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, the decrease in net interest income was attributable in part to a decrease in the Company’s net interest margin primarily as the Company’s cost of funds to increased more rapidly than interest earned on investments and loans. The average rate paid on deposits in the three and nine months ended September 30, 2007 was 3.58% and 3.59%, compared to 3.28% and 3.07% for the three and nine months ended September 30, 2006 . As a result, the Company’s net interest margin was 3.07% and 2.96% for the three and nine months ended

September 30, 2007, respectively, as compared to 3.25% and 3.20% for the three and nine months ended September 30, 2006, respectively.

The yield on interest-earning assets increased from approximately 6.62% and 6.34% in the three and nine months period ended September 30, 2006, respectively, to approximately 6.68% and 6.58% in the three and nine months period ended September 30, 2007, respectively. The cost of funds increased from approximately 3.38% at September 30, 2006, to approximately 3.55% at September 30, 2007. These increases were due to increases in market interest rates.

Net interest income before the provision for loan losses for the three months ended September 30, 2007, was $1,685,000 compared with $1,678,000 in the same period last year. The increase was primarily due to an increase in interest revenues of $252,000. This increase was offset by an increase in interest expense of $245,000. Net interest income before the provision for loan losses for the nine months ended September 30, 2007, was $4,870,000 compared with $4,928,000 in the same period last year. The decrease was primarily due to an increase in interest expense of $1,117,000 for the nine months ended September 30, 2007. This increase was offset in part by increases in interest revenue of $1,059,000 for the nine months ended September 30, 2007, compared with the same periods last year.

Provisions for loan losses are made to maintain the allowance for loan losses at adequate levels. The allowance for loan losses reflects management’s estimates, which take into account historical experience, the amount of non-performing loans, collateral values and general economic conditions. The provision for loan losses was $134,000 and $234,000 for the three and nine months ended September 30, 2007, compared to $135,000 and $382,500 for the three and nine months ended September 30, 2006. The decrease was primarily due to a decrease in charge-offs. C harge-offs for the nine months ended September 30, 2007 were $393,000 compared with $442,000 in the same periods last year. The Company’s risk management processes include loan review designed to evaluate the credit risk of the loan portfolio. Through this loan review process, at September 30, 2007, approximately $2,300,000 in performing loans were downgraded to special mention and approximately $3,200,000 were downgraded to substandard. The $5,500,000 in performing loans was downgraded because of deteriorating financial condition of the borrowers. These loans primarily are residential investment property loans and speculative residential loans. The Company does not originate subprime loans.

It is management’s opinion that the allowance for loan losses at September 30, 2007 was adequate to absorb losses related to the portfolio of loans. Management will continue to analyze the Bank’s exposure to losses. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the initial determinations.

Net interest income after the provision for loan losses for the three months ended September 30, 2007, was $1,550,000 compared with $1,543,000 in the same period last year. Net interest income after the provision for loan losses for the nine months ended September 30, 2007, was $4,636,000, compared with $4,546,000 in the same period last year.

Non-interest income, which includes fees and service charges, income from real estate operations, the sale of loans, bank owned life insurance and other income, decreased $113,000 in the three-month period ended September 30, 2007, as compared to the three-month period ended September 30, 2006 . This decrease was due primarily to a decrease in the gain on sale of loans held for sale of $43,000, a decrease in service fee income of $4,000, and a decrease in the gain on sale of real estate owned of $86,000. These decreases were offset by an increase in BOLI income of $5,000, an increase in fees and service charges on deposit accounts of $4,000, an increase in fees and service charges on loans of $11,000. Non-interest income decreased $187,000 in the nine-month period ended September 30, 2007, as compared to the nine-month period ended September 30, 2006 . This decrease was due primarily to a decrease in the gain on sale of loans held for sale of $82,000, and a decrease in the gain on sale of real estate owned of $92,000, a decrease in fees and service charges on loans of $12,000, a decrease in service fee income of $11,000, a decrease in the gain on sale of premises and equipment of $15,000, a decrease in the gain of securities available-for-sale of $60. These decreases were offset by an increase in fees and service charge on deposit accounts of $9,000 and an increase in BOLI income of $15,000.

Non-interest expense decreased $178,000in the three-month period ended September 30, 2007, as compared to the corresponding prior year period. This decrease was primarily due to a decrease in compensation and benefit expense of $137,000, a decrease in occupancy expense of $5,000, and a decrease in all other non-interest expense of $55,000. These decreases were offset by an increase in marketing and professional expense of $19,000. Non-interest expense decreased $143,000 in the nine-month period ended September 30, 2007, as compared to the corresponding prior year period. This decrease was primarily due to a decrease in compensation and benefits expense of $131,000 a decrease in occupancy expense of $2,000, and a decrease in all other non-interest expense of $70,000. This decrease was offset by an increase in marketing and professional expense of $59,000.

Income tax expense increased $13,000 in the three-month period ended September 30, 2007, as compared to the corresponding prior year period. This increase was primarily due to an increase in income before income tax expense of $73,000. The effective tax rate was 29.29% and 31.06% for the three months ended September 30, 2007 and 2006. Income tax expense increased $1,000 in the nine-month period ended September 30, 2007, as compared to the corresponding prior year period. The effective tax rate was 30.22% and 31.11% for the nine months ended September 30, 2007 and 2006, respectively.

Asset/Liability Management : The modeling techniques used by the Company simulate net interest income and impact on fair values under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate increase applied to all interest-earning assets and interest-bearing liabilities, the Company would expect net losses in fair value of the equity in the underlying instruments of approximately ($229,000), ($674,000) and ($1,845,000) respectively. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate decrease, the Company would expect net changes in projected net income for the first year of approximately $17,000, ($216,000) and ($672,000) respectively. This hypothetical is not a precise indicator of future events. Instead, it is a reasonable estimate of the results anticipated if the assumptions used in the modeling techniques were to occur.

Stock Repurchases: The following table details the purchases under the Company’s stock repurchase program during the nine months ended September 30, 2007.

		Total								Total Number of				Maximum Number
		Number				Average Price				Shares Purchased				of Shares that May
		of Shares				Paid per				As Part of Publicly				Yet Be Purchased
Period		Purchased				Share				Announced Programs				Under the Programs
January 1-31, 2007			0			$	0				0				16,696
February 1-28, 2007			0				0				0				0
March 1-31, 2007			0				0				0				0
April 1-30, 2007			0				0				0				0
May 1-31, 2007			0				0				0				0
June 1-30, 2007			0				0				0				0
July 1-31, 2007			0				0				0				0
August 1-31,2007			0				0				0				0
September 1-30, 2007			2,179			$	14.71				2,179				14,517

On June 28, 2006, the Company announced a supplemental stock repurchase program to acquire an additional 5% of the Company’s outstanding shares outstanding upon completion of its current repurchase program, or 73,900 shares. The stock repurchase program is intended to improve liquidity in the market for the common stock, to increase per share earnings and book value, and to provide a higher rate of return for the Company’s funds. As of September 30, 2007 the Company had repurchased 60,219 shares at an average price of $14.80 per share under the supplemental stock repurchase program. The maximum number of shares that may yet be purchased under the program is 14,517. The Company may consider additional repurchase programs in the future.

Capital Resources: Historically, funds provided by operations, mortgage loan principal repayments, deposits and short-term borrowings have been the Bank’s principal sources of funds. In addition, the Bank has the ability to obtain funds through the sale of mortgage loans, through borrowings from the FHLB of Atlanta and other borrowing sources. At September 30, 2007, the Bank’s total loan commitments, including construction loans in process, unused lines of credit and letter of credits, were approximately $32.0 million . Management believes that the Bank’s liquidity and other sources of funds are sufficient to fund all commitments outstanding and other cash needs. The Company and the Bank are required to maintain certain levels of regulatory capital. At September 30, 2007, the Company and the Bank exceeded all regulatory capital requirements.

Asset Quality Ratios:

New Branch Office : In recent years, the Company has expanded its operations in the Birmingham, Alabama metropolitan area. A new full-service branch office in Gardendale, Alabama was opened on August 7, 2006. The Company currently intends to expand further in the Birmingham market and other market areas as appropriate opportunities become available.

Item 3. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2007. Based upon that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in alerting him in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There has been no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Principal Executive Officer and Principal Financial Officer to allow timely decisions regarding required disclosures. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls’ cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

Pursuant to Section 404 of the Sarbanes-Oxley Act, the Company will be required under rules adopted by the SEC to include in its annual reports a report by management on the Company’s internal control over financial reporting and an accompanying auditor’s report. In March 2005, the SEC extended the Section 404 compliance date for the Company and other non-accelerated filers. Under the extension, the Company must begin to comply with these requirements for its fiscal year ending December 31, 2007. The Company expects that Section 404 compliance will significantly increase its regulatory compliance costs.

PART II – OTHER INFORMATION

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pinnacle Bancshr (AMEX:PLE)
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Pinnacle Bancshr (AMEX:PLE)
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