PPBN Pinnacle Bankshares Corporation (QX)

Net income for Pinnacle Bankshares Corporation (OTCQB:PPBN), the one-bank holding company (the “Company”) for First National Bank (the “Bank”), was $622,000 or $0.41 per basic and diluted share for the quarter ended March 31, 2014 compared to net income of $397,000 or $0.26 per basic and diluted share for the same period of 2013. Quarterly consolidated results are unaudited.

Net income generated during the first quarter of 2014 represents a 57% increase as compared to the same time period of the prior year and was driven by higher net interest income, a lower provision for loan losses and a decline in noninterest expense resulting from lower retirement plan expense.

Profitability as measured by the Company’s return on average assets (“ROA”) was 0.70% for the first quarter of 2014, which is a 25 basis points increase over the 0.45% produced in the first quarter of 2013. Correspondingly, return on average equity (“ROE”) also improved in the first quarter of 2014 to 7.65%, compared to 5.62% for the first quarter of the prior year.

“We are pleased with the positive trend of our core earnings, which has been powered by improvements in net interest income and asset quality as well as a nice decrease in our retirement expense,” stated Aubrey H. Hall, III, President and Chief Executive Officer for both the Company and the Bank.

The Company’s net interest income was $3,008,000 for the quarter ended March 31, 2014 compared to $2,797,000 for the quarter ended March 31, 2013 as interest expense decreased $426,000 or approximately 45%, which outpaced a decline in interest income of $215,000. The Company’s net interest margin improved to 3.64% for the first quarter of 2014 as compared to 3.38% for the first quarter of 2013 and 3.59% for the fourth quarter of 2013.

Material improvement in asset quality over the last year has resulted in a lower provision for loan losses, which was ($22,000) for the first quarter of 2014 as compared to $78,000 for the first quarter of 2013. This $100,000 decrease has been driven by a $790,000 decline in nonperforming assets from March 31, 2013 to March 31, 2014.

The allowance for loan losses was $3,225,000 as of March 31, 2014, which represented 1.15% of total loans outstanding. In comparison, the allowance for loan losses was $3,409,000 or 1.23% of total loans outstanding as of December 31, 2013. The decrease in the Company’s allowance to total loans ratio is reflective of continued improvement in the Company’s asset quality as previously referenced. Allowance coverage of problem loans continues to expand as the balance was 147% of nonperforming loans as of March 31, 2014 versus 132% as of December 31, 2013. Management views the allowance’s current level as being sufficient to offset potential future losses associated with problem loans.

Noninterest income for the quarter ended March 31, 2014 decreased $54,000 or approximately 7% to $750,000 from $804,000 for the quarter ended March 31, 2013. This decrease was mainly driven by a $71,000 decline in fees generated from the sale of mortgage loans and a $31,000 decline in commissions earned from investment and insurance sales. These declines were partially offset by a $23,000 increase in interchange income derived from debit card activity.

Noninterest expense for the quarter ended March 31, 2014 decreased $88,000 or approximately 3%, compared to the same period of 2013. The decline in noninterest expense is primarily attributed to an $89,000 decrease in retirement plan expense due to previous year contributions and the performance of underlying investments.

Total assets as of March 31, 2014 were $360,879,000, up less than 1% from $358,967,000 as of December 31, 2013. The principal components of the Company’s assets as of March 31, 2014 were $279,386,000 in total loans, $35,086,000 in cash and cash equivalents and $26,776,000 in securities. During the first quarter of 2014, total loans increased less than 1% or $1,628,000 from $277,758,000 as of December 31, 2013, while securities decreased approximately 8% or $2,350,000 from $29,126,000.

Total liabilities as of March 31, 2014 were $328,158,000, up $1,499,000 or less than 1% from $326,659,000 as of December 31, 2013. Higher levels of demand deposit account balances drove the increase, as this deposit category grew by $5,184,000 or approximately 11%. This growth is reflective of the company’s focus on the continued expansion of core deposit relationships in 2014 which has helped lower the Company’s cost of funds, decrease its dependency on time deposits and provide relationship expansion opportunities for the Bank. The increase in demand deposits was partially offset by a $1,541,000 or 1% decrease in savings and NOW accounts and a $1,940,000 or approximate 2% decline in time deposits as compared to those respective balances as of December 31, 2013.

Total stockholders’ equity as of March 31, 2014 was $32,721,000 and consisted primarily of $27,430,000 in retained earnings. In comparison, as of December 31, 2013 total stockholders’ equity was $32,308,000. Improved profitability and controlled growth have strengthened the capital position of both the Company and Bank, which are considered “well capitalized” per all regulatory definitions. For these reasons, the Company has been able to pay a cash dividend to shareholders in each of the last six quarters.

As mentioned in a previous press release, the Board of Directors approved a plan on November 20, 2013 to repurchase up to $500,000 of the Company’s outstanding common stock through May 12, 2014. The Company has repurchased shares on an ongoing basis through open market purchases and may purchase shares through block trades and privately-negotiated purchases. Actual repurchases are subject to the availability of stock, general market conditions, the trading price of stock, alternative uses for capital and the Company’s capital ratios. The repurchase program can be suspended, modified or discontinued at any time; and the Company has no obligation to repurchase any amount of its common stock under the program. Through April 29, 2014, the Company has repurchased 8,891 shares of its common stock at a cost of approximately $148,000 through the repurchase program.

In other news, at the Annual Meeting of Shareholders held on April 8, 2014, James E. Burton, IV, Judson H, Dalton, Thomas F. Hall and A. Patricia Merryman were re-elected to the Board of Directors as Class II Directors to serve until the 2017 Annual Meeting of Shareholders. Also, Dr. Robert L. Johnson, II, Superintendent of Campbell County Schools, was elected as a new Class I Director to serve until the 2016 Annual Meeting. The shareholders also approved a new Incentive Stock Plan intended to reward and retain key employees and directors with incentives that align their interests with the company’s shareholders since value is derived from the long-term financial success of the company and shareholder returns.

Finally, the Company would like to extend its sincere appreciation to John P. Erb and John L. Waller for their many years of faithful service to our Board of Directors and wish them the best during their well deserved retirements, which were effective April 8, 2014.

James E. Burton, IV, who previously served as Vice Chairman, was elected to replace John P. Erb as Chairman by the Pinnacle Bankshares Corporation Board of Directors. Michael E. Watson was elected to serve as Vice Chairman.

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Pinnacle Bankshares Corporation is a locally managed community banking organization based in Central Virginia. The one-bank holding company of First National Bank serves an area consisting primarily of all or portions of the Counties of Campbell, Pittsylvania, Bedford, Amherst and the City of Lynchburg. The Company has a total of eight branches with two located in the Town of Altavista, where the Bank was founded. Other branch locations include Village Highway in Rustburg, Wards Road near the Lynchburg Regional Airport, Timberlake Road in Campbell County, the Town of Amherst, Old Forest Road in the City of Lynchburg and Forest Road in Bedford County. First National Bank is in its 107th year of operation.

Various securities laws regulate the use of financial measures that are not prepared in accordance with GAAP. We believe these non-GAAP measures provide important supplemental information to investors. We use these measures, together with GAAP measures, for internal managerial purposes and as a means to evaluate period-to-period comparisons. However, we do not, and you should not, rely on non-GAAP financial measures alone as measures of our performance. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that - when taken together with GAAP results as presented in this press release- provide a more complete understanding of factors and trends affecting our business. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures, even if they have similar names.

This press release may contain “forward-looking statements” within the meaning of federal securities laws that involve significant risks and uncertainties. Any statements contained herein that are not historical facts are forward-looking and are based on current assumptions and analysis by the Company. These forward-looking statements may include, but are not limited to, statements regarding the credit quality of our asset portfolio in future periods, the expected losses of nonperforming loans in future periods, returns and capital accretion during future periods, the lowering of our cost of funds, the maintenance of our net interest margin, the continuation of improved returns, the cost savings related to the deregistration of our common stock, and future operating results and business performance. Although we believe our plans and expectations reflected in these forward-looking statements are reasonable, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and we can give no assurance that these plans or expectations will be achieved. Factors that could cause actual results to differ materially from management's expectations include, but are not limited to, the effectiveness of management’s efforts to improve asset quality, returns, net interest margin and collections and control operating expenses, management’s efforts to minimize losses related to nonperforming loans, management’s efforts to lower our cost of funds, changes in: interest rates, general economic and business conditions, declining collateral values, especially real estate, the real estate market, the legislative/regulatory climate, including the effect that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and regulations adopted thereunder may have on us, 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 and any policies or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows and funding costs, competition, demand for financial services in our market area, actual savings related to the deregistration of our common stock and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and you should not place undue reliance on such statements, which reflect our views as of the date of this release.

Selected financial highlights are shown below.

Pinnacle Bankshares Corporation Selected Financial Highlights

(3/31/2014 and 3/31/2013 results unaudited)

(In thousands, except ratios, share and per share data)       3 Months Ended 3 Months Ended 3 Months Ended Income Statement Highlights 03/31/2014 12/31/2013 03/31/2013 Interest Income $3,526 $3,631 $3,741 Interest Expense 518 595 944 Net Interest Income 3,008 3,036 2,797 Provision for Loan Losses (22) 11 78 Noninterest Income 750 830 804 Noninterest Expense 2,859 3,072 2,947 Net Income 622 547 397 Earnings Per Share (Basic) 0.41 0.36 0.26 Earnings Per Share (Diluted) 0.41 0.36 0.26   Balance Sheet Highlights 03/31/2014 12/31/2013 03/31/2013 Cash and Cash Equivalents $35,086 $35,457 $52,549 Total Loans 279,386 277,758 274,628 Total Securities 26,776 29,126 22,918 Total Assets 360,879 358,967 362,826 Total Deposits 323,834 322,130 332,016 Total Liabilities 328,158 326,659 334,420 Stockholders' Equity 32,721 32,308 28,406 Shares Outstanding 1,506,116 1,515,007 1,507,503  

Ratios and Stock Price

03/31/2014 12/31/2013 03/31/2013 Gross Loan-to-Deposit Ratio 86.27% 86.23% 82.72% Net Interest Margin (Year-to-date) 3.64% 3.47% 3.38% Liquidity 16.66% 17.74% 20.08% Efficiency Ratio 75.45% 80.53% 81.71% Return on Average Assets (ROA) 0.70% 0.55% 0.45% Return on Average Equity (ROE) 7.65% 6.54% 5.62% Leverage Ratio (Bank) 9.28% 9.25% 8.71% Tier 1 Risk-based Capital Ratio (Bank) 11.17% 11.25% 10.89% Total Capital Ratio (Bank) 12.28% 12.44% 12.14% Stock Price $17.00 $15.10 $13.00 Book Value $21.73 $21.32 $18.84  

Asset Quality Highlights

03/31/2014

12/31/2013

03/31/2013

Nonaccruing Loans $2,192 $2,586 $2,483 Loans 90 Days or More Past Due and Accruing 0 0 0 Total Nonperforming Loans (Impaired Loans) 2,586 2,586 2,483 Other Real Estate Owned (OREO) (Foreclosed Assets) 1,397 1,297 1,896 Total Nonperforming Assets 3,589 3,883 4,379 Nonperforming Loans to Total Loans 0.78% 0.93% 0.90% Nonperforming Assets to Total Assets 0.99% 1.08% 1.21% Allowance for Loan Losses $3,225 $3,409 $3,606 Allowance for Loan Losses to Total Loans 1.15% 1.23% 1.31% Allowance for Loan Losses to Nonperforming Loans 147.13% 131.83% 145.23%

Pinnacle Bankshares CorporationBryan M. Lemley, 434-477-5882bryanlemley@1stnatbk.com