2 0 1 9 A N N U A L R E P O R T
B O A R D O F D I R E C T O R S
Front Row: Connie C. Burnette, James E. Burton, IV, (Chairman), Aubrey H. Hall, III, A. Patricia Merryman
Back Row: Dr. Robert L. Johnson, II, Robert L. Finch, Jr., Michael E. Watson, (Vice Chairman), Thomas F. Hall,
C. Bryan Stott, Judson H. Dalton, Carroll E. Shelton, James O. Watts, IV, Esq., Elton W. Blackstock, Jr.
S E N I O R M A N A G E M E N T
Timothy W. Holt, Tony J. Bowling, Vivian S. Brown, Judith A. Clements, Aubrey H. Hall, III (President and CEO),
Bryan M. Lemley, Thomas R. Burnett, Jr. (not pictured)
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
First National Bank Office Locations ............................................................................................
Page
2
Directors, Officers and Senior Management…..………….……………………………………..... 3
President’s Letter ..........................................................................................................................
Selected Consolidated Financial Information ................................................................................
Results of Operations ....................................................................................................................
Consolidated Balance Sheets ........................................................................................................
Consolidated Statements of Income ..............................................................................................
5
7
8
13
14
Consolidated Statements of Comprehensive Income……………………………………………... 15
Consolidated Statements of Changes in Stockholders’ Equity .......................................................
Consolidated Statements of Cash Flows ........................................................................................
Notes to Consolidated Financial Statements ..................................................................................
16
17
18
Management’s Report on Internal Control over Financial Reporting…………............................... 50
Report of Independent Auditor .....................................................................................................
51
Shareholder Information ...............................................................................................................
52
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
First National Bank Office Locations
ALTAVISTA
MAIN OFFICE
622 Broad Street
Altavista, Virginia 24517
Telephone: (434) 369-3000
VISTA OFFICE
1303 Main Street
Altavista, Virginia 24517
Telephone: (434) 369-3001
RUSTBURG
RUSTBURG OFFICE
1033 Village Highway
Rustburg, Virginia 24588
Telephone: (434) 332-1742
FOREST
FOREST OFFICE
14417 Forest Road
Forest, Virginia 24551
Telephone: (434) 534-0451
GRAVES MILL OFFICE (Future Branch)
Projected opening in May of 2020
18077 Forest Road
Forest Virginia 24551
AMHERST
AMHERST OFFICE
130 South Main Street
Amherst, Virginia 24521
Telephone: (434) 946-7814
LYNCHBURG
DOWNTOWN OFFICE (New Branch)
800 Main Street
Lynchburg, Virginia 24504
Telephone: (434) 485-5999
AIRPORT OFFICE
14580 Wards Road
Lynchburg, Virginia 24502
Telephone: (434) 237-3788
TIMBERLAKE OFFICE
20865 Timberlake Road
Lynchburg, Virginia 24502
Telephone: (434) 237-7936
OLD FOREST ROAD OFFICE
3321 Old Forest Road
Lynchburg, Virginia 24501
Telephone: (434) 385-4432
ODD FELLOWS ROAD OFFICE
3401 Odd Fellows Road
Lynchburg, Virginia 24501
Telephone: (434) 333-6801
CHARLOTTESVILLE
CHARLOTTESVILLE
LOAN PRODUCTION OFFICE (New LPO)
2208 Ivy Road
Charlottesville, Virginia 22903
Telephone: (434) 260-7200
2
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Board of Directors of Pinnacle Bankshares Corporation and First National Bank
James E. Burton, IV Chairman
Michael E. Watson Vice Chairman
Elton W. Blackstock, Jr.
Connie C. Burnette
Judson H. Dalton
Robert L. Finch, Jr.
Aubrey H. Hall, III
Thomas F. Hall
Dr. Robert L. Johnson, II
A. Patricia Merryman
Carroll E. Shelton
C. Bryan Stott
James O. Watts IV, Esq.
Officers of Pinnacle Bankshares Corporation
Aubrey H. Hall, III President & Chief Executive Officer
Bryan M. Lemley Secretary, Treasurer & Chief Financial Officer
Thomas R. Burnett, Jr. Vice President
Senior Management of First National Bank
Aubrey H. Hall, III
President, Chief Executive Officer & Trust Officer
Bryan M. Lemley Senior Vice President, Cashier & Chief Financial Officer
Timothy W. Holt
Judith A. Clements
Thomas R. Burnett, Jr.
Vivian S. Brown
Tony J. Bowling
Allison G. Daniels
Senior Vice President & Chief Credit Officer
Senior Vice President & Chief Human Resources Officer
Senior Vice President & Chief Lending Officer
Senior Vice President & Chief Retail Officer
Senior Vice President & Chief Operating Officer
Senior Vice President & Deputy Chief Operations Officer
3
COVID-19 Pandemic Foreword
As we distribute Pinnacle Bankshares Corporation’s 2019 Annual Report, the United States and the World
are in the midst of fighting through the coronavirus (COVID-19) pandemic. Shareholders, clients and
employees of our Company are rightfully concerned about the health, safety and well-being of their
families. The pandemic has had a negative impact on the financial markets and our economy with long-
term consequences yet to be determined. Please know we have taken a number of proactive steps and
preventive measures to minimize the impact of the pandemic on our Company, while continuing to provide
critical financial functions and support our clients and communities depend on. Please visit our website at
www.1stnatbk.com for further information.
Pinnacle was a strong organization going into this crisis with outstanding credit quality. Our earnings
have been solid the last few years and we have grown our capital. Our loan growth has lagged behind
other competitors because of our unwillingness to “relax” underwriting requirements and standards.
Adherence to this mentality should serve us well as we move forward. This does not mean the Company
will not face challenges as we navigate through the pandemic and its resulting impacts, the full extent of
which will not be known for some time, but we believe we are well positioned to weather this storm.
Aubrey H. Hall, III “Todd”
President & Chief Executive Officer
Pinnacle Bankshares Corporation
First National Bank
Please see the Cautionary Statement Regarding Forward-Looking Statements on page 8 of Pinnacle
Bankshares Corporation’s 2019 Annual Report.
4
Dear Shareholders:
It is my pleasure to report to you that Pinnacle Bankshares Corporation, the one-bank holding company for
First National Bank, produced record high earnings again in 2019, while surpassing $500 million in total
assets and laying the foundation for future growth of our franchise. Our record performance was driven by
increased revenue from net interest income and noninterest income sources combined with strong asset
quality, which limited our provision for loan losses expense. These factors offset higher noninterest
expense associated with Pinnacle’s growth. We are one of the top performing community banks in Virginia
and continue to diligently work towards strengthening our position in the Lynchburg region, expanding our
geographical footprint and positioning our company for further enhanced long-term returns.
For 2019, Pinnacle generated net income of $4,396,000, representing a $236,000, or 6%, increase as
compared to 2018 and equating to a 0.92% return on average assets. Higher net interest income was the
primary catalyst for improvement, which increased $1,294,000, or 8%, due to increased loan volume and a
net interest margin of 4.00%. Non-interest income increased $421,000, or 10%, primarily due to a 66%
increase in fees generated from sales of mortgage loans originated through First National’s Mortgage
Division, which benefitted from a favorable interest rate environment. Provision for loan losses decreased
$444,000 compared to the prior year due to lower criticized and classified loans and net loan charge-offs.
Pinnacle experienced higher employee compensation and benefits expense, occupancy expense and core
processing expense in 2019 due to growth with overall noninterest expense increasing $1,844,000, or 12%.
Balance Sheet growth for 2019 was generally consistent with the prior year as outstanding loans grew $17.5
million, or 5%, driven by strong performances from First National’s Commercial and Dealer Divisions.
Core funding has been key to controlling our cost of funds and we were pleased with deposit growth of $25
million, or 6%, during 2019 due to higher demand deposit balances. Demand deposit accounts grew by
956 accounts, or 6%, for the year with a continued stream of new clients coming to us from larger national
banks. Total assets as of year-end 2019 were $500.5 million, an increase of 6% compared to the prior year-
end, as Pinnacle surpassed the $500 million threshold.
Asset quality ratios continue to be among the best in Pinnacle’s history with non-performing loans to total
loans and non-performing assets to total assets at 0.29% and 0.36%, respectively, as of year-end 2019. We
continue to maintain a strong credit culture focused on maintaining a sound and diversified loan portfolio
without excessive concentrations of non-owner occupied commercial real estate loans or construction and
development loans.
We were pleased to have increased the annual cash dividends paid per share to Pinnacle’s shareholders
$0.10, or 22%, during 2019 for a total of $0.545 per share. Pinnacle’s stock price as of December 31, 2019
was $31.77, which increased $4.32, or 15.74%, compared to December 31, 2018. Our stock price
improvement resulted in a 17.73% total return for 2019 compared to the SNL U.S. Bank Index total return
of 33.12%. As a reminder, Pinnacle’s stock fared better than many peer banks in 2018 whose stock price
dropped significantly as a result of turbulent markets during the fourth quarter of that year.
The continuation of improved profitability and adherence to a disciplined dividend strategy have enabled
Pinnacle to accrete capital and further improve its capital position to support growth. As of year-end 2019,
Pinnacle’s total risk-based capital ratio was 12.59% and its leverage ratio was 9.88% as compared to
12.29% and 9.36%, respectively, as of the prior year-end. Pinnacle and First National remain well
capitalized per all regulatory definitions.
5
Looking towards the future, Pinnacle and First National made several strategic moves during 2019 and in
the early part of 2020. First National Bank opened its tenth branch location on Main Street in Downtown
Lynchburg, VA in May of 2019. This part of our market is viewed as the hub of regional commerce and
has undergone significant redevelopment over the past fifteen years. We believe businesses and individuals
will continue to migrate to downtown Lynchburg based on its convenient location within the Lynchburg
region and the steady stream of commercial and residential options becoming available.
In September of 2019, we announced the successful recruitment of an experienced, local banker as our
Market Leader for Charlottesville, VA, which was the first step in establishing a presence in the
Charlottesville market. Since then we have opened a loan production office in a prior bank branch on Ivy
Road and intend to build a client base in Charlottesville over the next few years as we move towards
establishment of a full service presence.
On January 21, 2020, Pinnacle Bankshares Corporation and Virginia Bank Bankshares, Inc. announced the
signing of a definitive agreement to combine in a strategic merger with Pinnacle being the surviving
company. This partnership will create a footprint for Pinnacle stretching along the U.S. Highway 29
corridor from Danville to Charlottesville with seventeen branches and a loan production office based on
current locations. The combined company would have approximately $720 million in total assets, $641
million in total deposits, and $543 million in total loans based upon reported amounts as of December 31,
2019. We are extremely excited about this merger, which will create a larger and stronger institution with
a significantly higher lending limit, expanded product offerings and access to new markets. We anticipate
such enhanced scale and efficiency will create meaningful opportunities to drive further growth,
profitability and long-term value creation for employees, customers and shareholders. The merger is
expected to be completed in the third quarter of 2020, subject to approval of both companies’ shareholders,
regulatory approvals and other customary closing conditions.
Finally, in late January of this year we announced First National Bank received regulatory approval to
establish a new branch office at 18077 Forest Road, Forest, VA, which is a former SunTrust Bank facility.
The location is at the intersection of Forest Road and Graves Mill Road in the Graves Mill Center. The
branch is expected to open in the second quarter of this year after renovations and will be First National
Bank’s eleventh branch in the Central Virginia region, and its second branch in Bedford County.
As a result of the pending merger our Annual Meeting of Shareholders has been moved from its normal
second Tuesday of April. Pinnacle currently anticipates convening an annual meeting of its shareholders
during the summer of 2020, and at that meeting of shareholders will be asked to vote on matters relating to
the pending merger in addition to typical annual meeting matters. Once the details are finalized, Pinnacle
will provide additional information related to the 2020 annual meeting of shareholders.
In closing, we are very proud of Pinnacle Bankshares Corporation’s 2019 performance and feel we have
capitalized on opportunities to expand First National Bank’s footprint and client base. As always, thank
you for your support, confidence and the opportunity to serve your interests as President and Chief
Executive Officer of Pinnacle Bankshares Corporation.
Sincerely,
Aubrey H. Hall, III “Todd”
President & Chief Executive Officer
6
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Selected Consolidated Financial Information
(In thousands, except ratios, share and per share data)
Years ended December 31,
Income Statement Data:
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income tax expense
Net income
Per Share Data:
Basic net income
Diluted net income
Cash dividends
Book value
2019
2018
2017
2016
2015
$
$
17,676
163
4,623
16,772
968
4,396
2.84
2.82
0.545
29.29
16,382
607
4,202
14,928
889
4,160
2.71
2.68
0.45
27.34
14,850
260
3,855
14,128
1,569
2,748
1.80
1.78
0.40
25.37
13,635
87
3,896
13,044
1,396
3,004
1.97
1.96
0.38
24.01
12,505
129
3,731
12,060
1,306
2,740
1.80
1.79
0.34
22.88
Weighted-Average Shares Outstanding:
1,549,129
1,559,891
1,537,380
1,551,598
1,528,164
1,544,628
1,524,271
1,535,632
1,519,159
1,531,436
$
Basic
Diluted
Balance Sheet Data:
Assets
Loans, net
Securities
Cash and cash equivalents
Deposits
Stockholders’ equity
Performance Ratios:
Return on average assets
Return on average equity
Dividend payout
Asset Quality Ratios:
Allowance for loan losses to total
loans, net of unearned income and
fees
Net charge-offs to average loans,
500,530
389,849
44,958
32,903
450,283
45,445
0.92%
9.86%
19.22%
0.88%
net of unearned income and fees
0.01%
Capital Ratios:
Leverage
Risk-based:
Tier 1 capital
Total capital
Average equity to average assets
9.88%
11.71%
12.59%
9.30%
443,925
354,829
44,217
12,575
401,685
38,795
0.62%
7.25%
22.27%
440,104
338,423
27,569
48,174
399,743
36,549
0.76%
8.38%
19.34%
371,261
303,199
27,148
16,739
332,403
34,782
0.74%
8.12%
18.96%
0.83%
0.85%
0.94%
0.05%
0.02%
0.11%
9.15%
8.94%
9.68%
10.88%
11.69%
8.56%
10.83%
11.68%
9.08%
11.37%
12.32%
9.17%
470,611
372,482
49,826
15,717
425,278
42,111
0.90%
10.33%
16.44%
0.90%
0.05%
9.36%
11.40%
12.29%
8.73%
7
Pinnacle Bankshares Corporation
Results of Operations
(in thousands, except ratios, share and per share data)
Cautionary Statement Regarding Forward-Looking Statements
The discussion in this Annual Report is qualified in its entirety by the more detailed information and the consolidated
financial statements and accompanying notes appearing elsewhere in this Annual Report. In addition to the historical
information contained herein, this Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are not statements of historical
fact and are based on certain assumptions and describe future plans, strategies, and expectations of management, are
generally identifiable by use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”
“may,” “will” or similar expressions. These forward-looking statements may include, but are not limited to,
statements regarding anticipated future financial performance, impairment of goodwill, funding sources including
cash generated by banking operations, loan portfolio composition, trends in asset quality and strategies to address
nonperforming assets and nonaccrual loans, adequacy of the allowance for loan losses and future provisions for loan
losses, securities portfolio composition and future performance, interest rate environments, deposit insurance
assessments, and strategic business initiatives including our pending merger with Virginia Bank Bankshares, Inc.
Although we believe our plans, intentions and expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to
predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results, performance
or achievements could differ materially from those contemplated in any forward-looking statements. Factors that
could have a material adverse effect on our operations and future prospects include, but are not limited to, changes
in: the effectiveness of management’s efforts to maintain asset quality and control operating expenses; the quality,
composition and growth of the loan and investment portfolios; interest rates; decrease in net interest margin; real
estate values in our market area; general economic and financial market conditions; levels of unemployment in our
market area; the legislative/regulatory climate, including regulatory initiatives with respect to financial institutions,
products and services in accordance with the Dodd Frank Wall Street Reform Act (the “Dodd Frank Act”) and
otherwise; the Consumer Financial Protection Bureau and its regulatory and enforcement activities; and the
application of the Basel III capital standards to Pinnacle and First National Bank; monetary and fiscal policies of the
U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System;
the impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”); demand for loan products; deposit flows;
competition and demand for financial services in our market area; regulatory compliance costs; accounting
principles, policies and guidelines; technological risks and developments and cyber threats, attacks or events; the
effects of natural disasters, severe weather events, acts of war or terrorism, pandemics or epidemics (including the
2019 novel coronavirus, or “COVID-19”); climate change or other external events; and our ability to complete our
pending merger with Virginia Bank Bankshares, Inc. and recognize the anticipated benefits of the merger on a timely
basis or at all. These risks and uncertainties should be considered in evaluating forward-looking statements contained
herein. We base our forward-looking statements on management's beliefs and assumptions based on information
available as of the date of this report. You should not place undue reliance on such statements, because the
assumptions, beliefs, expectations and projections about future events on which they are based may, and often do,
differ materially from actual events and, in many cases, are outside of our control. We undertake no obligation to
update any forward-looking statement to reflect developments occurring after the statement is made.
Company Overview
Pinnacle Bankshares Corporation, a Virginia corporation, was organized in 1997 and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended. Pinnacle is headquartered in Altavista,
Virginia. Pinnacle conducts all of its business activities through the branch offices of its wholly-owned subsidiary
bank, First National Bank. Pinnacle exists primarily for the purpose of holding the stock of its subsidiary, First
National Bank, and of such other subsidiaries as Pinnacle may acquire or establish. Pinnacle’s administrative offices
are located at 622 Broad Street, Altavista, Virginia.
First National 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, First National Bank today offers a broad range of commercial and retail
8
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. First
National Bank also offers a full range of investment, insurance and annuity products through its association with
LPL, Inc. and Banker’s Insurance, LLC.
First National Bank serves a trade area consisting primarily of Campbell County, northern Pittsylvania County,
Bedford County, Amherst County, the city of Lynchburg and the city of Charlottesville from facilities located in
Campbell County, Bedford County, the town of Altavista, the town of Amherst, the village of Rustburg and the city
of Lynchburg, and the city of Charlottesville, Virginia.
First National Bank has two wholly-owned subsidiaries. FNB Property Corp., which is a Virginia corporation, was
formed to hold title to bank premises real estate. First Properties, Inc., also a Virginia corporation, was formed to
hold title to other real estate owned. Four properties valued at $666 are being held in other real estate owned as of
December 31, 2019.
A total of 117 full-time and 10 part-time staff members serve First National Bank’s customers.
Results of Operations
Net Income
Pinnacle had record net income of $4,396 for the year ended December 31, 2019, compared to net income of $4,160
for the year ended December 31, 2018, an increase of 5.67%. This increase was driven by a $1,294, or 7.90%
increase in net interest income, a $444 or 73.15% decrease in provision for loan losses and a $421, or 10.02% increase
in noninterest income. These increases were partially offset by an $1,844, or 12.35% increase in noninterest expense
and a $79, or 8.89% increase in income tax expense.
Profitability as measured by Pinnacle’s return on average assets (“ROA”) was 0.92% in 2019, compared to 0.90%
in 2018. Return on average equity (“ROE”) was 9.86% for 2019, compared to 10.33% for 2018.
In 2020, we expect to embark on a number of initiatives that will cause a decrease in net income, but will better
position First National Bank for future growth of assets and earnings. We also expect lower net interest spreads
leading to a decrease in net interest income. Furthermore, we do expect an increase in noninterest income in 2020
due to an increase in assets and increased volume from our Mortgage Division. Finally, we expect an increase in
noninterest expense in 2020 due to expected normal increases in salaries and the execution of future strategic
initiatives. We are carefully monitoring the COVID-19 coronavirus outbreak, but as of the date of this report we
have limited insight into the extent to which our business may be impacted by this outbreak and its related effects
during 2020.
Net Interest Income. Net interest income was $17,676 for the year ended December 31, 2019, compared to $16,382
for the year ended December 31, 2018, and is attributable to interest income from loans, interest from correspondent
banks and the Federal Reserve and securities exceeding the cost associated with interest paid on deposits and other
borrowings. Growth of outstanding loans and higher yields have been the catalyst for the net interest income
improvement.
The net interest spread increased to 3.82% for the year ended December 31, 2019 from 3.70% for the year ended
December 31, 2018. Yield on earning assets was 4.58% and cost of funds was 0.76% for the year ended December
31, 2019 as compared to a yield on earning assets of 4.27% and a cost of funds of 0.57% for the year ended December
31, 2018. In 2019, Pinnacle’s yield on earning assets increased due to higher loan and investment yields. The net
interest margin increased to 4.00% for the year ended December 31, 2019 from 3.83% for the year ended December
31, 2018 due also to the 31 basis point increase in yield on earning assets in 2019.
Provision for Loan Losses and Asset Quality. The provisions for loan losses for the years ended December 31,
2019 and 2018 were $163 and $607, respectively. The provision for loan losses decreased in 2019, and has remained
at a low level since 2013 as Pinnacle continues to have strong asset quality. The provision for loan losses decreased
$444 in 2019 in spite of the 4.59% growth in total loans. Loan quality remained strong due to sound underwriting
9
and credit management processes as total watch list loans decreased to $4,141 as of December 31, 2019 compared
to $4,969 as of December 31, 2018.
Nonperforming assets (including nonaccrual loans, accruing loans more than 90 days past due, and foreclosed assets)
increased to $1,801 or 0.36% of total assets as of December 31, 2019, as compared to $1,546 or 0.33% of total assets
as of December 31, 2018. Nonperforming loans to total loans increased slightly to 0.29% as of year-end 2019
compared to 0.24% as of year-end 2018. The allowance for loan losses balance was 306.03% of nonperforming
loans as of December 31, 2019 compared to 366.87% as of the end of 2018.
Noninterest Income. Pinnacle’s principal sources of noninterest income are service charges and fees on deposit
accounts, particularly transaction accounts, interchange fees from debit cards, fees on sales of mortgage loans, bank-
owned life insurance income, and commissions and fees from investment, insurance, annuity and other bank
products. Total noninterest income for the year ended December 31, 2019 increased $421, or 10.02%, to $4,623
from $4,202 in 2018 due mainly to an increase in mortgage loan fees, which increased by $287, or 65.53% and,
services charges on loan accounts, which increased $80 or 23.12%. In addition, First National Bank benefitted in
2019 from increased service charges on deposit accounts and interchange and ATM fees. These increases were
partially offset by a decrease in investment sales commissions, which decreased $49 or 8.39%.
Noninterest Expense. Total noninterest expense for the year ended December 31, 2019 increased $1,844, or 12.35%,
to $16,772 from $14,928 in 2018 as salaries and benefits increased by $1,136, or 13.95%, which included salaries
and benefits for new branch and loan production office staff, increased sales commissions and an 8% employee
bonus. Occupancy expense increased $45, or 4.80% and furniture and equipment increased $170, or 18.70%.
Pinnacle also saw expected increases in 2019 in office supplies, dealer loan expenses, telephone, loan fees paid, loan
review, fees paid to Directors, advertising expenses and capital stock taxes. The increases were partially offset by a
$144, or 52.36% decrease in FDIC premiums.
Income Tax Expense. Applicable income taxes on 2019 earnings amounted to $968, resulting in an effective tax
rate of 18.05%, compared to $889, and an effective tax rate of 17.61% in 2018. The effective tax rate was higher due
to lower amounts of tax free municipal investments.
Assets
Total assets as of December 31, 2019 were $500,530, up 6.36% from $470,611 as of December 31, 2018. The
principal components of Pinnacle’s assets at the end of the year were $32,903 in cash and cash equivalents, $44,958
in securities and $389,489 in net loans.
Investment Portfolio. Investment securities as of December 31, 2019 totaled $44,958, a decrease of $4,868, or
9.77% from $49,826 as of December 31, 2018. Held-to-maturity investment securities decreased to $1,764 as of
December 31, 2019 from $1,777 as of December 31, 2018, a decrease of $13, or 0.73%. Available-for-sale
investments decreased to $43,194 as of December 31, 2019 from $48,049 as of December 31, 2018, a decrease of
$4,855, or 10.10%. Investments decreased as proceeds from investment maturities and paydowns were used to fund
loans in 2019.
Loan Portfolio. Pinnacle’s net loans were $389,849 as of December 31, 2019, an increase of $17,367, or 4.66%,
from $372,482 as of December 31, 2018. Total loans were $393,520 as of December 31, 2019 compared to $376,066
as of December 31, 2018. This increase resulted from a $5,723 increase in real estate loans and an $8,059 increase
in consumer loans and a $3,672 increase in commercial loans during 2019. Pinnacle’s ratio of net loans to total
deposits was 86.58% as of December 31, 2019 compared to 88.38% as of December 31, 2018 as deposit growth
exceeded net loan growth by $7,638.
Bank Premises and Equipment. Bank premises and equipment decreased $205, or 1.30% in 2019 due to
depreciation expense exceeding purchases in 2019.
Liabilities
Total liabilities as of December 31, 2019 were $455,085, up 6.20% from $428,500 as of December 31, 2018.
Deposits. The increase in liabilities in 2019 was due to an increase in total deposits of $25,005, or 5.88%, to $450,283
as of December 31, 2019 from $425,278 as of December 31, 2018. Noninterest-bearing demand deposits increased
$26,739, or 31.95% and represented 24.52% of total deposits as of December 31, 2019, compared to 19.68% as of
10
December 31, 2018. Savings and NOW accounts decreased $552, or 0.22% and represented 54.40% of total deposits
as of December 31, 2019, compared to 57.73% as of December 31, 2018. Time deposits decreased $1,182 or 1.23%
and represented 21.08% of total deposits as of December 31, 2019, compared to 22.60% as of December 31, 2018.
The change in deposits during 2019 was primarily due to increased deposit balances in previously existing deposit
accounts, new deposit accounts opened as a result of new banking relationships, growth at Pinnacle’s branch
locations and competitive pricing of Pinnacle’s products and services.
Average deposits were $432,371 for the year ended December 31, 2019, an increase of $16,390, or 3.94% from
$415,991 of average deposits for the year ended December 31, 2018. Pinnacle’s deposits are provided by individuals
and businesses primarily located within the communities served. Pinnacle had no brokered deposits as of December
31, 2019 or December 31, 2018.
Stockholders’ Equity
Total stockholders’ equity as of December 31, 2019 was $45,445, including $42,404 in retained earnings. As of
December 31, 2018, stockholders’ equity totaled $42,111, including $38,853 in retained earnings. The increase in
stockholders’ equity resulted mainly from Pinnacle’s net income of $4,396 partially offset by dividends of $845 paid
to shareholders. Dividends paid to shareholders were $0.545 per share paid in 2019 as compared to the $0.445 per
share paid in 2018.
In July 2013, the Federal Reserve Board approved and published the final Basel III Capital Rules establishing a new
comprehensive capital framework for U.S. banking organizations. CET1 capital for Pinnacle and First National Bank
consists of common stock, related paid in capital, and retained earnings. In connection with the adoption of the Basel
III Capital Rules, we elected to opt out of the requirement to include most components of accumulated other
comprehensive income in CET1. CET1 for Pinnacle and First National Bank is reduced by goodwill and other
intangible assets, net of associated deferred tax liabilities and subject to transition provisions.
Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not
hold a “capital conservation buffer” consisting of 2.50% of CET1 capital, Tier 1 capital and total capital to risk
weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital
conservation buffer was first applied on January 1, 2016, at 0.625% of risk weighted assets, increasing each year
until fully implemented at 2.50% on January 1, 2019. Basel III was fully phased in on January 1, 2019 and now
requires (i) a minimum ratio of CET1 capital to risk weighted assets of at least 4.50%, plus a 2.50% capital
conservation buffer, (ii) a minimum ratio of Tier 1 capital to risk weighted assets of at least 6.00%, plus the capital
conservation buffer, (iii) a minimum ratio of total capital to risk weighted assets of at least 8.00%, plus the capital
conservation buffer and (iv) a minimum leverage ratio of 4.00%. Pinnacle and First National Bank continue to be
well capitalized under the Basel III rules. See Note 12 “Dividend Restrictions and Capital Requirements” of the
“Notes to Consolidated Financial Statements” for additional information.
Pinnacle’s CET1 and Tier 1 Risk-based Capital Ratio was 11.71% of December 31, 2019. The Total Risk-based
Capital Ratio was 12.59% and Pinnacle’s Tier 1 Leverage Ratio was 9.88% as of December 31, 2019. For
comparison, Pinnacle’s CET1 and Tier 1 Risk-based Capital Ratio was 11.40% of December 31, 2018. The Total
Risk-based Capital Ratio was 12.29% and Pinnacle’s Tier 1 Leverage Ratio was 9.36% as of December 31, 2018.
Pinnacle’s financial position as of December 31, 2019 reflects liquidity and capital levels management believes to
be currently adequate to support anticipated funding needs and budgeted growth of Pinnacle. Capital ratios are in
excess of required regulatory minimums for a “well-capitalized” institution. The assessment of capital adequacy
depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive
conditions and economic forces. The adequacy of Pinnacle’s capital is reviewed by management on an ongoing basis.
Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated
asset growth and to absorb potential losses.
11
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(In thousands of dollars, except share data)
Assets
2019
2018
Cash and cash equivalents:
Cash and due from banks
Certificates of deposits
Securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost
Federal Reserve Bank stock, at cost
Federal Home Loan Bank stock, at cost
Loans, net
Bank premises and equipment, net
Accrued interest receivable
Bank owned life insurance
Goodwill
Other real estate owned
Other assets
Total assets
Liabilities:
Liabilities and Stockholders' Equity
Deposits:
Demand
Savings and NOW accounts
Time
Total deposits
Accrued interest payable
Other liabilities
Total liabilities
Commitments, contingencies and other matters
Stockholders' equity:
Common stock, $3 par value. Authorized 3,000,000 shares,
issued and outstanding 1,551,339 shares in 2019 and
1,540,054 shares in 2018
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity
$
$
$
32,903
250
$
43,194
1,764
154
423
389,849
15,546
1,277
10,335
539
666
3,630
15,717
250
48,049
1,777
149
399
372,482
15,751
1,333
10,101
539
627
3,437
500,530
$
470,611
$
110,419
244,941
94,923
450,283
205
4,597
83,680
245,493
96,105
425,278
168
3,054
455,085
428,500
4,564
1,461
42,404
(2,984)
45,445
4,547
1,333
38,853
(2,622)
42,111
Total liabilities and stockholders' equity
$
500,530
$
470,611
See accompanying notes to consolidated financial statements.
12
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2019 and 2018
(In thousands of dollars, except per share data)
Interest income:
Interest and fees on loans
Interest on securities:
U.S. Government agencies
States and political subdivisions (taxable)
States and political subdivisions (tax-exempt)
Other
Interest on federal funds sold
Total interest income
Interest expense:
Interest on deposits:
Savings and NOW accounts
Time
Interest on federal funds purchased
Total interest expense
Net interest income
Provision for loan losses and unfunded commitments
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Commissions and fees
Mortgage loan fees
Service charges on loan accounts
Other operating income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy expense
Furniture and equipment expense
Office supplies and printing
Federal deposit insurance premiums
Capital stock tax
Advertising expense
Other operating expenses
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Basic net income per share
Diluted net income per share
See accompanying notes to consolidated financial statements.
13
2019
2018
$
18,730 $
16,876
832
69
227
379
2
717
88
254
334
1
20,239
18,270
1,112
1,446
5
2,563
17,676
163
17,513
1,941
535
725
426
996
4,623
9,281
982
1,079
205
131
239
198
4,657
16,772
5,364
968
$
$
$
4,396 $
2.84
2.82
$
$
660
1,183
45
1,888
16,382
607
15,775
1,894
584
438
346
940
4,202
8,145
937
909
174
275
215
183
4,090
14,928
5,049
889
4,160
2.71
2.68
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2019 and 2018
(In thousands of dollars)
Net income
Other comprehensive income (losses), net of related income taxes:
Unrealized gains (losses) on availabile-for-sale securities
Before tax
Income tax (expense) benefit
Changes in plan assets and benefit obligation of defined benefit pension plan
Before tax
Income tax benefit
Total other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
2019
2018
4,396 $
4,160
1,155
(241)
(1,615)
339
(362)
4,034 $
(319)
66
(107)
22
(338)
3,822
$
$
14
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2019 and 2018
(In thousands of dollars, except share and per share data)
Balances, December 31, 2017
Net income
Other comprehensive loss
Issuance of restricted stock and related expense
Stock options exercised
Cash dividends declared by
Bankshares ($0.445 per share)
Balances, December 31, 2018
Net income
Other comprehensive loss
Issuance of restricted stock and related expense
Stock options exercised
Cash dividends declared by
Bankshares ($0.545 per share)
Balances, December 31, 2019
See accompanying notes to consolidated financial statements.
Common Stock
Shares
Par Value
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
1,529,033
$
4,526
$
1,176
$
35,377 $
(2,284) $
7,794
3,227
21
157
(338)
4,160
(684)
1,540,054
$
4,547
$
1,333
$
38,853 $
(2,622) $
8,594
2,691
17
128
(362)
4,396
(845)
1,551,339
$
4,564
$
1,461
$
42,404 $
(2,984) $
Total
38,795
4,160
(338)
178
(684)
42,111
4,396
(362)
145
(845)
45,445
15
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019 and 2018
(In thousands of dollars)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of bank premises and equipment
Amortization of unearned fees, net
Net amortization of premiums and
discounts on securities
Provision for loan losses
Provision for deferred income taxes
Stock based compensation expense
Increase in cash value of bank owned life insurance
Valuation loss on OREO
Net decrease (increase) in:
Accrued interest receivable
Other assets
Net increase (decrease) in:
Accrued interest payable
Other liabilities
2019
2018
$
4,396
$
4,160
730
12
332
157
(79)
145
(234)
7
56
(16)
37
(72)
684
4
348
607
(208)
178
(236)
-
(150)
539
27
156
Net cash provided by operating activities
5,471
6,109
Cash flows from investing activities:
Purchases of available-for-sale securities
Sales of availble-for-sale securities
Proceeds from maturities and calls of held-to-maturity securities
Proceeds from maturities and calls of available-for-sale securities
Proceeds from paydowns and maturities of available-for-sale
mortgage-backed securities
Proceeds from the sale of of OREO
Purchase of Federal Reserve Stock
Purchase of Federal Home Loan Bank Stock
Net increase in loans made to customers
Purchases of bank premises and equipment
Disposals of bank premises and equipment
(4,968)
1,887
-
2,965
5,807
280
(5)
(24)
(17,862)
(825)
300
(11,319)
-
570
134
4,339
181
(2)
(4)
(18,848)
(414)
-
Net cash used in investing activities
(12,445)
(25,363)
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits
Net decrease in time deposits
Repayment of line of credit
Cash dividends paid
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
26,187
(1,182)
-
(845)
24,160
17,186
15,717
25,812
(2,219)
(513)
(684)
22,396
3,142
12,575
Cash and cash equivalents, end of year
$
32,903
$
15,717
Supplemental disclosure of cash flows information
Cash paid during the year for:
Income taxes
Interest
Supplemental schedule of noncash investing and
financing activities:
$
1,480
2,526
$
940
1,861
Transfer from loans to foreclosed assets
Loans charged against the allowance for loan losses
Unrealized gains (losses) on available-for-sale securities
Defined benefit plan adjustment per ASC topic Compensation-Retirement Benefits
$
326
609
1,155
(1,615)
$
584
454
(319)
(107)
See accompanying notes to consolidated financial statements.
16
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except ratios, share and per share data)
(1) Summary of Significant Accounting Policies and Practices
Pinnacle Bankshares Corporation, a Virginia corporation (“Pinnacle”), was organized in 1997 and is registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended. Pinnacle is
headquartered in Altavista, Virginia. Pinnacle conducts all of its business activities through the branch offices
of its wholly owned subsidiary bank, First National Bank (“First National Bank”). Pinnacle exists primarily
for the purpose of holding the stock of its subsidiary, and of such other subsidiaries as it may acquire or
establish. Pinnacle has a single reportable segment for purposes of segment reporting.
The accounting and reporting policies of Pinnacle and its wholly owned subsidiary (collectively, the
“Company”), conform to generally accepted accounting principles in the United States of America (“GAAP”)
and general practices within the banking industry. The following is a summary of the more significant
accounting policies and practices:
(a) Consolidation
The consolidated financial statements include the accounts of Pinnacle and First National Bank. All
material intercompany balances and transactions have been eliminated.
(b) Use of Estimates
In preparing the consolidated financial statements in accordance with GAAP, management is required
to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the
dates of the consolidated balance sheets and revenues and expenses for the years ended December 31,
2019 and 2018. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the determination of the allowance for loan
losses, payments/obligations under benefit and pensions plans, other real estate owned and fair value of
investments.
(c)
Securities
Pinnacle classifies its securities in three categories: (1) debt securities that Pinnacle has the positive
intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at
amortized cost; (2) debt securities that are bought and held principally for the purpose of selling them
in the near term are classified as “trading securities” and reported at fair value, with unrealized gains
and losses included in net income; and (3) debt securities not classified as either held-to-maturity
securities or trading securities are classified as “available-for-sale securities” and reported at fair value,
with unrealized gains and losses excluded from net income and reported in accumulated other
comprehensive income, a separate component of stockholders’ equity, net of deferred taxes. Fair value
is determined from quoted prices obtained and reviewed by management. Held-to-maturity securities
are stated at cost, adjusted for amortization of premiums and accretion of discounts on a basis, which
approximates the level yield method. As of December 31, 2019 and 2018, Pinnacle does not maintain
trading securities. Gains or losses on disposition are based on the net proceeds and adjusted carrying
values of the securities called or sold, using the specific identification method on a trade date basis.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on a least a quarterly
basis, and more frequently when economic or market conditions warrant such an evaluation. For
securities in an unrealized loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer. Pinnacle assesses OTTI based
upon whether it intends to sell a security or if it is likely that it would be required to sell the security
before recovery of the amortized cost basis of the investment, which may be maturity. For debt
securities, if Pinnacle intends to sell the security or it is likely that Pinnacle will be required to sell the
security before recovering its cost basis, the entire impairment loss would be recognized in earnings as
an OTTI. If Pinnacle does not intend to sell the security and it is not likely that Pinnacle will be required
to sell the security but we do not expect to recover the entire amortized cost basis of the security, only
17
the portion of the impairment loss representing credit losses would be recognized in earnings. The credit
loss on a security is measured as the difference between the amortized cost basis and the present value
of the cash flows expected to be collected. Projected cash flows are discounted by the original or current
effective interest rate depending on the nature of the security being measured for potential OTTI. The
remaining impairment related to all other factors, the difference between the present value of the cash
flows expected to be collected and fair value, is recognized as a charge to other comprehensive income
(“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI.
For investment securities held to maturity, this amount is accreted over the remaining life of the debt
security prospectively based on the amount and timing of future estimated cash flows. The accretion of
the amount recorded in OCI increases the carrying value of the investment and does not affect earnings.
If there is an indication of additional credit losses the security is re-evaluated according to the
procedures described above.
(d) Restricted Equity Investments
As a member of the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Atlanta
(“FHLB”), Pinnacle is required to maintain certain minimum investments in the common stock of the
FRB and FHLB, which are carried at cost. Required levels of investment are based upon Pinnacle’s
capital and a percentage of qualifying assets.
In addition, Pinnacle is eligible to borrow from the FHLB with borrowings collateralized by qualifying
assets, primarily residential mortgage loans, and Pinnacle’s capital stock investment in the FHLB.
Management’s determination of whether these investments are impaired is based on its assessment of
the ultimate recoverability of cost rather than by recognizing temporary declines in value. The
determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria
such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock
amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB
to make payments required by law or regulation and the level of such payments in relation to the
operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions
and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.
(e) Borrowings
As of December 31, 2019, Pinnacle’s available borrowing limit with the FHLB was approximately
$117,198. Pinnacle had $0 in borrowings from the FHLB outstanding at December 31, 2019 and 2018.
Pinnacle also has a $5,000 line of credit commitment of which $5,000 is currently available. The line of
credit is secured by the authorized capital stock of First National Bank with a correspondent bank. The
line of credit had $0 outstanding as of December 31, 2019 and December 31, 2018.
(f)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income and fees on loans, an
allowance for loan losses, and net charge-offs. Interest income is recognized over the terms of the loans
using methods that approximate the level yield method. The allowance for loan losses is a cumulative
valuation allowance consisting of an annual provision for loan losses, plus any amounts recovered on
loans previously charged off, minus loans charged off. The provision for loan losses charged to
operations is the amount necessary in management’s judgment to maintain the allowance for loan losses
at a level it believes adequate to absorb probable losses inherent in the loan portfolio. Management
determines the adequacy of the allowance based upon reviews of individual credits, recent loss
experience, delinquencies, current economic conditions, the risk characteristics of the various categories
of loans and other pertinent factors. Management uses historical loss data by loan type as well as current
economic factors in its calculation of allowance for loan loss.
Management also uses qualitative factors such as changes in lending policies and procedures, changes
in national and local economies, changes in the nature and volume of the loan portfolio, changes in
experience of lenders and the loan department, changes in volume and severity of past due and classified
loans, changes in quality of Pinnacle’s loan review system, the existence and effect of concentrations of
credit and external factors such as competition and regulation in its allowance for loan loss calculation.
Each qualitative factor is evaluated and applied to each type of loan in Pinnacle’s portfolio and a
18
percentage of each loan is reserved as allowance. A percentage of each loan type is also reserved
according to the loan type’s historical loss data. Larger percentages of allowance are taken as the risk
for a loan is determined to be greater. Loans are charged against the allowance for loan losses when
management believes the principal is uncollectible.
While management uses available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic conditions or Pinnacle’s
recent loss experience. It is reasonably possible that management’s estimate of loan losses and the
related allowance may change materially in the near term. However, the amount of change that is
reasonably possible cannot be estimated. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Pinnacle’s allowance for loan losses. Such agencies may
require Pinnacle to recognize additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examinations.
Loans are charged against the allowance when, in management’s opinion, they are deemed doubtful,
although Pinnacle usually continues to aggressively pursue collection. Pinnacle considers a number of
factors to determine the need for and timing of charge-offs including the following: whenever any
commercial loan becomes past due for 120 days for any scheduled principal or interest payment and
collection is considered unlikely; whenever foreclosure on real estate collateral or liquidation of other
collateral does not result in full payment of the obligation and the deficiency or some portion thereof is
deemed uncollectible, the uncollectible portion shall be charged-off; whenever any installment loan
becomes past due for 120 days and collection is considered unlikely; whenever any repossessed vehicle
remains unsold for 60 days after repossession; whenever a bankruptcy notice is received on any
installment loan and review of the facts results in an assessment that all or most of the balance will not
be collected, the loan will be placed in non-accrual status; whenever a bankruptcy notice is received on
a small, unsecured, revolving installment account; and whenever any other small, unsecured, revolving
installment account becomes past due for 180 days.
Loans are generally placed in non-accrual status when the collection of principal and interest is 90 days
or more past due, unless the obligation relates to a consumer or residential real estate loan or is both
well-secured and in the process of collection. All interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Generally,
loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured, which usually requires a minimum of six
months of sustained repayment performance.
Impaired loans are required to be presented in the financial statements at net realizable value of the
expected future cash flows or at the fair value of the loan’s collateral. Homogeneous loans such as real
estate mortgage loans, individual consumer loans and home equity loans are evaluated collectively for
impairment. Management, considering current information and events regarding the borrower’s ability
to repay their obligations, considers a loan to be impaired when it is probable that Pinnacle will be unable
to collect all amounts due according to the contractual terms of the loan agreement. Impairment losses
are included in the allowance for loan losses through a charge to the provision for loan losses. Cash
receipts on impaired loans receivable are applied first to reduce interest on such loans to the extent of
interest contractually due and any remaining amounts are applied to principal.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at
the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled
debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of
the collateral less cost to sell. For troubled debt restructurings that subsequently default, Pinnacle
determines the amount of reserve in accordance with the accounting policy for the allowance for loan
losses.
(g) Loan Origination and Commitment Fees and Certain Related Direct Costs
Loan origination and commitment fees and certain direct loan origination costs charged by Pinnacle are
deferred and the net amount amortized as an adjustment of the related loan’s yield. Pinnacle amortizes
19
these net amounts over the contractual life of the related loans or, in the case of demand loans, over the
estimated life. Fees related to standby letters of credit are recognized over the commitment period.
(h) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is
computed by the straight-line and declining-balance methods over the estimated useful lives of the
assets. Depreciable lives include 15 years for land improvements, 39 years for buildings, and 3 to 7 years
for equipment, furniture and fixtures. The cost of assets retired and sold and the related accumulated
depreciation are eliminated from the accounts and the resulting gains or losses are included in
determining net income. Expenditures for maintenance and repairs are charged to expense as incurred,
and improvements and betterments are capitalized.
(i) Bank Owned Life Insurance
Pinnacle has purchased life insurance policies on certain key officers. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which
is the cash surrender value adjusted for other charges or other amounts due that are probable at
settlement.
(j) Goodwill
Pinnacle performs a goodwill impairment analysis on an annual basis as of December 31st. Additionally,
Pinnacle performs a goodwill impairment evaluation on an interim basis when events or circumstances
indicate impairment potentially exists. During 2019 and 2018, Pinnacle reviewed its goodwill for
impairment and determined that goodwill is not impaired. Management will continue to monitor the
relationship of Pinnacle’s market capitalization to both its book value and tangible book value, which
management attributes to factors that are both Company-specific and that affect the financial services
industry-wide, and to evaluate the carrying value of goodwill.
(k) Other Real Estate Owned
Foreclosed properties consist of properties acquired through foreclosure or deed in lieu of foreclosure.
At time of foreclosure, the properties are recorded at the fair value less costs to sell. Subsequently, these
properties are carried at the lower of cost or fair value less estimated costs to sell. Losses from the
acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan
losses. Subsequent write-downs, if any, are charged to expense. Gains and losses on the sales of
foreclosed properties are included in determining net income in the year of the sale.
(l)
Impairment or Disposal of Long-Lived Assets
Pinnacle’s long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used, such as bank premises and equipment, is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, such as
foreclosed properties, are reported at the lower of the carrying amount or fair value less costs to sell.
(m) Pension Plan
Pinnacle maintains a noncontributory defined benefit pension plan, which covers substantially all of its
employees. The net periodic pension expense includes a service cost component, interest on the
projected benefit obligation, a component reflecting the actual return on plan assets, the effect of
deferring and amortizing certain actuarial gains and losses, and the amortization of any unrecognized
net transition obligation on a straight-line basis over the average remaining service period of employees
expected to receive benefits under the plan. Pinnacle’s funding policy is to make annual contributions
in amounts necessary to satisfy the Internal Revenue Service’s funding standards, to the extent that they
are tax deductible.
Accounting Standards Codification (“ASC”) Topic 715, Defined Benefit Pension Plans requires a
business entity to recognize the overfunded or underfunded status of a single-employer defined benefit
20
postretirement plan as an asset or liability in its statement of financial position and to recognize changes
in that funded status in comprehensive income in the year in which the changes occur. Defined Benefit
Pension Plans also requires a business entity to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited exceptions.
(n) Revenue Recognition
Pinnacle recognizes revenue from contracts with customers. Noninterest revenue streams such as
service charges on deposit accounts and commissions and fees are recognized in accordance with ASC
Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including
revenue from loans, securities and mortgage banking. In addition, certain noninterest income streams
such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the
guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds
fees, and VISA debit card interchange fees. Pinnacle’s performance obligation for monthly service
fees is generally satisfied, and the related revenue recognized, over the period in which the service is
provided. Payment for service charges on deposit accounts is primarily received immediately or at the
end of each month through a direct charge to customers’ accounts. Overdraft and nonsufficient funds
fees and other deposit account related fees are transactional based, and therefore, Pinnacle’s
performance obligation is satisfied, and related revenue recognized, at a point in time when the service
is delivered. Debit card fees are primarily comprised of interchange fee income. Interchange fees are
earned whenever Pinnacle’s debit cards are processed through the Visa network. Pinnacle’s
performance obligation for interchange fee income is satisfied, and related revenue recognized, when
the services are rendered or upon completion. Payment is typically received immediately or in the
following month. Interchange income for vendors using terminals Pinnacle has sold and commissions
from VISA related to the Pinnacle’s principal status are also included in other operating income.
Pinnacle’s performance obligation is satisfied, and the related revenue recognized, when the
commissions or fees are earned and are generally based on a percentage of activity.
Commissions and Fees
Commissions and fees consists of commissions received on investment product and insurance policies
sales. For insurance sales, Pinnacle acts as an intermediary between the Pinnacle’s customer and the
insurance carrier. Pinnacle’s performance obligation is satisfied upon the issuance of the insurance
policy. Pinnacle retains a certain percentage of the policy premium for each policy sold. Investment
commissions consists of recurring revenue streams such as commissions from sales of mutual funds
and other investments. Commissions from the sale of investments are recognized on trade date, which
is when Pinnacle has satisfied its performance obligation. Commissions and fees that total $535 on the
income statement includes $173 in loan late fees that are out-of-scope of Topic 606.
Other Operating Income
Included in other operating income are various transaction based revenue streams such as wire transfer
fees, foreign ATM fees, ACH origination fees, cashier check fees and miscellaneous services provided
such as assistance with balancing a customer’s checking account or making copies. Each of these fees
are transactional based, and therefore, Pinnacle’s performance obligation is satisfied, and related
revenue recognized, at a point in time when the service is delivered.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope
of Topic 606, for the year ended December 31, 2019 and 2018:
21
Non-interest Income
In-scope of Topic 606:
Service charges on deposit accounts
Commissions and fees
Other operating income
Non-interest Income (in-scope of Topic 606)
Non-interest Income (out-of-scope of Topic 606)
Years Ended December 31,
2019
2018
$
$
1,941
362
657
2,960
1,663
4,623
$
$
$
$
1,894
403
605
2,902
1,300
4,202
(o) Advertising
Pinnacle recognizes advertising expenses as incurred. Advertising expenses totaled $198 in 2019
compared to $183 in 2018.
(p)
Income Taxes
Income taxes are accounted for under the asset and liability method, whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes
the enactment date.
Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. When tax returns
are filed, it is highly certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in
the financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with
other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as
the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits
in the accompanying balance sheet along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.
(q) Stock Options and Restricted Stock
Pinnacle accounts for its stock based compensation plan by recognizing expense for options and
restricted stock granted equal to the grant date fair value of the unvested amounts over their remaining
vesting periods. Future levels of compensation cost recognized related to share-based compensation
awards may be impacted by new awards and/or modification, repurchases and cancellations of existing
awards after the adoption of this standard.
(r) Net Income per Share
Basic net income per share excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if securities or other contracts to issue
common stock that are not anti-dilutive were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of Pinnacle.
22
The following is a reconciliation of the numerators and denominators of the basic and diluted net income
per share computations for the periods indicated:
Year ended December 31, 2019
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
Year ended December 31, 2018
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
$
$
$
$
Net income
(numerator)
Shares
(denominator)
Per share
amount
4,396
—
4,396
1,549,129 $
10,763
1,559,892 $
2.84
2.82
Net income
(numerator)
Shares
(denominator)
Per share
amount
4,160
—
2,748
1,537,380 $
14,218
1,551,598 $
2.71
2.68
(s) Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on
hand, amounts due from banks (with original maturities of three months or less), and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
(t) Comprehensive Income
ASC Topic 220, Comprehensive Income, requires Pinnacle to classify items of “Other Comprehensive
Income” (such as net unrealized gains (losses) on available-for-sale securities) by their nature in a
financial statement and present the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a statement of financial position.
Pinnacle’s other comprehensive income consists of net income, and net unrealized gains (losses) on
securities available-for-sale, net of income taxes, and adjustments relating to its defined benefit plan, net
of income taxes.
(u) Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for using fair
value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants as of the measurement date.
In accordance with Fair Value Measurements and Disclosures, Pinnacle groups its financial assets and
financial liabilities in three levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. The most significant instruments that
Pinnacle measures at fair value are available-for-sale securities. As of December 31, 2018, all available-
for-sale securities fell into Level 2 fair value hierarchy and remained at Level 2 as of December 31,
2019. Valuation methodologies for the fair value hierarchy are as follows:
Level 1 – Valuations are based on quoted prices for identical assets and liabilities traded in active
exchange markets, such as the New York Stock Exchange.
Level 2 – Valuations for assets and liabilities are obtained from readily available pricing sources via
independent providers for market transactions involving similar assets or liabilities, model-based
valuation techniques, or other observable inputs.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies,
including option pricing models, discounted cash flow models and similar techniques, and are not based
on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain
assumptions and projections in determining fair value assigned to such assets and liabilities.
23
(v) Current Accounting Developments
For each of the accounting pronouncements that affect the Company, the Company elected to follow the
rule that allows companies engaging in an initial public offering as an Emerging Growth Company to
follow the private company implementation dates.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
(“ASU”) 2014-09, Revenue from Contracts with Customers. The objective of ASU No. 2014-09 is to
establish a single, comprehensive, five-step model for entities to use in accounting for revenue arising
from contracts with customers that will supersede most of the existing revenue recognition guidance,
including industry-specific guidance. The core principle of this standard is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. ASU
2014-09 applies to all contracts with customers except those that are within the scope of other topics in
the FASB ASC. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which
clarifies the implementation guidance on principal versus agent considerations. In June 2016, the FASB
issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients, which relates to assessing collectability, presentation of sales
taxes, noncash consideration and completed contracts and contract modifications in transition. In
December 2016, the FASB issued 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers, which clarifies or corrects unintended application of the
standard. Companies are permitted to adopt the ASUs as early as fiscal years beginning after December
15, 2016, but the adoption is required for private companies for fiscal years beginning after December
15, 2018. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605),"
"Revenue from Contracts with Customers (Topic 606), Leases (Topic 840)," and Leases (Topic 842).
These amendments provide additional clarification and implementation guidance on the previously
issued ASU 2014-09. The Company adopted Topic 606 effective on January 1, 2019. The adoption of
this guidance did not have a material impact to the consolidated financial statements but did result in
expanded disclosures related to noninterest income and enhanced qualitative disclosures on the revenues
within the scope of the new guidance. Refer to Note 1, Revenue Recognition, for further discussion on
the Company’s accounting policies for revenue sources within the scope of Topic 606.
In January 2016, the FASB ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is
intended to improve the recognition and measurement of financial instruments. ASU 2016-01 affects
public and private companies, not-for-profit organizations, and employee benefit plans that hold
financial assets or owe financial liabilities. The new guidance makes targeted improvements to existing
U.S. GAAP by 1) requiring equity investments (except those accounted for under the equity method of
accounting, or those that result in consolidation of the investee) to be measured at fair value with changes
in fair value recognized in net income; 2) requiring separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables)
on the balance sheet or the accompanying notes to the financial statements; 3) eliminating the
requirement to disclose the fair value of financial instruments measured at amortized cost for
organizations that are not public business entities; and 4) requiring a reporting organization to present
separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the
organization has elected to measure the liability at fair value in accordance with the fair value option for
financial instruments. In January 2018, FASB issued ASU 2018-03, Technical Corrections and
Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities to clarify certain aspects of the guidance issued in ASU 2016-
01. The new guidance is effective for private companies for fiscal years beginning after December 15,
2018, and for interim periods within fiscal years beginning after December 15, 2019. The adoption of
this guidance did not have an impact to the consolidated financial statements.
24
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to
increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet by lessees for those leases classified as operating leases under current
U.S. GAAP and disclosing key information about leasing arrangements. The core principle is that a
lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its
balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of twelve months or less, a
lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for
such leases generally on a straight-line basis over the lease term. In July 2019, FASB issued ASU 2018-
11, Leases (Topic 842): Targeted Improvements to provide entities with additional guidance related to
the transition method selected, as well as on separating components of a contract to the original
information issued in ASU 2016-02. In November 2019, FASB issued ASU 2019-10, Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),
which clarified the amendments and delayed the effective dates of the previously issued ASU’s. The
amendments in this ASU are effective for private companies for fiscal years beginning after December
15, 2020, and interim periods beginning after December 15, 2021. Early application of this ASU is
permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance
on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic
326):Measurement of Credit Losses on Financial Instruments, which sets forth a "current expected credit
loss" ("CECL") model requiring the Company to measure all expected credit losses for financial
instruments held at the reporting date based on historical experience, current conditions and reasonable
supportable forecasts. This replaces the existing incurred loss model and is applicable to the
measurement of credit losses on financial assets measured at amortized cost and applies to some off-
balance sheet credit exposures. In November 2018, FASB issued ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses to clarify that operating lease
receivables are within the scope of ASC 842 rather than ASC Topic 326. In November 2019, FASB
issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842), which clarified the amendments and delayed the effective dates of
the previously issued ASU’s. ASU 2016-13 is effective for private companies for fiscal years beginning
after December 15, 2022. Early application of this ASU is permitted for all entities. The Company is
currently assessing the potential impact of this ASU and collecting loan data needed to measure the
required calculation.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715),
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This ASU was issued to improve the presentation of net periodic pension or benefit costs for employers
that offer their employees defined benefit pension plans, postretirement benefit plans, or other types of
benefits accounted for under Topic 715. The amendments prescribe where the amount of net benefit cost
should be presented in an employer’s income statement and require entities to disclose by line item the
amount of net benefit cost that is included in the income statement or capitalized in assets. ASU 2017-
07 is effective for public business entities that are SEC filers for annual periods beginning after
December 15, 2017, and interim periods within those annual periods, for public entities that are not SEC
filers for annual periods beginning after December 15, 2018 and for all other entities for annual periods
beginning after December 15, 2019 with early adoption permitted. Retrospective application is required
for the change in income statement presentation, while the change in capitalized benefit cost is to be
applied prospectively. The Company adopted this guidance effective after December 15, 2018. The other
components of net periodic benefit cost are presented as a component of other non-interest expense. The
adoption resulted in a reclassification of $70 and $193 for the twelve months ended December 31, 2019
and 2018, respectively, from salaries and employee benefits to other expenses.
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs
(Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. The update shortens
the amortization period for certain callable debt securities held at a premium. Specifically, the update
25
requires the premium to be amortized to the earliest call date. The update does not require an accounting
change for securities held at a discount; the discount continues to be amortized to maturity. The
amendments of this ASU are effective for public business entities that are SEC filers for annual periods
beginning after December 15, 2018, and interim periods within those annual periods, for public entities
that are not SEC filers for annual periods beginning after December 15, 2019 and for all other entities
for annual periods beginning after December 15, 2020 with early adoption permitted. An entity should
apply the amendments in this update on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in
the period of adoption, an entity should provide disclosures about a change in accounting principle. The
Company does not expect the adoption of this guidance to be material to the consolidated financial
statements.
In July 2017, FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815 ): (Part I) Accounting for Certain
Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception.” Companies that provide earnings per
share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e.,
when the exercise price of the related equity-linked financial instrument is adjusted downward because
of the down round feature) and will also recognize the effect of the trigger within equity. Amendments
in this ASU simplifies the accounting for certain financial instruments with down round features, a
provision in an equity-linked financial instrument (or embedded feature) that provides a downward
adjustment of the current exercise price based on the price of future equity offerings. For public business
entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. For all other entities, the amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. The Company is evaluating the provisions of ASU 2017-11 but believes that its
adoption will not have a material impact on the Company’s consolidated financial statements.
The Company early adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
(“ASU 2018-02”), which was issued by FASB in February 2018. ASU 2018-02 provides for the
reclassification of the effect of re-measuring deferred tax balances related to items within accumulated
other comprehensive income (“AOCI”) to retained earnings resulting from the Tax Cuts and Jobs Act
of 2017. As a result, the Company reclassified $376 from AOCI to retained earnings as of and for the
year ended December 31, 2018.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic
718 to include all share-based payment transactions for acquiring goods and services from non-
employees. The new guidance is effective for private companies for fiscal years beginning after
December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. The Company does
not expect the adoption of this guidance to be material to the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments
in this ASU modify the disclosure requirements on fair value measurement in Topic 820, Fair Value
Measurement, based on the ideas in the Concepts Statements, including the consideration of costs and
benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance
of this ASU. The adoption of this guidance did not have a material impact to the consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
26
Computing Arrangement That Is a Service Contract. This ASU amends the Intangibles—Goodwill and
Other topic of the ASC to align the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation
costs incurred to develop or obtain internal-use software. This ASU will be effective for the Company
for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not
expect the adoption of this guidance to be material to the consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments. This ASU clarifies and improves areas of guidance related to the recently issued standards
on credit losses, hedging, and recognition and measurement including improvements resulting from
various TRG Meetings. The amendments are effective for private companies for fiscal years beginning
after December 15, 2022. Early adoption is permitted. The Company is currently assessing the impact
that ASU 2019-04 will have on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326):
Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments
within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic
825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of
Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity
that elects the fair value option should subsequently measure those instruments at fair value with changes
in fair value flowing through earnings. The amendments are effective for fiscal years beginning after
December 15, 2022, and interim periods within those fiscal years. The amendments should be applied
on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of
retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently
assessing the impact that ASU 2019-05 will have on its consolidated financial statements.
(2) Restrictions on Cash
To comply with Federal Reserve regulations, Pinnacle is required to maintain certain average reserve balances.
The daily average reserve requirements were approximately $5,892 and $5,051 for the weeks including
December 31, 2019 and 2018, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of
December 31, 2019 and 2018 are as follows:
Available-for-Sale
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities – government
Total available-for-sale
2019
Gross
Gross
Amortized
unrealized
unrealized
costs
gains
losses
Fair
values
$
$
5,986
8,897
27,984
42,867
30
370
179
579
(15)
-
(237)
(252)
6,001
9,267
27,926
43,194
Held-to-Maturity
Obligations of states and political subdivisions
costs
1,764
$
gains
16
losses
—
2019
Gross
Gross
Amortized
unrealized
unrealized
Fair
values
1,780
27
2018
Gross
Gross
Available-for-Sale
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities – government
Total available-for-sale
Amortized
unrealized
unrealized
costs
gains
losses
Fair
values
$
$
8,351
11,915
28,611
48,877
6
77
10
93
(130)
(233)
(558)
(921)
8,227
11,759
28,063
48,049
Held-to-Maturity
Obligations of states and political subdivisions
costs
1,777
$
gains
26
losses
—
2018
Gross
Gross
Amortized
unrealized
unrealized
Fair
values
1,803
The following table shows the gross unrealized losses and fair value of Pinnacle’s investments, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2019:
Description of Securities
U.S. Treasury securities and obligations of
Less than 12 months
More than 12 months
Total
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Gross
Fair
value
Gross
unrealized
losses
U.S. Government corporations and agencies $
Obligations of states and political subdivisions
Mortgage-backed securities-government
1,457
—
9,482
Total
$ 10,939
9
—
80
89
995
—
11,175
12,170
6
—
157
2,452
—
20,657
163
23,109
15
—
237
252
The following table shows the gross unrealized losses and fair value of Pinnacle’s investments, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2018:
Description of Securities
U.S. Treasury securities and obligations of
Less than 12 months
More than 12 months
Total
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Gross
Fair
value
Gross
unrealized
losses
U.S. Government corporations and agencies $
Obligations of states and political subdivisions
Mortgage-backed securities-government
2,982
—
7,085
6
—
25
4,645
8,168
18,904
124
233
533
7,627
8,168
25,989
130
233
558
Total temporarily
impaired
securities
$
10,067
31
31,717
890
41,784
921
Pinnacle does not consider the unrealized losses other-than-temporary losses based on the volatility of the
securities market price involved, the credit quality of the securities, and Pinnacle’s ability, if necessary, to hold
the securities until maturity. For 2019, the securities included 15 bonds that had continuous losses for less
than 12 months and 28 bonds that had continuous losses for more than 12 months. For 2018, the securities
included 11 bonds that had continuous losses for less than 12 months and 53 bonds that had continuous losses
for more than 12 months. There were $2 in net realized losses on securities sold in 2019 and no gains or losses
in 2018.
28
The amortized costs and fair values of available-for-sale and held-to-maturity securities as of December 31,
2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
2019
Available-for-Sale
Fair
values
Amortized
costs
Held-to-Maturity
Fair
values
Amortized
costs
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
$
1,997
3,128
8,453
1,305
2,001
3,171
8,784
1,312
Mortgage-backed securities
14,883
15,268
27,984
27,926
1,264
500
—
—
1,764
—
1,273
507
—
—
1,780
—
Totals
$
42,867
43,194
1,764
1,780
Securities with amortized costs of approximately $7,456 and $8,593 (fair values of $7,464 and $8,475,
respectively) as of December 31, 2019 and 2018, respectively, were pledged as collateral for public deposits,
loans and to the FRB for overdraft protection.
(4) Loans, Allowance for Loan Losses and Credit Quality
A summary of loans as of December 31, 2019 and 2018 follows:
Real estate loans:
Residential-mortgage
Residential-construction
Commercial
$
Loans to individuals for household, family and other
consumer expenditures
Commercial and industrial loans
Total loans, gross
Less unearned income and fees
Loans, net of unearned income and fees
Less allowance for loan losses
Loans, net
$
2019
2018
116,139
6,250
110,277
99,318
61,536
393,520
(199)
393,321
(3,472)
389,849
122,760
7,156
97,027
91,259
57,864
376,066
(212)
375,854
(3,372)
372,482
In the normal course of business, the First National Bank has made loans to executive officers and directors.
As of December 31, 2019 and 2018, loans to executive officers and directors totaled $298 and $281,
respectively. During 2019, new loans made to executive officers and directors totaled $65 and advances totaled
$153. New loans made to companies in which executive officers and directors have an interest per Regulation
O totaled $43 and advances totaled $43 in 2019. All such loans were made in the ordinary course of business
on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at
the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not
involve more than normal risk of collectability or present other unfavorable features.
The fair value of loans, net of unearned income and fees, was $396,109 as of December 31, 2019 and $378,081
as of December 31, 2018.
29
The following table presents information on Pinnacle’s allowance for loan losses and recorded investment in
loans:
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2019
Commercial
Commercial Real Estate Consumer Residential
Total
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
(Recovery of) provision for loan losses
Ending Balance
Allowance:
Ending balance: individually
evaluated for impairment
Ending balance: collectively evaluated
for impairment
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
$518
(3)
78
(153)
$440
1,035
-
1
51
1,087
985
834
(68)
(538)
170
303
338 (79)
1,008
937
3,372
(609)
552
157
3,472
-
-
-
-
-
$440
1,087
937
1,008
3,472
Commercial
Commercial Real Estate Consumer Residential
Total
$61,536
110,277
99,318
122,389
393,520
-
149
124
985
1,258
Ending balance: collectively evaluated for
impairment
$61,536
110,128
99,194
121,404
392,262
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2018
Commercial
Commercial Real Estate Consumer Residential
Total
Allowance for Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision for loan losses
Ending Balance
Allowance:
Ending balance: individually
evaluated for impairment
Ending balance: collectively evaluated
for impairment
$505
(112)
-
125
$518
751
-
2
282
1,035
957
750
-
(342)
248
13
178 15
985
834
2,963
(454)
263
600
3,372
-
-
80
-
80
$518
30
1,035
754
985
3,292
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
Commercial
Commercial Real Estate Consumer Residential
Total
$57,864
97,027
91,259
129,916
376,066
-
-
94
1,092
1,186
Ending balance: collectively evaluated for
impairment
$57,864
97,027
91,165
128,824
374,880
Pinnacle utilizes a risk rating matrix to assign a risk grade to each of its loans. A description of the general
characteristics of the risk grades is as follows:
Pass – These loans have minimal and acceptable credit risk.
Special Mention – These loans have potential weaknesses that deserve management’s close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects
for the loan at some future date.
Substandard – These loans are inadequately protected by the net worth or paying capacity of the
obligor or collateral pledged, if any. Loans classified as substandard must have a well-defined
weakness, or weaknesses, that jeopardize the liquidation of the debt. A substandard loan is
characterized by the distinct probability that Pinnacle will sustain some loss if the deficiencies are not
corrected.
Doubtful – These loans have all of the weakness inherent in one classified as substandard with the
added characteristic that the weaknesses make collection liquidation in full, on the basis of the
currently existing facts, conditions and values, highly questionable and improbable.
The following table illustrates Pinnacle’s credit quality indicators:
Credit Quality Indicators
As of December 31, 2019
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Commercial
Commercial Real Estate Consumer
99,226
-
92
-
99,318
109,249
147
881
-
110,277
$61,308
72
156
-
$61,536
As of December 31, 2018
Commercial
Commercial Real Estate Consumer
91,087
-
172
-
91,259
$57,254
395
215
-
$57,864
95,365
1,263
399
-
97,027
Residential
Total
120,731
479
1,179
-
122,389
390,514
698
2,308
-
393,520
Residential
Total
128,231
622
1,063
-
129,916
371,937
2,280
1,849
-
376,066
31
The following table represents an age analysis of Pinnacle’s past due loans:
Age Analysis of Past Due Loans
As of December 31, 2019
30-59
Days
60-89
Days
Past Due Past Due
Greater
Than
90 Days
Total
Past
Due
Total
Current Loans
Commercial
Commercial real estate
Consumer
Residential
Total
$-
-
157
61
$218
-
-
-
-
-
-
149
124
862
1,135
-
61,536
61,536
149 110,128 110,277
281
99,318
923 121,466 122,389
1,353 392,167 393,520
99,037
Age Analysis of Past Due Loans
As of December 31, 2018
30-59
Days
60-89
Days
Past Due Past Due
-
10
16
42
68
$21
25
208
246
$500
Greater
Than
90 Days
-
-
94
825
919
Commercial
Commercial real estate
Consumer
Residential
Total
Total
Past
Due
Total
Current Loans
57,864
57,843
97,027
96,992
91,259
90,941
1,113 128,803 129,916
1,487 374,579 376,066
21
35
318
Recorded
Investment
90 Days
and
Accruing
-
-
-
-
-
Recorded
Investment
90 Days
and
Accruing
-
-
80
-
80
The following table presents information on Pinnacle’s impaired loans and their related allowance for loan
losses:
Impaired Loans
For the Year Ended December 31, 2019
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ -
149
124
985
-
149
124
$985
$1,258
-
149
124
985
-
149
124
985
1,258
32
-
-
-
-
-
-
-
-
-
-
75
69
1,039
-
75
69
1,039
1,183
-
-
-
-
-
-
-
7
7
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
Impaired Loans
For the Year Ended December 31, 2018
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ -
-
14
1,092
-
-
94
$1,092
$1,186
-
-
14
1,092
-
-
94
1,092
1,186
-
-
-
-
-
-
80
-
80
-
39
7
1,139
-
39
74
1,139
1,252
-
-
-
-
-
-
6
-
6
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
The following presents information on Pinnacle’s nonaccrual loans:
Loans in Nonaccrual Status
As of December 31, 2019 and 2018
Commercial
Commercial real estate
Consumer
Residential
Total
2019
$ -
149
124
862
$ 1,135
2018
-
-
14
825
839
Pinnacle had two restructured loans totaling $191 as of December 31, 2019 and had three restructured loans
totaling $429 as of December 31, 2018. All of these restructured loans constituted troubled debt restructurings
as of December 31, 2019 and 2018.
Pinnacle offers a variety of modifications to borrowers. The modification categories offered can generally be
described in the following categories.
Rate Modification is a modification in which the interest rate is changed.
Term Modification is a modification in which the maturity date, timing of payments or frequency of payments
is changed.
Interest Only Modification is a modification in which the loan is converted to interest only payments for a
period of time.
Payment Modification is a modification in which the dollar amount of the payment is changed, other than an
interest only modification described above.
Combination Modification is any other type of modification, including the restructuring of two or more loan
terms through the use of multiple categories above.
There were no additional commitments to extend credit related to these troubled debt restructurings that were
outstanding as of December 31, 2019 or December 31, 2018.
33
The following tables present troubled debt restructurings as of December 31, 2019 and 2018:
December 31, 2019
Accrual
Non-Accrual
Status
Status
Total
Troubled Debt
Restructuring
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
123
$123
-
-
-
68
68
-
-
-
191
191
December 31, 2018
Accrual
Non-Accrual
Status
Status
Total
Troubled Debt
Restructuring
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
267
$ 267
-
-
-
172
172
-
-
-
439
439
For 2019 and 2018, Pinnacle had no new troubled debt restructures. No troubled debt restructures experienced
payment defaults in 2019 or 2018.
(5) Bank Premises and Equipment
Bank premises and equipment, net were comprised of the following as of December 31, 2019 and 2018:
Land improvements
Buildings
Equipment, furniture and fixtures
Construction in progress
Less accumulated depreciation
$
Land
Bank premises and equipment, net $
2019
2018
710
14,983
7,151
76
22,920
(9,925)
12,995
2,551
15,546
710
15,174
6,511
-
22,395
(9,195)
13,200
2,551
15,751
34
(6) Deposits
A summary of deposits as of December 31, 2019 and 2018 follows:
Noninterest-bearing demand deposits
Interest-bearing:
Savings and money market accounts
NOW accounts
Time deposits – under $250,000
Time deposits – $250,000 and over
Total interest-bearing deposits
Total deposits
$
2019
2018
$
110,419
83,680
161,279
83,662
87,278
7,645
339,864
450,283
166,020
79,473
85,506
10,599
341,598
425,278
At December 31, 2019, the scheduled maturity of time deposits is as follows: $41,507 in 2020; $14,670 in
2021; $11,028 in 2022, $16,274 in 2023 and $11,443 in 2024.
In the normal course of business, the First National Bank has received deposits from executive officers and
directors. As of December 31, 2019 and 2018, deposits from executive officers and directors were
approximately $2,145 and $1,875, respectively. All such deposits were received in the ordinary course of
business on substantially the same terms and conditions, including interest rates, as those prevailing at the
same time for comparable transactions with unrelated persons.
The fair value of deposits was $410,213 as of December 31, 2019 and $370,056 as of December 31, 2018.
(7) Employee Benefit Plans
First National Bank maintains a noncontributory defined benefit pension plan that covers substantially all of
its employees. Benefits are computed based on employees’ average final compensation and years of credited
service. Pension expenses amounted to approximately $500 and $392 in 2019 and 2018, respectively. The
change in benefit obligation, change in plan assets and funded status of the pension plan as of December 31,
2019 and 2018 and pertinent assumptions are as follows:
35
Change in Benefit Obligation
2019
2018
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial income (loss)
Benefits paid
Settlement loss
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return (loss) on plan assets
Employer contribution
Benefits paid
$
$
Projected fair value of plan assets at end of year $
Funded Status at the End of the Year
Amounts Recognized in the Balance Sheet
8,598
567
365
2,542
(116)
—
11,956
7,303
1,362
—
(116)
8,549
(3,407)
9,184
586
313
(761)
(724)
—
8,598
8,388
(362)
—
(723)
7,303
(1,295)
Other liabilities, accrued pension
Amounts Recognized in Accumulated Other Comprehensive
(3,407)
(1,295)
Income Net of Tax Effect
Unrecognized actuarial loss
Income tax effect
(4,104)
862
Benefit obligation included in accumulated
other comprehensive income
$
(3,242)
Funded Status
Benefit obligation
Fair value of assets
Unrecognized net actuarial loss
Prepaid benefit cost included in the balance sheet
(11,956)
8,549
4,104
697
$
(2,489)
523
(1,966)
(8,598)
7,303
2,489
1,194
Weighted Average Assumptions as of December 31, 2019 and
2018 :
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension Benefits
2019
2018
3.25%
7.25%
3.00%
4.25%
7.25%
3.00%
The estimated portion of prior service cost and net transition obligation included in accumulated other
comprehensive income that will be recognized as a component of net periodic pension cost over the next fiscal
year is $752.
Pinnacle selects the expected long-term rate-of-return-on-assets assumption in consultation with its investment
advisors and actuary. This rate is intended to reflect the average rate of return expected to be earned on the
funds invested or to be invested to provide plan benefits. Historical performance is reviewed especially with
respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the
trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the
measurement period, and higher significance is placed on current forecasts of future long-term economic
conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for
this purpose, the plan is assumed to continue in force and not terminate during the period during which assets
are invested. However, consideration is given to the potential impact of current and future investment policy,
cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from
plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
36
The components of net pension benefit cost under the plan for the years ended December 31, 2019 and 2018
is summarized as follows:
Service cost
Interest cost
Expected return on plan assets
Net loss due to settlement
Recognized net actuarial loss
Net pension benefit cost
Gross (gain) loss recognized in other comprehensive income
Pension Benefits
2019
567
365
(528)
-
93
497
1,615
$
$
2018
586
313
(591)
-
85
393
107
Total Recognized in Net Pension Benefit Cost
and Other Comprehensive Income
$
2,112
500
Projected Benefit Payments
The projected benefit payments under the plan are summarized as follows for the years ending December 31:
2020
2021
2022
2023
2024
2025-2029
$ 379
1,586
274
1,073
142
3,178
Plan Asset Allocation
Plan assets are held in a pooled pension trust fund administered by the Virginia Bankers Association. The
pooled pension trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently
sacrificing return, with a targeted asset allocation of 38% fixed income and 62% equities. The Investment
Manager selects investment fund managers with demonstrated experience and expertise, and funds with
demonstrated historical performance, for the implementation of the pension plan’s investment strategy. The
Investment Manager will consider both actively and passively managed investment strategies and will allocate
funds across the asset classes to develop an efficient investment structure.
It is the responsibility of the Virginia Bankers Association to administer the investments of the pooled pension
trust fund within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not
limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the
use of observable inputs and minimize the use of unobservable inputs. Following is a description of the
valuation methodologies used for assets measured at fair value.
Mutual funds-fixed income and equity funds: Valued at the net asset value of shares held at year-end.
Cash and equivalents: Valued at cost which approximates fair value.
The preceding methods described may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, although Pinnacle believes its valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine fair value of certain financial instruments could result in a different fair value
measurement as of December 31, 2019 and 2018.
37
The following table presents the fair value of the assets, by asset category, as of December 31, 2019 and 2018.
Mutual funds-fixed income $
Mutual funds-equity
Total assets at fair value
$
3,249
5,300
8,549
3,067
4,236
7,303
2019
2018
The following table sets forth by level, within the fair value hierarchy, the assets carried at fair value as of
December 31, 2019 and 2018.
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
Mutual funds-fixed income
Mutual funds-equity
Total assets at fair value
$
$
$
$
Asse ts at Fair Value as of De ce mbe r 31, 2019
Level 1
3,249
5,300
8,549
Level 2
-
-
-
Level 3
-
-
-
3,249
5,300
8,549
Total
Asse ts at Fair Value as of De ce mbe r 31, 2018
Level 1
3,067
4,236
7,303
Level 2
-
-
-
Level 3
-
-
-
3,067
4,236
7,303
Total
Contributions
Pinnacle expects to contribute $0 to its pension plan in 2020.
Pinnacle also has a 401(k) plan under which Pinnacle matches employee contributions to the plan. In 2019
and 2018, Pinnacle matched 100% of the first 1% of salary deferral and 50% of the next 5% of salary deferral
to the 401(k) plan. The amount expensed for the 401(k) plan was $195 during the year ended December 31,
2019 and $166 during the year ended December 31, 2018.
(8)
Income Taxes
Income tax expense attributable to income before income tax expense for the years ended December 31, 2019
and 2018 is summarized as follows:
Current
Deferred
Total income tax expense
2019
2018
$
$
943
25
968
1,098
(209)
889
Reported income tax expense for the years ended December 31, 2019 and 2018 differed from the amounts
computed by applying the U.S. Federal income tax rate of 21% for 2019 and 2018 to income before income
tax expense as a result of the following:
2019
2018
Computed at statutory Federal tax rate
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest
Disallowance of interest expense
Other, net
$
1,126
1,060
(72)
3
(89)
968
(78)
3
(96)
889
Reported income tax expense
$
38
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and
deferred tax liabilities as of December 31, 2019 and 2018 are as follows:
2019
2018
Deferred tax assets:
Loans, principally due to allowance for loan losses
Defined benefit plan valuation adjustments
Net unrealized losses on available-for-sale securities
Other
Total gross deferred tax assets
Deferred tax liabilities:
Bank premises and equipment, due to differences
in depreciation
Accrued pension, due to actual pension contributions
in excess of accrual for financial reporting purposes
Net unrealized gains on available-for-sale securities
Other
Total gross deferred tax liabilities
Net deferred tax asset, included in other assets
$
$
678
862
—
114
1,654
(403)
(146)
(67)
(115)
(731)
923
647
523
174
135
1,479
(368)
(251)
(113)
(732)
747
First National Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary
as of December 31, 2019 and 2018, since realization of the entire gross deferred tax assets can be supported
by the amounts of taxes paid during the carry back periods available under current tax laws.
Pinnacle did not recognize any interest or penalties related to income tax during the years ended December
31, 2019 and 2018. Pinnacle does not have an accrual for uncertain tax positions as deductions taken and
benefits accrued are based on widely understood administrative practices and procedures and are based on
clear and unambiguous tax law. Tax returns for all years from 2016 and thereafter are subject to future
examination by tax authorities.
(9) Financial Instruments with Off-Balance-Sheet Risk
Pinnacle is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include mortgage sale lock commitments,
commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees,
credit risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments
reflect the extent of involvement First National Bank has in particular classes of financial instruments.
Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument
fail to perform in accordance with the terms of the contract. Pinnacle’s maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the contractual amount of these
instruments. Pinnacle uses the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Pinnacle requires collateral to support financial instruments when it is deemed necessary. First National Bank
evaluates such customers’ creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management’s credit evaluation of the counterparty. Collateral may include
deposits held in financial institutions, U.S. Treasury securities, other marketable securities, real estate,
accounts receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
Contract amounts at
December 31,
2019
79,001
5,074
2018
72,899
4,373
Commitments to extend credit
Standby letters of credit
$
$
39
In the ordinary course of business, Pinnacle may enter into mortgage rate lock commitments that are
subsequently funded by Pinnacle. Pinnacle then sells the mortgage loan to a secondary market bank that had
underwritten the mortgage loan before Pinnacle funded the loan. The secondary market bank pays a fee that
was agreed upon on the lock commitment date to Pinnacle and buys the loan within five days of the initial
funding by Pinnacle. Pinnacle had outstanding mortgage rate lock commitments of $2,590 and $2,592 as of
December 31, 2019 and December 31, 2018 respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by First National Bank to guarantee the
performance of a customer to a third party. These guarantees are primarily issued to support public and private
borrowing arrangements, including bond financing and similar transactions. Unless renewed, substantially all
of Pinnacle’s standby letters of credit commitments as of December 31, 2019 will expire within one year.
Management does not anticipate any material losses as a result of these transactions. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loans to customers.
(10) Leases
Pinnacle leases premises and equipment under various operating lease agreements. Lease payments for all
leases in 2019 were $191. Generally, operating leases provide for one or more renewal options on the same
basis as current rental terms. Certain leases require increased rentals under cost-of-living escalation clauses.
The following are future minimum lease payments as required under the agreements:
Year
2020
2021
2022
2023
2024
Thereafter
Total
Payments
$285
307
311
314
292
1,125
$2,634
Pinnacle entered into a lease of the Amherst branch facility, with an entity in which a director of Pinnacle has
a 50% ownership interest, in 2009. The original term of the lease is twenty years and may be renewed at the
Pinnacle’s option for two additional terms of five years each. The Pinnacle’s current rental payment under the
lease is $161 annually.
(11) Concentrations of Credit Risk and Contingencies
Pinnacle grants commercial, residential and consumer loans to customers primarily in the central Virginia area.
As a whole, the portfolio is affected by general economic conditions in the central Virginia region.
Pinnacle’s commercial and real estate loan portfolios are diversified, with no significant concentrations of
credit other than the geographic focus on the central Virginia region. The installment loan portfolio consists
of consumer loans primarily for automobiles and other personal property. Overall, the Pinnacle’s loan portfolio
is diversified and is not concentrated within a single industry or group of industries, the loss of any one or
more of which would generate a materially adverse impact on the business of Pinnacle.
Pinnacle has established operating policies relating to the credit process and collateral in loan originations.
Loans to purchase real and personal property are generally collateralized by the related property. Credit
approval is primarily based on the creditworthiness of the borrower, the ability to repay and the value of the
collateral pledged.
40
At times, Pinnacle may have cash and cash equivalents at a financial institution in excess of insured limits.
Pinnacle places its cash and cash equivalents with high credit quality financial institutions whose credit rating
and financial condition is monitored by management to minimize credit risk.
In the ordinary course of business, various claims and lawsuits are brought by and against Pinnacle. In the
opinion of management, there is no pending or threatened proceeding in which an adverse decision could result
in a material adverse change in the Pinnacle’s consolidated financial condition or results of operations.
(12) Dividend Restrictions and Capital Requirements
Pinnacle’s principal source of funds for dividend payments is dividends received from its subsidiary Bank.
For the years ended December 31, 2019 and 2018, dividends from the subsidiary Bank totaled $973 and
$1,461, respectively.
Substantially all of Pinnacle’s retained earnings consist of undistributed earnings of its subsidiary Bank, which
are restricted by various regulations administered by federal banking regulatory agencies. Under applicable
federal laws, the Comptroller of the Currency restricts, without prior approval, the total dividend payments of
First National Bank in any calendar year to the net profits of that year, as defined, combined with the retained
net profits for the two preceding years. As of December 31, 2019, retained net profits of First National Bank
that were free of such restriction approximated $9,163.
Pinnacle and First National Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect
on Pinnacle’s consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Pinnacle and First National Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Pinnacle and First National Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
Beginning January 1, 2015, Pinnacle and First National Bank became subject to new Basel III Capital Rules.
As a result, certain items in the risk-based capital calculation have changed. In addition, a new ratio, Common
Equity Tier 1 or “CET 1” Risk-Based Capital Ratio, is now measured and monitored. Pinnacle and First
National Bank's actual regulatory capital amounts and ratios as of December 31, 2019 and December 31, 2018
are listed on the following page:
Regulatory Capital Ratios as of December 31, 2019
Total Risk-Based Capital Ratio (to Risk Weighted Assets)
CET 1 Risk Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Leverage Capital Ratio (to Average Assets)
Regulatory Capital Ratios as of December 31, 2018
Total Risk-Based Capital Ratio (to Risk Weighted Assets)
CET 1 Risk Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Leverage Capital Ratio (to Average Assets)
Pinnacle
Consolidated
Amount
$51,455
$47,889
$47,889
$47,889
Ratio
12.60%
11.72%
11.72%
9.88%
Pinnacle
Consolidated
Amount Ratio
$47,651
12.29%
$44,192 11.40%
$44,192 11.40%
$44,192 9.36%
First
National Bank
Amount Ratio
12.36%
$50,331
11.48%
$46,765
11.48%
$46,765
9.67%
$46,765
First
National Bank
Ratio
12.04%
11.14%
11.14%
9.15%
Amount
$46,551
$43,092
$43,092
$43,092
Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does
not hold a “capital conservation buffer” consisting of 2.50% of CET1 capital, Tier 1 capital and total capital
to risk weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.
The capital conservation buffer was first applied on January 1, 2016, at 0.625% of risk weighted assets,
increasing each year until fully implemented at 2.50% on January 1, 2019. Basel III was fully phased in on
January 1, 2019 and now requires (i) a minimum ratio of CET1 capital to risk weighted assets of at least 4.50%,
plus a 2.50% capital conservation buffer, (ii) a minimum ratio of Tier 1 capital to risk weighted assets of at
41
least 6.00%, plus the capital conservation buffer, (iii) a minimum ratio of total capital to risk weighted assets
of at least 8.00%, plus the 2.50% capital conservation buffer and (iv) a minimum leverage ratio of 4.00%.
As of December 31, 2019, the most recent notification from Office of the Comptroller of the Currency
categorized Pinnacle and First National Bank as “well capitalized” under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification that management believes have
changed Pinnacle and the First National Bank’s category.
(13) Disclosures about Fair Value of Financial Instruments
GAAP requires Pinnacle to disclose estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the approximate fair value of each class of
financial instrument for which it is practicable to estimate that value.
(a) Securities
The fair value of securities is estimated based on bid prices as quoted on national exchanges or bid
quotations received from securities dealers. The fair value of certain state and municipal securities is not
readily available through market sources other than dealer quotations; so fair value estimates are based
on quoted market prices of similar instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
(b) Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type such as commercial, real estate - residential, real estate - commercial, loans to
individuals and other loans. Each loan category is further segmented into fixed and adjustable rate
interest terms.
The fair value of fixed rate loans is calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the
loan as well as estimates for prepayments. The estimate of maturity is based on Pinnacle’s historical
experience with repayments for each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions.
(c) Deposits
The fair value of demand deposits, NOW accounts, and savings deposits is the amount payable on
demand. The fair value of fixed maturity time deposits, certificates of deposit is estimated by discounting
scheduled cash flows through the estimated maturity using the rates currently offered for deposits or
borrowings of similar remaining maturities.
(f) Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and standby letters of credit are the
deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed
significant as of December 31, 2019 and 2018, and as such, the related fair values have not been
estimated.
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time Pinnacle’s entire holdings of a particular financial
instrument. Because no market exists for a significant portion of Pinnacle’s financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated funding needs and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are not considered financial assets
include deferred tax assets and premises and equipment and other real estate owned. In addition, the tax
42
ramifications related to the realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
(g) Fair Value Methodologies
The following is a description of valuation methodologies used for assets and liabilities recorded at fair
value.
Available-for-Sale Securities
Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is
based upon quoted prices, if available, and would in such case be included as a Level 1 asset. As of
December 31, 2019, Pinnacle currently carried no Level 1 securities. If quoted prices are not available,
valuations are obtained from readily available pricing sources from independent providers for market
transactions involving similar assets or liabilities. Pinnacle’s principal market for these securities is the
secondary institutional markets, and valuations are based on observable market data in those markets.
These would be classified as Level 2 assets. Pinnacle’s entire available-for-sale securities portfolio was
classified as Level 2 securities at December 31, 2019. As of December 31, 2019, Pinnacle carried no
Level 3 securities for which fair value would be determined using unobservable inputs.
Loans
Pinnacle does not record loans at fair value on a recurring basis. However, from time to time, a loan is
considered impaired and a specific allowance for loan losses is established for that loan. Loans for
which it is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with ASC Topic 360,
Impairment of a Loan. The fair value of impaired loans is estimated using one of several methods,
including collateral value, market value of a similar debt, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans at which fair value of the expected
repayments or collateral exceed the recorded investments in such loans. As of December 31, 2019,
substantially all of the impaired loans were evaluated based on the fair value of the collateral. In
accordance with Impairment of a Loan, impaired loans where an allowance is established based on the
fair value of the collateral require classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value, Pinnacle records the
impaired loan as a nonrecurring Level 2 asset. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there is no
observable market price, Pinnacle records the impaired loan as a nonrecurring Level 3 asset. For
substantially all of Pinnacle‘s impaired loans as of December 31, 2019 and December 31, 2018, the
valuation methodology utilized by Pinnacle was collateral based measurements such as a real estate
appraisal and the primary unobservable input was adjustments for differences between the comparable
real estate sales. The discount to reflect current market conditions and ultimately collectability ranged
from 0% to 25% for each of the respective periods.
Other Real Estate Owned
Other real estate owned is adjusted to fair value less estimated selling costs upon transfer of the loans to
foreclosed assets. Subsequently, other real estate owned is carried at the lower of carrying value or fair
value less estimated selling costs. Fair value is based upon independent market prices, appraised values
of the collateral or management’s estimation of the value of the collateral. When the fair value of the
collateral is based on observable market price or a current appraised value, Pinnacle records the
foreclosed asset as a nonrecurring Level 2 asset. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below the appraised value and
there is no observable market price, Pinnacle records the other real estate owned as a nonrecurring Level
3 asset. For substantially all of Pinnacle’s other real estate owned as of December 31, 2019 and
December 31, 2018, the valuation methodology utilized by Pinnacle was collateral based measurements
such as a real estate appraisal and the primary unobservable input was adjustments for differences
43
between the comparable real estate sales. The discount to reflect current market conditions ranged from
0% to 25% for each of the respective periods.
The following tables present information about certain assets and liabilities measured at fair value:
Fair Value Measurements on December 31, 2019
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
$43,194
$43,194
$1,258
$1,258
$666
$666
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
$-
$-
$-
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$43,194
$-
$-
$-
$1,258
$666
Fair Value Measurements on December 31, 2018
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
$48,049
$48,049
$1,186
$1,186
$627
$627
$-
$-
$-
$48,049
$-
$-
$-
$1,186
$627
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
44
The following table sets forth a summary of changes in the fair value of Pinnacle’s nonrecurring Level
3 assets for the year ended December 31, 2019:
Level 3 Assets
Year Ended December 31, 2019
Impaired
Loans
$
1,186
Other Real
Estate Owned
627
$
72
1,258
39
666
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2019.
The following table sets forth a summary of changes in the fair value of Pinnacle’s nonrecurring Level
3 assets for the year ended December 31, 2018:
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
Level 3 Assets
Year Ended December 31, 2018
Impaired
Loans
$
1,264
Other Real
Estate Owned
224
$
(78)
1,186
403
627
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2018.
45
(14) Parent Company Financial Information
Condensed financial information of Pinnacle (“Parent”) is presented below:
Condensed Balance Sheets
Assets
Cash due from subsidiary
Investment in subsidiary, at equity
Other assets
Total assets
Liabilities and stockholders' equity
Notes payable
Other liabilities
Total liabilities
Stockholders' equity
Common stock of $3 par value, authorized 3,000,000
shares; issued and outstanding 1,551,339 shares
in 2019 and 1,540,054 in 2018
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
$
$
$
$
$
Total stockholders' equity
$
Total liabilities and stockholders' equity $
December 31,
2019
2018
31
44,320
1,141
45,492
-
47
47
4,564
1,461
42,404
(2,984)
45,445
45,492
30
41,009
1,113
42,152
-
41
41
4,547
1,333
38,853
(2,622)
42,111
42,152
Condensed Statements of Income
Income:
Dividends from subsidiary
Equity in undistributed net income of subsidiary
Total Income
Expenses:
Other expenses
Income before income tax benefit
Applicable income tax benefit
Net income
Years ended December 31,
2019
2018
$
$
973
3,528
4,501
133
4,368
28
4,396
1,461
2,886
4,347
237
4,110
50
4,160
46
Condensed Statements of Cash Flows
Years ended December 31,
2019
2018
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
$
4,396
4,160
operating activities:
Equity in undistributed net income of subsidiary
Increase in other assets
Net cash provided by operating activities
Cash flows from financing activities
Cash dividends paid
Repayment of line of credit
Increase in other liabilities
Net cash used in financing activities
Net increase (decrease) in cash from subsidiary
Cash due from subsidiary, beginning of year
Cash due from subsidiary, end of year
$
(3,528)
(28)
840
(845)
-
6
(839)
1
30
31
(2,886)
(51)
1,223
(684)
(513)
-
(1,197)
26
4
30
(15) Stock-based Compensation
Pinnacle’s 2004 Incentive Stock Plan (the “2004 Plan”), pursuant to which Pinnacle’s Board of Directors may
grant stock options and other equity-based awards to officers and key employees, was approved by
shareholders on April 13, 2004 and became effective as of May 1, 2004. The 2004 Plan authorized grants of
up to 100,000 shares of Pinnacle’s authorized, but unissued common stock. All stock options were granted
with an exercise price equal to the stock’s fair market value at the date of the grant. As of December 31, 2014,
the 2004 Plan has expired and no additional awards may be granted under this plan.
Stock options granted under the 2004 Plan generally have 10-year terms, vest at the rate of 25% per year, and
become fully exercisable four years from the date of grant.
At December 31, 2019, options for 7,500 shares were exercisable at an exercise price of $9.00 per share and
options for 10,875 shares were exercisable at an exercise price of $15.70 per share under the 2004 Plan.
On April 8, 2014, shareholders approved the 2014 Incentive Stock Plan (the “2014 Plan”), pursuant to which
Pinnacle’s Board of Directors may grant stock options and other equity-based awards to officers and key
employees. The 2014 Plan authorizes grants of up to 150,000 shares of Pinnacle’s authorized, but unissued
common stock. All stock options are granted with an exercise price equal to the stock’s fair market value at
the date of the grant. As of December 31, 2019, there were 91,771 shares available for grant under the 2014
Plan.
On May 1, 2019, 7,700 shares of restricted stock were granted to employees pursuant to the 2014 Plan. On
May 1, 2018, 5,675 shares of restricted stock were granted to employees pursuant to the 2014 Plan. On May
1, 2017, 4,700 shares of restricted stock were granted to employees pursuant to the 2014 Plan. On May 1,
2016, 8,500 shares of restricted stock were granted to employees pursuant to the 2014 Plan. On May 1, 2015,
6,250 shares of restricted stock were granted to employees pursuant to the 2014 Plan. On May 1, 2014, 8,400
shares of restricted stock were granted to employees pursuant to the 2014 Plan. The restricted stock grants
will vest on the third anniversary of the grant date.
On January 9, 2019, 3,297 shares of restricted stock were granted to Pinnacle’s Directors in lieu of cash for
2018 director fees. On January 9, 2018, 3,831 shares of restricted stock were granted to Pinnacle’s Directors
in lieu of cash for 2017 director fees. On January 10, 2017, 3,998 shares of restricted stock were granted to
Pinnacle’s Directors in lieu of cash for 2016 director fees. On January 12, 2016, 3,818 shares of restricted
stock were granted to Pinnacle’s Directors in lieu of cash for 2015 director fees. On January 13, 2015, 3,310
shares of restricted stock were granted to Pinnacle’s Directors as payment in lieu of cash for 2014 director
fees.
47
At December 31, 2019, no options for shares were exercisable under the 2014 Plan.
Pinnacle expensed $0 in 2019 and 2018 in compensation expense as a direct result of the issuance of the 24,125
incentive stock options with tandem stock appreciation rights in previous years and recognized $0 in
compensation expense related to 4,375 unvested stock options in 2019 and $1 in 2018. For the 2004 Plan
stock options granted May 1, 2010, the fair value of $3.96 per share of each option grant is estimated on the
grant date using the Black-Scholes option-pricing model with the following weighted average assumptions
used: dividend yield of 2.065%, expected volatility of 45.61%, a risk-free interest rate of 4.63%, and expected
lives of nine years. For the 2004 Plan stock options granted February 11, 2014, the fair value of $5.45 per
share of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions used: dividend yield of 4.00%, expected volatility of 44.70%, a
risk-free interest rate of 2.69%, and expected lives of nine years.
Pinnacle expensed $177 in 2019 in compensation expense as a direct result of the granting of 11,000 shares of
restricted stock to employees in 2012, 10,000 shares of restricted stock to employees in 2013, 8,400 shares of
restricted stock to employees in 2014, 6,250 shares of restricted stock to employees in 2015, 8,500 shares of
restricted stock to employees in 2016, 4,700 shares of restricted stock to employees in 2017, 5,675 shares of
restricted stock to employees in 2018 and 0 shares of restricted stock to employees in 2019 and will expense
$156 in 2020, $104 in 2021 and $28 in 2022 on such restricted stock.
Stock option activity during the years ended December 31, 2019 and 2018 is as follows:
Number Weighted
Average
Exercise
Price
of
Shares
Balance as of December 31, 2017
Forfeited
Exercised
Granted
Balance as of December 31, 2018
Forfeited
Exercised
Granted
Balance as of December 31, 2019
32,500
0
8,375
0
24,125
0
5,750
0
18,375
$12.61
-
13.50
-
$12.30
-
10.17
-
$12.97
The following table summarizes information about stock options outstanding as of December 31, 2019:
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining Weighted-
Contractual
Life
(in years)
Average
Exercise
Price
Number
Outstanding
at 12/31/19
Number
Exercisable at
12/31/2019
Weighted-
Average
Exercise
Price
7,500
10,875
0.4
3.1
$
9.00
15.70
7,500
10,875
$
9.00
15.70
Exercise
Price
$
9.00
15.70
48
The following table summarizes information about stock options outstanding at December 31, 2018:
Options Outstanding
Weighted-
Average
Remaining Weighted-
Average
Contractual
Exercise
Life
Price
(in years)
Number
Outstanding
at 12/31/18
Options Exercisable
Number
Exercisable at
12/31/2018
Weighted-
Average
Exercise
Price
12,250
11,875
2.4
5.1
$
9.00
15.70
12,250
11,875
$
9.00
15.70
Exercise
Price
$
9.00
15.70
The aggregate intrinsic value of options outstanding was $346, of options exercisable was $346, and of options
unvested and expected to vest was $0 as of December 31, 2019. The aggregate intrinsic value of options
outstanding was $366, of options exercisable was $366, and of options unvested and expected to vest was $0
as of December 31, 2018. The total intrinsic value (market value on date of exercise less exercise price) of
options exercised was $130 for the year ended December 31, 2019 and $136 for the year ended December 31,
2018.
(16) Subsequent Events
On January 14, 2020, 3,347 shares of restricted stock were granted to Pinnacle’s Directors in lieu of cash for
2019 director fees.
On January 21, 2020, Pinnacle and Virginia Bank Bankshares, Inc. (“Virginia Bank”) jointly announced the
signing of a definitive agreement to combine in a strategic merger. The combined company would have over
$700,000 in total assets.
Under the terms of the agreement, Virginia Bank shareholders will have the opportunity to elect to receive
either $16.00 of cash (the “Cash Consideration”) or 0.5000 shares of Pinnacle common stock (the “Stock
Consideration”) for each share of Virginia Bank common stock held, subject to the limitation that 70% of the
shares will be exchanged for the Stock Consideration and 30% of the shares will be exchanged for the Cash
Consideration. After the merger of Virginia Bank into Pinnacle, Pinnacle shareholders will own 71% of the
combined company, and Virginia Bank shareholders will own approximately 29%.
Upon consummation of the transaction, Virginia Bank will merge into Pinnacle and Pinnacle will be the
surviving holding company. Following the holding company merger, Virginia Bank and Trust Company will
merge into First National Bank and First National Bank will be the surviving bank.
The transaction is expected to be completed in the third quarter of 2020, subject to approval of both companies’
shareholders, regulatory approvals and other customary closing conditions.
Pinnacle has evaluated all other subsequent events for potential recognition and/or disclosure in the December
31, 2019 consolidated financial statements through March 23, 2020, the date the consolidated financial
statements were available to be issued.
49
Management’s Report on Internal Control over Financial Reporting.
Pinnacle’s management is responsible for establishing and maintaining adequate internal control over financial
reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of Pinnacle’s internal control over financial reporting as of December 31,
2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on this
assessment, our management concluded that, as of December 31, 2019, Pinnacle’s internal control over financial
reporting was effective based on those criteria.
This annual report does not include an attestation report of Pinnacle's independent auditor regarding internal control
over financial reporting.
50
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Pinnacle Bankshares Inc. and Subsidiaries
Altavista, Virginia
We have audited the accompanying consolidated balance sheets of Pinnacle Bankshares, Inc. and Subsidiaries
(collectively, the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31,
2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and their cash flows for each of the years in the two-
year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Raleigh, North Carolina
March 23, 2020
We have served as the Company’s auditors since 2005.
51
Shareholder Information
PERFORMANCE GRAPH
The graph below compares total returns assuming reinvestment of dividends of Pinnacle Bankshares Corporation
Common Stock, the NASDAQ Market Index, and S&P 500 and the SNL U.S. Bank Index from December 31, 2014
to December 31, 2019. The graph assumes $100 invested on December 31, 2014 in Pinnacle Bankshares Corporation
Common Stock and in each of the indices.
Pinnacle Bankshares Corporation
Total Return Performance
Pinnacle Bankshares Corporation
NASDAQ Composite Index
S&P 500 Index
SNL U.S. Bank Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Index
Pinnacle Bankshares Corporation
NASDAQ Market Index
S&P 500
SNL U.S. Bank Index
12/31/14
100.00
100.00
100.00
100.00
12/31/15
112.80
106.96
101.38
101.71
12/31/16
168.51
116.45
113.51
128.51
12/31/17
174.54
150.96
138.29
151.75
12/31/18 12/31/19
194.09
200.49
173.86
170.79
164.86
146.67
132.23
126.12
52
Annual Meeting
Shareholder Information
The 2020 Annual Meeting of Shareholders, historically held in April, has been postponed in order to combine the
matters to be voted on at the annual meeting with proposals related to the previously announced strategic merger of
Virginia Bank Bankshares, Inc. into Pinnacle. Pinnacle currently anticipates convening an annual meeting of its
shareholders during the summer of 2020. Once the details are finalized, Pinnacle will provide additional information
related to the 2020 Annual Meeting of Shareholders.
Market for Common Equity and Related Stockholder Matters
Pinnacle’s Common Stock is quoted on the OTC Bulletin Board. The following table presents the high and low bid
prices per share of the Common Stock, as reported on the OTCQX marketplace, and dividend information of Pinnacle
for the quarters presented. The high and low bid prices of the Common Stock presented below reflect inter-dealer
prices and do not include retail markups, markdowns or commissions, and may not represent actual transactions.
High
2019
Low
Dividends
High
2018
Low
Dividends
First Quarter
$32.95
$27.45
$0.125
$34.50
$28.35
$0.11
Second Quarter
$35.00
$31.00
$0.14
$30.55
$27.50
$0.11
Third Quarter
$31.50
$30.00
$0.14
$33.00
$29.59
$0.11
Fourth Quarter
$32.00
$30.50
$0.14
$31.20
$26.60
$0.125
Each share of Common Stock is entitled to participate equally in dividends, which are payable as and when
determined by the Board of Directors after consideration of the earnings, general economic conditions, the financial
condition of the business and other factors as might be appropriate. Pinnacle’s ability to pay dividends is dependent
upon its receipt of dividends from its subsidiary. Prior approval from the Comptroller of the Currency is required if
the total of all dividends declared by a national bank, including the proposed dividend, in any calendar year will
exceed the sum of First National Bank’s net profits for that year and its retained net profits for the preceding two
calendar years, less any required transfers to surplus. This limitation has not had a material impact on First National
Bank’s ability to declare dividends during 2019 and 2018 and is not expected to have a material impact during 2020.
As of March 20, 2020, there were approximately 254 shareholders of record of Pinnacle’s Common Stock.
Requests for Information
Requests for information about Pinnacle should be directed to Bryan M. Lemley, Secretary, Treasurer and Chief
Financial Officer, P.O. Box 29, Altavista, Virginia 24517, telephone (434) 369-3000.
Shareholders seeking information regarding lost certificates and dividends should contact Computershare Inc. in
College Station, Texas, telephone (800) 368-5948. Please submit address changes in writing to:
Shareholder correspondence should be mailed to:
Computershare Shareholder Services
P.O. Box 30170
College Station, TX 77842-3170
Overnight correspondence should be mailed to:
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station TX 77845
622 Broad Street • Post Office Box 29 • Altavista, Virginia 24517 • (434) 369-3000
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