PINNACLE BANKSHARES CORP

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 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.

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, 2020 and 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, 2020, 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.  

Dr. Payne is President and founding dentist of Danville Dental Associates, PC, a multi-doctor dental practice serving the Danville-Pittsylvania County community since 1976.  He graduated from the College of William and Mary with a Bachelor of Science degree in Biology and from Virginia Commonwealth University’s School of Dentistry with a Doctor of Dental Surgery degree. Dr. Payne has served on the Board of Delta Dental of Virginia for 25 years, and on the Dental Policy and Marketing Committees and as Chairman of the Executive Compensation Committee. He served on the Pittsylvania County School Board for 12 years and as Chairman of the Building Committee, whose responsibility was the planning for two new elementary schools. He also served on the boards of directors of Virginia Bank Bankshares, Inc. and Virginia Bank for 25 years and was Chairman of the Loan Committee. He is a life-long member of Trinity United Methodist Church where he presently serves as Chairman of the Finance Committee.  Dr. Payne is also a life-time member of the American and Virginia Dental Associations as well as the Piedmont Dental Society, the Danville Regional Dental Society, the American College of Dentists and the International College of Dentists.  He was named a Fellow in the Piedmont Dental Society and the American College of Dentists. Through his professional background and public service Dr. Payne brings a wealth of experience in business management and human resources to Pinnacle, as well as knowledge of the Danville-Pittsylvania County community of which he is a well-respected member.

Change in Control Agreements. Pinnacle has entered into agreements with Messrs. Aubrey H. Hall, III, Lemley and Burnett that provide for severance payments and certain other benefits if their employment terminates under specified conditions in anticipation of or after a “change in control” (as defined therein) of Pinnacle. The agreements for Messrs. Hall and Lemley were amended and replaced effective as of January 1, 2017. The agreement for Mr. Burnett was effective as of July 1, 2017. Each of these agreements has an initial term of three years from its effective date and automatically renews each year for a rolling three-year term, unless terminated or not renewed under its terms. Payments and benefits will be paid under each agreement if, within two years following a change in control, (i) the executive’s employment is terminated involuntarily without “cause” (as defined therein) and not as a result of death or disability, or (ii) the executive terminates his employment voluntarily for “good reason” (as defined therein). Payments and benefits will also be paid if the executive’s employment is terminated prior to a change in control if the executive can reasonably demonstrate that the termination was at the request of a third party who has taken steps reasonably calculated to effect a change in control or was in connection with, or in anticipation of, a change in control. These agreements also contain customary non-disclosure, non-solicitation, non-recruitment and non-hiring provisions that apply during the executive’s employment and generally continue for five years (non-disclosure) or two years (non-solicitation, non-recruitment, non-hiring) after