##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-QSB (Mark one) x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended March 31, 2004 o Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from ____________________ to _______________________ Commission file number 1-12707 Pinnacle Bancshares, Inc.   Delaware
    
    72-1370314(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1811 Second Avenue, Jasper, Alabama 35502-1388   (205) 221-4111   Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No o The number of shares outstanding of each of the issuers classes of
common equity, as of May 14, 2004: 1,568,678 shares of common stock. Transitional Small Business Disclosure Format (check one): Yes o No x 1




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CONTENTS PagePART I            FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Statements of Financial Condition at March 31, 2004
and December 31, 2003.
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three-months ended
March 31, 2004 and March 31, 2003.
    
    
    4Unaudited Condensed Consolidated Statements of Stockholders Equity for the three-months
ended March 31, 2004 and March 31, 2003.
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the three-months ended
March 31, 2004 and March 31, 2003.
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements.
    
    
    7Item 2. Managements Discussion and Analysis
    
    
    10Item 3. Controls and Procedures
    
    
    14Part II            OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    16Certifications
    
    
    17EX-31.1  SECTION 302 CERTIFICATIONS OF THE CEO&CFOEX-32.1  SECTION 906 CERTIFICATIONS OF THE CEO&CFO
 2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements PINNACLE BANCSHARES, INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 March 31,
    
    December 31,2004
    
    2003ASSETS:Cash and cash equivalents
    
    $
    3,817,320
    
    
    $
    3,519,377Interest-bearing deposits in other banks
    
    
    6,863,642
    
    
    
    256,294Securities available-for-sale
    
    
    77,388,510
    
    
    
    83,325,381FHLB stock
    
    
    557,500
    
    
    
    732,400Loans held for sale
    
    
    2,375,878
    
    
    
    1,428,190Loans receivable, net of allowance for loan losses
of $1,538, 276 and $1,467,128, respectively
    
    
    105,623,402
    
    
    
    105,477,419Real estate owned, net
    
    
    985,879
    
    
    
    1,023,026Premises and equipment
    
    
    5,831,515
    
    
    
    5,790,124Goodwill
    
    
    306,488
    
    
    
    306,488Bank owned life insurance
    
    
    4,585,616
    
    
    
    4,514,902Accrued interest receivable
    
    
    981,566
    
    
    
    1,362,440Other assets
    
    
    474,711
    
    
    
    838,150Total assets
    
    $
    209,792,027
    
    
    $
    208,574,191LIABILITIES AND STOCKHOLDERS EQUITY:Deposits
    
    $
    181,578,789
    
    
    $
    179,939,397Subordinated debt
    
    
    3,093,000
    
    
    
    3,093,000Borrowed funds
    
    
    2,580,000
    
    
    
    3,465,000Official checks outstanding
    
    
    1,281,607
    
    
    
    1,481,801Accrued interest payable
    
    
    429,001
    
    
    
    439,729Other liabilities
    
    
    660,053
    
    
    
    724,068Total liabilities
    
    
    189,622,450
    
    
    
    189,142,995STOCKHOLDERS EQUITY:Common stock, par value $.01 per share; 2,400,000 authorized; 1,811,780
and 1,800,813 issued at March 31, 2004 and December 31, 2003,
respectively; 1,563,678 and 1,562,611 outstanding at March 31, 2004 and
December 31, 2003, respectively.
    
    
    18,118
    
    
    
    18,008Additional paid-in capital
    
    
    8,330,872
    
    
    
    8,219,941Treasury shares, at cost (248,102 shares and 238,202 shares at
March 31, 2004 and December 31, 2003, respectively)
    
    
    (2,919,960
    )
    
    
    (2,743,245
    )Retained earnings
    
    
    14,770,588
    
    
    
    14,508,277Accumulated other comprehensive loss, net of tax
    
    
    (30,041
    )
    
    
    (571,785
    )Total stockholders equity
    
    
    20,169,577
    
    
    
    19,431,196Total liabilities and stockholders equity
    
    $
    209,792,027
    
    
    $
    208,574,191
 See accompanying notes to these condensed consolidated financial statements. 3




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PINNACLE BANCSHARES, INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2004
    
    2003INTEREST REVENUES:Interest on loans
    
    $
    1,856,306
    
    
    $
    2,205,045Interest and dividends on securities
    
    
    750,377
    
    
    
    708,130Other interest
    
    
    10,646
    
    
    
    10,2552,617,329
    
    
    
    2,923,430INTEREST EXPENSE:Interest on deposits
    
    
    777,890
    
    
    
    1,063,370Interest on borrowed funds
    
    
    37,065
    
    
    
    49,682Interest on subordinated debentures
    
    
    41,648
    
    
    
    0856,603
    
    
    
    1,113,052NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES
    
    
    1,760,726
    
    
    
    1,810,378PROVISION FOR LOAN LOSSES
    
    
    147,000
    
    
    
    267,500NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    1,613,726
    
    
    
    1,542,878NON-INTEREST INCOME:Fees and service charges on deposit accounts
    
    
    228,944
    
    
    
    211,037Service fee income, net
    
    
    40,893
    
    
    
    39,520Fees and service charges on loans
    
    
    53,378
    
    
    
    49,526Bank owned life insurance
    
    
    70,714
    
    
    
    71,405Net gain (loss) on sale or write-down of:Loans held for sale
    
    
    135,555
    
    
    
    247,743Securities available-for-sale
    
    
    (78,304
    )
    
    
    285,186Real estate owned and other assets
    
    
    (9,835
    )
    
    
    (5,806
    )441,345
    
    
    
    898,611NON-INTEREST EXPENSE:Compensation and benefits
    
    
    856,445
    
    
    
    795,466Occupancy
    
    
    255,974
    
    
    
    253,200Marketing and professional
    
    
    58,078
    
    
    
    53,126Other
    
    
    256,956
    
    
    
    261,6271,427,453
    
    
    
    1,363,419INCOME BEFORE INCOME TAX EXPENSE
    
    
    627,618
    
    
    
    1,078,070INCOME TAX EXPENSE
    
    
    208,939
    
    
    
    374,393NET INCOME
    
    $
    418,679
    
    
    $
    703,677Basic earnings per share
    
    $
    0.27
    
    
    $
    0.43Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.42Cash dividends per share
    
    $
    0.10
    
    
    $
    0.10Weighted average basic shares outstanding
    
    
    1,565,929
    
    
    
    1,640,773Weighted average diluted shares outstanding
    
    
    1,612,176
    
    
    
    1,659,669
 See accompanying notes to condensed consolidated financial statements. 4




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PINNACLE BANCSHARES, INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003 AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Other
    
    TotalPaid-in
    
    Treasury
    
    Retained
    
    Comprehensive
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Stock
    
    Earnings
    
    (Loss) Income
    
    EquityBALANCE, December 31, 2002
    
    
    1,792,086
    
    
    $
    17,921
    
    
    $
    8,131,746
    
    
    $
    (1,497,777
    )
    
    $
    12,716,579
    
    
    $
    587,009
    
    
    $
    19,955,478Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    703,677
    
    
    
    0
    
    
    
    703,677Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (215,391
    )
    
    
    (215,391
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488,286Repurchase of common stock (54,000 shares at cost)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (625,440
    )
    
    
    0
    
    
    
    0
    
    
    
    (625,440
    )Cash dividends declared ($.10 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (165,268
    )
    
    
    0
    
    
    
    (165,268
    )BALANCE, March 31, 2003
    
    
    1,792,086
    
    
    $
    17,921
    
    
    $
    8,131,746
    
    
    $
    (2,123,217
    )
    
    $
    13,254,988
    
    
    $
    371,618
    
    
    $
    19,653,056BALANCE, December 31, 2003
    
    
    1,800,813
    
    
    $
    18,008
    
    
    $
    8,219,941
    
    
    $
    (2,743,245
    )
    
    $
    14,508,277
    
    
    $
    (571,785
    )
    
    $
    19,431,196Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    418,679
    
    
    
    0
    
    
    
    418,679Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    541,744
    
    
    
    541,744Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960,423Exercise of stock options
    
    
    10,967
    
    
    
    110
    
    
    
    110,931
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    111,041Repurchase of common stock (9,900 shares at cost)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (176,715
    )
    
    
    0
    
    
    
    0
    
    
    
    (176,715
    )Cash dividends declared ($.10 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (156,368
    )
    
    
    0
    
    
    
    (156,368
    )BALANCE, March 31, 2004
    
    
    1,811,780
    
    
    $
    18,118
    
    
    $
    8,330,872
    
    
    $
    (2,919,960
    )
    
    $
    14,770,588
    
    
    $
    (30,041
    )
    
    $
    20,169,577
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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PINNACLE BANCSHARES, INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    418,679
    
    
    $
    703,677Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    120,863
    
    
    
    114,398Provision for loan losses
    
    
    147,000
    
    
    
    267,500Amortization, net
    
    
    (290,424
    )
    
    
    (45,333
    )Increase in cash surrender value of Bank owned life insurance
    
    
    (70,714
    )
    
    
    (71,405
    )Net gain on sale or write down of:Loans held for sale
    
    
    (135,555
    )
    
    
    (247,743
    )Securities available-for-sale
    
    
    78,304
    
    
    
    (285,186
    )Real estate owned and other assets
    
    
    9,835
    
    
    
    5,806Proceeds from sale of loans
    
    
    8,036,329
    
    
    
    19,032,551Loans originated for sale
    
    
    (8,848,462
    )
    
    
    (18,459,318
    )Decrease (increase) in accrued interest receivable
    
    
    380,874
    
    
    
    (5,392
    )Decrease in other assets
    
    
    363,939
    
    
    
    60,340Decrease in accrued interest payable
    
    
    (10,728
    )
    
    
    (9,615
    )Decrease in other liabilities
    
    
    (396,050
    )
    
    
    (262,767
    )Net cash (used in) provided by operating activities
    
    
    (196,110
    )
    
    
    797,513CASH FLOWS FROM INVESTING ACTIVITIES:Net loan (originations) repayments
    
    
    (481,094
    )
    
    
    602,934Net change in interest bearing deposits in other banks
    
    
    (6,607,348
    )
    
    
    (773,363
    )Purchase of securities available-for-sale
    
    
    (39,670,854
    )
    
    
    (43,000,000
    )Proceeds from the sale of securities available-for-sale
    
    
    34,905,702
    
    
    
    20,285,186Proceeds from maturing, called, and payments received on securities available-for-sale
    
    
    11,713,167
    
    
    
    12,977,501Proceeds from sale of FHLB stock
    
    
    174,900
    
    
    
    0Purchase of premises and equipment
    
    
    (162,254
    )
    
    
    (55,488
    )Proceeds from sales of real estate owned
    
    
    289,678
    
    
    
    84,891Net cash provided by (used in) investing activities
    
    
    161,897
    
    
    
    (9,878,339
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in passbook, NOW and money market deposit accounts
    
    
    1,021,266
    
    
    
    726,054Proceeds from sales of time deposits
    
    
    7,073,504
    
    
    
    8,328,779Payments on maturing time deposits
    
    
    (6,455,378
    )
    
    
    (6,809,059
    )(Decrease) increase in borrowed funds
    
    
    (885,000
    )
    
    
    7,825,000Decrease in official checks outstanding
    
    
    (200,194
    )
    
    
    (208,850
    )Proceeds from the exercise of stock options
    
    
    111,041
    
    
    
    0Repurchase of common stock
    
    
    (176,715
    )
    
    
    (625,440
    )Payments of cash dividends
    
    
    (156,368
    )
    
    
    (165,268
    )Net cash provided by financing activities
    
    
    332,156
    
    
    
    9,071,216NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    297,943
    
    
    
    (9,610
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    3,519,377
    
    
    
    3,862,956CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,817,320
    
    
    $
    3,853,346SUPPLEMENTAL DISCLOSURES:Cash payments for interest on deposits and borrowed funds
    
    $
    867,331
    
    
    $
    1,122,667Real estate acquired through foreclosure
    
    
    262,366
    
    
    
    99,444
 See accompanying notes to unaudited condensed consolidated financial statements. 6




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PINNACLE BANCSHARES, INC. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements
include the accounts of Pinnacle Bancshares, Inc. (the Company) and
Pinnacle Bank (the Bank), the Companys wholly owned subsidiary. All
significant intercompany transactions and accounts have been eliminated in
consolidation. In the opinion of management, all adjustments (none of which are other than
normal recurring accruals) necessary for a fair presentation of the results
of such interim periods have been included. The results of operations for the
three month period ended March 31, 2004, are not necessarily indicative of
the results of operations which may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements and the notes thereto
included in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2003. The accounting policies followed by the Company are set
forth in the summary of Significant Accounting Policies in the Companys
audited consolidated financial statements. 7




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2. EARNINGS PER SHARE: The following table represents the earnings per share calculations for the
three and three-month periods ended March 31, 2004 and 2003: PerShareFor The Three Months Ended
    
    Net Income
    
    Shares
    
    AmountMarch 31, 2004Basic earnings per share
    
    $
    418,679
    
    
    
    1,565,929
    
    
    $
    0.27Dilutive securities
    
    
    
    
    
    
    46,247Diluted earnings per share
    
    $
    418,679
    
    
    
    1,612,176
    
    
    $
    0.26
 PerShareFor The Three Months Ended
    
    Net Income
    
    Shares
    
    AmountMarch 31, 2003Basic earnings per share
    
    $
    703,677
    
    
    
    1,640,773
    
    
    $
    0.43Dilutive securities
    
    
    
    
    
    
    18,896Diluted earnings per share
    
    $
    703,677
    
    
    
    1,659,669
    
    
    $
    0.42
 3. STOCK BASED COMPENSATION: In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company
has elected to recognize compensation cost under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly
does not recognize compensation cost due to the fact that all options granted
were priced at the fair market value of the underlying stock on the date of
grant. Had compensation cost been determined, consistent with SFAS No. 123, the
Companys net income would have reflected the following pro forma amounts: Three
    
    ThreeMonths
    
    MonthsEnded
    
    EndedMarch 31,
    
    March 31,2004
    
    2003Net Incomeas reported
    
    $
    418,679
    
    
    $
    703,677Stock-based compensation expense
    
    
    0
    
    
    
    0Net Incomepro forma
    
    $
    418,679
    
    
    $
    703,677Basic earnings per shareas reported
    
    $
    0.27
    
    
    $
    0.43Basic earnings per sharepro forma
    
    
    0.27
    
    
    
    0.43Diluted earnings per shareas reported
    
    $
    0.26
    
    
    $
    0.42Diluted earnings per sharepro forma
    
    
    0.26
    
    
    
    0.42
 8




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4. RECENT ACCOUNTING PRONOUNCEMENTS: In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities(FIN 46R),which addresses
how a business enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidated of Variable Interest Entities (FIN 46),which was issued January
2003. Pinnacle Bancshares, Inc. will be required to apply FIN 46R to all
entities subject to this Interpretation no later than the end of the first
reporting period that end after December 15, 2004. This interpretation must be
applied to those entities that are considered to be special-purpose entities no
later than as of the end of the first reporting period that ends after December
15, 2003. For any variable interest entities (VIEs) that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
non-controlling interest of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the
balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and non-controlling interest of the VIE. Pinnacle Bancshares, Inc. has applied FIN 46R in accounting for Pinnacle
Capital Trust I (Trust), established on December 22, 2003. Accordingly, in
the accompanying balance sheet the Company has included in other assets, our
investment in the Trust of $93,000 and also included, in subordinated debt, the
balance owed the Trust of $3,093,000. Except as related to the Trust, the
application of this Interpretation is not expected to have a material effect on
Pinnacle Bancshares, Inc.s consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivatives
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
adoption of this Statement did not have a material impact on the Companys
consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. On November 7, 2003, the FASB deferred
indefinitely the classification and measurement provisions related to mandatory
redeemable non controlling interest. The adoption of this Statement and the
amendment did not have a material impact on the Companys consolidated
financial position or results of operations. In March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 105, Application of Accounting Principles to Loan
Commitments, which summarizes the views of the staff regarding the application
of generally accepted accounting principles to loan commitments accounted for
as derivative instruments. The SAB requires that the fair value measurement of
a loan commitment that is accounted for as a derivative includes only
differences between the guaranteed interest rate in the loan commitment and a
market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. This SAB is effective for loan
commitments entered into after March 31, 2004. The Company adopted SAB 105 on
April 1, 2004, and the effect was not material. 9




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Item 2. Managements Discussion and Analysis or Plan of Operation Forward-Looking Statements:This Quarterly Report on Form 10-QSB contains
forward-looking statements. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission or otherwise. The words believe, expect,
seek and intend, and similar expressions identify forward-looking
statements, which speak only as of the date the statement is made. Such
forward-looking statements are within the meaning of that term in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but are not
limited to, projections of income or loss, expenditures, acquisitions, plans
for future operations, financing needs or plans relating to services of the
Company, as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risk and uncertainties, some of which
cannot be predicted or qualified. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to
publicly release the results of revisions, which may be made to forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. Critical Accounting Policies:The accounting principles followed by the
Company and the methods of applying these principles conform with United States
generally accepted accounting principles and with general practices within the
banking industry. The Companys critical accounting policies relate to the
allowance for loan losses and real estate owned. These policies require the use
of estimates, assumptions and judgments and are based on information available
as of the date of the financial statements. Accordingly, as this information
changes, the financial statements could reflect different estimates,
assumptions and judgments. Certain policies inherently have a greater result on
the use of estimates, assumptions and judgments and as such have a greater
possibility of producing reliance that could be materially different than
originally reported. These policies require the use of subjective and complex
estimates, assumptions and judgments that are important to the portrayal of the
Companys financial condition and results. The allowance for loan losses is maintained at a level which management
considers to be adequate to absorb losses inherent in the loan portfolio.
Managements estimation of the amount of the allowance is based on a continuing
evaluation of the loan portfolio and includes such factors as economic
conditions, analysis of individual loans, overall portfolio characteristics,
delinquencies and the balance of any impaired loans (generally considered to be
nonperforming loans, excluding residential mortgages and other homogeneous
loans). Management reviews the adequacy of the allowance for loan losses on a
continuous basis by assessing the quality of the loan portfolio and adjusting
the allowance when appropriate. Managements evaluation of certain
specifically identified loans includes a review of the financial condition and
capacity of the borrower, the value of the collateral, current economic trends,
historical losses, workout and collection arrangements, and possible
concentrations of credit. The loan review process also includes a collective
evaluation of credit quality within the mortgage and installment loan
portfolios. In establishing the allowance, loss percentages are applied to
groups of loans with similar risk characteristics. These loss percentages are
determined by historical experience, portfolio mix, regulatory influence, and
other economic factors. Each quarter this review is quantified in a report to
management, which uses it to determine whether an appropriate allowance is
being maintained. This report is then submitted to the Board of Directors and
to the appropriate Board committee quarterly. Changes in the allowance can result from changes in economic events, changes in
the creditworthiness of the borrowers, or changes in collateral values. The
effect of these changes is reflected when known. Though management believes
the allowance for loan losses to be adequate as of March 31, 2004, ultimate
losses may vary from estimations. Real estate owned acquired through foreclosure is carried at the lower of cost
or fair value less expected selling costs. Any excess of the recorded
investment over fair value, less estimated costs of disposition of the
property, is charged to the allowance for loan losses at the time of
foreclosure. Subsequent to foreclosure, real estate owned is evaluated on an
individual basis for changes in fair value. Declines in fair value of the
asset, less costs of disposition below its carrying amount, require an increase
in the valuation allowance account. Future increases in fair value of the
asset, less cost of disposition, may cause a reduction in the valuation
allowance account, but not below zero. Increases or decreases in the 10




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valuation allowance account are charged or credited to income. Costs relating
to the development and improvement of property are capitalized, whereas costs
relating to the holding of property are expensed. The recognition of gains and losses on the sale of real estate owned is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized
under an alternative method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate. Comparison of Financial Condition as of December 31, 2003 and March 31, 2003.
Total assets were $209.8 million at March 31, 2004, compared to $208.6 million
at December 31, 2003. Net loans receivable were $105.6 million at March 31,
2004, compared to $105.5 million at December 31, 2003. Total securities
available-for-sale were $77.4 million at March 31, 2004, compared to $83.3
million at December 31, 2003. At March 31, 2004, the investment portfolio of $77.4 million consisted
primarily of U. S. agency securities and mortgage-backed securities. The entire
investment portfolio is classified as available-for-sale, which is carried at
fair value with the unrealized gains/losses reflected directly in stockholders
equity, net of taxes. During the three months ended March 31, 2004, the Bank
had $11.7 million in agency securities called. Also during the nine month
period ended March 31, 2004, the Bank sold $34.9 million in agency securities.
Gross losses of $78,000 were realized on these sales. The proceeds from these
calls, and sales of securities available-for-sale, combined with the proceeds
from loan principal repayments and Federal Home Loan Bank (FHLB) of Atlanta
advances, were used by the Bank to purchase $39.7 million in agency securities
with an average yield of 4.15%. Total deposits increased approximately $1.6 million, from $180.0 million at
December 31, 2003 to $181.6 million at March 31, 2004. This increase was
primarily due to an increase in passbook, NOW and money market deposit accounts
of $1.0 million and an increase in time deposit of $600,000. On December 22, 2003, the Company established Pinnacle Capital Trust I, (the
Trust) a wholly-owned statutory business trust. The Company is the sole
sponsor of the trust and owns $93,000 of the Trusts common securities. The
Trust was created for the exclusive purpose of issuing 30-year capital trust
preferred securities (Trust Preferred Securities) in the aggregate amount of
$3,000,000 and using proceeds from the issuance of the common and preferred
securities to purchase $3,093,000 of junior subordinated debentures
(Subordinated Debentures) issued by the Company. The sole assets of the Trust
are the Subordinated Debentures. The Companys $93,000 investment in the Trust
is included in other assets in the accompanying consolidated balance sheet at
March 31, 2004 and the $3,093,000 obligation of Pinnacle Bancshares, Inc. is
included in subordinated debt. During the three-months ended March 31, 2004, the Bank periodically borrowed
funds on a short-term basis from the FHLB of Atlanta. During the three-months
ended March 31, 2004, the Bank used proceeds from borrowed funds to purchase
agency securities as part of managing the Banks investment portfolio. The
maximum amount outstanding during the three-months ended March 31, 2004 was
$8.5 million. The average amount outstanding during the three-months ended
March 31, 2004 was $358,000. Results of Operations-Comparison of the Three-Months Ended March 31, 2003 and
2003.For the three-months ended March 31, 2004 net income was $419,000,
compared with net income of $704,000 for the three-months ended March 31, 2003.
A significant portion of the decrease in net income was related to losses of
$78,000 on securities sales in the three months ended March 31, 2004, compared
to gains of $285,000 on securities sales in the first quarter of 2003. In each
of these periods the Company engaged in securities transactions in response to
current and anticipated economic conditions. In addition, gains on sales of
loans held for sale decreased $112,000 in the first quarter of 2004 primarily
due to reduced refinancing resulting from increases in interest rates. Net
interest income after the provision for loan losses for the three-months ended
March 31, 2004, was $1,614,000, compared with $1,543,000 in the same period
last year. The net interest margin was 3.70% for the three-months ended March 31, 2004,
compared to 3.60% for the three-months ended March 31, 2003, respectively.As
market rates continued to stabilize at lower levels during the three-month
period ended March 31, 2004, the Companys cost of funds decreased more rapidly
than rates on loans and investments, contributing to the improved margin. The
yield on interest-earning assets decreased from approximately 5.82% in the
three-month periods ended March 31, 2003, to approximately 5.46% in the
three-month periods ended at March 31, 2004. These decreases were due to
decreases in market interest rates as well as a decrease in the average balance
of interest earning 11




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assets. The cost of funds decreased from approximately 2.3% at March 31, 2003,
to approximately 1.8% at March 31, 2004, due to decreases in market deposit
rates. Provisions for loan losses are made to maintain the allowance for loan losses
at adequate levels. The allowance for loan losses reflects managements
estimates, which take into account historical experience, the amount of
non-performing loans, collateral values and general economic conditions. The
provision for loan losses was $147,000 for the three-months ended March 31,
2004, compared to $267,500 for the three months ended March 31, 2003. The
decrease in the provision for loan losses for the three-month periods ended
March 31, 2004, as compared to the prior year period, was primarily the result
of a decrease in charge-offs as well as a decrease in non-accrual loans. It is
managements opinion that the allowance for loan losses at March 31, 2004 was
adequate to absorb losses related to the portfolio of loans. Management will
continue to analyze the Banks exposure to losses. Although management believes
that it uses the best information available to make such determinations, future
adjustments to allowances may be necessary, and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in making the initial determinations. Non-interest income, which includes fees and service charges, income from real
estate operations, the sale of loans, bank owned life insurance and other
income, decreased $457,000 in the three-month period ended March 31, 2004, as
compared to the three-month period ended March 31, 2003. The decrease was due
primarily to a decrease in the gain on sale of securities available-for-sale
of $363,000,a decrease in net gain on sale of loans held for sale of
$112,000. This decrease was offset by an increase in fees and service charges
on deposit accounts of $18,000. Non-interest expense increased $64,000 in the three-month period ended March
31, 2004, as compared to the corresponding prior year period. This was
primarily a result of an increase in compensation and benefits of $61,000. Asset Liability Management: The modeling techniques used by the Company
simulate net interest income and impact on fair values under various rate
scenarios. Important elements of these techniques include the mix of floating
versus fixed rate assets and liabilities, and the scheduled, as well as
expected, re-pricing and maturing volumes and rates of the existing balance
sheet. Under a scenario simulating a hypothetical 100, 200 and 300 basis point
rate increase applied to all fixed rate interest earning assets and
interest-bearing liabilities, the Company would expect a net loss in fair value
of the underlying instruments of approximately $517,000, $1,109,000, and
$1,761,000, respectively. Under a scenario simulating a hypothetical 100, 200
and 300 basis point rate decrease applied to all fixed rate interest earning
assets and interest-bearing liabilities, the Company would expect a net loss in
fair value of the underlying instruments of approximately $467,000, $1,447,000,
and $2,431,000, respectively. This hypothetical is not a precise indicator of
future events. Instead, it is a reasonable estimate of the results anticipated
if the assumptions used in the modeling techniques were to occur. Changes in interest rates can affect loans and other interest-earning assets,
including the Banks investment portfolio. A significant change in interest
rates could have a negative impact on the Companys operating income and
portfolio market value. In 2002, the Company announced a stock repurchase program to acquire up to
178,000 shares of common stock. As of December 31, 2002, the Company had
repurchased 122,700 shares at an average price of $11.16 per share. During
fiscal year 2003, the Company completed this stock repurchase plan by
repurchasing 54,000 shares at an average price of $11.58 per share. On April
25, 2003, the Company announced a stock repurchase program to additionally
acquire up to 80,000 shares of common stock. As of March 31, 2004 the Company
had repurchased 54,700 shares at an average price of $14.57 per share. 12




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The following table details purchases under the Companys stock repurchase
program during the three months ended March 31, 2004. Total Number of
    
    Maximum NumberTotal Number
    
    
    
    
    
    Shares Purchased
    
    of Shares that Mayof Shares
    
    Average Price
    
    As Part of Publicly
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    Paid per Share
    
    Announced Programs
    
    Under the ProgramsJanuary 1-31, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0February 1-29, 2004
    
    
    9,900
    
    
    $
    17.85
    
    
    
    9,900
    
    
    
    25,300March 1-31, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    9,900
    
    
    $
    17.85
    
    
    
    9,900
    
    
    
    25,300
 Capital Resources:Historically, funds provided by operations, mortgage loan
principal repayments, deposits and short-term borrowings have been the Banks
principal sources of funds. In addition, the Bank has the ability to obtain
funds through the sale of mortgage loans, through borrowings from the FHLB of
Atlanta and other borrowing sources. At March 31, 2004, the Banks total loan
commitments, including construction loans in process, unused lines of credit
and letter of credits, were approximately $25.1 million. Management believes
that the Banks liquidity and other sources of funds are sufficient to fund all
commitments outstanding and other cash needs. The Company and the Bank are
required to maintain certain levels of regulatory capital. At March 31, 2004,
the Company and the Bank exceeded all regulatory capital requirements. As of March 31, 2004, the $3.0 million of Trust Preferred Securities qualifies
as Tier I Capital under current regulators definitions. If these Trust
Preferred Securities had not been included in the consolidated capital
calculations, the Company would have still been classified as well capitalized. 13




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##### Table of Contents



Item 3. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
March 31, 2004. Based upon that evaluation, the Companys Principal Executive
Officer and Principal Financial Officer concluded that the Companys disclosure
controls and procedures, as designed and implemented, are effective in alerting
him in a timely manner to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings. In addition, the Company reviewed its internal controls under the supervision
of the audit committee. There has been no change in the Companys internal
control over financial reporting during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. Disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports filed by the Company under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to the Companys management, including the
Principal Executive Officer and Principal Financial Officer to allow timely
decisions regarding required disclosures. Disclosure controls include internal
controls that are designed to provide reasonable assurance that transactions
are properly authorized, assets are safeguarded against unauthorized or
improper use and transactions are properly recorded and reported. Any control system, no matter how well conceived and operated, can provide only
reasonable assurance that its objectives are achieved. The design of a control
system inherently has limitations, including the controls cost relative to
their benefits. Additionally, controls can be circumvented. No cost-effective
control system can provide absolute assurance that all control issues and
instances of fraud, if any, will be detected. 14




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##### Table of Contents



PART II  OTHER INFORMATION ITEM 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities Information regarding the Companys purchases of equity securities
is described on pages 12 and 13 under Item 2. Managements Discussion and
Analysis or Plan of Operation. 
 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1  Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Exhibit 32.1  Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (b) Reports on Form 8-K Current Report on Form 8-K dated February 27,2004, furnishing under
Item 12 announcement of the Companys results of operations for the
fourth quarter and fiscal year ended December 31, 2003. 15




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. PINNACLE BANCSHARES, INCDATE: May  14, 2004
    BY: /s/ Robert B. Nolen Jr.Robert B. Nolen, Jr.President and Chief
Executive Officer
(Principal Executive Officer and
Principal Financial Officer) /s/ Marie GuthrieMarie GuthrieTreasurer
(Principal Accounting Officer) 16