##### 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 September 30, 2003

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

For the transition period from  to

Commission file number 1-12707

Pinnacle Bancshares, Inc.




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


Delaware
    
    72-1370314(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)


1811 Second Avenue, Jasper, Alabama 35502-1388




(Address of Principal Executive Offices)


(205) 221-4111




(Issuers Telephone Number, Including Area Code)


Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes
    
    X
    
    No


The number of shares outstanding of each of the issuers classes of
common equity, as of October 14, 2003: 1,558,684 shares of common stock.

Transitional Small Business Disclosure Format (check one):

Yes
    
    
    
    No
    
    X


1



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TABLE OF CONTENTS



|                                                   |                                              |                                                                     |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                    
|                                                   | Item 1. Financial Statements                
|                                                   |                                              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 
|                                                   |                                              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                                   |                                              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|                                                   |                                              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                                                   |                                              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                                                   | Item 2. Managements Discussion and Analysis
|                                                   | Item 3. Controls and Procedures             
|PART II  OTHER INFORMATION                       
|                                                   | ITEM 6. Exhibits and Reports on Form 8-K    
|SIGNATURES                                        
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO & CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO



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CONTENTS

PART I FINANCIAL INFORMATION
    
    PageItem 1. Financial StatementsUnaudited Condensed Consolidated Statements of Financial Condition at September 30, 2003
and December 31, 2002.
    
    3Unaudited Condensed Consolidated Statements of Operations for the three and nine-months
ended September 30, 2003 and 2002.
    
    4Unaudited Condensed Consolidated Statements of Stockholders Equity for the nine-months
ended September 30, 2003 and September 30, 2002.
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the nine-months ended
September 30, 2003 and September 30, 2002
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    7Item 2. Managements Discussion and Analysis
    
    10Item 3. Controls and Procedures
    
    13Part II OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    14Signatures
    
    15Certifications
    
    16


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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 30,
    
    December 31,2003
    
    2002ASSETS:Cash and cash equivalents
    
    $
    3,699,858
    
    
    $
    3,862,956Interest-bearing deposits in other banks
    
    
    1,539,908
    
    
    
    357,467Securities available-for-sale
    
    
    78,065,544
    
    
    
    75,301,227FHLB stock
    
    
    732,400
    
    
    
    975,000Loans held for sale
    
    
    3,091,524
    
    
    
    4,968,715Loans receivable, net of allowance for loan losses
of $1,529,382 and $1,322,380, respectively
    
    
    107,416,866
    
    
    
    119,375,036Real estate owned, net
    
    
    990,959
    
    
    
    1,608,710Premises and equipment, net
    
    
    5,682,382
    
    
    
    5,654,823Goodwill
    
    
    306,488
    
    
    
    306,488Bank owned life insurance
    
    
    4,443,496
    
    
    
    4,229,280Accrued interest receivable
    
    
    1,150,340
    
    
    
    1,318,060Other assets
    
    
    534,359
    
    
    
    332,439Total assets
    
    $
    207,654,124
    
    
    $
    218,290,201LIABILITIES AND STOCKHOLDERS EQUITY:LIABILITIES:Deposits
    
    $
    181,968,059
    
    
    $
    188,954,730Borrowed funds
    
    
    4,265,000
    
    
    
    5,940,000Official checks outstanding
    
    
    849,113
    
    
    
    1,504,293Accrued interest payable
    
    
    532,072
    
    
    
    614,320Other liabilities
    
    
    781,413
    
    
    
    1,321,380188,395,657
    
    
    
    198,334,723STOCKHOLDERS EQUITY:Preferred stock, par value $.01 per share, no shares issued,
100,000 authorized
    
    
    0
    
    
    
    0Common stock, par value $.01 per share, 2,400,000
authorized; 1,792,086 issued, 1,565,684 and 1,652,684
outstanding, at September 30, 2003 and December 31, 2002,
respectively
    
    
    17,921
    
    
    
    17,921Additional paid-in capital
    
    
    8,131,746
    
    
    
    8,131,746Treasury stock, at cost (226,402 and 139,402 shares at
September 30, 2003 and December 31, 2002)
    
    
    (2,568,716
    )
    
    
    (1,497,777
    )Retained earnings
    
    
    14,108,384
    
    
    
    12,716,579Accumulated other comprehensive (loss) income, net of tax
    
    
    (430,868
    )
    
    
    587,009Total stockholders equity
    
    
    19,258,467
    
    
    
    19,955,478Total liabilities and stockholders equity
    
    $
    207,654,124
    
    
    $
    218,290,201


See accompanying notes to unaudited condensed consolidated financial statements.

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PINNACLE BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002INTEREST REVENUES:Interest on loans
    
    $
    2,025,875
    
    
    $
    2,347,648
    
    
    $
    6,376,902
    
    
    $
    7,245,780Interest and dividends on securities
    
    
    729,002
    
    
    
    973,130
    
    
    
    2,195,738
    
    
    
    2,676,805Other interest
    
    
    3,726
    
    
    
    8,172
    
    
    
    19,362
    
    
    
    64,9402,758,603
    
    
    
    3,328,950
    
    
    
    8,592,002
    
    
    
    9,987,525INTEREST EXPENSE:Interest on deposits
    
    
    872,850
    
    
    
    1,417,973
    
    
    
    2,918,569
    
    
    
    4,559,821Interest on borrowed funds
    
    
    43,399
    
    
    
    52,691
    
    
    
    142,687
    
    
    
    138,637916,249
    
    
    
    1,470,664
    
    
    
    3,061,256
    
    
    
    4,698,458NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES
    
    
    1,842,354
    
    
    
    1,858,286
    
    
    
    5,530,746
    
    
    
    5,289,067PROVISION FOR LOAN LOSSES
    
    
    347,000
    
    
    
    120,000
    
    
    
    882,000
    
    
    
    380,300NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    1,495,354
    
    
    
    1,738,286
    
    
    
    4,648,746
    
    
    
    4,908,767NON-INTEREST INCOME:Fees and service charges on deposit accounts
    
    
    228,956
    
    
    
    211,589
    
    
    
    689,098
    
    
    
    616,153Service fee income, net
    
    
    41,130
    
    
    
    39,812
    
    
    
    121,145
    
    
    
    118,468Fees and service charges on loans
    
    
    71,780
    
    
    
    60,336
    
    
    
    142,904
    
    
    
    157,146Bank owned Life Insurance
    
    
    71,406
    
    
    
    70,341
    
    
    
    214,216
    
    
    
    211,024Net gain (loss) on sale or write-down of:Loans held for sale
    
    
    290,561
    
    
    
    127,022
    
    
    
    783,604
    
    
    
    381,132Securities available-for-sale
    
    
    14,063
    
    
    
    17,785
    
    
    
    390,303
    
    
    
    37,941Real estate owned and other assets
    
    
    57,685
    
    
    
    (15,709
    )
    
    
    6,948
    
    
    
    4,566Premises and equipment
    
    
    0
    
    
    
    0
    
    
    
    13,500
    
    
    
    0775,581
    
    
    
    511,176
    
    
    
    2,361,718
    
    
    
    1,526,430NON-INTEREST EXPENSE:Compensation and benefits
    
    
    799,318
    
    
    
    765,773
    
    
    
    2,382,926
    
    
    
    2,269,277Occupancy
    
    
    280,827
    
    
    
    470,442
    
    
    
    802,496
    
    
    
    1,065,425Marketing and professional
    
    
    72,978
    
    
    
    49,201
    
    
    
    182,176
    
    
    
    153,208Other
    
    
    251,750
    
    
    
    253,255
    
    
    
    792,539
    
    
    
    795,1331,404,873
    
    
    
    1,538,671
    
    
    
    4,160,137
    
    
    
    4,283,043INCOME BEFORE INCOME TAX EXPENSE
    
    
    866,062
    
    
    
    710,791
    
    
    
    2,850,327
    
    
    
    2,152,154INCOME TAX EXPENSE
    
    
    294,855
    
    
    
    237,766
    
    
    
    980,116
    
    
    
    721,588NET INCOME
    
    $
    571,207
    
    
    $
    473,025
    
    
    $
    1,870,211
    
    
    $
    1,430,566Basic earnings per share
    
    $
    0.36
    
    
    $
    0.27
    
    
    $
    1.17
    
    
    $
    0.81Diluted earnings per share
    
    $
    0.36
    
    
    $
    0.27
    
    
    $
    1.15
    
    
    $
    0.80Cash dividends per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.30Weighted average basic shares outstanding
    
    
    1,565,684
    
    
    
    1,775,384
    
    
    
    1,593,528
    
    
    
    1,775,384Weighted average diluted shares outstanding
    
    
    1,606,058
    
    
    
    1,783,769
    
    
    
    1,623,478
    
    
    
    1,779,688


See accompanying notes to condensed consolidated financial statements.

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PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Other
    
    TotalPaid-in
    
    Treasury
    
    Retained
    
    Comprehensive
    
    Stockholders'Shares
    
    Amount
    
    Capital
    
    Stock
    
    Earnings
    
    (Loss) Income
    
    EquityBALANCE, December 31, 2001
    
    
    1,775,384
    
    
    $
    17,921
    
    
    $
    8,131,746
    
    
    $
    (128,075
    )
    
    $
    11,413,945
    
    
    $
    (423,671
    )
    
    $
    19,011,866Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,430,566
    
    
    
    0
    
    
    
    1,430,566Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    864,570
    
    
    
    864,570Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,295,136Cash dividends declared ($.30 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (532,615
    )
    
    
    
    
    
    
    (532,615
    )BALANCE, September 30, 2002
    
    
    1,775,384
    
    
    $
    17,921
    
    
    $
    8,131,746
    
    
    $
    (128,075
    )
    
    $
    12,311,896
    
    
    $
    440,899
    
    
    $
    20,774,387BALANCE, 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
    
    
    
    1,870,211
    
    
    
    0
    
    
    
    1,870,211Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,017,877
    )
    
    
    (1,017,877
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    852,334Repurchase of common stock (87,000 shares at cost)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,070,939
    )
    
    
    
    
    
    
    0
    
    
    
    (1,070,939
    )Cash dividends declared ($.30 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (478,406
    )
    
    
    0
    
    
    
    (478,406
    )BALANCE, September 30, 2003
    
    
    1,792,086
    
    
    $
    17,921
    
    
    $
    8,131,746
    
    
    $
    (2,568,716
    )
    
    $
    14,108,384
    
    
    $
    (430,868
    )
    
    $
    19,258,467


See accompanying notes to unaudited condensed consolidated financial
statements.

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PINNACLE BANCSHARES, INC,
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months EndedSeptember 30,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,870,211
    
    
    $
    1,430,566Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    350,116
    
    
    
    397,876Provision for loan losses
    
    
    882,000
    
    
    
    380,300Amortization, net
    
    
    (148,449
    )
    
    
    (298,039
    )Increase in cash surrender value of Bank owned life insurance
    
    
    (214,216
    )
    
    
    (211,024
    )Net gain on sale or write down of:Loans held for sale
    
    
    (783,604
    )
    
    
    (381,132
    )Securities available-for-sale
    
    
    (390,303
    )
    
    
    (37,941
    )Real estate owned and other assets
    
    
    (6,948
    )
    
    
    (4,566
    )Premises and equipment
    
    
    (13,500
    )
    
    
    0Proceeds from sale of loans
    
    
    63,920,515
    
    
    
    37,533,472Loans originated for sale
    
    
    (61,259,720
    )
    
    
    (34,120,778
    )Decrease in accrued interest receivable
    
    
    167,720
    
    
    
    34,343(Increase) decrease in other assets
    
    
    (201,920
    )
    
    
    285,992Decrease in accrued interest payable
    
    
    (82,248
    )
    
    
    (215,564
    )(Decrease) increase in other liabilities
    
    
    (15,607
    )
    
    
    226,316Net cash provided by operating activities
    
    
    4,074,047
    
    
    
    5,019,821CASH FLOWS FROM INVESTING ACTIVITIES:Net loan repayments
    
    
    10,623,095
    
    
    
    8,700,378Proceeds from payments received on securities available-for-sale
    
    
    4,607,363
    
    
    
    2,654,155Net change in interest bearing deposits at other banks
    
    
    (1,182,441
    )
    
    
    386,412Purchase of securities available-for-sale
    
    
    (83,990,000
    )
    
    
    (54,163,622
    )Proceeds from maturing and called securities available-for-sale
    
    
    34,990,000
    
    
    
    36,620,000Proceeds from the sale of securities available-for-sale
    
    
    40,632,903
    
    
    
    3,037,941Purchase of premises and equipment
    
    
    (390,385
    )
    
    
    (112,783
    )Proceeds from sales of premises and equipments
    
    
    26,210
    
    
    
    0Proceeds from sales of real estate owned
    
    
    1,312,306
    
    
    
    1,693,106Net cash provided by (used in) investing activities
    
    
    6,629,051
    
    
    
    (1,184,413
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in passbook, NOW and money market deposit accounts
    
    
    1,676,643
    
    
    
    382,904Proceeds from sales of time deposits
    
    
    14,481,290
    
    
    
    20,687,664Payments on maturing time deposits
    
    
    (23,144,604
    )
    
    
    (24,512,940
    )Payments on borrowed funds
    
    
    (63,225,000
    )
    
    
    (17,535,000
    )Proceeds from borrowed funds
    
    
    61,550,000
    
    
    
    17,375,000(Decrease) increase in official checks outstanding
    
    
    (655,180
    )
    
    
    280,710Repurchase of common stock
    
    
    (1,070,939
    )
    
    
    0Payments of cash dividends
    
    
    (478,406
    )
    
    
    (532,615
    )Net cash used in financing activities
    
    
    (10,866,196
    )
    
    
    (3,854,277
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (163,098
    )
    
    
    (18,869
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    3,862,956
    
    
    
    3,342,141CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,699,858
    
    
    $
    3,323,272SUPPLEMENTAL DISCLOSURES:Cash payments for interest on deposits and borrowed funds
    
    $
    3,143,504
    
    
    
    4,930,274Cash payments for income taxes
    
    
    1,110,938
    
    
    
    545,000Real estate acquired through foreclosure
    
    
    687,607
    
    
    
    784,788


See accompanying notes to unaudited condensed consolidated financial
statements.

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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 and nine month periods ended September 30, 2003, 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, 2002. 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.

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|2. |  | EARNINGS PER SHARE:
|-- |  | -------------------

The following table represents the earnings per share calculations for the
three and nine month periods ended September 30, 2003 and 2002:

PerShareFor The Three Months Ended
    
    Net Income
    
    Shares
    
    AmountSeptember 30, 2003Basic earnings per share
    
    $
    571,207
    
    
    
    1,565,684
    
    
    $
    0.36Dilutive securities
    
    
    
    
    
    
    40,374Diluted earnings per share
    
    $
    571,207
    
    
    
    1,606,058
    
    
    $
    0.36


PerShareFor The Three Months Ended
    
    Net Income
    
    Shares
    
    AmountSeptember 30, 2002Basic earnings per share
    
    $
    473,025
    
    
    
    1,775,384
    
    
    $
    0.27Dilutive securities
    
    
    
    
    
    
    8,385Diluted earnings per share
    
    $
    473,025
    
    
    
    1,783,769
    
    
    $
    0.27


PerShareFor The Nine Months Ended
    
    Net Income
    
    Shares
    
    AmountSeptember 30, 2003Basic earnings per share
    
    $
    1,870,211
    
    
    
    1,593,823
    
    
    $
    1.17Dilutive securities
    
    
    
    
    
    
    29,655Diluted earnings per share
    
    $
    1,870,211
    
    
    
    1,623,478
    
    
    $
    1.15


PerShareFor The Nine Months Ended
    
    Net Income
    
    Shares
    
    AmountSeptember 30, 2002Basic earnings per share
    
    $
    1,430,566
    
    
    
    1,775,384
    
    
    $
    0.81Dilutive securities
    
    
    
    
    
    
    4,304Diluted earnings per share
    
    $
    1,430,566
    
    
    
    1,779,688
    
    
    $
    0.80


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|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
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net Income as reported
    
    $
    571,207
    
    
    $
    473,025
    
    
    $
    1,870,211
    
    
    $
    1,430,566Stock-based compensation expense
    
    
    0
    
    
    
    (2,106
    )
    
    
    0
    
    
    
    (6,318
    )Net Income pro forma
    
    $
    571,207
    
    
    $
    471,919
    
    
    $
    1,870,211
    
    
    $
    1,424,248Basic earnings per shareas reported
    
    $
    0.36
    
    
    $
    0.27
    
    
    $
    1.17
    
    
    $
    0.81Basic earnings per sharepro forma
    
    
    0.36
    
    
    
    0.27
    
    
    
    1.17
    
    
    
    0.81Diluted earnings per shareas reported
    
    $
    0.36
    
    
    $
    0.27
    
    
    $
    1.15
    
    
    $
    0.80Diluted earnings per sharepro forma
    
    
    0.36
    
    
    
    0.27
    
    
    
    1.15
    
    
    
    0.80




|4. |  | RECENT ACCOUNTING PRONOUNCEMENTS:
|-- |  | ---------------------------------

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
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 financial position or
results of operations.

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Item 2. Managements Discussion and Analysis

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

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

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

The allowance for loan losses is maintained at a level which management
considers to be adequate to absorb losses inherent in the loan portfolio.
Managements estimation of the amount of the allowance is based on a 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 September 30, 2003, ultimate
losses may vary from estimations.

Real estate owned acquired through foreclosure is carried at the lower of cost
or fair value less expected selling costs. Any excess of the recorded
investment over fair value, less estimated costs of disposition of the
property, is charged to the allowance for loan losses at the time of
foreclosure. Subsequent to foreclosure, real estate owned is evaluated on an
individual basis for changes in fair value. Declines in fair value of the
asset, less costs of disposition below its carrying amount, require an increase
in the valuation allowance account. Future increases in fair value of the
asset, less cost of disposition, may cause a reduction in the valuation
allowance account, but not below zero. Increases or decreases in the valuation
allowance account are charged or credited to income. Costs relating to the
development and improvement of property are capitalized, whereas costs relating
to the holding of property are expensed.

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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 September 30, 2003 and December 31,
2002.Total assets were $207.7 million at September 30, 2003, compared to
$218.3 million at December 31, 2002. Net loans receivable decreased
approximately $12.0 million, from $119.4 million at December 31, 2002 to $107.4
million at September 30, 2003, primarily due to refinancing activities and
principal repayments. Total securities available-for-sale were $78.1 million
at September 30, 2003, compared to $75.3 million at December 31, 2002.

At September 30, 2003, the investment portfolio of $78.1 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 nine months ended September 30, 2003, the Bank
had $35.0 million in agency securities called. Also during the nine month
period ended September 30, 2003, the Bank sold $40.6 million in agency
securities. Gross gains of $390,000 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 $84.0 million in agency
securities with an average yield of 3.56%.

Total deposits decreased approximately $7.0 million, from $189.0 million at
December 31, 2002 to $182.0 million at September 30, 2003. This decrease was
primarily due to a decrease in rates paid on deposits, from 2.40% at December
31, 2002 to 1.80% at September 30, 2003.

The maximum amount of FHLB advances outstanding during the nine-month period
ended September 30, 2003, was $13.5 million.

Results of Operations-Comparison of the Three and Nine-Months Ended September
30, 2003 and 2002. For the three-months ended September 30, 2003 net income was
$571,000, compared with net income of $473,000 for the three-months ended
September 30, 2002. For the nine-months ended September 30, 2003, net income
was $1,870,000, compared with net income of $1,431,000 for the nine-months
ended September 30, 2002. Net interest income after the provision for loan
losses for the three-months ended September 30, 2003, was $1,495,000, compared
with $1,738,000 for the three-months ended September 30, 2002. Net interest
income after the provision for loan losses for the nine-months ended September
30, 2003, was $4,649,000, compared with $4,909,000 for the nine-months ended
September 30, 2002. Approximately 1.9 % of the higher net income was related to
non-interest income, which increased from $1,526,000 for the nine-months ended
September 30, 2002 to $2,362,000 for the nine months ended September 30, 2003.
This increase was primarily attributable to increases in net gains on the sale
of loans held for sale and available-for-sale securities of $402,000 and
$352,000, respectively.

The net interest margin was 3.73% and 3.68% for the three and nine-months ended
September 30, 2003, respectively, compared to 3.63% and 3.40% for the three and
nine-months ended September 30, 2002, respectively. As market rates continued
to stabilize at lower levels during the nine-month period ended September 30,
2003, 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 6.50% and 6.42% in the
three and nine-month periods ended September 30, 2002, respectively, to
approximately 5.60% and 5.71% in the three and nine-month periods ended
September 30, 2003. These decreases were due to decreases in market interest
rates. The cost of funds decreased from approximately 2.79% at September 30,
2002, to approximately 1.86% at September 30, 2003, 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 $347,000 and $882,000 for the three and
nine-months ended September 30, 2003, compared to $120,000 and $380,000 for the
three and nine-months ended September 30, 2002, respectively. The increase in
the provision for loan losses for the three and nine-month periods ended
September 30, 2003, as compared to the prior year periods, was primarily the
result of an increase in charge-offs as well as an increase in non-accrual
loans. It is managements opinion that the allowance for loan losses at
September 30, 2003 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, increased $264,000 in the three-month period ended September 30, 2003,
as compared to the three-month period ended September 30, 2002. The increase
was due primarily to an increase in net gain on sale of loans held for sale of
$164,000, an increase in net gain on sale of real estate owned of $73,000, an
increase in fees and service charges on deposit accounts of $17,000, and an
increase in all other non-interest income of $10,000. Non-interest income
increased $835,000 in the nine-month period ended September 30, 2003, as
compared to the nine-month period ended September 30, 2002. The increase was
due primarily to an increase in net gain on sale of securities available for
sale of $352,000, an increase in the net gain on sale of loans held for sale
of $402,000, an increase in fees and service charges on deposit accounts of
$73,000, and an increase in all other non-interest income of $8,000.

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Non-interest expense decreased $134,000 in the three-month period ended
September 30, 2003, as compared to the corresponding prior year period. This
was primarily a result of a decrease in occupancy expense of $190,000. This
decrease was offset by an increase in compensation and benefits of $34,000 and
an increase in all other non-interest expense of $22,000. Non-interest
expense decreased $123,000 in the nine-month period ended September 30, 2003,
as compared to the corresponding prior year period. This was primarily a
result of a decrease in occupancy expense of $263,000. This decrease was
offset by an increase in compensation and benefits of $114,000, an increase in
all other non-interest expense of $26,000. The decrease in occupancy expense
for the three and nine months ended September 30, 2003, as compared to the
prior year periods, was primarily the result of a property tax assessment that
had not been received by the Company from the tax assessor until the period
ended September 30, 2002, on a branch location amounting to approximately
$160,000.

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 $781,000, $1,566,000, and
$2,404,000, 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 $4,000, $870,000, and
$1,702,000, respectively. This hypothetical is not a precise indicator of
future events. Instead, it is a reasonable estimate of the results anticipated
if the assumptions used in the modeling techniques were to occur.

Stock Repurchase Program:In 2002, the Company announced a stock repurchase
program to acquire up to 178,000 shares of common stock, or approximately 10%
of the Companys currently outstanding shares. As of December 31, 2002 the
Company had repurchased 122,700 shares at an average price of $11.16 per
share. As of March 17, 2003 the Company had repurchased an additional 54,000
shares of common stock at an average price of $11.58 per share, which completed
this stock repurchase program.

On April 25, 2003, the Company announced a supplemental stock repurchase
program to acquire up to an additional 5% of the Companys currently
outstanding shares. The repurchase program will be dependent upon market
conditions and other requirements, and there is no guarantee as to the exact
number of shares to be repurchased by the Company. As of September 30, 2003,
the Company had repurchased 33,000 shares at an average price of $13.50 per
share.

Had these purchases not occurred, basic and diluted earnings per share would
have been $0.04 less for the nine-months ended September 30, 2003.

Capital Resources:Historically, funds provided by operations, mortgage loan
principal repayments, deposits and short-term borrowings have been the Banks
principal sources of funds. In addition, the Bank has the ability to obtain
funds through the sale of mortgage loans, through borrowings from the FHLB of
Atlanta and other borrowing sources. At September 30, 2003, the Banks total
loan commitments, including construction loans in process, unused lines of
credit and letter of credits, were approximately $22.2 million. Management
believes that the Banks liquidity and other sources of funds are sufficient to
fund all commitments outstanding and other cash needs. The Company and the Bank
are required to maintain certain levels of regulatory capital. At September
30, 2003, the Company and the Bank exceeded all regulatory capital
requirements.

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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
September 30, 2003. 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. 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.

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##### Table of Contents






PART II  OTHER INFORMATION




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 July 24, 2003, furnishing under
Item 9 (pursuant to Item 12) announcement of the Companys results
of operations for the quarter ended June 30, 2003.

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##### Table of Contents






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:
    
    November 14, 2003
    
    
    
    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)