##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-QSB (Mark one) þ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 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 þ No o The number of shares outstanding of each of the issuers classes of common equity, as
of May 14, 2005: 1,549,778 shares of common stock. Transitional Small Business Disclosure Format (check one): Yes o No þ




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CONTENTS PagePART I FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Statements of Financial Condition at March 31, 2005
and December 31, 2004.
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004.
    
    
    4Unaudited Condensed Consolidated Statements of Stockholders Equity for three months
ended March 31, 2005 and 2004.
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004.
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements.
    
    
    7Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    10Item 3. Controls and Procedures
    
    
    14Part II OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 6. Exhibits
    
    
    15Signatures
    
    
    16EX-31.1  SECTION 302 CERTIFICATION OF THE CEO & CFOEX-32.1  SECTION 906 CERTIFICATION 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 31,2005
    
    
    2004ASSETS:Cash and cash equivalents
    
    $
    2,929,078
    
    
    $
    3,451,046Interest-bearing deposits in other banks
    
    
    1,232,939
    
    
    
    484,958Securities available-for-sale
    
    
    94,271,637
    
    
    
    89,025,401FHLB stock
    
    
    415,500
    
    
    
    417,000Loans held for sale
    
    
    861,699
    
    
    
    1,206,322Loans receivable, net of allowances for loan losses
of $1,243,358 and $1,167,263 respectively
    
    
    99,639,220
    
    
    
    99,599,999Real estate owned, net
    
    
    558,680
    
    
    
    598,642Premises and equipment
    
    
    5,650,109
    
    
    
    5,723,120Goodwill
    
    
    306,488
    
    
    
    306,488Bank owned life insurance
    
    
    4,872,358
    
    
    
    4,797,758Accrued interest receivable
    
    
    1,191,027
    
    
    
    1,254,307Other assets
    
    
    1,834,605
    
    
    
    967,308Total assets
    
    $
    213,763,340
    
    
    $
    207,832,349LIABILITIES AND STOCKHOLDERS EQUITY:Deposits
    
    $
    187,293,323
    
    
    $
    179,965,635Subordinated debt
    
    
    3,093,000
    
    
    
    3,093,000Borrowed funds
    
    
    2,375,000
    
    
    
    2,580,000Official checks outstanding
    
    
    1,082,056
    
    
    
    1,103,521Accrued interest payable
    
    
    527,745
    
    
    
    498,656Other liabilities
    
    
    774,139
    
    
    
    677,107Total liabilities
    
    
    195,145,263
    
    
    
    187,917,919STOCKHOLDERS EQUITY:Common stock, par value $.01 per share; 2,400,000 authorized; 1,821,780
issued at March 31, 2005 and December 31, 2004, respectively; 1,549,778 and
1,553,778 outstanding at March 31, 2005 and December 31, 2004,
respectively.
    
    
    18,218
    
    
    
    18,218Additional paid-in capital
    
    
    8,418,897
    
    
    
    8,418,897Treasury shares, at cost (272,002 shares and 268,002 shares at
March 31, 2005 and December 31, 2004, respectively)
    
    
    (3,282,335
    )
    
    
    (3,220,730
    )Retained earnings
    
    
    15,726,625
    
    
    
    15,571,155Accumulated other comprehensive loss, net of tax
    
    
    (2,263,328
    )
    
    
    (873,110
    )Total stockholders equity
    
    
    18,618,077
    
    
    
    19,914,430Total liabilities and stockholders equity
    
    $
    213,763,340
    
    
    $
    207,832,349
 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 31,2005
    
    
    2004INTEREST REVENUE:Interest on loans
    
    $
    1,760,278
    
    
    $
    1,856,306Interest and dividends on securities
    
    
    896,098
    
    
    
    750,377Other interest
    
    
    33,482
    
    
    
    10,6462,689,858
    
    
    
    2,617,329INTEREST EXPENSE:Interest on deposits
    
    
    922,800
    
    
    
    777,890Interest on borrowed funds
    
    
    43,106
    
    
    
    37,065Interest on subordinated debentures
    
    
    36,236
    
    
    
    41,6481,002,142
    
    
    
    856,603NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES
    
    
    1,687,716
    
    
    
    1,760,726PROVISION FOR LOAN LOSSES
    
    
    156,000
    
    
    
    147,000NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    1,531,716
    
    
    
    1,613,726NONINTEREST INCOME:Fees and service charges on deposit accounts
    
    
    188,424
    
    
    
    228,944Service fee income, net
    
    
    39,548
    
    
    
    40,893Fees and charges on loans
    
    
    31,019
    
    
    
    53,378Bank owned life insurance
    
    
    74,600
    
    
    
    70,714Net gain (loss) on sale or write-down of:Loans held for sale
    
    
    113,857
    
    
    
    135,555Real estate owned
    
    
    3,737
    
    
    
    (9,835
    )Securities available-for-sale
    
    
    (3,750
    )
    
    
    (78,304
    )447,435
    
    
    
    441,345NONINTEREST EXPENSE:Compensation and benefits
    
    
    862,709
    
    
    
    856,445Occupancy
    
    
    275,319
    
    
    
    255,974Marketing and professional
    
    
    89,334
    
    
    
    58,078Other
    
    
    283,673
    
    
    
    256,9561,511,035
    
    
    
    1,427,453INCOME BEFORE INCOME TAXES
    
    
    468,116
    
    
    
    627,618INCOME TAX EXPENSE
    
    
    142,061
    
    
    
    208,939NET INCOME
    
    $
    326,055
    
    
    $
    418,679Basic earnings per share
    
    $
    0.21
    
    
    $
    0.27Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.26Cash dividends per share
    
    $
    0.11
    
    
    $
    0.10Weighted average basic shares outstanding
    
    
    1,552,078
    
    
    
    1,565,929Weighted average diluted shares outstanding
    
    
    1,586,786
    
    
    
    1,612,176
 See accompanying notes to these condensed consolidated financial statements. 4




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PINNACLE BANCSHARES, INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    (Loss) Income
    
    
    EquityBALANCE, December 31, 2003Comprehensive income:
    
    
    1,800,813
    
    
    $
    18,008
    
    
    $
    8,219,941
    
    
    $
    (2,743,245
    )
    
    $
    14,508,277
    
    
    $
    (571,785
    )
    
    $
    19,431,196Net 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
    )
    
    $
    20,169,577BALANCE, December 31, 2004
    
    
    1,821,780
    
    
    $
    18,218
    
    
    $
    8,418,897
    
    
    $
    (3,220,730
    )
    
    $
    15,571,155
    
    
    $
    (873,110
    )
    
    $
    19,914,430Comprehensive income:Net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    326,055
    
    
    
    0
    
    
    
    326,055Change in fair value of securities available-
For-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,390,218
    )
    
    
    (1,390,218
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,064,163
    )Repurchase of common stock (4,000 shares at cost)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (61,605
    )
    
    
    0
    
    
    
    0
    
    
    
    (61,605
    )Cash dividends declared ($.11 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (170,585
    )
    
    
    0
    

    
    
    (170,585
    )BALANCE, March 31, 2005
    
    
    1,821,780
    
    
    $
    18,218
    
    
    $
    8,418,897
    
    
    $
    (3,282,335
    )
    
    $
    15,726,625
    
    
    $
    (2,263,328
    )
    
    $
    18,618,077
 See accompanying notes to these condensed consolidated financial statements. 5




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PINNACLE BANCSHARES, INC, 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Three Months EndedMarch 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    
    326,055
    
    
    $
    418,679Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    122,731
    
    
    
    120,863Provision for loan losses
    
    
    156,000
    
    
    
    147,000Accretion, net
    
    
    (28,394
    )
    
    
    (290,424
    )Increase in cash surrender value of Bank owned life insurance
    
    
    (74,600
    )
    
    
    (70,714
    )Net (gain) loss on sale or write down of:Loans held for sale
    
    
    (113,857
    )
    
    
    (135,555
    )Securities available-for-sale
    
    
    3,750
    
    
    
    78,304Real estate owned and other assets
    
    
    (3,737
    )
    
    
    9,835Proceeds from sale of loans
    
    
    9,150,868
    
    
    
    8,036,329Loans originated for sale
    
    
    (8,692,388
    )
    
    
    (8,848,462
    )Decrease in accrued interest receivable
    
    
    63,280
    
    
    
    380,874(Increase) decrease in other assets
    
    
    (14,728
    )
    
    
    363,939Increase (decrease) in accrued interest payable
    
    
    29,089
    
    
    
    (10,728
    )Increase (decrease) in other liabilities
    
    
    97,032
    
    
    
    (396,050
    )Net cash provided by (used in) operating activities
    
    
    1,021,101
    
    
    
    (196,110
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net loan originations
    
    
    (229,069
    )
    
    
    (481,094
    )Net change in interest bearing deposits in other banks
    
    
    (747,981
    )
    
    
    (6,607,348
    )Purchase of securities available-for-sale
    
    
    (13,191,025
    )
    
    
    (39,670,854
    )Proceeds from the sale of securities available-for-sale
    
    
    4,000,000
    
    
    
    34,905,702Proceeds from payments received on securities available-for-sale
    
    
    1,661,110
    
    
    
    11,713,167Proceeds from sale of Federal Home Loan Bank stock
    
    
    1,500
    
    
    
    174,900Purchase of premises and equipment
    
    
    (49,720
    )
    
    
    (162,254
    )Proceeds from sales of real estate owned
    
    
    143,083
    
    
    
    289,678Net cash (used in) provided by investing activities
    
    
    (8,412,102
    )
    
    
    161,897CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in passbook, NOW and money market deposit accounts
    
    
    1,174,772
    
    
    
    1,021,266Proceeds from sales of time deposits
    
    
    9,313,132
    
    
    
    7,073,504Payments on maturing time deposits
    
    
    (3,160,216
    )
    
    
    (6,455,378
    )Decrease in borrowed funds
    
    
    (205,000
    )
    
    
    (885,000
    )Decrease in official checks outstanding
    
    
    (21,465
    )
    
    
    (200,194
    )Proceeds from the exercise of stock options
    
    
    0
    
    
    
    111,041Repurchase of common stock
    
    
    (61,605
    )
    
    
    (176,715
    )Payments of cash dividends
    
    
    (170,585
    )
    
    
    (156,368
    )Net cash provided by financing activities
    
    
    6,869,033
    
    
    
    332,156NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (521,968
    )
    
    
    297,943CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    3,451,046
    
    
    
    3,519,377CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,929,078
    
    
    $
    3,817,320SUPPLEMENTAL DISCLOSURES:Cash payments for interest on deposits and borrowed funds
    
    $
    973,053
    
    
    $
    867,331Cash payments for income taxes
    
    
    100,000
    
    
    
    0Real estate acquired through foreclosure
    
    
    99,384
    
    
    
    262,366
 See accompanying notes to these 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 periods ended March 31, 2005, 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, 2004. 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 period
ended March 31, 2005 and 2004: PerShareFor The Three Months Ended
    
    Net Income
    
    
    Shares
    
    
    AmountMarch 31, 2005Basic earnings per share
    
    $
    326,055
    
    
    
    1,552,078
    
    
    $
    0.21Dilutive securities
    
    
    
    
    
    
    34,708Diluted earnings per share
    
    $
    326,055
    
    
    
    1,586,786
    
    
    $
    0.21
 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
 3. STOCK BASED COMPENSATION: In accordance with the provision of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company has elected to continue to record
compensation cost under 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 impact on the Companys net income would
not have been material. 8




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4. RECENT ACCOUNTING PRONOUNCEMENTS: In March 2004, the Financial Accounting Standards Boards (FASB) Emerging Issues Task Force
reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment
is considered impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor
has the ability and intent to hold an investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence
indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an
impairment loss should be recognized equal to the difference between the investments cost and its
fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began
presenting the new disclosure requirements in its consolidated financial statements for the year
ended December 31, 2003. The recognition and measurement provisions were initially effective for
other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was delayed until the
finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to
the recognition and measurement provisions being suspended and the final rule delayed, the Company
is not able to determine whether the adoption of these new provisions will have a material impact
on its consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No.
123R), which revised SFAS No. 123, (Accounting for Stock-Based Compensation). This statement
supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised statement
addresses the accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation transactions using APB 25
and requires that the compensation costs relating to such transactions be recognized in the
consolidated statement of operations. The revised statement is effective as of the first interim
period beginning after December 15, 2005. The Company is currently evaluating the provisions of
SFAS No. 123R and will adopt it on January 1, 2006 as required. 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 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 different estimates, assumptions and judgments. Certain policies inherently have a greater
reliance 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 Audit Committee and to the Board of
Directors 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, 2005, 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 10




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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. 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, 2004 and March 31, 2005:Total assets were
$213.8 million at March 31, 2005, compared to $207.8 million at December 31, 2004. Net loans
receivable were $99.6 million at March 31, 2005 and December 31, 2004. Total securities
available-for-sale increased $5.3 million, to $94.3 million March 31, 2005,compared to $89.0
million at December 31, 2004. At March 31, 2005, the investment portfolio of $94.3 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, 2005, the
Bank sold $4.0 million in agency securities. Net losses of $3,750 were realized on these sales. The
proceeds from these sales of securities available-for-sale, combined with the proceeds from loan
principal repayments and proceeds from sales of deposits, were used by the Bank to purchase $13.2
million in agency securities with an average yield of 4.34%. Total deposits increased $7.3 million, to $187.3 million at March 31, 2005, from $180.0 million at
December 31, 2004. This increase was primarily due to an increase in time deposits of $6.1 million
and an increase in NOW and money market deposit accounts of $1.2 million. 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 investment in
the Trust is included in other assets in the accompanying consolidated balance sheet at March 31,
2005 and the $3,093,000 obligation of the Company is included in subordinated debt. Stockholders equity decreased from $19.9 million at December 31, 2004, to $18.6 million at March
31, 2005. This decrease was primarily attributable to a $1.4 million decrease in the market value
of the Companys available-for-sale securities portfolio, which is marked to fair value based on
prevailing interest rates. The interest rate risk in the Companys portfolio is monitored closely. Results of Operations-Comparison of the Three-Months Ended March 31, 2005 and 2004:For the
three-months ended March 31, 2005, net income was $326,000, compared with net income of $419,000
for the three months ended March 31, 2004. The decrease in net income for the three months ended
March 31, 2005 was primarily attributable to an increase in interest expense on deposits of
approximately $145,000. This increase was primarily attributable to an increase in the average
balance of interest bearing deposits of $4.7 million. The net interest margin was 3.40% for the three-months ended March 31, 2005, compared to 3.70% for
the three- months ended March 31, 2004, respectively.The yield on interest-earning assets
increased from approximately 5.46% in the three-month periods ended March 31, 2004 to approximately
5.47% in the three-month period ended at March 31, 2005. These increases were due to increases in
market interest rates as well as an increase in the average balance of interest earning assets. The
cost of funds was 2.18% at March 31, 2005, compared to 1.77% at March 31, 2004. Net interest income before the provision for loan losses for the three months ended March 31, 2005,
was $1,687,716 compared with $1,760,726 in the same period last year. The decrease was primarily
due to increases in interest 11




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expense on deposits and borrowed funds of $146,000. This increase was offset by a increase in
interest revenue of $73,000 for the three months ended March 31, 2005, respectively, compared with
the same periods last year. 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 $156,000 for the three-months ended March 31, 2005, compared to
$147,000 for the three-months ended March 31, 2004. It is managements opinion that the allowance
for loan losses at March 31, 2005 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. Net interest income after the provision for loan losses for the three months ended March 31, 2005,
was $1,531,716 compared with $1,613,726 in the same period last year. 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 $6,000 in the three-month
period ended March 31, 2005, as compared to the three-month period ended March 31, 2004. This
increase was due primarily to a decrease in the loss on sale of securities available-for-sale and
other real estate owned of $88,000. These increases were off set by a decrease in net gain on
sale of loans held for sale of $22,000, a decrease in fees and service charges on deposit accounts
of $41,000 and a decrease in all other non-interest income of $19,000. Non-interest expense increased $84,000 in the three-month period ended March 31, 2005, as compared
to the corresponding prior year period. This was primarily a result of an increase in occupancy
expense of $19,000, an increase in marketing and professional expense of $31,000, and an increase
in all other non-interest expense of $34,000. 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, repricing and maturing volumes and rates of the existing balance sheet. Under
a scenario simulating a hypothetical 50, 100 and 200 basis point rate increase applied to all
interest- earning assets and interest-bearing liabilities, the Company would expect net losses in
fair value of the equity in the underlying instruments of approximately ($505,000), ($1,009,000)
and ($2,074,000) respectively. Under a scenario simulating a hypothetical 50, 100 and 200 basis
point rate decrease, the Company would expect net changes in projected net income for the first
year of approximately $727,000, $1,371,000 and $1,255,000, 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. The rate environment is a function of the monetary policy of the Federal Reserve Board (FRB). The
principal tools of the FRB for implementing monetary policy are open market operations, or the
purchases and sales of U.S. Treasury and federal agency securities. The FRBs objective for open
market operations has varied over the years, but the focus has gradually shifted toward attaining a
specified level of the federal funds rate to achieve the long-run goals of price stability and
sustainable economic growth. The federal funds rate is the basis for overnight funding and drives
the short end of the yield curve. Longer maturities are influenced by FRB purchases and sales and
also expectations of monetary policy going forward. The FRB began to increase the targeted level
for the federal funds rate in June 2004 after reaching an all-time low of 1.00% in mid-2003. The
targeted fed funds rate increased at each Federal Open Market Committee meeting by 25 basis points
and ended the first quarter of 2005 at 2.80%. Although each FRB rate increase becomes more
challenging to offset, the ability to delay deposit rate increases and less aggressive repricing of
the maturing certificate of deposit portfolio has allowed the Company to offset the negative impact
of recent FRB rate movements. Although management believes that the Companys operating results are
not significantly affected by changes in interest rates over an extended period of time, the
continued flattening of the yield curve is expected to exert downward pressure on the net interest
margin and net interest income. The Company is most impacted at this time by the increase in short
term interest rates which continues to put upward pressure on transaction deposit rates and short
term borrowings from the Federal Home Loan Bank (FHLB) of Atlanta. Under traditional measures of
interest rate gap positions, the Company is moderately liability sensitive in the short-term. 12




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##### Table of Contents



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. Stock Repurchases:The following table details purchases under the Companys stock repurchase
program during the three-months ended March 1, 2005. Total
    
    
    
    
    
    
    Total Number of
    
    
    Maximum NumberNumber
    
    
    
    
    
    
    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, 2005
    
    
    3,000
    
    
    $
    15.47
    
    
    
    3,000
    
    
    
    2,400February 1-28, 2005
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0March 1-31, 2005
    
    
    1,000
    
    
    $
    15.19
    
    
    
    1,000
    
    
    
    1,400Total
    
    
    4,000
    
    
    $
    15.40
    
    
    
    4,000
    
    
    
    1,400
 On April 25, 2003, the Company announced a stock repurchase program to acquire up to 80,000 shares
of common stock. As of March 31, 2005, the Company had repurchased 78,600 shares at an average
price of $14.75 per share. On June 10, 2004, the Company announced a supplemental stock repurchase
program to acquire an additional 5% of the Companys outstanding shares outstanding upon completion
of its current repurchase program, or 77,169 shares. This program supplements the Companys
current repurchase program. The repurchase programs are 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. 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, 2005, the Banks total loan
commitments, including construction loans in process, unused lines of credit and letter of credits,
were approximately $24.9 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, 2005, the
Company and the Bank exceeded all regulatory capital requirements. 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, 2005. 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. Pursuant to Section 404 of the Sarbanes-Oxley Act, the Holding Company will be required under rules
adopted by the SEC to include in its annual reports a report by management on the Holding Companys
internal control over financial reporting and an accompanying auditors report. In March 2005, the
SEC extended the Section 404 compliance date for the Company and other non-accelerated filers.
Under the extension, the Holding Company must begin to comply with these requirements for its
fiscal year ending December 31, 2006. The Company expects that Section 404 compliance will
significantly increase its regulatory compliance costs. 14




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 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 15




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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: May 16, 2005
    
    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