##### 



EXHIBIT 13
 BALANCE SHEET AND OTHER DATA
 At December 31,2006
    
    2005(Dollars in Thousands)TOTAL AMOUNT OF:Assets
    
    $
    232,234
    
    
    $
    220,249Loans, net
    
    
    113,490
    
    
    
    106,256Interest-bearing deposits in other banks
    
    
    8,599
    
    
    
    13,369Securities available-for-sale
    
    
    87,852
    
    
    
    80,654Loans held for sale
    
    
    976
    
    
    
    374Deposits
    
    
    206,570
    
    
    
    192,552Subordinated debt
    
    
    3,093
    
    
    
    3,093Borrowed funds
    
    
    0
    
    
    
    2,375Stockholders equity
    
    
    19,406
    
    
    
    19,410NUMBER OF:Loans outstanding
    
    
    2,884
    
    
    
    3,006Deposits
    
    
    12,829
    
    
    
    12,930Full-service offices open
    
    
    7
    
    
    
    6
 STATEMENT OF OPERATIONS DATA
 For the Years Ended December 31,2006
    
    
    2005(In Thousands)INTEREST INCOME
    
    $
    13,265
    
    
    $
    11,559INTEREST EXPENSE
    
    
    6,722
    
    
    
    4,717Net interest income before provision for loan losses
    
    
    6,543
    
    
    
    6,842PROVISION FOR LOAN LOSSES
    
    
    405
    
    
    
    575Net interest income after provision for loan losses
    
    
    6,138
    
    
    
    6,267NONINTEREST INCOME
    
    
    1,890
    
    
    
    1,816NONINTEREST EXPENSE
    
    
    6,062
    
    
    
    5,875INCOME TAX EXPENSE
    
    
    615
    
    
    
    691Net income
    
    $
    1,351
    
    
    $
    1,517




---



##### 



OTHER DATA
 For the Years EndedDecember 31,2006
    
    2005Interest rate spread
    
    
    3.1
    %
    
    
    3.4
    %Yield on average interest earning assets
    
    
    6.4
    
    
    
    5.8Return on average assets (net income divided by average total assets)
    
    
    .60
    
    
    
    .70Return on average equity (net income divided by average equity)
    
    
    7.2
    
    
    
    7.8Equity-to-assets ratio (average equity divided by total average assets)
    
    
    8.4
    
    
    
    9.0Dividend payout ratio (dividends declared divided
by net income)
    
    
    48.0
    
    
    
    45.0
 YIELDS EARNED AND RATES PAID
  For the Years EndedDecember 31,2006
    
    2005Weighted average yield on loans
    
    
    8.2
    %
    
    
    7.5
    %Weighted average yield on securities available-
for-sale
    
    
    4.3
    
    
    
    4.0Weighted average yield on all interest-earning
assets
    
    
    6.4
    
    
    
    5.8Weighted average rate paid on deposits
    
    
    3.2
    
    
    
    2.3Weighted average rate paid on
borrowed funds
    
    
    8.3
    
    
    
    5.4Weighted average rate paid on all interest-
bearing liabilities
    
    
    3.3
    
    
    
    2.4Weighted average rate paid on subordinated-
Debentures
    
    
    8.2
    
    
    
    6.4Interest rate spread (spread between weighted
average rate on all interest-bearing assets and
all interest bearing-liabilities)
    
    
    3.1
    
    
    
    3.4Net yield (net interest income as percentage of
interest-earning assets)
    
    
    3.2
    
    
    
    3.4
 2




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS
   INTRODUCTION
     CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 Allowance for Loan Losses
   3




---



##### 



Real Estate Owned
  Accounting for Sales of Real Estate.
 ASSET-LIABILITY MANAGEMENT
     4




---



##### 



FINANCIAL CONDITION
       5




---



##### 



RESULTS OF OPERATIONS
 General
  Net Income
  Interest Income
   Interest Expense
    Provision for Loan Losses
  6




---



##### 



.
 Noninterest Income
  Noninterest Expense
 i .
 LIQUIDITY AND CAPITAL RESOURCES
 Liquidity
   7




---



##### 



Capital Resources
      MaximumNumberTotal
    
    
    
    
    
    Total Number of
    
    of Shares that MayNumber
    
    Average Price
    
    Shares Purchased
    
    Yet Be Purchasedof Shares
    
    Paid per
    
    As Part of Publicly
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Announced Programs
    
    ProgramsJanuary 1-31, 2006
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    63,936February 1-28, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    63,936March 1-31, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    63,936April 1-30, 2006
    
    
    58,800
    
    
    
    14.87
    
    
    
    58,800
    
    
    
    5,136May 1-31, 2006
    
    
    4,300
    
    
    $
    14.72
    
    
    
    4,300
    
    
    
    74,736June 1-30, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    74,736July 1-31, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    74,736August 1-31, 2006
    
    
    58,040
    
    
    
    14.81
    
    
    
    58,040
    
    
    
    16,696September 1-30, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,696October 1-31, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,696November 1-30, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,696December 1-31, 2006
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,696Total
    
    
    121,140
    
    
    $
    14.83
    
    
    
    121,140
    
    
    
    16,696
 8




---



##### 



IMPACT OF INFLATION
  RECENT ACCOUNTING PRONOUNCEMENTS
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting for Income Tax Uncertainties
 ccounting for Purchases of Life
Insurance  Determining the Amount that Could Be Realized in Accordance with FASB Tech Bulletin
 Fair Value Measurements.
 9




---



##### 



, An Amendment to Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans.
  10




---



##### 



MARKET PRICE AND DIVIDEND INFORMATION
   Price RangeCommon StockHigh
    
    LowFiscal Year Ended December 31, 2006First quarter
    
    $
    14.700
    
    
    $
    13.650Second quarter
    
    
    15.000
    
    
    
    13.700Third quarter
    
    
    15.050
    
    
    
    14.100Fourth quarter
    
    
    16.000
    
    
    
    13.750Fiscal Year Ended December 31, 2005First quarter
    
    $
    15.750
    
    
    $
    14.650Second quarter
    
    
    14.700
    
    
    
    13.500Third quarter
    
    
    14.900
    
    
    
    13.250Fourth quarter
    
    
    15.100
    
    
    
    12.750
  11




---



##### 



12




---



##### 



PINNACLE BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 AS OF DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005ASSETS:Cash and cash equivalents
    
    $
    4,206,018
    
    
    $
    3,784,867Interest-bearing deposits in other banks
    
    
    8,599,278
    
    
    
    13,368,882Securities available-for-sale
    
    
    87,852,495
    
    
    
    80,653,931Federal Home Loan Bank stock
    
    
    532,100
    
    
    
    507,300First National Bankers Bancshares stock
    
    
    525,000
    
    
    
    525,000Loans held for sale
    
    
    975,951
    
    
    
    374,192Loans receivable, net of allowance for loan losses
of $1,382,190 and $1,383,410 respectively
    
    
    113,489,632
    
    
    
    106,255,517Real estate owned, net
    
    
    208,903
    
    
    
    381,229Premises and equipment, net
    
    
    7,075,617
    
    
    
    5,892,093Goodwill
    
    
    306,488
    
    
    
    306,488Bank owned life insurance
    
    
    5,413,237
    
    
    
    5,096,157Accrued interest receivable
    
    
    1,535,638
    
    
    
    1,372,733Other assets
    
    
    1,513,250
    
    
    
    1,730,328Total assets
    
    $
    232,233,607
    
    
    $
    220,248,717LIABILITIES AND STOCKHOLDERS EQUITY:Deposits
    
    $
    206,569,999
    
    
    $
    192,551,915Subordinated debt
    
    
    3,093,000
    
    
    
    3,093,000Borrowed funds
    
    
    0
    
    
    
    2,375,000Official checks outstanding
    
    
    1,005,512
    
    
    
    1,088,302Accrued interest payable
    
    
    1,262,887
    
    
    
    786,133Other liabilities
    
    
    896,672
    
    
    
    944,393Total liabilities
    
    
    212,828,070
    
    
    
    200,838,743STOCKHOLDERS EQUITY:Common stock, par value $.01 per share; 2,400,000
authorized; 1,872,313 and 1,827,813 issued at December
31, 2006 and 2005 respectively, 1,464,538 and 1,541,178
outstanding at December 31, 2006 and 2005, respectively.
    
    
    18,723
    
    
    
    18,278Additional paid-in capital
    
    
    8,923,223
    
    
    
    8,479,921Treasury stock, at cost (407,775 and 286,635 shares at
December 31, 2006 and 2005, respectively)
    
    
    (5,285,739
    )
    
    
    (3,488,724
    )Retained earnings
    
    
    17,103,780
    
    
    
    16,405,863Accumulated other comprehensive loss, net of tax
    
    
    (1,354,450
    )
    
    
    (2,005,364
    )Total stockholders equity
    
    
    19,405,537
    
    
    
    19,409,974Total liabilities and stockholders equity
    
    $
    232,233,607
    
    
    $
    220,248,717
  13




---



##### 



PINNACLE BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005INTEREST REVENUE:Interest on loans
    
    $
    8,896,494
    
    
    $
    7,725,348Interest and dividends on securities
    
    
    3,504,852
    
    
    
    3,697,136Other interest
    
    
    863,698
    
    
    
    137,09913,265,044
    
    
    
    11,559,583INTEREST EXPENSE:Interest on deposits
    
    
    6,454,654
    
    
    
    4,357,495Interest on borrowed funds
    
    
    14,694
    
    
    
    162,059Interest on subordinated debentures
    
    
    252,573
    
    
    
    197,7476,721,921
    
    
    
    4,717,301NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    
    
    6,543,123
    
    
    
    6,842,282PROVISION FOR LOAN LOSSES
    
    
    405,000
    
    
    
    575,500NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    6,138,123
    
    
    
    6,266,782NONINTEREST INCOME:Fees and service charges on deposit accounts
    
    
    843,560
    
    
    
    893,008Service fee income, net
    
    
    131,816
    
    
    
    149,440Fees and charges on loans
    
    
    135,875
    
    
    
    152,590Bank owned life insurance
    
    
    317,080
    
    
    
    293,539Net gain (loss) on sale or write-down of:Loans held for sale
    
    
    376,343
    
    
    
    426,600Real estate owned
    
    
    70,496
    
    
    
    243,512Premises and equipment
    
    
    14,737
    
    
    
    7,693Securities available-for-sale
    
    
    60
    
    
    
    (350,591
    )1,889,967
    
    
    
    1,815,791NONINTEREST EXPENSE:Compensation and benefits
    
    
    3,510,340
    
    
    
    3,313,613Occupancy
    
    
    1,136,722
    
    
    
    1,095,162Marketing and professional
    
    
    366,449
    
    
    
    387,436Other
    
    
    1,048,741
    
    
    
    1,078,5686,062,252
    
    
    
    5,874,779INCOME BEFORE INCOME TAXES
    
    
    1,965,838
    
    
    
    2,207,794INCOME TAX EXPENSE
    
    
    614,934
    
    
    
    691,247NET INCOME
    
    $
    1,350,904
    
    
    $
    1,516,547Basic earnings per share
    
    $
    0.90
    
    
    $
    0.98Diluted earnings per share
    
    $
    0.89
    
    
    $
    0.96Cash dividends per share
    
    $
    0.44
    
    
    $
    0.44Weighted average basic shares outstanding
    
    
    1,493,234
    
    
    
    1,547,381Weighted average diluted shares outstanding
    
    
    1,510,053
    
    
    
    1,576,041
  14




---



##### 



PINNACLE BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 AccumulatedOtherAdditional
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Retained
    
    
    (Loss) Income,
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    Net of Tax
    
    
    EquityBALANCE, 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
    
    
    
    1,516,547
    
    
    
    0
    
    
    
    1,516,547Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,132,254
    )
    
    
    (1,132,254
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384,293Exercise of stock options
    
    
    6,033
    
    
    
    60
    
    
    
    61,024
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    61,084Cash dividends ($.44 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (681,839
    )
    
    
    0
    
    
    
    (681,839
    )Repurchase of 18,633 shares of common stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (267,994
    )
    
    
    0
    
    
    
    0
    
    
    
    (267,994
    )BALANCE, December 31, 2005
    
    
    1,827,813
    
    
    
    18,278
    
    
    
    8,479,921
    
    
    
    (3,488,724
    )
    
    
    16,405,863
    
    
    
    (2,005,364
    )
    
    
    19,409,974Comprehensive income:Net Income:
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,350,904
    
    
    
    0
    
    
    
    1,350,904Change in fair value of securities available-
for-sale, net of tax
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    650,914
    
    
    
    650,914Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,001,818Exercise of stock options and related tax benefits
    
    
    44,500
    
    
    
    445
    
    
    
    443,302
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    443,747Cash dividends ($.44 per share)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (652,987
    )
    
    
    0
    
    
    
    (652,987
    )Repurchase of 121,140 shares of common stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1,797,015
    )
    
    
    0
    
    
    
    0
    
    
    
    (1,797,015
    )BALANCE, December 31, 2006
    
    
    1,872,313
    
    
    $
    18,723
    
    
    $
    8,923,223
    
    
    $
    (5,285,739
    )
    
    $
    17,103,780
    
    
    $
    (1,354,450
    )
    
    $
    19,405,537
  15




---



##### 



PINNACLE BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,350,904
    
    
    $
    1,516,547Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    506,196
    
    
    
    493,935Provision for loan losses
    
    
    405,000
    
    
    
    575,500Deferred tax benefit
    
    
    (34,326
    )
    
    
    (44,363
    )Accretion, net
    
    
    (114,929
    )
    
    
    (171,031
    )Bank owned life insurance income
    
    
    (317,080
    )
    
    
    (293,539
    )Net (gain) loss on sale or write-down of:Loans held for sale
    
    
    (376,343
    )
    
    
    (426,600
    )Securities available-for-sale
    
    
    (60
    )
    
    
    350,591Real estate owned
    
    
    (70,496
    )
    
    
    (243,512
    )Premises and equipment
    
    
    (14,737
    )
    
    
    (7,693
    )Excess tax benefit from stock compensation
    
    
    (51,591
    )
    
    
    0Proceeds from sales of loans held for sale
    
    
    26,676,220
    
    
    
    34,107,645Origination of loans held for sale
    
    
    (26,901,636
    )
    
    
    (32,848,915
    )Increase in accrued interest receivable
    
    
    (162,905
    )
    
    
    (118,426
    )Increase in other assets
    
    
    (145,239
    )
    
    
    (127,413
    )Increase in accrued interest payable
    
    
    476,754
    
    
    
    287,477Increase in other liabilities
    
    
    3,570
    
    
    
    267,286Net cash provided by operating activities
    
    
    1,229,302
    
    
    
    3,317,489CASH FLOWS FROM INVESTING ACTIVITIES:Net loan originations
    
    
    (7,595,086
    )
    
    
    (7,700,188
    )Net change in interest bearing deposits in other banks
    
    
    4,769,604
    
    
    
    (12,883,924
    )Purchases of securities available-for-sale
    
    
    (15,689,637
    )
    
    
    (13,191,025
    )Proceeds from sales of securities available-for-sale
    
    
    0
    
    
    
    10,000,000Proceeds from maturing or callable securities available-for-sale
    
    
    9,400,949
    
    
    
    9,367,825Proceeds from sale of Federal Home Loan Bank stock
    
    
    0
    
    
    
    222,000Purchases of First National Banker Bancshares stock
    
    
    0
    
    
    
    (525,000
    )Purchases of Federal Home Loan Bank stock
    
    
    (24,800
    )
    
    
    (312,300
    )Purchases of premises and equipment
    
    
    (1,753,696
    )
    
    
    (655,215
    )Proceeds from sales of premises and equipment
    
    
    78,713
    
    
    
    0Proceeds from sales of real estate owned
    
    
    451,763
    
    
    
    1,216,847Net cash used in investing activities
    
    
    (10,362,190
    )
    
    
    (14,460,980
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in passbook, NOW, and money market deposit accounts
    
    
    1,115,191
    
    
    
    3,172,184Proceeds from sales of time deposits
    
    
    36,000,935
    
    
    
    27,679,209Payments on maturing or redeemed time deposits
    
    
    (23,098,042
    )
    
    
    (18,265,113
    )Decrease in borrowed funds
    
    
    (2,375,000
    )
    
    
    (205,000
    )Decrease in official checks outstanding
    
    
    (82,790
    )
    
    
    (15,219
    )Proceeds from exercise of stock options
    
    
    392,156
    
    
    
    61,084Excess tax benefit from stock compensation
    
    
    51,591
    
    
    
    0Repurchase of common stock
    
    
    (1,797,015
    )
    
    
    (267,994
    )Payments of cash dividends
    
    
    (652,987
    )
    
    
    (681,839
    )Net cash provided by financing activities
    
    
    9,554,039
    
    
    
    11,477,312NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    421,151
    
    
    
    333,821CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    3,784,867
    
    
    
    3,451,046CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    4,206,018
    
    
    $
    3,784,867SUPPLEMENTAL DISCLOSURES:Cash payments for interest
    
    $
    6,245,167
    
    
    $
    4,429,824Cash payments for income taxes
    
    
    741,870
    
    
    
    680,013Real estate acquired through foreclosure
    
    
    208,941
    
    
    
    755,922
  16




---



##### 



PINNACLE BANCSHARES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2006 AND 2005
 1.
    
    SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIESFollowing is a description of the business and the more significant accounting policies
followed by Pinnacle Bancshares, Inc. (the Company) and its wholly-owned subsidiary
Pinnacle Bank (the Bank) in presenting the consolidated financial statements.Nature of OperationsThe Bank is primarily in the business of obtaining funds in the form of various savings and
time deposit products and investing those funds in mortgage, consumer, and commercial loans.
The Bank operates in seven offices in the central and northwest portions of Alabama and
originates its loans in this market area. The Companys principal activities do not
constitute separate reportable segments of its business, but encompass traditional banking
activities which offer similar products and services within the same primary geographic area
and regulatory and economic environment.Use of EstimatesThe preparation of financial statements in conformity with U. S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those estimates. The
primary estimates that are reflected in the consolidated financial statements are the
valuation allowances for loan losses and real estate owned and subject to significant change
in the near term.ConsolidationThe consolidated financial statements include the accounts of the Company and the Bank. All
significant intercompany transactions and accounts have been eliminated in consolidation.Cash and Cash EquivalentsCash and cash equivalents include cash on hand and in banks.SecuritiesSecurities are classified as available-for-sale and are carried at fair value. The
unrealized difference between amortized cost and fair value of securities available-for-sale
is excluded from earnings and is reported net of deferred taxes as a separate component of
stockholders equity in accumulated other comprehensive loss. The available-for-sale
category includes securities that management intends to use as part of its asset/liability
management strategy or that may be sold in response to changes in interest rates, changes in
prepayment risk, liquidity needs, or for other purposes.Amortization of premiums and accretion of discounts is computed using the interest
method. The adjusted cost of the specific security sold is used to compute gain or loss on
the sale of securities.
 17




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##### 



Loans Held for SaleLoans held for sale are recorded at the lower of amortized cost or fair value, as such loans
are not intended to be held to maturity. Net unrealized losses measured in the aggregate
are recognized in a valuation allowance by charges to income. There were no unrealized
losses at December 31, 2006 or 2005. Gains or losses on loan sales are recognized at the
time of sale and are determined by the difference between net sales proceeds and the
carrying value of the loan sold.The Company enters into interest rate lock commitments, where customers have locked into
mortgages at a set interest rate, and forward sales commitments, which are sales of mortgage
loans to third parties at a specified price. These interest rate locks and forward sales
commitments qualify as derivatives; however, the change in fair value of these derivatives
during the years ended December 31, 2006 and 2005 did not have a material impact on the
Companys consolidated financial position or results of operations.Loans ReceivableLoans receivable are stated at their unpaid principal balance, less the undisbursed portion
of loans, unearned interest income, net deferred loan fees, and an allowance for loan
losses. Unearned interest on consumer loans is accreted into income by use of a method
which approximates the interest method over the lives of the related loans. Interest accrual
on loans is generally discontinued and uncollected accrued interest is reversed if principal
or interest payments become 90 days past due, unless the credit is well secured and in the
process of collection. Past due status is based on the contractual terms of the loan.
Income is subsequently recognized only to the extent that cash payments are received until,
in managements judgment, the borrowers ability to make interest and principal payments has
been demonstrated, in which case the loan is returned to accrual status.Allowance for Loan LossesThe 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). Changes in the allowance can result from changes in economic events or changes in
the creditworthiness of the borrowers. The effect of these changes is reflected when known.
Though management believes the allowance for loan losses to be adequate, ultimate losses
may vary from estimations. Specific allowances for impaired loans are generally based on
comparisons of the carrying values of the loans to the estimated fair value of the
collateral. The Company had no loans designated as impaired at December 31, 2006 or 2005.Loan Origination Fees, Loan Commitment Fees and Premiums and DiscountsAmortization of loan fees, net of certain direct costs of loan origination, are treated as
an adjustment to the yield of the related loan over the contractual term of the loan
adjusted for prepayments as they occur. Loan commitment fees are recognized into income
upon expiration of the commitment period or sale of the loan, unless the commitment results
in the loan being funded and maintained in the loan portfolio.Real Estate OwnedReal estate owned acquired through foreclosure is carried at the lower of cost or fair
value, less expected selling cost. 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.
 18




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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.Long-Lived AssetsLand is carried at cost. Premises and equipment are stated at cost less accumulated
depreciation computed on a straight-line basis over the estimated service lives of the
related assets (30 to 50 years for buildings, shorter of lease period or estimated life of
10 to 15 years for leasehold improvements and 3 to 10 years for equipment). Expenditures
for maintenance and repairs are charged to operations as incurred; expenditures for renewals
and improvements are capitalized and charged to operations through depreciation and
amortization charges. Equipment retired or sold is removed from the asset and related
accumulated depreciation amounts and any gain or loss resulting therefrom is reflected in
the accompanying consolidated statements of operations.The Company continually evaluates whether events and circumstances have occurred that
indicate such long-lived assets have been impaired. Measurement of any impairment of such
long-lived assets is based on those assets fair values and is recognized through a
valuation allowance with the resulting charge reflected in the accompanying consolidated
statements of operations. There were no impairment losses recorded during any period
reported herein.GoodwillThe Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
and ceased amortizing goodwill. Goodwill is analyzed for impairment annually and the
impairment testing completed at December 31, 2006 and 2005, indicated there was no goodwill
impairment.Bank Owned Life InsuranceThe Company has bank owned life insurance on certain current and former key officers of the
Company. The life insurance policies were purchased to reduce costs associated with certain
existing employee benefits. Increases in the cash surrender value of the policies, as well
as insurance proceeds received, are recorded as a component of non-interest income.Stock-Based CompensationPrior to January 1, 2006, the Company recorded compensation cost under APB Opinion No. 25,
Accounting for Stock Issued to Employeesand, accordingly, has not recognized compensation
cost through December 31, 2005 due to the fact that all options granted were priced at the
fair 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. As further discussed herein, the company adopted SFAS No. 123 (R), Share
Based Paymenton January 1, 2006.Earnings Per ShareBasic earnings per share (EPS) is computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock are exercised and
converted into common stock and is computed in the same manner, except the number of
weighted average shares outstanding is adjusted for the number of additional common shares
that would have been outstanding if the potential common shares had been issued.
 19




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##### 



PerNet
    
    
    
    
    
    
    ShareFor the Years Ended
    
    Income
    
    
    Shares
    
    
    AmountDecember 31, 2006Basic earnings per share
    
    $
    1,350,904
    
    
    
    1,493,234
    
    
    $
    0.90Dilutive securities
    
    
    
    
    
    
    16,819Diluted earnings per share
    
    $
    1,350,904
    
    
    
    1,510,053
    
    
    $
    0.89December 31, 2005Basic earnings per share
    
    $
    1,516,547
    
    
    
    1,547,381
    
    
    $
    0.98Dilutive securities
    
    
    
    
    
    
    28,660Diluted earnings per share
    
    $
    1,516,547
    
    
    
    1,576,041
    
    
    $
    0.96
  Recent Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting for Income Tax Uncertainties
 ccounting for Purchases of
Life Insurance 
 20




---



##### 



Fair Value Measurements
 , An Amendment to Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
  21




---



##### 



2.
    
    SECURITIESThe amortized cost, unrealized gross gains and losses, and estimated fair value of
securities available-for-sale at December 31, 2006 and 2005 are as follows:
 December 31, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gross Gain
    
    
    Gross Loss
    
    
    ValueSecurities of U.S. Government Agencies
    
    $
    50,976,966
    
    
    $
    0
    
    
    
    ($1,757,297
    )
    
    $
    49,219,669Other Securities
    
    
    716
    
    
    
    0
    
    
    
    0
    
    
    
    716Mortgage-Backed Securities
    
    
    39,044,773
    
    
    
    146,550
    
    
    
    (559,213
    )
    
    
    38,632,110$
    90,022,455
    
    
    $
    146,550
    
    
    
    ($2,316,510
    )
    
    $
    87,852,495
 December 31, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gross Gain
    
    
    Gross Loss
    
    
    ValueSecurities of U.S. Government Agencies
    
    $
    53,969,115
    
    
    $
    0
    
    
    
    ($2,205,136
    )
    
    $
    51,763,979Other Securities
    
    
    716
    
    
    
    0
    
    
    
    0
    
    
    
    716Mortgage-Backed Securities
    
    
    29,903,921
    
    
    
    35,575
    
    
    
    (1,050,260
    )
    
    
    28,889,236$
    83,873,752
    
    
    $
    35,575
    
    
    
    ($3,255,396
    )
    
    $
    80,653,931
 The amortized cost and estimated fair value of securities available-for-sale at
December 31, 2006 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because the issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
 Amortized
    
    
    FairCost
    
    
    ValueDue after one year through five years
    
    $
    50,977,682
    
    
    $
    49,220,385Due after five years through ten years
    
    
    0
    
    
    
    050,977,682
    
    
    
    49,220,385Mortgage-Backed Securities
    
    
    39,044,773
    
    
    
    38,632,110$
    90,022,455
    
    
    $
    87,852,495
 Securities of approximately $26 million and $30 million at December 31, 2006 and 2005,
respectively, were pledged to secure deposits. Deposits associated with pledged securities
had aggregate balances of approximately $24 million and $23 million at December 31, 2006 and
2005, respectively.Proceeds from the sale of available-for-sale securities during the year-ended December 31,
2006 and 2005 were $0 and $10.0 million, respectively. Gross realized gains on sales and
calls of available-for-sale securities were $60 and $0 during 2006 and 2005, respectively.
Gross realized losses on sales of available-for-sale securities were $0 and $350,591 during
2006 and 2005, respectively.
 22




---



##### 



The following table shows the Companys combined investments gross unrealized losses and
fair values, aggregated by investment category and length of time that individual securities
have been in continuous unrealized loss position, at December 31, 2006 and 2005.
 December 31, 2006Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Gross Loss
    
    
    Value
    
    
    Gross Loss
    
    
    Value
    
    
    Gross LossSecurities of U.S. Government
Agencies
    
    $
    0
    
    
    $
    0
    
    
    $
    49,219,669
    
    
    $
    1,757,297
    
    
    $
    49,219,669
    
    
    $
    1,757,297Mortgage-Backed Securities
    
    
    16,544,241
    
    
    
    9,418
    
    
    
    21,787,521
    
    
    
    549,795
    
    
    
    38,331,762
    
    
    
    559,213$
    16,544,241
    
    
    $
    9,418
    
    
    $
    71,007,190
    
    
    $
    2,307,092
    
    
    $
    87,551,431
    
    
    $
    2,316,510
 December 31, 2005Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Gross Loss
    
    
    Value
    
    
    Gross Loss
    
    
    Value
    
    
    Gross LossSecurities of U.S. Government
Agencies
    
    $
    5,829,401
    
    
    $
    43,004
    
    
    $
    45,934,536
    
    
    $
    2,162,132
    
    
    $
    51,763,937
    
    
    $
    2,205,136Mortgage-Backed Securities
    
    
    7,470,940
    
    
    
    204,464
    
    
    
    20,526,037
    
    
    
    845,796
    
    
    
    27,996,977
    
    
    
    1,050,260$
    13,300,341
    
    
    $
    247,468
    
    
    $
    66,460,573
    
    
    $
    3,007,928
    
    
    $
    79,760,914
    
    
    $
    3,255,396
 At December 31, 2006, the Company had 43 individual investment positions that were in
an unrealized loss position or impaired for more than twelve months. At December 31, 2005,
the Company had 37 individual investment positions that were in an unrealized loss position
or impaired for more than twelve months. All of these investment positions impairments are
deemed not to be other-than temporary impairments and are primarily due to the fact that
these securities have experienced volatility in their fair value as a result of current
market conditions, with no credit concerns related to the entities that issued the
securities. The Company does not expect any other than temporary impairment to develop
related to these investment securities and has the ability and intent to hold these
securities until maturity or a market price recovery.3.
    
    LOANS RECEIVABLELoans receivable, net at December 31, 2006 and 2005, are summarized as follows:
 2006
    
    
    2005Residential and commercial real estate mortgage loans with variable
rates
    
    $
    27,927,425
    
    
    $
    27,572,764Residential and commercial real estate mortgage loans with fixed rates
    
    
    36,634,930
    
    
    
    35,424,907Real estate construction loans
    
    
    21,645,224
    
    
    
    17,992,583Commercial loans
    
    
    16,345,673
    
    
    
    12,939,880Consumer loans
    
    
    12,482,033
    
    
    
    13,877,710115,035,285
    
    
    
    107,807,844Allowance for loan losses
    
    
    (1,382,190
    )
    
    
    (1,383,410
    )Unearned income
    
    
    (163,463
    )
    
    
    (168,917
    )$
    113,489,632
    
    
    $
    106,255,517
 23




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##### 



During fiscal years 2006 and 2005, certain executive officers and directors of the Bank were
loan customers of the Bank. Total loans outstanding to these persons at December 31, 2006
and 2006 amounted to $537,205 and $814,214, respectively. The change from December 31, 2005
to December 31, 2006 reflects payments amounting to $347,527 and advances of $70,518 made
during the year.The Bank has a credit concentration in residential and commercial real estate mortgage
loans. Approximately $65 million and $63 million at December 31, 2006 and 2005,
respectively, of the Banks total loan portfolio represented first or second mortgage
residential and commercial real estate loans. Substantially all of the Banks loan
customers are located in the Banks primary lending areas of Walker, Winston, Jefferson, and
Shelby counties in Alabama. Although the Bank believes that its underwriting standards are
generally conservative, including a policy calling for low loan to collateral values, the
ability of its borrowers to meet their mortgage obligations is dependent upon local economic
conditions. At December 31, 2006, the largest amount loaned by the Bank to one borrower was
$3.4 million, which was approximately 18% of the Companys stockholders equity.A reconciliation of the allowance for loan losses is as follows:
 2006
    
    
    2005Balance at beginning of year
    
    $
    1,383,410
    
    
    $
    1,167,263Charge-offs
    
    
    (619,680
    )
    
    
    (517,003
    )Recoveries
    
    
    213,460
    
    
    
    157,650Provision
    
    
    405,000
    
    
    
    575,500Balance at end of year
    
    $
    1,382,190
    
    
    $
    1,383,410
 The Bank was servicing first mortgage loans for others totaling $50,256,726 and $56,301,424
at December 31, 2006 and 2005, respectively. The liability associated with the Companys
total servicing portfolio at December 31, 2006 and 2005 was not deemed significant by the
Company.At December 31, 2006, the Bank had outstanding loan commitments of $37,389,528,including
$7,256,185 in undisbursed construction loans in process; $28,796,843 in unused lines and
letters of credit; and $1,336,500 in commitments to originate mortgage loans consisting
primarily of 30-day commitments. Commitments to originate conventional mortgage loans
consisted of fixed-rate mortgages all having terms ranging from 15 to 30 years.The Company had approximately $419,797 and $236,172 of loans classified as non-accrual at
December 31, 2006 and 2005, respectively. During the years ended December 31, 2006 and
2005, gross interest income of $3,140 and $4,888, respectively, would have been recorded on
loans accounted for on a non-accrual basis if the loans had been current throughout the
period. The amount of interest income included in current income for these loans was $7,387
and $3,161 for the years ended December 31, 2006 and 2005, respectively.4.
    
    REAL ESTATE OWNEDActivity in the allowance for losses on real estate owned is as follows:
 2006
    
    
    2005Balance at beginning of year
    
    $
    54,305
    
    
    $
    61,626Provision
    
    
    0
    
    
    
    0Charge-offs, net of recoveries
    
    
    0
    
    
    
    (7,321
    )Balance at end of year
    
    $
    54,305
    
    
    $
    54,305
 24




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##### 



5.
    
    PREMISES AND EQUIPMENTPremises and equipment at December 31, 2006 and 2005 are summarized as follows:
 2006
    
    
    2005Land
    
    $
    1,196,928
    
    
    $
    1,196,928Buildings and leasehold improvements
    
    
    8,122,001
    
    
    
    6,767,526Furniture, fixtures, and equipment
    
    
    5,594,772
    
    
    
    5,228,973Construction in Process
    
    
    0
    
    
    
    61,777Automobiles
    
    
    87,854
    
    
    
    96,01415,001,555
    
    
    
    13,351,218Less accumulated depreciation
    
    
    (7,925,938
    )
    
    
    (7,459,125
    )$
    7,075,617
    
    
    $
    5,892,093
 Depreciation expense for the fiscal years ended December 31, 2006 and 2005 on premises and
equipment was approximately $506,000 and $494,000, respectively.The Bank had noncancelable operating leases for the main and branch office sites. Occupancy
expenses for the fiscal years ended December 31, 2006 and 2005, include rental expense under
these leases of $118,181 and $121,616, respectively. Future rental payments subject to
periodic renegotiations required under these leases are as follows:
 At December 31, 2006
    
    Amount2007
    
    $
    84,0582008
    
    
    87,1182009
    
    
    60,6182010
    
    
    42,2562011
    
    
    43,092Thereafter
    
    
    257,700Total
    
    $
    574,842
 The Bank has a lease agreement for the building in which the main office branch is located
that generated income of $99,786 and $97,836 for the fiscal years ended December 31, 2006
and 2005 respectively. The Bank also has a lease from a related party for a building that
formerly housed administrative offices. This lease generated income of $56,000 for each of
the fiscal years ended December 31, 2006 and 2005 respectively.
 25




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##### 



6.
    
    DEPOSITSDeposits at December 31, 2006 and 2005 are summarized as follows:
 2006
    
    
    2005Passbook accounts
    
    $
    13,176,434
    
    
    $
    15,434,075NOW accounts
    
    
    27,297,429
    
    
    
    27,499,565Money market deposit accounts
    
    
    12,117,560
    
    
    
    7,310,568Noninterest-bearing accounts
    
    
    9,454,493
    
    
    
    10,686,51762,045,916
    
    
    
    60,930,725Time deposits:Fixed-rate certificates less than $100,000
    
    
    74,655,162
    
    
    
    71,341,503Fixed-rate certificates greater than $100,000
    
    
    69,868,921
    
    
    
    60,279,687144,524,083
    
    
    
    131,621,190$
    206,569,999
    
    
    $
    192,551,915
 The amounts and scheduled maturities of time deposits at December 31, 2006 are as follows:
 2007
    
    $
    117,064,4312008
    
    
    11,054,8072009
    
    
    10,375,3582010
    
    
    3,283,4342011 and thereafter
    
    
    2,746,053$
    144,524,083
 Interest expense on deposits is summarized as follows:
 2006
    
    
    2005Passbook accounts
    
    $
    49,458
    
    
    $
    58,434NOW accounts
    
    
    444,058
    
    
    
    154,106Money market deposit accounts
    
    
    219,823
    
    
    
    156,543Fixed-rate certificates less than $100,000
    
    
    2,920,640
    
    
    
    2,105,852Fixed-rate certificates greater than $100,000
    
    
    2,820,675
    
    
    
    1,882,560$
    6,454,654
    
    
    $
    4,357,495
 26




---



##### 



7.
    
    SUBORDINATED DEBTOn December 22, 2003, the Company established Pinnacle Capital Trust I (Trust), a
wholly-owned statutory business trust. The Company is the sole sponsor of the Trust and
acquired the Trusts common securities for $93,000. The Trust was created for the
exclusive purpose of issuing 30-year capital trust securities (Trust Preferred
Securities) in the aggregate amount of $3,000,000 and using proceeds 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 and the $3,093,000 obligation of the Company is included in
subordinated debt.The Trust Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR which is set each quarter and matures on December 22, 2033. Distributions
are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption
upon repayment of the Subordinated Debentures at their stated maturity date or their
earlier redemption in an amount equal to their liquidation amount plus accumulated and
unpaid distributions to the date of redemption. The Company guarantees the payment of
distributions and payments for redemption or liquidation of the Trust Preferred Securities
to the extent of funds held by the Trust. Pinnacle Bancshares, Inc.s obligation under the
Subordinated Debentures together with the guarantee and other back-up obligation, in
aggregate, constitute a full and unconditional guarantee by the Company of the
obligations of the Trust under the Trust Preferred Securities.The Subordinated Debentures are unsecured, bear an interest rate based on a spread over a
3 month LIBOR (equal to the spread paid by the Trust on the Trust Preferred Securities)
which is set each quarter and matures on December 30, 2033. Interest is payable
quarterly. The Company may defer the payment of interest at any time for a period not
exceeding 20 consecutive quarters provided that deferral period does not extend past the
stated maturity. During any such deferral period, distributions on the Trust Preferred
Securities will also be deferred and the Companys ability to
pay dividends on the common shares will be restricted.Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities
may be redeemed prior to maturity at the Companys option on or after January 7, 2009.The
Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in
the event of unfavorable changes in laws or regulations that result in (1) the Trust
becoming subject to federal income tax on income received on the Subordinated Debentures,
(2) interest payable by the Company on the Subordinated Debentures becoming non-deductible
for federal tax purposes, (3) the requirement for Trust Preferred Securities as Tier I
Capital under the Federal Reserve capital adequacy guidelines.Debt issuance cost of $54,000 consisting primarily of underwriting discounts and
professional fees are included in other assets in the accompanying consolidated statements
of financial condition as of December 31, 2006 These debt issuance costs are being
amortized over 30 years using the straight-line method.
 27




---



##### 



8.
    
    BORROWED FUNDSBorrowed funds at December 31, 2006 and 2005 are summarized as follows:
 2006
    
    2005Warrants payable:
    
    $
    0
    
    
    $
    2,375,000
  28




---



##### 



9.
    
    INCOME TAXESIncome tax expense included in the consolidated statements of operations, is comprised
of the following:
 Federal
    
    
    State
    
    
    TotalYear ended December 31, 2006:Current
    
    $
    598,733
    
    
    $
    50,527
    
    
    $
    649,260Deferred
    
    
    (28,906
    )
    
    
    (5,420
    )
    
    
    (34,326
    )$
    569,827
    
    
    $
    45,107
    
    
    $
    614,934Year ended December 31, 2005:Current
    
    $
    674,602
    
    
    $
    61,008
    
    
    $
    735,610Deferred
    
    
    (37,300
    )
    
    
    (7,063
    )
    
    
    (44,363
    )$
    637,302
    
    
    $
    53,945
    
    
    $
    691,247
 Total income tax expense differs from the amount determined by multiplying income before
income taxes by the statutory federal rate of 34%, as follows:
 2006
    
    
    2005Tax expense at federal income tax rate
    
    $
    668,385
    
    
    $
    750,650Increase (decrease) resulting from:State income tax, net of federal tax benefit
    
    
    29,771
    
    
    
    35,603Cash surrender value increase of bank owned
life insurance, net of premiums
    
    
    (106,073
    )
    
    
    (99,803
    )Other
    
    
    22,851
    
    
    
    4,797$
    614,934
    
    
    $
    691,247Effective income tax rate
    
    
    31.3
    %
    
    
    31.3
    %
 Temporary differences between the consolidated financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the net deferred
tax assets relate to the following:
 December 31,
    
    
    December 31,2006
    
    
    2005Allowance for loan losses
    
    $
    511,410
    
    
    $
    511,862Unrealized loss on securities available-for-sale
    
    
    824,585
    
    
    
    1,223,532Other real estate
    
    
    0
    
    
    
    9,698Other
    
    
    88,616
    
    
    
    77,444Deferred tax assets
    
    
    1,424,611
    
    
    
    1,822,536Premises & equipment, net
    
    
    (512,528
    )
    
    
    (566,130
    )FHLB stock
    
    
    (24,985
    )
    
    
    (24,985
    )Other real estate
    
    
    (20,298
    )
    
    
    0Deferred tax liabilities
    
    
    (557,811
    )
    
    
    (591,115
    )Net deferred tax assets
    
    $
    866,800
    
    
    $
    1,231,421
 In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projection for future taxable income
over the periods which the temporary differences resulting in the deferred tax and assets
are deductible, management believes it is more likely than not that the Company will realize
the benefits of these deductible differences.
 29




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##### 



10.
    
    COMPENSATION AND BENEFITSThe Bank maintains a noncontributory profit sharing plan and a contributory 401(k) plan.
The Companys contributions to these plans were $96,914 and $81,415 in fiscal years ended
December 31, 2006 and 2005, respectively.The Company and the Bank have an employment agreement with the chief executive officer
which provides for compensation and benefits in the event the chief executive officer is
terminated. The maximum aggregate liability at December 31, 2006 for termination is
approximately $436,789.11.
    
    LONG-TERM INCENTIVE COMPENSATION PLANThe Bank maintains the 1996 Stock Option and Incentive Plan (Option Plan), which provides
for a number of forms of stock-based compensation for key employees of the Company. Under
the Option Plan, eligible employees may be awarded incentive and nonqualified stock options,
stock appreciation rights, and restricted stock. The Option Plan provides for the issuance
of up to 170,000 shares of the Companys common stock. In addition, each option vests three
years after the grant date and expires no later than ten years after the grant date. The
exercise price of each option is determined by the stock option committee but, in the case
of incentive stock options, the price shall not be less than the fair value on the grant
date. The Company used the intrinsic value method for accounting for stock based employee
compensation in 2005 and the fair value method in 2006.A summary of the status of the Companys stock option plan at December 31, 2006 and 2005 and
the changes during the years then ended is as follows:
 2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    62,333
    
    
    $
    9.19
    
    
    
    70,366
    
    
    $
    9.30Granted
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Exercised
    
    
    (44,500
    )
    
    
    8.81
    
    
    
    (6,033
    )
    
    
    10.13Forfeited
    
    
    0
    
    
    
    0
    
    
    
    (2,000
    )
    
    
    10.13Outstanding at end of year
    
    
    17,833
    
    
    $
    10.13
    
    
    
    62,333
    
    
    $
    9.19Exercisable at end of year
    
    
    17,833
    
    
    $
    10.13
    
    
    
    62,333
    
    
    $
    9.19Fair value of options granted
    
    
    N/A
    
    
    
    
    
    
    
    N/A
 During the years ended December 31, 2006 and 2005, the aggregate intrinsic value of options
exercised was $645,740 and $23,702, respectively, determined as of the date of option
exercise. As of December 31, 2006 there was no unrecognized compensation cost related to
unvested options, as there no unvested options.The following table summarizes information about these stock options at December 31, 2006:
 Number outstanding
    
    Remaining
    
    AggregateExercise
    
    At
    
    Contractual
    
    IntrinsicPrice
    
    December 31, 2006
    
    Life
    
    Value$10.13
    
    
    17,833
    
    
    2.4 years
    
    $
    100,043
 30




---



##### 



12.
    
    STOCKHOLDERS EQUITYDividends are paid by the Company from funds provided by dividends from the Bank. However,
certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to
the Company in the form of cash dividends, loans, or advances. As of January 1, 2007,
approximately $1.5 million of the Banks retained earnings was available for distribution
without prior regulatory approval.The Company and the Bank are subject to various regulatory capital requirements that
prescribe quantitative measures of the Companys and Banks assets, liabilities, and certain
off-balance sheet items. The regulators have also imposed qualitative guidelines for
capital amounts and classifications such as risk weightings, capital components, and other
details. The quantitative measures to ensure capital adequacy require that the Company and
the Bank maintain amounts and ratios, as set forth in the schedule below, of Total and Tier
I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I
capital to average total assets (as defined). Failure to meet minimum capital requirements
can initiate certain actions by regulators that, if undertaken, could have a direct material
effect on the Companys financial statements. Management believes, as of December 31, 2006
and 2005, that the Company and the Bank meet all capital adequacy requirements imposed by
its regulators.As of December 31, 2006 and 2005, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There have been no conditions or events since that notification that
Management believes have changed the institutions category.Actual capital amounts as well as required and well capitalized Tier I, Total, and Tier I
leverage ratios as of December 31, 2006 for the Company and the Bank are as follows:
 To be Well-CapitalizedUnder PromptFor Capital
    
    CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollar Amounts in Thousands)As of December 31, 2006:Total Capital (to Risk Weighted Assets):Consolidated
    
    
    24,835
    
    
    
    18.0
    %
    
    3$
    11,044
    
    
    
    38.0
    %
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    21,835
    
    
    
    15.8
    
    
    3$
    11,044
    
    
    
    38.0
    
    
    3$
    13,606
    
    
    
    310.0
    %Tier I Capital (to Risk Weighted Assets):Consolidated
    
    
    23,453
    
    
    
    17.0
    
    
    
    35,522
    
    
    
    34.0
    
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    20,453
    
    
    
    14.8
    
    
    
    35,522
    
    
    
    34.0
    
    
    
    38,283
    
    
    
    36.0Tier I Capital (to Average Assets):Consolidated
    
    
    23,453
    
    
    
    10.2
    
    
    
    39,212
    
    
    
    34.0
    
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    20,453
    
    
    
    8.9
    
    
    
    39,212
    
    
    
    34.0
    
    
    
    311,515
    
    
    
    35.0As of December 31, 2005:Total Capital (to Risk Weighted Assets):Consolidated
    
    $
    25,491
    
    
    
    19.9
    %
    
    3$
    10,259
    
    
    
    38.0
    %
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    22,491
    
    
    
    17.5
    
    
    3$
    10,259
    
    
    
    38.0
    
    
    3$
    12,824
    
    
    
    310.0
    %Tier I Capital (to Risk Weighted Assets):Consolidated
    
    
    24,108
    
    
    
    18.8
    
    
    
    35,130
    
    
    
    34.0
    
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    21,108
    
    
    
    16.5
    
    
    
    35,130
    
    
    
    34.0
    
    
    
    37,694
    
    
    
    36.0Tier I Capital (to Average Assets):Consolidated
    
    
    24,108
    
    
    
    11.0
    
    
    
    38,784
    
    
    
    34.0
    
    
    
    N/A
    
    
    
    N/APinnacle Bank
    
    
    21,108
    
    
    
    9.6
    
    
    
    38,784
    
    
    
    34.0
    
    
    
    310,981
    
    
    
    35.0
 31




---



##### 



As of December 31, 2006, 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.On June 28, 2006, 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 73,900 shares. The stock repurchase program is intended to
improve liquidity in the market for the common stock, to increase per share earnings and
book value, and to provide a higher rate of return for the Companys funds. As of December
31, 2006 the Company had repurchased 58,040 shares at an average price of $14.83 per share
under the supplemental stock repurchase program. In addition during 2006, the Company
repurchased 63,100 shares at an average price of $14.86 per share. The Company may consider
additional repurchase programs in the future.Comprehensive IncomeComprehensive income is the change in equity during a period from transactions and other
events and circumstances from nonowner sources. For the Company, comprehensive income
includes changes in unrealized gains and losses on securities available-for-sale and net
income.In the calculation of comprehensive income, certain reclassification adjustments are made to
avoid double- counting items that are displayed as part of net income and accumulated other
comprehensive income in that period or earlier periods.The following table reflects the reclassification amounts and the related tax effects for
the two years ended December 31:
 2006Before
    
    
    
    
    
    
    AfterTax
    
    
    Tax
    
    
    TaxAmount
    
    
    Effect
    
    
    AmountUnrealized gains arising during the year
    
    $
    1,049,921
    
    
    $
    (398,969
    )
    
    $
    650,952Reclassification for adjustments for
gains included in net earnings
    
    
    (60
    )
    
    
    22
    
    
    
    (38
    )Net change in unrealized gains on securities
    
    $
    1,049,861
    
    
    $
    (398,947
    )
    
    $
    650,914
 2005Before
    
    
    
    
    
    
    AfterTax
    
    
    Tax
    
    
    TaxAmount
    
    
    Effect
    
    
    AmountUnrealized losses arising during the year
    
    $
    (2,176,807
    )
    
    $
    823,681
    
    
    $
    (1,353,126
    )Reclassification for adjustments for
losses included in net earnings
    
    
    350,591
    
    
    
    (129,719
    )
    
    
    220,872Net change in unrealized losses on securities
    
    $
    (1,826,216
    )
    
    $
    693,962
    
    
    $
    (1,132,254
    )
 13.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTSSFAS No. 107, Disclosure About Fair Value of Financial Instruments,requires disclosure of
fair value information about financial instruments, whether or not recognized in the
consolidated statement of financial condition, for which it is practicable to estimate that
value. Financial instruments are defined as cash, evidence of ownership in an entity,
contracts that convey either a right to receive cash or other financial instruments or an
obligation to deliver cash or other financial instruments, or contracts that convey the
right or obligation to exchange financial instruments on potentially favorable or
unfavorable terms. The Company has a variety of financial instruments, which include items
recorded on the consolidated statements of financial condition and items which, by their
nature, are not recorded on the consolidated statements of financial condition.
 32




---



##### 



Quoted market prices, if available, are utilized as an estimate of the fair value of
financial instruments. In cases where quoted market prices are not available, fair values
have been estimated using present value or other valuation techniques. These methods are
highly sensitive to the assumptions used by management, such as those concerning appropriate
discount rates and estimates of future cash flows. Different assumptions could
significantly affect the estimated fair value amounts presented above. In that regard, the
derived fair value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in the immediate settlement of the instrument.
Further, assets that are not financial instruments are not included in the following table.
Accordingly, the aggregate estimated fair value amounts presented do not represent the
underlying value of the Company.A summary of the Companys disclosure of fair value of financial instruments made in
accordance with the requirements of SFAS No. 107 is as follows:
 At December 31, 2006
    
    At December 31, 2005Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In Thousands)ASSETS:Cash on hand and in banks
    
    $
    4,206
    
    
    $
    4,206
    
    
    $
    3,785
    
    
    $
    3,785Interest-bearing deposits in other banks
    
    
    8,599
    
    
    
    8,599
    
    
    
    13,369
    
    
    
    13,369Securities available-for-sale
    
    
    87,852
    
    
    
    87,852
    
    
    
    80,654
    
    
    
    80,654FHLB stock
    
    
    532
    
    
    
    532
    
    
    
    507
    
    
    
    507FNBB stock
    
    
    525
    
    
    
    525
    
    
    
    525
    
    
    
    525Loans held for sale
    
    
    975
    
    
    
    975
    
    
    
    374
    
    
    
    374Loans receivable, net
    
    
    113,490
    
    
    
    113,233
    
    
    
    106,255
    
    
    
    106,912Accrued interest receivable
    
    
    1,536
    
    
    
    1,536
    
    
    
    1,373
    
    
    
    1,373LIABILITIES:Deposits
    
    $
    206,570
    
    
    $
    206,723
    
    
    $
    192,552
    
    
    $
    192,069Subordinated Debt
    
    
    3,093
    
    
    
    3,093
    
    
    
    3,093
    
    
    
    3,093Borrowed funds
    
    
    0
    
    
    
    0
    
    
    
    2,375
    
    
    
    2,841Accrued interest payable
    
    
    1,263
    
    
    
    1,263
    
    
    
    786
    
    
    
    786
 The following methods and assumptions were used by the Company in estimating the fair values
provided above:Cash on Hand and in Banks and Interest-Bearing Deposits in Other Banks. The carrying value
of highly liquid instruments, such as cash on hand and in banks and interest-bearing
deposits are considered to approximate their fair values. The carrying amount of accrued
interest in these instruments approximates its fair value.Securities Available-For-Sale and Loans Held for Sale. Substantially all of the Companys
securities available-for-sale and loans held for sale, primarily to third-party investors,
have a readily determinable fair value. Fair values for these securities are based on
quoted market prices, where available. If not available, fair values are based on market
prices of comparable instruments. The carrying amount of accrued interest on these
instruments approximates its fair value.FHLB and FNBB Stock.The FHLB and FNBB stock have historically repurchased their stock at
cost, as no readily available market exists. Therefore the carrying amount is considered a
reasonable estimate of its fair value.Loans Receivable, Net. For loans with rates that are repriced in coordination with
movements in market rates and with no significant credit risk, fair value estimates are
based on carrying values. The fair value for certain mortgage loans is based on quoted
market prices of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair values for other loans are
estimated by
 33




---



##### 



discounting future cash flows using current rates at which loans with similar terms would be made to borrowers
of similar credit ratings. The carrying amount of accrued interest on loans approximates
its fair value.Deposits. The fair value of deposits with no stated maturity, such as interest and
noninterest-bearing deposits, NOW accounts, savings accounts, and money market accounts, is
by definition, equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for certificates of deposits are estimated using a
discounted cash flow analysis that applies rates currently offered for certificates of
deposits with similar remaining maturities. The carrying amount of accrued interest payable
on deposits approximates its fair value.The economic value attributed to the long-term relationship with depositors who provide
low-cost funds to the Company is considered to be a separate intangible asset and is
excluded from the presentation.Subordinated Debt.The carrying amount of subordinated debt approximates its fair value.Borrowed Funds. The fair value of borrowed funds is estimated using discounted cash flow
analyses, based on the current rates offered for similar borrowing arrangements. The
carrying amount of accrued interest payable on borrowed funds approximates its fair value.Off-Balance Sheet Items. Off-balance sheet financial instruments include commitments to
extend credit and letters of credit to be held in the Banks loan portfolio. The fair value
of such instruments is negligible since the arrangements are at current rates, and are for
short periods, and have no significant credit exposure.14.
    
    CONTINGENCIESThe Company and the Bank are parties to litigation and claims arising in the normal course
of business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be material to the
consolidated financial statements.
 34




---



##### 



15.
    
    CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
 STATEMENTS OF CONDITION
 DECEMBER 31, 2006 AND 2005
(In Thousands)
 2006
    
    
    2005ASSETS:Cash and cash equivalents
    
    $
    2
    
    
    $
    1Interest-bearing deposits in other banks
    
    
    1,153
    
    
    
    2,729Debt issue cost
    
    
    54
    
    
    
    56Investment in unconsolidated subsidiary
    
    
    93
    
    
    
    93Investment in Pinnacle Bank
    
    
    21,053
    
    
    
    19,590Other assets
    
    
    208
    
    
    
    89Total assets
    
    $
    22,563
    
    
    $
    22,558LIABILITIES:Subordinated debt
    
    $
    3,093
    
    
    $
    3,093Other liabilities
    
    
    64
    
    
    
    55Total liabilities
    
    
    3,157
    
    
    
    3,148STOCKHOLDERS EQUITY:Common stock
    
    
    19
    
    
    
    18Additional paid in capital
    
    
    8,923
    
    
    
    8,480Treasury shares at cost
    
    
    (5,286
    )
    
    
    (3,489
    )Retained earnings
    
    
    17,104
    
    
    
    16,406Accumulated other comprehensive loss, net of tax
    
    
    (1,354
    )
    
    
    (2,005
    )Total stockholders equity
    
    
    19,406
    
    
    
    19,410Total liabilities and stockholders equity
    
    $
    22,563
    
    
    $
    22,558
 35




---



##### 



STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 (In Thousands)
 2006
    
    
    2005INCOME:Dividend income from Pinnacle Bank
    
    $
    653
    
    
    $
    682Interest income
    
    
    87
    
    
    
    83Total income
    
    
    740
    
    
    
    765EXPENSE
    
    
    253
    
    
    
    204INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY
    
    
    487
    
    
    
    561EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY
    
    
    864
    
    
    
    956Net income
    
    $
    1,351
    
    
    $
    1,517
 STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 (In Thousands)
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,351
    
    
    $
    1,517Adjustments to reconcile net income to net cash provided by operating activities:Undistributed income of subsidiary
    
    
    (864
    )
    
    
    (956
    )Increase in other assets
    
    
    (119
    )
    
    
    (46
    )Increase in other liabilities
    
    
    63
    
    
    
    57Net cash provided by operating activities
    
    
    431
    
    
    
    572CASH FLOWS FROM INVESTING ACTIVITIES:Net change in interest bearing deposits in other banks
    
    
    1,576
    
    
    
    306Net cash provided by investing activities
    
    
    1,576
    
    
    
    306CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase of shares of common stock
    
    
    (1,797
    )
    
    
    (268
    )Proceeds from stock options exercised
    
    
    444
    
    
    
    61Cash dividends paid
    
    
    (653
    )
    
    
    (682
    )Net cash used in financing activities
    
    
    (2,006
    )
    
    
    (889
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1
    
    
    
    (11
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    1
    
    
    
    12CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    2
    
    
    $
    1
 36




---



##### 



16.
    
    INVESTMENT IN AFFILIATED COMPANIES (unaudited)Investments in affiliated companies accounted for under the equity method consist of 100% of
common stock of Pinnacle Capital Trust I (Trust), a wholly-owned statutory business trust.
The Trust was formed on December 22, 2003. Summary unaudited financial information for the
Trust as of December 31, 2006 and 2005 follows (dollars in thousands):
 SUMMARY BALANCE SHEET
  2006
    
    
    2005ASSETS:Investment in subordinated debentures issued by Pinnacle Bancshares, Inc.
    
    $
    3,093
    
    
    $
    3,093LIABILITIES:
    
    $
    0
    
    
    $
    0EQUITY:Trust preferred securities
    
    
    3,000
    
    
    
    3,000Common stock (100% owned by Pinnacle Bancshares, Inc.)
    
    
    93
    
    
    
    93TOTAL EQUITY
    
    
    3,093
    
    
    
    3,093TOTAL LIABILITIES & EQUITY
    
    $
    3,093
    
    
    $
    3,093
 SUMMARY INCOME STATEMENT
  2006
    
    
    2005INCOME:Interest income from subordinated debentures issued
by Pinnacle Bancshares, Inc.
    
    $
    253
    
    
    $
    198NET INCOME
    
    $
    253
    
    
    $
    198
 37




---



##### 



SELECTED QUARTERLY INFORMATION (UNAUDITED)
  First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterYear Ended December 31, 2006:Interest revenue
    
    $
    3,125,951
    
    
    $
    3,232,336
    
    
    $
    3,411,610
    
    
    $
    3,495,147Interest expense
    
    
    1,480,064
    
    
    
    1,627,966
    
    
    
    1,733,766
    
    
    
    1,880,125Net interest income after provision for loan losses
    
    
    1,510,887
    
    
    
    1,491,870
    
    
    
    1,542,844
    
    
    
    1,592,522Noninterest income
    
    
    428,180
    
    
    
    503,552
    
    
    
    537,739
    
    
    
    420,496Noninterest expense
    
    
    1,520,817
    
    
    
    1,444,509
    
    
    
    1,609,343
    
    
    
    1,487,583Net income
    
    
    291,658
    
    
    
    375,733
    
    
    
    324,890
    
    
    
    358.623Basic earnings per share
    
    
    0.19
    
    
    
    0.25
    
    
    
    0.22
    
    
    
    0.24Diluted earnings per share
    
    
    0.19
    
    
    
    0.25
    
    
    
    0.22
    
    
    
    0.24Year Ended December 31, 2005:Interest revenue
    
    $
    2,689,858
    
    
    $
    2,814,367
    
    
    $
    2,970,511
    
    
    $
    3,084,847Interest expense
    
    
    1,002,142
    
    
    
    1,094,753
    
    
    
    1,240,265
    
    
    
    1,380,141Net interest income after provision for loan losses
    
    
    1,531,716
    
    
    
    1,572,614
    
    
    
    1,592,746
    
    
    
    1,569,706Noninterest income
    
    
    447,435
    
    
    
    469,070
    
    
    
    560,922
    
    
    
    338,364Noninterest expense
    
    
    1,511,035
    
    
    
    1,446,521
    
    
    
    1,471,387
    
    
    
    1,445,836Net income
    
    
    326,055
    
    
    
    406,769
    
    
    
    461,508
    
    
    
    322,215Basic earnings per share
    
    
    0.21
    
    
    
    0.26
    
    
    
    0.30
    
    
    
    0.21Diluted earnings per share
    
    
    0.21
    
    
    
    0.26
    
    
    
    0.29
    
    
    
    0.21
 38




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##### 



CORPORATE INFORMATION
Directors  Pinnacle Bancshares, Inc.
and Pinnacle Bank
 President, Dependable True Value Hardware, Inc
 CPA
Haynes Downard LLP
 Insurance Agent, Pittman & Associates, Inc.
 Retired
 Chairman of the Board & Chief Executive Officer,
Murphy Manufacturing, Inc
 President
Pinnacle Bancshares, Inc.
Pinnacle Bank
 Retired
Chairman of the Board
Pinnacle Bancshares, Inc.
Pinnacle Bank
 Consultant
Birmingham Business Consultants, LLC
 Executive Officers  Pinnacle Bancshares, Inc.
 President
 Vice President & Corporate Secretary
 Treasurer
 39




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##### 



Officers
 Pinnacle Bank
 President
 Senior Vice President Banking Services
& Corporate Secretary
 Vice President & Controller
 Vice President  Lending & Business Development
 Vice President- Lending    Vice President- Loan Servicing
& Compliance Officer
 Vice President  Mortgage Lending
 Vice President  Lending
 Vice President & I.S. Officer
& GLBA Security Officer
 Haleyville Regional President
 Vice President  Lending
 Birmingham Regional President
 Vice President
 Vice President-Commercial Loan Officer
 Vice President-Commercial Loan Officer
 Vice President-Office Manager  Sumiton
 Vice President-Secondary Marketing
 40




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##### 



Offices
 Transfer Agent
 General Counsel
 Auditors
 Additional Information
 Annual Meeting
 FORM 10-KSB
A copy of the Pinnacle Bancshares, Inc. Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2006, as filed with
the Securities and Exchange Commission is available to
stockholders of record for the 2006 Annual Meeting
without charge upon written request to
Marie Guthrie
Pinnacle Bancshares, Inc.
Post Office Box 1388
Jasper, Alabama 35502-1388
 41