##### Table of Contents



U.S. SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-KSB
 (Mark One)  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 1-12707 PINNACLE BANCSHARES, INC. 
  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)
    
    (Zip Code)
 Issuers telephone number, including area code: (205) 221-4111. Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange
on Which RegisteredCommon Stock, par value $.01 per share
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None. Check whether the issuer (1) has 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. YESþ NO o Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained
in this form, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o State issuers revenues for its most recent fiscal year. $12,399,624 The aggregate market value of the voting stock held by non-affiliates, computed by reference to the
price $15.38 per share) at which the Common Stock was sold on March 22, 2005, was approximately
$19,615,470. For purposes of this calculation, the term affiliate refers to all executive
officers and directors of the registrant and all stockholders beneficially owning more than 10% of
the registrants Common Stock. As of the close of business on March 25, 2005, 1,549,778 shares of the registrants Common Stock
were outstanding. Transitional Small Business Disclosure Format: YES o NO þ Documents Incorporated By Reference Part II:
Annual Report to Stockholders for the year ended December 31, 2004. Part III:
Portions of the definitive proxy statement for the 2005 Annual Meeting of Stockholders.




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TABLE OF CONTENTS  PART IItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6. Managements Discussion and Analysis or Plan of OperationItem 7. Financial StatementsItem 8. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors and Executive Officers of the RegistrantItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. Exhibits and Reports on Form 8-KItem 14 . Principal Accountant Fees and ServicesSIGNATURESEX-13 ANNUAL REPORTEX-14 CODE OF ETHICSEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF KPMG LLPEX-31 SECTION 302 CERTIFICATIONS OF THE CEO & CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO & CFO    Table of Contents  
 PART I Item 1. Description of Business General The Holding Company. Pinnacle Bancshares, Inc. (the Holding Company) is a bank holding
company incorporated under the laws of the State of Delaware. The Holding Company is registered
under the Bank Holding Company Act of 1956, as amended (the Holding Company Act). The Holding
Company is the holding company for Pinnacle Bank (the Bank), which was chartered by the State of
Alabama and acquired by the Holding Company on January 31, 1997. The Holding Companys executive offices and the main office of the Bank are located at 1811
Second Avenue, Jasper, Alabama 35502. The Holding Companys telephone number is (205) 221-4111. The Bank. The Bank is an Alabama-chartered commercial bank with six offices located in
Central and Northwest Alabama. The Bank converted from a federal stock savings bank to an
Alabama-chartered commercial bank on January 31, 1997 in connection with the holding company
reorganization. The Bank has its main office at 1811 Second Avenue, Jasper, Alabama, and also has
a branch office in Jasper, Alabama, with other branch offices in Sumiton, Haleyville, Vestavia and
Trussville, Alabama. The Bank is primarily engaged in the business of obtaining funds in the form of savings
deposits and investing such funds in mortgage loans on single-family residential real estate. To a
lesser extent the Bank is engaged in making consumer loans, commercial real estate loans, and other
commercial loans. The principal sources of funds for the Banks lending activities are savings deposits, Federal
Home Loan Bank (FHLB) of Atlanta advances, principal repayments of loans, sales of loans, and
maturities and sales of available-for-sale securities. The Banks principal sources of income are
interest on loans, servicing and commitment fees, and interest and dividends on securities. Its
principal expenses are interest on savings deposit accounts and borrowings, and general and
administrative expenses. 2




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##### Table of Contents



Selected Financial and Other Data The following data should be read in conjunction with the consolidated financial
statements and accompanying notes thereto, and other financial information included elsewhere
herein. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Financial Condition and Other Data:Total amount of:Assets
    
    $
    207,832
    
    
    $
    208,574
    
    
    $
    218,290
    
    
    $
    210,020
    
    
    $
    230,269Loans, net
    
    
    99,600
    
    
    
    105,477
    
    
    
    119,375
    
    
    
    131,284
    
    
    
    152,021Interest-bearing deposits in other banks
    
    
    485
    
    
    
    256
    
    
    
    357
    
    
    
    2,466
    
    
    
    1,136Securities
    
    
    89,025
    
    
    
    83,325
    
    
    
    75,301
    
    
    
    61,838
    
    
    
    61,069Loans held for sale
    
    
    1,206
    
    
    
    1,428
    
    
    
    4,969
    
    
    
    3,875
    
    
    
    1,337Deposits
    
    
    179,966
    
    
    
    179,939
    
    
    
    188,955
    
    
    
    193,498
    
    
    
    187,471Subordinated debt
    
    
    3,093
    
    
    
    3,093
    
    
    
    0
    
    
    
    0
    
    
    
    0Other borrowed funds
    
    
    2,580
    
    
    
    3,465
    
    
    
    5,940
    
    
    
    3,100
    
    
    
    20,500Stockholders equity
    
    
    19,914
    
    
    
    19,431
    
    
    
    19,955
    
    
    
    19,012
    
    
    
    19,230Number of:Real estate loans outstanding
    
    
    2,116
    
    
    
    2,263
    
    
    
    2,504
    
    
    
    2,911
    
    
    
    3,209Savings accounts
    
    
    13,157
    
    
    
    13,624
    
    
    
    14,301
    
    
    
    14,485
    
    
    
    14,962Full service offices open
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
 Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)Operating Data:Interest
income
    
    $
    10,636
    
    
    $
    11,287
    
    
    $
    13,103
    
    
    $
    15,823
    
    
    $
    17,805Interest
expense
    
    
    3,516
    
    
    
    3,906
    
    
    
    5,982
    
    
    
    9,192
    
    
    
    10,573Net interest income
before provision
for loan losses
    
    
    7,120
    
    
    
    7,381
    
    
    
    7,121
    
    
    
    6,631
    
    
    
    7,232Provision for loan
losses
    
    
    588
    
    
    
    963
    
    
    
    647
    
    
    
    1,942
    
    
    
    530Net interest income
after provision for
losses
    
    
    6,532
    
    
    
    6,418
    
    
    
    6,474
    
    
    
    4,689
    
    
    
    6,702Noninterest
income
    
    
    1,763
    
    
    
    2,845
    
    
    
    2,157
    
    
    
    1,758
    
    
    
    1,250Noninterest
expense
    
    
    5,794
    
    
    
    5,569
    
    
    
    5,593
    
    
    
    5,306
    
    
    
    5,152Income tax
expense
    
    
    769
    
    
    
    1,268
    
    
    
    1,025
    
    
    
    350
    
    
    
    1,058Income before
extraordinary
item
    
    
    1,732
    
    
    
    2,426
    
    
    
    2,013
    
    
    
    791
    
    
    
    1,742Extraordinary item,
net of tax benefit
of $63
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    108
    
    
    
    0Net income
    
    $
    1,732
    
    
    $
    2,426
    
    
    $
    2,013
    
    
    $
    683
    
    
    $
    1,742
 3




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##### Table of Contents



The following table sets forth certain information relating to the Banks average
interest-earning assets and interest-bearing liabilities and reflects the average yields on assets
and average cost of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if any, are included
in the net loan category. Average balances are derived from month-end average balances. Management
does not believe that the use of month-end average balances instead of average daily balances has
caused any material difference in the information presented. For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    105,583
    
    
    $
    7,294
    
    
    
    6.9
    %
    
    $
    117,465
    
    
    $
    8,299
    
    
    
    7.1
    %
    
    $
    126,507
    
    
    $
    9,524
    
    
    
    7.5
    %Securities available-for-sale
    
    
    85,318
    
    
    
    3,298
    
    
    
    3.9
    %
    
    
    79,034
    
    
    
    2,964
    
    
    
    3.8
    %
    
    
    71,735
    
    
    
    3,506
    
    
    
    4.9
    %Other
    
    
    2,904
    
    
    
    44
    
    
    
    1.5
    %
    
    
    2,189
    
    
    
    23
    
    
    
    1.1
    %
    
    
    4,328
    
    
    
    73
    
    
    
    1.7
    %Total interest earning assets
    
    
    193,805
    
    
    
    10,636
    
    
    
    5.5
    %
    
    
    198,688
    
    
    
    11,286
    
    
    
    5.7
    %
    
    
    202,570
    
    
    
    13,103
    
    
    
    6.5
    %Non-interest-earning assets
    
    
    16,787
    
    
    
    
    
    
    
    
    
    
    
    16,867
    
    
    
    
    
    
    
    
    
    
    
    16.193Total assets
    
    $
    210,592
    
    
    
    
    
    
    
    
    
    
    $
    215,555
    
    
    
    
    
    
    
    
    
    
    $
    218,763Interest-bearing liabilities:Deposits
    
    $
    181,296
    
    
    
    3,200
    
    
    
    1.8
    %
    
    $
    186,713
    
    
    
    3,710
    
    
    
    2.0
    %
    
    $
    193,073
    
    
    
    5,789
    
    
    
    3.0
    %Subordinated debt
    
    
    3,093
    
    
    
    143
    
    
    
    4.6
    %
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Borrowed funds
    
    
    4,159
    
    
    
    173
    
    
    
    4.2
    %
    
    
    5,384
    
    
    
    195
    
    
    
    3.6
    %
    
    
    4,179
    
    
    
    194
    
    
    
    4.6
    %Total interest-bearing
liabilities:
    
    
    188,548
    
    
    
    3,516
    
    
    
    1.9
    %
    
    
    192,173
    
    
    
    3,905
    
    
    
    2.0
    %
    
    
    197,252
    
    
    
    5,983
    
    
    
    3.0
    %Non-interest-bearing liabilities
    
    
    2,365
    
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    
    
    
    
    
    
    
    
    1,464Total Liabilities:
    
    
    190,913
    
    
    
    
    
    
    
    
    
    
    
    196,060
    
    
    
    
    
    
    
    
    
    
    
    198,716Equity
    
    
    19,679
    
    
    
    
    
    
    
    
    
    
    
    19,495
    
    
    
    
    
    
    
    
    
    
    
    20,047Total Liabilities and Equity
    
    $
    210,592
    
    
    
    
    
    
    
    
    
    
    $
    215,555
    
    
    
    
    
    
    
    
    
    
    $
    218,763Net interest-earning assets
    
    $
    5,257
    
    
    
    
    
    
    
    
    
    
    $
    6,515
    
    
    
    
    
    
    
    
    
    
    $
    5,318Net interest income
    
    
    
    
    
    $
    7,120
    
    
    
    
    
    
    
    
    
    
    $
    7,381
    
    
    
    
    
    
    
    
    
    
    $
    7,120Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.6
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3.5
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3.5
    %Ratio of average
interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    102.8
    %
    
    
    
    
    
    
    
    
    
    
    103.4
    %
    
    
    
    
    
    
    
    
    
    
    102.7
    %
 4




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##### Table of Contents



Lending Activities General. The Banks net loan portfolio totaled $99.6 million at December 31, 2004, or 47.9%
of its total assets. On that date, $76.4 million, or 76% of total net loans outstanding, consisted
of loans secured by mortgages on residential, construction loans, and commercial real estate loans,
while the remainder of the loan portfolio consisted of commercial and consumer loans. The principal lending activity of the Bank historically has been the origination of
conventional first mortgage single-family loans. The Bank also makes commercial real estate,
construction, commercial and consumer loans. The majority of the Banks loans have been originated
within its primary market area. The Banks volume of total loans originated to be retained in the Banks loan portfolio
totaled approximately $64.1 million during the year ended December 31, 2004, and $63.1 million
during the year ended December 31, 2003. The Bank directly originates most of its mortgage loans
through its existing branches. These loans have been originated predominantly within the Banks
geographical lending area of Walker, Jefferson, Shelby, Winston and Fayette counties, in Alabama.
See   Loan Solicitation and Processing and  Loan Originations, Purchases and Sales. The Bank seeks to improve the interest rate sensitivity of its mortgage loan portfolio through
the origination of adjustable rate loans, which constituted approximately 66% of the single-family
residential mortgage loans in the Banks loan portfolio, and 30% of the Banks net loan portfolio
at December 31, 2004. Most adjustable rate mortgage loans are held in the Banks loan portfolio,
while most fixed-rate mortgage loans are either sold as whole loans to the Federal Home Loan
Mortgage Corporation (FHLMC) or the Federal National Mortgage Association (FNMA) or other
investors, or converted into mortgage-backed securities with servicing retained by the Bank. The following table sets forth, in dollar amonts and percentages, the major categories of the
Banks loans. December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002(Dollars in thousands)Type of loan:Residential and commercial
real estate mortgage loans
    
    $
    64,361
    
    
    
    63.6
    %
    
    $
    69,037
    
    
    
    65.5
    %
    
    $
    80,189
    
    
    
    67.2
    %Construction loans
    
    
    12,019
    
    
    
    12.4
    %
    
    
    14,060
    
    
    
    13.3
    %
    
    
    15,329
    
    
    
    12.8
    %Commercial loans
    
    
    10,807
    
    
    
    11.2
    %
    
    
    10,568
    
    
    
    10.0
    %
    
    
    11,549
    
    
    
    9.7
    %Consumer loans
    
    
    13,709
    
    
    
    14.2
    %
    
    
    13,444
    
    
    
    12.7
    %
    
    
    13,834
    
    
    
    11.6
    %LessDiscounts and other
    
    
    129
    
    
    
    0.1
    %
    
    
    165
    
    
    
    0.2
    %
    
    
    204
    
    
    
    0.2
    %Allowance for loan losses
    
    
    1,167
    
    
    
    1.3
    %
    
    
    1,467
    
    
    
    1.3
    %
    
    
    1,322
    
    
    
    1.1
    %Total
    
    $
    99,600
    
    
    
    100.00
    %
    
    $
    105,477
    
    
    
    100.00
    %
    
    $
    119,375
    
    
    
    100.00
    %
 December 31,2001
    
    
    
    
    
    
    2000(Dollars in thousands)Type of loan:Residential and Commercial
real estate mortgage loans
    
    $
    86,053
    
    
    
    65.5
    %
    
    $
    96,592
    
    
    
    63.5
    %Construction loans
    
    
    18,387
    
    
    
    14.0
    %
    
    
    27,157
    
    
    
    18.0
    %Commercial loans
    
    
    15,987
    
    
    
    12.2
    %
    
    
    16,798
    
    
    
    11.0
    %Consumer loans
    
    
    12,373
    
    
    
    9.4
    %
    
    
    13,099
    
    
    
    8.6
    %Less
Discounts and other
    
    
    208
    
    
    
    0.1
    %
    
    
    286
    
    
    
    0.2
    %Allowance for loan losses
    
    
    1,308
    
    
    
    1.0
    %
    
    
    1,339
    
    
    
    0.9
    %Total
    
    $
    131,284
    
    
    
    100.00
    %
    
    $
    152,021
    
    
    
    100.00
    %
 5




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##### Table of Contents



Residential and Commercial Real Estate Loans. The Banks real estate loan portfolio
includes loans on single family, two-to-four family dwellings, multi-family housing (over four
units), and loans made for the development of unimproved real estate to be used for residential
housing. The Bank has historically originated commercial real estate loans within its primary market
area. The Bank either funded or purchased participation interests in various large commercial real
estate projects, one of which was outside of its primary market area. See   Non-Performing
Loans and Asset Classification and Subsidiary Activities. Since 1984, the Bank has limited its
commercial real estate lending activities to commercial real estate projects located in its primary
market area, with the amount loaned limited to 15% of its net worth. See  Nonperforming Loans
and Asset Classification and Subsidiary Activities. At December 31, 2004, the Bank had $26.0
million outstanding in commercial real estate loans, including $2.9 million in commercial
construction loans. These loans are typically limited to owner-occupied financings. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank generally
have reflected the policy of making less than the maximum loan permissible under applicable
regulations, in accordance with sound lending practices, market conditions, and underwriting
standards established by the Bank. Mortgage loans made by the Bank are generally long-term loans,
amortized on a monthly basis, with principal and interest due each month. The initial contractual
loan payment period for residential loans typically ranges from 15 to 30 years. Currently, the
Bank offers one-year, adjustable rate loans based upon the one-year U.S. Treasury Bill rate
adjusted to a constant maturity, with limitations on adjustments of 2% in any one year and 6% over
the life of the loan. Fixed rate loans increase exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become subject to
repricing. Adjustable-rate loans decrease the risks associated with changes in interest rates but
involve other risks. As interest rates rise, the payment by the borrower rises to the extent
permitted by the terms of the loan, and the increased payment increases the potential for default.
At the same time, the marketability of the collateral underlying secured loans may be adversely
affected by higher interest rates. In a declining interest rate environment, there may be an
increase in prepayments on loans as borrowers refinance at lower interest rates. At December 31, 2004, the largest amount loaned by the Bank to one borrower was $2.3 million
which was approximately 11% of the Holding Companys stockholders equity. Construction Loans. Construction loans on residential properties are made primarily to
builders and a significant percentage are made on a speculative basis. The maximum loan to value
ratio generally is 80% of the appraisal value. Residential construction loans are typically made
for one year. At December 31, 2004, the Bank had $14.5 million outstanding in residential
construction loans, compared with $21.6 million in construction loans on residential properties
outstanding at December 31, 2003. The Bank also offers construction loans on commercial and other
properties. At December 31, 2004, total construction loans were $18.1 million. Approximately 59%
of total construction loans were loans to builders for speculative construction loans. Construction financing generally is considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the propertys value at completion
of construction or development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, the Bank may be confronted at or prior to
the maturity of the loan, with a project having a value which is insufficient to assure full
repayment. The ability of a developer to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing, availability of comparable properties and economic
conditions. The Bank has sought to minimize this speculative risk of construction financing by
limiting construction lending to qualified borrowers in the Banks market area by obtaining
personal guarantees from many of these borrowers, by requiring the involvement of qualified
builders, and by limiting the aggregate amount of outstanding construction loans. Construction and commercial real estate lending also is generally considered to involve a
higher level of risk due to the concentration of principal in a limited number of loans and
borrowers. The nature of these loans is such that they are generally less predictable and more
difficult to evaluate and monitor. 6




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##### Table of Contents



Commercial Business Loans. At December 31, 2004, there were approximately $10.8 million in
commercial loans outstanding. The Bank will consider making these types of loans primarily in its
local market area. Commercial business loans can pose the same increased risks posed by commercial
real estate lending activity. Consumer Loans. The Bank makes various types of consumer loans, including the loans made for
automobile loans, personal loans, educational loans and loans for home improvement or other
purposes. At December 31, 2004 the Bank had $13.7 million outstanding in consumer loans. Consumer loans tend to be originated at higher interest rates than mortgage loans and for
shorter terms. Consumer loans generally involve more risk than single-family mortgage loans.
Repossessed collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection efforts against the
borrower. In addition, loan collections are dependent on the borrowers continuing financial
stability. Further, various federal and state laws may limit the amount which may be recovered.
In underwriting consumer loans, the Bank considers the borrowers credit history, income and
ability to repay the loan, and the value of the collateral. However, consumer loans generally are
associated with a higher level of charge-offs than single-family mortgage loans. Loan Originations, Purchases and Sales. Loan originations come from a combination of walk-in
customers and real estate brokers. The Bank has engaged in selling in the secondary market certain
loans it has originated. Such loans sold are generally fixed-rate, long-term mortgage loans.
These sales, the majority of which do not allow recourse to the Bank, have been made to FHLMC and
FNMA, which purchases residential mortgage loans from federally insured financial institutions and
certain other lenders. Many of the Banks loans have been exchanged for FHLMC participation
certificates (PCs) or FNMA mortgage-backed securities. These PCs and mortgage-backed securities
are generally considered to be a more liquid form of asset and are a more widely accepted form of
collateral than the underlying loans. The sale of loans in the secondary mortgage market reduces the Banks risk that the interest
rates it pays will escalate while holding long-term, fixed-rate loans in its portfolio and allows
the Bank to continue to make loans during periods when savings flows decline or funds are not
otherwise available for lending purposes. In connection with certain sales, the Bank provides
servicing on the loans (i.e., collection of principal and interest payments) for which it receives
a fee payable monthly of 1/4% to 3/8% per annum of the unpaid balance of each loan. These loan
sales will continue as the Bank attempts to maintain its loan servicing base. As of December 31,
2004, the Bank was servicing loans for others aggregating approximately $67.3 million. Net
servicing income for the years ended December 31, 2004 and 2003 was approximately $164,000 and
$163,000, respectively. During the years ended December 31, 2004 and 2003, the Bank sold approximately $39.6 million
and $76.1 million, respectively, in whole loans. As of December 31, 2004, the Bank had
approximately $329,000 in commitments outstanding to package or sell additional loans. The Banks loan policy requires that the Banks loan committee identify, at the beginning of
each quarter, loans which will be held for the portfolio and loans which will be held for sale.
Loans that are designated to be held for the portfolio may be sold only in unusual circumstances
which could not be reasonably anticipated at the time of their origination or purchase. Loans held
for sale are carried at the lower of cost or market value and are sold as soon as possible after
their origination, as market conditions allow. Loan Commitments. The Bank issues commitments to prospective borrowers to make loans
conditioned upon the occurrence of certain events, which are honored for 60 days from approval with
no additional fees required. The Bank charges a non-refundable commitment fee equal to 1% of the
actual amount of committed funds on most single-family construction loans. The Bank had outstanding
commitments to originate mortgage loans aggregating $22.8 million at December 31, 2004. Of these
commitments, $22.0 million were for adjustable rate mortgages and $800,000 were for fixed-rate
mortgages. Although the Bank originates most fixed-rate loans for resale in the secondary mortgage
market, a certain amount of interest rate risk exists for the Bank after a loan is closed until
that loan is sold. 7




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##### Table of Contents



Loan Origination and Other Fees. In addition to interest earned on loans, the Bank receives
loan origination fees or points for originating loans. Loan points are a percentage of the
principal amount of the mortgage loan which are charged to the borrower for creation of the loan.
The Bank accounts for loan origination fees net of direct costs as a yield adjustment over the life
of the loan. See Note 1 of Notes to Consolidated Financial Statements. Maturity of Loan Portfolio.The following table sets forth certain information at December
31, 2004, regarding the dollar amount of loans maturing in the Banks portfolio based on their
contractual terms to maturity, which may differ from realized maturites due to prepayments. Demand
loans and overdrafts are reported as due in one year or less. The Bank does not have any loans
with no stated schedule of repayments and no stated maturity. Due One Through
    
    
    DueDue by
    
    
    Five Years After
    
    
    Five Years AfterDecember 31, 2005
    
    
    December 31, 2005
    
    
    December 31, 2005
    
    
    TotalReal estate mortgage
    
    $
    31,817,194
    
    
    $
    24,205,286
    
    
    $
    8,339,193
    
    
    $
    64,361,673Real estate construction
    
    
    10,472,529
    
    
    
    1,529,090
    
    
    
    17,936
    
    
    
    12,019,555Commercial business loans
    
    
    8,871,686
    
    
    
    1,806,241
    
    
    
    128,753
    
    
    
    10,806,680Consumer
    
    
    3,520,427
    
    
    
    9,663,023
    
    
    
    525,232
    
    
    
    13,708,682Total
    
    $
    54,681,836
    
    
    $
    37,203,640
    
    
    $
    9,011,114
    
    
    $
    100,896,590
 The following table sets forth the dollar amount of all loans due after one year at December
31, 2004 which have predetermined interest rates and have floating or adjustable interest rates. Floating orPredetermined Rates
    
    
    Adjustable RatesReal estate mortgage
    
    $
    32,243,316
    
    
    $
    1,848,189Commercial business loans
    
    
    1,934,994
    
    
    
    Consumer
    
    
    10,188,255
    
    
    
    Total
    
    $
    44,366,565
    
    
    $
    1,848,189
 Non-Performing Loans and Asset Classification. Interest accrued on loans is generally
discontinued and 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 periodic
interest and principal payments has been demonstrated, in which case the loan is returned to
accrual status. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure
is classified as real estate owned until such time it is sold. When such property is acquired, it
is recorded at the lower of the unpaid principal balance of the related loan or its fair value less
estimated selling costs. Any write-down of the property at foreclosure is charged to the allowance
for loan losses. Future declines in fair value of the asset less selling costs below its carrying
amount increases a valuation allowance account. Future increases in fair value of the asset less
costs of disposition above its carrying amount reduces 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 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. 8




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##### Table of Contents



The following table sets forth information with respect to the Banks non-performing assets
for the periods indicated. At December 31,(Dollars in thousands)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loans accounted for on a
nonaccrual basis: (1)Real Estate:Residential
    
    $
    422
    
    
    $
    130
    
    
    $
    788
    
    
    $
    588
    
    
    $
    2,036Commercial
    
    
    278
    
    
    
    588

    
    
    
    326
    
    
    
    208
    
    
    
    298Consumer
    
    
    26
    
    
    
    10
    
    
    
    56
    
    
    
    71
    
    
    
    37Total
    
    $
    726
    
    
    $
    728
    
    
    $
    1,170
    
    
    $
    867
    
    
    $
    2,371Accruing loans which are
contractually
past due 90 days or more:Real Estate:Residential
    
    $
    
    
    
    $
    226
    
    
    $
    
    
    
    $
    
    
    
    $
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    226
    
    
    $
    
    
    
    $
    
    
    
    $
    Total of nonaccrual and 90 days
past due loans
    
    $
    726
    
    
    $
    954
    
    
    $
    1,170
    
    
    $
    867
    
    
    $
    2,371Percentage of total loans
    
    
    0.73
    %
    
    
    0.68
    %
    
    
    0.98
    %
    
    
    0.66
    %
    
    
    1.56
    %Percentage of total assets
    
    
    0.35
    %
    
    
    0.35
    %
    
    
    0.54
    %
    
    
    0.40
    %
    
    
    1.03
    %Other non-performing assets (2)
    
    $
    599
    
    
    $
    1,023
    
    
    $
    1,609
    
    
    $
    2,345
    
    
    $
    1,420
   (1)
    
    Nonaccrual status denotes loans on which accrual of interest has been ceased in accordance
with the guidelines discussed previously. Payments received on a nonaccrual loan are either
applied to the outstanding principal balance or recorded as interest income, depending on
assessment of the collectibility of the loan.(2)
    
    Other non-performing assets represent property acquired by the Bank through foreclosure or
repossession. The property is carried at the lower of its fair value less estimated costs of
disposition or the investment balance of the related loan. Non-performing loans were $726,000 and $728,000 at December 31, 2004 and 2003. Other
non-performing assets at December 31, 2004, were $599,000 million as compared to $1.0 million at
December 31, 2003. The decrease in other non-performing assets is due to sales of real estate owned
exceeding foreclosures. During the years ended December 31, 2004 and 2003, gross interest income of $8,941 and
$22,889, respectively, would have been recorded on loans accounted for on a nonaccrual basis if the
loans had been current throughout the period. The amount of interest income included in current
income for these loans was $5,743 and $3,639 for the years ended December 31, 2004 and 2003,
respectively. It is managements policy to establish an allowance for estimated losses on loans and real
estate owned based upon prior experience, current economic conditions in its market area, or when
it determines that losses are expected to be incurred on the ultimate disposition of the underlying
properties. 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. The following table presents an allociation of the allowance for loan losses by the categories
indicated and the percentages that all loans in the category bear to total loans. This allocation
is used by management to quantify its evaluation of the loan portfolio. Allocations are merely
estimates and are subject to revisions and conditions change. 9




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##### Table of Contents



Pecent of
    
    
    
    
    
    
    Pecent of
    
    
    
    
    
    
    Pecent ofLoans in Each
    
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total loansDecember 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002(Dollars in thousands)Real estate
mortgage loans
    
    $
    572
    
    
    
    75.4
    %
    
    $
    472
    
    
    
    77.2
    %
    
    $
    447
    
    
    
    78.8
    %Construction
loans
    
    
    258
    
    
    
    10.9
    %
    
    
    372
    
    
    
    10.0
    %
    
    
    349
    
    
    
    9.7
    %Other Loans
    
    
    337
    
    
    
    13.7
    %
    
    
    623
    
    
    
    12.8
    %
    
    
    526
    
    
    
    11.5
    %Total
    
    $
    1,167
    
    
    
    100.0
    %
    
    $
    1,467
    
    
    
    100.0
    %
    
    $
    1,322
    
    
    
    100.0
    %
 Pecent of
    
    
    
    
    
    
    Pecent ofLoans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansDecember 31,2001
    
    
    
    
    
    
    2000(Dollars in thousands)Real estate mortgage loans
    
    $
    589
    
    
    
    78.4
    %
    
    $
    547
    
    
    
    80.3
    %Construction loans
    
    
    268
    
    
    
    12.2
    %
    
    
    289
    
    
    
    11.1
    %Other Loans
    
    
    451
    
    
    
    9.4
    %
    
    
    503
    
    
    
    8.6
    %Total
    
    $
    1,308
    
    
    
    100.0
    %
    
    $
    1,339
    
    
    
    100.0
    %
 The following table sets forth an analysis of the Banks allowance for loan losses for the
periods indicated. Year Ended December 31,Allowance for loan losses
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    2000(Dollars in thousands)Balance at the beginning of period
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308
    
    
    $
    1,339
    
    
    $
    1,223Loans Charged off:Mortgage
    
    
    699
    
    
    
    767
    
    
    
    505
    
    
    
    1,803
    
    
    
    308Consumer
    
    
    372
    
    
    
    281
    
    
    
    242
    
    
    
    220
    
    
    
    161Total charge-offs
    
    
    1,071
    
    
    
    1,048
    
    
    
    747
    
    
    
    2,023
    
    
    
    469Total recoveries
    
    
    (183
    )
    
    
    (230
    )
    
    
    (114
    )
    
    
    (50
    )
    
    
    (55
    )Net loans charged-off
    
    
    888
    
    
    
    818
    
    
    
    633
    
    
    
    1,973
    
    
    
    414Provision for loan losses
    
    
    588
    
    
    
    963
    
    
    
    647
    
    
    
    1,942
    
    
    
    530Balance at end of period
    
    $
    1,167
    
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308
    
    
    $
    1,339Ratio of net charge-off to
average loans outstanding during
the period
    
    
    0.85
    %
    
    
    0.70
    %
    
    
    1.4
    %
    
    
    0.28
    %
    
    
    0.28
    %
 For further information and for an analysis of the Banks allowances for loan and real estate
losses, see Notes 3 and 4 of Notes to Consolidated Financial Statements. 10




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##### Table of Contents



Investment Activities Interest income from cash deposits and securities generally provides the second largest source
of income for the Bank after interest on loans and loan servicing fees and other fees. At December
31, 2004, the Banks interest-bearing deposits, FHLB stock, and securities portfolio of
approximately $89.0 million, excluding mortgage-backed securities, consisted primarily of
interest-bearing bank deposits, U.S. government and agency obligations, corporate securities. Securities have been classified as available-for-sale based on managements intent and
ability. See Note 1 of Notes to Consolidated Financial Statements. The following table sets forth the carrying value of the Banks investment securities at the
dates indicated. At December 31,2004
    
    
    2003
    
    
    2002(In thousands)Securities available-for-sale:U.S. Government and agency securities
    
    $
    57,918
    
    
    $
    74,595
    
    
    $
    60,645Mortgage-backed securities
    
    
    31,106
    
    
    
    8,729
    
    
    
    14,655Other securities
    
    
    1
    
    
    
    1
    
    
    
    1Total
    
    $
    89,025
    
    
    $
    83,325
    
    
    $
    75,301
 The following table sets forth the scheduled maturities, amortized cost, estimated fair values
and weighted average yields for the Banks securities available-for-sale at December 31, 2004. One Year Or Less
    
    
    After One Through Five Years
    
    
    After Five Through Ten YearsWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield(Dollars in thousands)U.S. government and agency
    
    $
    
    
    
    $
    
    
    
    $
    29,961
    
    
    
    3.7
    %
    
    $
    28,996
    
    
    
    4.1
    %Other securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Mortgage-backed securities (3)
    
    
    
    
    
    
    
    
    
    
    2,925
    
    
    
    5.1
    %
    
    
    20,645
    
    
    
    5.1Total
    
    $
    
    
    
    $
    
    
    
    $
    32,886
    
    
    
    3.8
    %
    
    $
    49,642
    
    
    
    4.5
    %
 After Ten Years
    
    
    TotalWeighted
    
    
    
    
    
    
    Estimated
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. government and agency
    
    $
    
    
    
    
    
    %
    
    $
    58,957
    
    
    $
    57,918
    
    
    
    3.9
    %Other securities(2)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Mortgage-backed securities (3)
    
    
    7,891
    
    
    
    4.4
    
    
    
    31,461
    
    
    
    31,106
    
    
    
    4.9Total
    
    $
    7,891
    
    
    
    4.4
    %
    
    $
    90,419
    
    
    $
    89,025
    
    
    
    4.2
    %
   (1)
    
    Other securities includes the Banks investment in limited partnerships, at cost, of $1 whose
sole purpose is to hold and operate real estate. The Bank has no loans to these real estate
partnerships. These investments are not readily marketable.(2)
    
    Mortgage-backed securities are reflected in the above table based on their
contractual maturity. Sources of Funds General.Deposits are the major source of the Banks funds for lending and other investment
purposes. In addition to deposits, the Bank derives funds from loan principal repayments, advances
from the FHLB of Atlanta and other borrowings. 11




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##### Table of Contents



Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates
and money market conditions. Borrowings may be used on a short term basis to compensate for
reductions in the availability of other sources of funds. They may also be used on a longer term
basis for general business purposes. Deposits.Consumer and commercial deposits are attracted principally from within the Banks
primary market area through the offering of a broad selection of deposit instruments including NOW
accounts, non-interest bearing demand deposit accounts, money market accounts, regular savings
accounts, term certificate accounts and retirement savings plans. Deposit account terms vary, with
the principal differences being the minimum balance required, the amount of time the funds must
remain on deposit and the interest rate. The Bank offers a full range of accounts including: passbook, money market, checking,
individual retirement accounts (IRAs) and certificate accounts. The deregulation of various
federal controls on insured deposits has allowed the Bank to be more competitive in obtaining funds
and given it more flexibility to alleviate the risk of net deposit outflows. While the
deregulation of rates payable on deposits has allowed the Bank to be competitive in the acquisition
and retention of funds, it has also resulted in a more volatile cost of funds. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by
the Bank on a weekly basis. Determination of rates and terms are predicated on funds acquisition
and liquidity requirements, rates paid by competitors, growth goals, and federal regulations. Marketing of the Banks savings programs takes a number of different forms. All branch
offices are provided with brochures which outline the rates and features of the Banks various
accounts. The Bank already offers most of the services provided by other savings institutions.
These services include consumer and commercial loans, limited lines of credit, all types of
checking and deposit accounts, and IRAs. As of December 31, 2004, the Banks total deposits were $180.0 million. The following table indicates the amount of the Banks certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of December 31, 2004. CertificatesMaturity Period
    
    of Deposit(In thousands)Three months or less
    
    $
    23,964Over three through six months
    
    
    5,107Over six through twelve months
    
    
    9,373Over twelve months
    
    
    14,844Total
    
    $
    53,288
 The following table sets forth the average balances and average interest rates based on daily
balances for deposits for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageDeposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Non-interest bearing demand deposits
    
    $
    12,033
    
    
    
    
    %
    
    $
    8,795
    
    
    
    
    %
    
    $
    8,381
    
    
    
    
    %Interest bearing demand deposits
    
    
    32,089
    
    
    
    .3
    
    
    
    28,775
    
    
    
    .3
    
    
    
    29,454
    
    
    
    .6Savings deposits
    
    
    17,751
    
    
    
    .3
    
    
    
    16,957
    
    
    
    .3
    
    
    
    15,435
    
    
    
    2.3Time deposits
    
    
    122,354
    
    
    
    2.5
    
    
    
    132,186
    
    
    
    2.7
    
    
    
    139,803
    
    
    
    3.8Total deposits
    
    $
    184,227
    
    
    
    1.7
    %
    
    $
    186,713
    
    
    
    2.0
    %
    
    $
    193,073
    
    
    
    3.0
    %
 For further information on deposits, see Note 6 of Notes to Consolidated Financial Statements. Subordinated Debt.On December 22, 2003, Pinnacle Bancshares, Inc. established Pinnacle
Capital Trust I (Trust), a wholly-owned statutory business trust. Pinnacle Bancshares, Inc. 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 Pinnacle 12




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##### Table of Contents



Bancshares. Inc. The sole assets of the Trust are Subordinated Debentures. Pinnacle Bancshares, Inc.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 Pinnacle Bancshares, Inc. is included in subordinated debt. Borrowed Funds.The Bank relies upon deposits and loan repayments and sales as its major
sources of funds. However, the Bank makes use of FHLB advances to expand its lending and
short-term investment activities and to meet depositor withdrawals. Advances have been used to
supplement deposit flows and are particularly used when the Bank determines that it can profitably
invest the advances over their term. At or for theYear Ended December 31,2004
    
    
    2003(Dollars in thousands)Amounts outstanding at end of period
    
    $
    0
    
    
    $
    700,000Weighted average rate paid at period end
    
    
    1.15
    %
    
    
    1.30
    %Maximum amount of borrowings outstanding at any month end
    
    $
    10,000,000
    
    
    $
    13,500,000Approximate average amount outstanding for period
    
    $
    1,548,000
    
    
    $
    2,600,000Approximate weighted average rate paid during period (1)
    
    
    1.36
    %
    
    
    1.31
    %
   (1)
    
    The approximate weighted average rate paid during the period was computed by dividing the
average amounts outstanding into the related interest expense for the period. For further information on the Banks borrowings, see Note 8 of Notes to Consolidated
Financial Statements. Selected Financial Ratios The following table sets forth selected financial ratios of the Holding Company for the
periods indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002Return on Assets (Net Income Divided By
Average Total Assets)
    
    
    0.8
    %
    
    
    1.1
    %
    
    
    0.9
    %Return on Equity (Net Income Divided By
Average Equity)
    
    
    8.8
    %
    
    
    12.4
    %
    
    
    10.0
    %Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)
    
    
    9.3
    %
    
    
    9.0
    %
    
    
    9.2
    %Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)
    
    
    39.0
    %
    
    
    26.2
    %
    
    
    32.8
    %
 13




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##### Table of Contents



Liquidity and Rate Sensitivity The following table sets forth the maturity distribution of the Banks interest-earning assets
and interest-bearing liabilities as of December 31, 2004, the Banks interest rate sensitivity gap
(i.e., interest rate sensitive assets less interest rate sensitive liabilities) and the Banks
cumulative interest rate sensitivity gap. Over One
    
    
    Over FiveOne Year
    
    
    Through
    
    
    Through
    
    
    Overor Less
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten Years
    
    
    Total(In thousands)Interest-Earning Assets: (1)Loans
    
    $
    54,682
    
    
    $
    37,204
    
    
    $
    4,921
    
    
    $
    4,090
    
    
    $
    100,897Securities
    
    
    
    
    
    
    32,382
    
    
    
    48,742
    
    
    
    7,901
    
    
    
    89,025Interest bearing deposits
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485Total
    
    $
    55,167
    
    
    $
    69,586
    
    
    $
    53,663
    
    
    $
    11,991
    
    
    $
    190,407Interest-Bearing Liabilities:(2)Deposits
    
    $
    139,948
    
    
    $
    39,938
    
    
    $
    80
    
    
    $
    
    
    
    $
    179,966Subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,093
    
    
    
    3,093Borrowings
    
    
    205
    
    
    
    985
    
    
    
    1,390
    
    
    
    
    
    
    
    2,580Total
    
    $
    140,153
    
    
    $
    40,923
    
    
    $
    1,470
    
    
    $
    3,093
    
    
    $
    185,639Interest Sensitivity Gap
    
    $
    (84,986
    )
    
    
    28,663
    
    
    $
    52,193
    
    
    $
    8,898
    
    
    $
    4,768Cumulative Interest Sensitivity
Gap
    
    $
    (84,986
    )
    
    $
    (56,323
    )
    
    $
    (4,130
    )
    
    $
    4,768
    
    
    $
    4,768
   (1)
    
    Fixed-rate loans are distributed based on their contractual maturity adjusted for
projected or anticipated prepayments, and variable rate loans are distributed based on the
interest rate reset date and contractual maturity adjusted for prepayments. Loan run-off
and repricing assumes a constant prepayment rate based on coupon rate and maturity.(2)
    
    Passbook savings and demand deposits are presented in the earliest repricing period
since amounts in these accounts are subject to withdrawal on demand. Savings certificates
are distributed assuming no withdrawal prior to maturity Liquidity refers to the ability or the financial flexibility to manage future cash flows to
meet the needs of depositors and borrowers and to provide funds for operations, as well as future
acquisitions if they become available. Maintaining appropriate levels of liquidity allows the
Holding Company to have sufficient funds available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The
Holding Companys primary source of liquidity is dividends paid by the Bank, which actively manages
both assets and liabilities to achieve its desired level of liquidity. Alabama law imposes
restrictions on the amount of dividends that may be declared by the Bank. Further, any dividend
payment by the Bank is subject to the continuing ability of the Bank to maintain compliance with
federal regulatory capital requirements. The modeling techniques used by the Holding 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 Holding Company would expect net losses in fair values of the
equity in the underlying instruments of approximately ($177,000), ($127,000), and ($1,162,000),
respectively. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate decrease
the Holding Company would expect a net changes in projected net income for the first year of
approximately $238,000, 14




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##### Table of Contents



($120,000), and ($1,127,000),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 Companys contractual obligations and commitments at December 31, 2004 are summarized in
the accompanying tables. Contractual ObligationsOver One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Borrowed
funds (1)
    
    $
    205
    
    
    $
    455
    
    
    $
    530
    
    
    $
    1,390
    
    
    $
    2,580Subordinated
debt (1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,093
    
    
    
    3,093Operating
leases
    
    
    62
    
    
    
    100
    
    
    
    14
    
    
    
    130
    
    
    
    306Certificates of
deposits
    
    
    82,308
    
    
    
    23,048
    
    
    
    16,889
    
    
    
    81
    
    
    
    122,326Total
    
    $
    82,575
    
    
    $
    23,603
    
    
    $
    17,433
    
    
    $
    4,694
    
    
    $
    128,305
   (1)
    
    Refer to notes 7 and 8 in the notes to consolidated financial statements for additional
information about these obligations; including certain redemption features. CommitmentsOver One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Lines of
credit
    
    $
    11,696
    
    
    $
    1,691
    
    
    $
    2,214
    
    
    $
    5,692
    
    
    $
    21,293Letters of
credit
    
    
    1,551

    
    
    
    9
    
    
    
    0
    
    
    
    0
    
    
    
    1,560Total
    
    $
    13,247
    
    
    $
    1,700
    
    
    $
    2,214
    
    
    $
    5,692
    
    
    $
    22,853
 15




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##### Table of Contents



Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and
interest expense of the Bank for the periods indicated. The calculations are based on average
month end balances during the respective periods. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates (change in rate
multiplied by old volume). Changes in rate-volume (change in rate multiplied by the change in
volume) have been allocated to the volume and rate changes based upon the pro-rata amount that rate
and volume are to their total change, before allocation of the rate/volume amount. Both interest
income and interest expense decreased due to rate, a result of interest earning assets and interest
bearing liabilities continuing to reprice downard due to the general lowering of interest rates
which began in 2001. Year ended December
    
    
    Year ended December2004 vs. 2003
    
    

2002 v/s 2003Increase (Decrease)
    
    
    Increase (Decrease))Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest Income:Loans
    
    $
    (836
    )
    
    $
    (169
    )
    
    $
    (1,005
    )
    
    $
    (661
    )
    
    $
    (564
    )
    
    $
    (1,225
    )Securities
    
    
    238
    
    
    
    96
    
    
    
    334
    
    
    
    237
    
    
    
    (779
    )
    
    
    (542
    )Other interest-earning assets
    
    
    9
    
    
    
    12
    
    
    
    21
    
    
    
    (31
    )
    
    
    (19
    )
    
    
    (50
    )Total interest earning assets
    
    $
    (589
    )
    
    $
    (61
    )
    
    
    (650
    )
    
    $
    (455
    )
    
    $
    (1,362
    )
    
    
    (1,817
    )Interest Expense:Deposits
    
    $
    (98
    )
    
    $
    (412
    )
    
    $
    (510
    )
    
    
    (130
    )
    
    $
    (1,949
    )
    
    $
    (2,079
    )Borrowed funds & subordinated debt
    
    
    69
    
    
    
    52
    
    
    
    121
    
    
    
    (4
    )
    
    
    5
    
    
    
    1Total interest-bearing liabilities
    
    $
    (29
    )
    
    $
    (360
    )
    
    $
    (389
    )
    
    $
    (134
    )
    
    $
    (1,944
    )
    
    $
    (2,078
    )
 16




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##### Table of Contents



Competition The Bank faces strong competition in its primary market area for the attraction and retention
of deposits and in the origination of loans. The Banks most direct competition for deposits has
historically come from other commercial banks and thrift institutions located in its primary market
area. The Bank also has had significant competition from money market mutual funds and other
sources. The Banks competition for real estate loans comes principally from other commercial
banks, thrift institutions, and mortgage banking companies, insurance companies and other
institutional lenders. The Bank competes for loans through the interest rates and loan fees it charges and the
efficiency and quality of the services it provides borrowers, real estate brokers, and home
builders. It competes for deposits by offering a wide variety of accounts, convenient branch
locations, tax-deferred retirement programs, and other miscellaneous services. Management considers the Banks branch network and reputation for financial strength and
quality service as its major competitive advantage in attracting and retaining customers in its
matket area. While the Bank is subject to competition from other financial institutions which have
greater financial and marketing resources, and expects to be subject to additional competition from
a new local financial institution which has commemced operations in 2004, management believes the
Bank benefits by its community orientation and long standing customer relationships. Regulation, Supervision and Governmental Policy The following is a brief summary of certain statutes, rules and regulations affecting the
Holding Company and the Bank. A number of other statutes and regulations have an impact on their
operations. The following summary of applicable statutes and regulations does not purport to be
complete and is qualified in its entirety by reference to such statutes and regulations. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the SOX Act) provides
for sweeping changes with respect to corporate governance, accounting policies and disclosure
requirements for public companies, and also for their directors and officers. The SOX Act required
the Securities and Exchange Commission (SEC) to adopt new rules to implement its requirements,
including new financial reporting requirements and rules concerning corporate governance. New SEC
rules require a reporting companys chief executive and chief financial officers to certify certain
financial and other information included in the companys quarterly and annual reports. The rules
also require these officers to certify that they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of the companys disclosure controls and procedures; that
they have made certain disclosures to the auditors and to the audit committee of the board of
directors about the companys controls and procedures; and that they have included information in
their quarterly and annual filings about their evaluation and whether there have been significant
changes to the controls and procedures or other factors which would significantly impact these
controls subsequent to their evaluation. Certifications by the Holding Companys Chief Executive
Officer and Chief Financial Officer of the financial statements and other information are included
as an exhibit to this Annual Report on Form 10-KSB. See Item 8A.- Controls and Procedures hereof
for the Holding Companys evaluation of disclosure controls and procedures. The certifications
required by Section 906 of the SOX Act also have been filed as an exhibit to this Form 10-KSB. 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. USA Patriot Act. The USA Patriot Act authorizes new regulatory powers to combat
international terrorism. The provisions that affect financial institutions most directly provide
the federal government with enhanced authority to identify, deter, and punish international money
laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign
shell banks and requires increased due diligence for private banking transactions and
correspondent accounts for foreign banks. In 17




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##### Table of Contents



addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share
information with law enforcement authorities under circumstances that were not previously
permitted. Financial Modernization Legislation. The Gramm-Leach-Bliley Act of 1999 (the GLB
Act) includes a number of provisions intended to modernize and to increase competition in the
American financial services industry, including authority for bank holding companies to engage in a
wider range of nonbanking activities, including securities underwriting and general insurance
activities. Under the GLB Act, a bank holding company that elects to become a financial holding
company may engage in any activity that the board of Governors of the Federal Reserve Board (the
FRB), in consultation with the Secretary of the Treasury, determines by regulation or order is
(i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to
any such financial activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The GLB Act specifies certain
activities that are deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and selling insurance;
providing financial, investment, or economic advisory services; underwriting, dealing in or making
a market in, securities; and any activity currently permitted for bank holding companies by the
FRB. A bank holding company may elect to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are and continue to be well-capitalized
and well-managed and have at least a satisfactory rating under the Community Reinvestment Act. National banks and state banks with the requisite investment authority are also authorized by
the GLB Act to engage, through financial subsidiaries, in any activity that is permissible for a
financial holding company (as described above) and any activity that the Secretary of the Treasury,
in consultation with the FRB, determines is financial in nature or incidental to any such financial
activity, except (i) insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and
(iv) merchant banking. The authority of a bank to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital the banks outstanding investments
in financial subsidiaries). The GLB Act also adopts a number of consumer protections, including provisions intended to
protect privacy of bank customers financial information and provisions requiring disclosure of ATM
fees imposed by banks on customers of other banks. At this time, the Holding Company has not determined whether it will become a financial
holding company in order to utilize the expanded powers offered by the GLB Act. To date, the GLB
Acts financial subsidiary provisions and consumer protections have not had a material impact on
its operations. Bank Holding Company Regulation. The Holding Company is registered as a bank holding
company under the Holding Company Act and, as such, subject to supervision and regulation by the
FRB. A bank holding company is required to furnish to the FRB annual and quarterly reports of its
operations and to furnish such additional information as the FRB may require pursuant to the
Holding Company Act. The Holding Company is also subject to regular examination by the FRB. Under the Holding Company Act, a bank holding company must obtain the prior approval of the
FRB before (i) acquiring direct or indirect ownership or control of any voting shares of any bank
or bank holding company if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or consolidating with another
bank holding company. The Holding Company Act, as amended by the Riegle-Neal Act, generally permits the FRB to
approve interstate bank acquisitions by bank holding companies without regard to any prohibitions
of state law. See Competition. Under the Holding Company Act, any company must obtain approval of the FRB prior to acquiring
control of the Holding Company or the Bank. For purposes of the Holding Company Act, control is
defined as ownership of more than 25% of any class of voting securities of the Holding Company or
the Bank, the ability to control the 18




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##### Table of Contents



election of a majority of the directors, or the exercise of a
controlling influence over management or policies of the Holding Company or the Bank. The Change in Bank Control Act and the regulations of the FRB thereunder require any person or
persons acting in concert (except for companies required to make application under the Holding
Company Act), to file a written notice with the FRB before such person or persons may acquire
control of the Holding Company the Bank. The Change in Bank Control Act defines control as the
power, directly or indirectly, to vote 25% or more of any voting securities or to direct the
management or policies of a bank holding company or an insured bank. The Holding Company Act also prohibits, with certain exceptions, a bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company
that is not a bank or a bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as activities closely related
to the business of banking or managing or controlling banks. The non-bank activities of the
Holding Company are subject to these legal and regulatory limitations under the Holding Company Act
and the FRBs regulations thereunder. Notwithstanding the FRBs prior approval of specific
nonbanking activities, the FRB has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any subsidiary, when it has
reasonable cause to believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary
of that holding company. The FRB has adopted guidelines regarding the capital adequacy of bank holding companies, which
require bank holding companies to maintain specified minimum ratios of capital to total assets and
capital to risk-weighted assets. See Capital Requirements. The FRB has the power to prohibit dividends by bank holding companies if their actions
constitute unsafe or unsound practices. The FRB has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the FRBs view that a bank holding
company should pay cash dividends only to the extent that the companys net income for the past
year is sufficient to cover both the cash dividends and a rate of earning retention that is
consistent with the companys capital needs, asset quality, and overall financial condition. Bank Regulation. As an Alabama banking institution, the Bank is subject to
regulation, supervision and regular examination by the Banking Department. Furthermore, as a state
bank that is not a member of the Federal Reserve System (a state nonmember bank), the Bank is
subject to regulation, supervision and regular examination by the FDIC under the applicable
provisions of the Federal Deposit Insurance Act (the FDI Act) and the FDICs regulations. The
deposits of the Bank are insured by the FDIC to the maximum extent provided by law (a maximum of
$100,000 for each insured depositor). Alabama and federal banking laws and regulations control,
among other things, the Banks required reserves, investments, loans, mergers and consolidations,
issuance of securities, payment of dividends, and establishment of branches and other aspects of
the Banks operations. The Bank is required to pay assessments, based on a percentage of its insured deposits, to the
FDIC for insurance of its deposits. The FDIC has established a risk-based deposit insurance
assessment system for insured depository institutions, under which insured institutions are
assigned assessment risk classifications based upon capital levels and supervisory evaluations. The FDIC has adopted a risk-based insurance assessment system for determining the deposit
insurance assessments to be paid by insured depository institutions. The FDIC assigns an
institution to one of three capital categories based on the institutions financial information, as
of the reporting period ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the institutions primary
federal regulator and information that the FDIC determines to be relevant to the institutions
financial condition and the risk posed to the deposit insurance funds. Assessment rates for the
Bank depend on the capital category and supervisory category to which they are assigned. 19




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##### Table of Contents



Under Alabama law, the approval of the Banking Department is required if the total of all the
dividends declared by the Bank in any calendar year exceeds the Banks net income as defined for
that year combined with its retained net income for the preceding two calendar years. The Bank is subject to various regulatory capital requirements administered by the federal
banking agencies, including the FDICs capital adequacy guidelines for state non-member banks.
Failure to meet minimum capital requirements can initiate certain mandatory  and possibly
additional discretionary  actions by regulators that, if undertaken, could have a direct material
effect on the Banks and the Companys financial statements. See Capital Requirements. The FDI Act requires the federal banking agencies to prescribe for all insured depository
institutions standards relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality and compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The federal banking agencies have adopted final
regulations and Interagency Guidelines Establishing Standards for Safety and Soundness
(Guidelines) to implement safety and soundness standards pursuant to the statute. The Guidelines
set forth the safety and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes impaired. The Guidelines
address internal controls and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. Supervision, regulation and examination of the Holding Company and the Bank by the bank
regulatory agencies are intended primarily for the protection of depositors rather than for holders
of Holding Company stock or of the Holding Company as the holder of the stock of the Bank. Capital Requirements. The FRB has established guidelines with respect to the
maintenance of appropriate levels of capital by bank holding companies, and the FDIC has
promulgated substantially similar capital adequacy regulations for state nonmember banks. These
capital regulations impose two sets of capital adequacy requirements: minimum leverage rules, which
require bank holding companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of
capital to risk-weighted assets. The regulations of the FRB and the FDIC require bank holding companies and state nonmember
banks, respectively, to maintain a minimum leverage ratio of Tier 1 capital (as defined in the
risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the regulations state that only the strongest bank
holding companies and banks, with composite examination ratings of 1 under the rating system used
by the federal bank regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a leverage ratio of
at least 1% to 2% above the minimum ratio, depending on the assessment of an individual
organizations capital adequacy by its primary regulator. Any bank or bank holding company
experiencing or anticipating significant growth would be expected to maintain capital well above
the minimum levels. In addition, the FRB has indicated that whenever appropriate, and in
particular when a bank holding company is undertaking expansion, seeking to engage in new activities or otherwise facing unusual
or abnormal risks, it will consider, on a case-by-case basis, the level of an organizations ratio
of tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall
assessment of capital. The risk-based capital rules of the FRB and the FDIC require bank holding companies and state
nonmember banks, respectively, to maintain minimum regulatory capital levels based upon a weighing
of their assets and off-balance sheet obligations according to risk. The risk-based capital rules
have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2)
requirement. Core capital consists primarily of common stockholders equity, certain perpetual
preferred stock (which must be noncumulative with respect to banks), and minority interests in the
equity accounts of consolidated subsidiaries; less intangible assets, primarily goodwill, with
limited exceptions for mortgage servicing rights and purchased credit card relationships. 20




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##### Table of Contents



Supplementary capital elements include, subject to certain limitations, the allowance for
losses on loans and leases; perpetual preferred stock that does not qualify for Tier 1 and
long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock. The risk-based capital regulations assign
balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four
broad risk categories based principally on the degree of credit risk associated with the obligor.
The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and
100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a
minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core
capital. For the purpose of calculating these ratios: (i) supplementary capital will be limited to
no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit the allowance for
loan losses includable as capital to 1.25% of total risk-weighted assets. The FRB, the FDIC and the other banking agencies have amended the risk-based capital standards
to take account of a banks concentration of credit risk, the risk of nontraditional activities,
and a banks exposure to declines in the economic value of its capital resulting from changes in
interest rates. The revised capital guidelines do not, however, codify a measurement framework for
assessing the level of a banks interest rate exposure. The FRB, the FDIC and the other banking
agencies have adopted a joint policy statement requiring that banks adopt comprehensive policies
and procedures for managing interest rate risk and setting forth general standards for such
internal policies. The FDIC classifies insured depository institutions by capital levels and provide that the
applicable agency will take various prompt corrective actions to resolve the problems of any
institution that fails to satisfy the capital standards. A well-capitalized bank is one that is
not subject to any regulatory order or directive to meet any specific capital level and that has or
exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based
capital ratio of 6%, and a leverage ratio of 5%. An adequately capitalized bank is one that does
not qualify as well capitalized but meets or exceeds the following capital requirements: a total
risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either
(i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank not meeting
these criteria is treated as undercapitalized, significantly undercapitalized, or critically
undercapitalized depending on the extent to which the banks capital levels are below these
standards. A bank that fails within any of the three undercapitalized categories will be subject
to certain severe regulatory sanctions under the FDIC prompt corrective action regulation. As of
December 31, 2004, the Bank was categorized as well-capitalized by the FDIC. See Item 6, Managements Discussion and Analysis or Plan of Operation, and Notes to
Consolidated Financial Statements contained in the Holding Companys Annual Report to Stockholders
for the year ended December 31, 2004 (Exhibit No. 13) which is incorporated herein by reference. Effects of Governmental Policy. The earnings and business of the Holding Company and
the Bank have been and will be affected by the policies of various regulatory authorities of the
United States, particularly the FRB. Important functions of the FRB, in addition to those
enumerated above, include the regulation of the supply of money in light of general economic
conditions within the United States. The instruments of monetary policy employed by the FRB for
these purposes influence in various ways the overall level of investments, loans, other extensions
of credit and deposits, and the interest rates paid on liabilities and received on interest-earning
assets. Banking is a business which depends on interest rate differentials. In general, the
difference between the interest paid by the Bank on its deposits and its other borrowings and the
interest received by the Bank on loans extended to customers and securities held in its investment
portfolios comprises the major portion of the Banks earnings. The earnings and gross income of
the Bank thus have been and will be subject to the influence of economic conditions generally, both
domestic and foreign, and also to monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The nature and timing of any future changes in such policies and
their impact on the Bank are not predictable. 21




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Check 21. The Check Clearing for the 21st Century Act, or Check 21 as it
is commonly known, became effective October 28, 2004. Check 21 facilitates check collection by
creating a new negotiable instrument called a substitute check, which permits, but does not
require, banks to replace original checks with substitute checks or information from the original
check and process check information electronically. Banks that do use substitute checks must comply
with certain notice and recredit rights. Check 21 is expected to cut the time and cost involved in
physically transporting paper items and reduce the time between the deposit of a check in a bank
and payment, especially in cases in which items were not already being delivered same-day or
overnight. Employees As of December 31, 2004, the Holding Company and the Bank had 88 full-time and 7 part-time
employees. The employees are not represented by a collective bargaining agreement. The Holding Company
and the Bank believe their employee relations are good. Executive Officers of the Registrant Name, Age and Position
    
    Business ExperienceRobert
B. Nolen, Jr., 46 -
President of the Holding
Company and the
Bank
    
    Mr. Nolen joined the Bank in 1987 as First Vice
President, Chief Financial Officer and Treasurer.  Effective July 1, 1994, Mr. Nolen was appointed President and Chief Executive Officer of the
Bank. As President of the Holding Company and
Bank, Mr. Nolen is responsible for ensuring that
the overall operations of the Holding Company and
the Bank are carried out in accordance with the
policies and procedures of the Board of Directors.Mary
Jo Gunter, 51-
Vice President of the
Holding Company and Senior
Vice President - Banking
Services
 of the Bank.
    
    Ms. Gunter joined the Bank in September 1976 and
has served in various lending related positions within
the Bank. She is responsible for branch operations,
personnel, loan servicing and other customer service
areas.
 Forward-Looking Statements This Annual Report on Form 10-KSB, including all documents incorporated herein by reference,
contains forward-looking statements. Additional written or oral forward-looking statements may be
made by the Holding Company from time to time in filings with the Securities and Exchange
Commission or otherwise. The words believe, expect, seek, and intend and similar
expressions identify forward-looking statements, which speak only as of the date the statement is
made. Such forward-looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements may include, but are not limited to, projections of income or loss,
expenditures, acquisitions, plans for future operations, financing needs or plans relating to
services of the Holding Company, as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements. The Holding 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. 22




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##### Table of Contents



Item 2. Description of Property The Holding Companys principal executive offices and the Banks main office are located at
1811 Second Avenue, Jasper, Alabama. At December 31, 2004 the Bank maintained six branches in
Jasper, Haleyville, Sumiton, Vestavia and Trussville, Alabama. The Haleyville branch is leased.
The Bank also leases an administrative office in Jasper, Alabama, which is currently subleased to
another financial institution. For further information on the Banks lease commitments, see Notes to Consolidated Financial
Statements. The total net book value of the Banks investment in premises and equipment was $5,700,000 at
December 31, 2004. See Notes to Consolidated Financial Statements for further information. 
 Item 3. Legal Proceedings The Holding 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 would not be material to the
consolidated financial statements. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of the fiscal year covered by this report
to a vote of security holders of the Holding Company through a solicitation of proxies or
otherwise. 
 PART II 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities The information contained under the section captioned Managements Discussion and Analysis
and Market Price and Dividend Information in the Holding Companys Annual Report to Stockholders
for the year ended December 31, 2004 (Exhibit No. 13), is incorporated herein by reference. 
 Item 6. Managements Discussion and Analysis or Plan of Operation The information contained in the section captioned Managements Discussion and Analysis in
the Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) is
incorporated herein by reference. 
 Item 7. Financial Statements The financial statements contained in Exhibit No. 13 are incorporated herein by reference. 
 Item 8. Controls and Procedures The Holding Company carried out an evaluation, under the supervision and with the
participation of the Holding Companys management, including the Holding Companys Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation
of the Holding Companys disclosure controls and procedures as of December 31, 2004. Based upon
that evaluation, the Holding Companys Principal Executive Officer and Principal Financial Officer
concluded that the Holding 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 Holding Company (including its consolidated subsidiaries) required to be included in the
Holding Companys periodic SEC filings. 23




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##### Table of Contents



In addition, the Holding Company reviewed its internal controls. There has been no change in
the Holding Companys internal control over financial reporting during the last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the Holding 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 Holding 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 Holding 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. 
 Item 8B. Other Information In 2004, the Holding Company adopted a Code of Ethics that applies to all directors and
employees, including without exception, the principal executive officer, principal financial
officer, principal accounting officer and/or controller, or persons performing similar functions.
Effective March 31, 2005, the Board of Directors amended the Code of Ethics to delete references to
equal employment matters and to include provisions relating to confidentiality, SEC and other
reporting, and accounting complaints. The Code of Ethics, as amended, is attached as Exhibit 14 to
this Form 10-KSB. 24




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##### Table of Contents



PART III 
 Item 9. Directors and Executive Officers of the Registrant For information concerning the Board of Directors of the Holding Company, the information
contained under the section captioned Proposal I  Election of Directors in the Holding
Companys definitive proxy statement, to be filed within 120 days after the end of the fiscal year
covered by this Form 10-KSB (the Proxy Statement), is incorporated herein by reference. For information concerning the executive officers of the Holding Company, see Item 1.
Business  Executive Officers of the Registrant, which is incorporated herein by reference. Informaion regarding Section 16(a) beneficial ownership reporting compliance is omitted from
this Report as the Company will file the Proxy Statement not later than 120 days after December 31,
2004, and the information included therein under Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated herein by reference. Information regarding audit committee financial compliance is omitted from this Report and the
Holding Company will file the Proxy Statement not later than 120 days after December 31, 2004, and
the information contained therein under Proposal I Election of Directors is incorporated
herein by reference. The
Company has adopted a code of ethics that applies to all directors
and employees, including without exception, the principal executive
officer, principal financial officer, principal accounting officer and/or controller or persons performing similar functions. 
 Item 10. Executive Compensation The information contained under the section captioned Proposal I  Election of Directors 
Executive Compensation in the Proxy Statement is incorporated herein by reference. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.  (a)
    Equity Compensation Plan Information The following table provides information as of December 31, 2004 with respect to the shares of
the Holding Companys common stock that may be issued under its existing equity compensation plan. Number ofSecurities to be
    
    
    
    
    
    
    Number ofissued upon
    
    
    Weighted Average
    
    
    SecuritiesExercise of
    
    
    Exercise Price of
    
    
    Remaining AvailableOutstanding
    
    
    Outstanding
    
    
    for Future IssuanceOptions, Warrants
    
    
    Options, Warrants
    
    
    Under EquityPlan Category
    
    and Rights
    
    
    and Rights
    
    
    Compensation PlansEquity Compensation Plans
Approved by Stockholders(1)
    
    
    70,366
    
    
    $
    9.30
    
    
    
    44,500Equity Compensation Plans Not
Approved by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    70,366
    
    
    $
    9.30
    
    
    
    44,500
 25




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##### Table of Contents



(b)
    Security Ownership of Certain Beneficial OwnersInformation required by this item is incorporated herein by reference to the section
captioned Voting Securities and Principal Holders Thereof of the Proxy Statement.(c)
    Security Ownership of ManagementInformation required by this item is incorporated herein by reference to the sections
captioned Voting Securities and Principal Holders Thereof and Proposal I 
Election of Directors of the Proxy Statement.(d)
    Changes in ControlManagement of the Registrant knows of no arrangements, including any pledge by any
person of securities of the Registrant, the operation of which may at a subsequent
date result in a change of control of the Registrant. 
 Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the sections
captioned Proposal I  Election of Directors and Voting Securities and Principal Holders
Thereof of the Proxy Statement. 26




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##### Table of Contents



Item 13. Exhibits and Reports on Form 8-K  (a)
    Exhibits  3.1
    Certificate of Incorporation - Incorporated by reference to
Exhibit 3.1 to Registrants Annual Report on Form 10-KSB for the six months
ended December 31, 1996.3.2
    Bylaws - Incorporated by reference to Exhibit 3.2 to
Registrants Annual Report on Form 10-KSB for the six months ended December 31,
1996.4
    Form of Stock Certificate - Incorporated by reference to
Exhibit 4 to Registrants Annual Report on Form 10-KSB for the six months ended
December 31, 1996.10.1
    Employment Agreement between the Registrant and Robert B.
Nolen, Jr. - Incorporated by reference to Exhibit 10.2 to the Registrants
Registration Statement on Form S-4 (File No. 333-11495)10.2
    Pinnacle Bank 1996 Stock Option and Incentive Plan -
Incorporated by reference to Exhibit 10.4 to the Registrants Registration
Statement on Form S-4 (File No. 333-11495)13
    Annual Report to Stockholders for the year ended December 31,
2004. Except for the portions of the Annual Report to Stockholders which are
expressly incorporated herein by reference, such Annual Report to Stockholders
is furnished for the information of the SEC and is not to be deemed filed as
part of this Report.14
    Code of Ethics, as amended21
    Subsidiaries23
    Consent of Independent Registered Public Accounting Firm.31
    Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    Certification of Chief Executive Officer and Chief Finanical
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
 Item 14 . Principal Accountant Fees and Services The information required by this item is incorporated herin by reference to the section
captioned Proposal II  Ratification of Appointment of
Independent Registered Public Accountants 
of the Proxy Statement. 27




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. PINNACLE BANCSHARES, INC.Date: March 23, 2005
    By:
    /s/ Robert B. Nolen, Jr.Robert B. Nolen, Jr., President(Duly Authorized Representative) In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated. By:
    
    /s/ Robert B. Nolen, Jr.
    
    
    
    By:
    
    /s/ James W. CannonRobert B. Nolen, Jr.
    
    
    
    
    
    James W. CannonPresident and Chief Executive Officer
    
    
    
    
    
    Director(Principal Executive Officer and Principal
    
    
    
    Date:
    
    March 23, 2005Financial Officer)Date:
    
    March 23, 2005
    
    
    
    By:
    
    /s/ Max W. PerdueMax W. PerdueBy:
    
    /s/ Marie Guthrie
    
    
    
    
    
    DirectorMarie Guthrie
    
    
    
    Date:
    
    March 23, 2005Treasurer(Principal Accounting Officer)
    
    
    
    By:
    
    /s/ Greg BatchelorDate:
    
    March 23, 2005
    
    
    
    
    
    Greg BatchelorDirectorBy:
    
    /s/ Albert H. Simmons
    
    
    
    Date:
    
    March 23, 2005Albert H. SimmonsDate:
    
    March 23, 2005
    
    
    
    By:
    
    /s/ J. T. WaggonerJ. T. WaggonerBy:
    
    /s/ O. H. Brown
    
    
    
    
    
    DirectorO. H. Brown
    
    
    
    Date:
    
    March 23, 2005DirectorDate:
    
    March 23, 2005By:
    
    /s/ Sam W. MurphySam W. MurphyDirectorDate:
    
    March 23, 2005
 28