##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)1811 Second Avenue, Jasper, Alabama
    
    35502-1388(Address of principal executive offices)
    
    (Zip Code)
   Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredCommon Stock, par value $.01 per share
    
    American Stock Exchange
  o
 þ o
 o
 o þ
   ,
 o þ




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Managements Discussion and Analysis or Plan of OperationItem 7. Financial StatementsItem 8. Changes In and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14 . Principal Accountant Fees and ServicesSIGNATURESEx-13 Annual ReportEx-21 SubsidiariesEx-23 Consent of Independent Registered Public Accounting FirmEx-31 Section 302 CertificationEx-32 Section 906 Certification    Table of Contents  
 PART I
 
 Item 1. Description of Business
 General
 The Holding Company
  The Bank
   2




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##### Table of Contents



Selected Financial and Other Data
  At December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Dollars in thousands)Financial Condition and Other Data:Total amount of:Assets
    
    $
    232,234
    
    
    $
    220,249
    
    
    $
    207,832
    
    
    $
    208,574
    
    
    $
    218,290Loans, net
    
    
    113,490
    
    
    
    106,256
    
    
    
    99,600
    
    
    
    105,477
    
    
    
    119,375Interest-bearing deposits in other banks
    
    
    8,599
    
    
    
    13,369
    
    
    
    485
    
    
    
    256
    
    
    
    357Securities
    
    
    87,852
    
    
    
    80,654
    
    
    
    89,025
    
    
    
    83,325
    
    
    
    75,301Loans held for sale
    
    
    976
    
    
    
    374
    
    
    
    1,206
    
    
    
    1,428
    
    
    
    4,969Deposits
    
    
    206,570
    
    
    
    192,552
    
    
    
    179,966
    
    
    
    179,939
    
    
    
    188,955Subordinated debt
    
    
    3,093
    
    
    
    3,093
    
    
    
    3,093
    
    
    
    3,093
    
    
    
    0Other borrowed funds
    
    
    0
    
    
    
    2,375
    
    
    
    2,580
    
    
    
    3,465
    
    
    
    5,940Stockholders equity
    
    
    19,406
    
    
    
    19,410
    
    
    
    19,914
    
    
    
    19,431
    
    
    
    19,955Number of:Loans outstanding
    
    
    2,884
    
    
    
    3,006
    
    
    
    3,076
    
    
    
    3,243
    
    
    
    3,428Deposits
    
    
    12,829
    
    
    
    12,930
    
    
    
    13,157
    
    
    
    13,624
    
    
    
    14,301Full service offices open
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Operating Data:Interest
income
    
    $
    13,265
    
    
    $
    11,559
    
    
    $
    10,636
    
    
    $
    11,287
    
    
    $
    13,103Interest
expense
    
    
    6,722
    
    
    
    4,717
    
    
    
    3,516
    
    
    
    3,906
    
    
    
    5,982Net interest income
before provision
for loan losses
    
    
    6,543
    
    
    
    6,842
    
    
    
    7,120
    
    
    
    7,381
    
    
    
    7,121Provision for loan
losses
    
    
    405
    
    
    
    575
    
    
    
    588
    
    
    
    963
    
    
    
    647Net interest income
after provision for
losses
    
    
    6,138
    
    
    
    6,267
    
    
    
    6,532
    
    
    
    6,418
    
    
    
    6,474Noninterest
income
    
    
    1,890
    
    
    
    1,816
    
    
    
    1,763
    
    
    
    2,845
    
    
    
    2,157Noninterest
expense
    
    
    6,062
    
    
    
    5,875
    
    
    
    5,794
    
    
    
    5,569
    
    
    
    5,593Income tax
expense
    
    
    615
    
    
    
    691
    
    
    
    769
    
    
    
    1,268
    
    
    
    1,025Net income
    
    $
    1,351
    
    
    $
    1,517
    
    
    $
    1,732
    
    
    $
    2,426
    
    
    $
    2,013
 3




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##### Table of Contents



For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    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
    
    $
    108,314
    
    
    $
    8,896
    
    
    
    8.2
    %
    
    $
    103,640
    
    
    $
    7,725
    
    
    
    7.5
    %
    
    $
    105,583
    
    
    $
    7,294
    
    
    
    6.9
    %Securities available-for-sale
    
    
    81,395
    
    
    
    3,505
    
    
    
    4.3
    %
    
    
    91,952
    
    
    
    3,697
    
    
    
    4.0
    %
    
    
    85,318
    
    
    
    3,298
    
    
    
    3.9
    %Other
    
    
    17,420
    
    
    
    864
    
    
    
    5.0
    %
    
    
    3,887
    
    
    
    137
    
    
    
    3.5
    %
    
    
    2,904
    
    
    
    44
    
    
    
    1.5
    %Total interest earning assets
    
    
    207,129
    
    
    
    13,265
    
    
    
    6.4
    %
    
    
    199,479
    
    
    
    11,559
    
    
    
    5.8
    %
    
    
    193,805
    
    
    
    10,636
    
    
    
    5.5
    %Non-interest-earning assets
    
    
    18,317
    
    
    
    
    
    
    
    
    
    
    
    17,253
    
    
    
    
    
    
    
    
    
    
    
    16,787Total assets
    
    $
    225,446
    
    
    
    
    
    
    
    
    
    
    $
    216,732
    
    
    
    
    
    
    
    
    
    
    $
    210,592Interest-bearing liabilities:Deposits
    
    $
    201,478
    
    
    
    6,455
    
    
    
    3.2
    %
    
    $
    188,845
    
    
    
    4,357
    
    
    
    2.3
    %
    
    $
    181,296
    
    
    
    3,200
    
    
    
    1.8
    %Subordinated debt
    
    
    3,093
    
    
    
    253
    
    
    
    8.2
    %
    
    
    3,093
    
    
    
    198
    
    
    
    6.4
    %
    
    
    3,093
    
    
    
    143
    
    
    
    4.6
    %Borrowed funds
    
    
    169
    
    
    
    14
    
    
    
    8.3
    %
    
    
    2,981
    
    
    
    162
    
    
    
    5.4
    %
    
    
    4,159
    
    
    
    173
    
    
    
    4.2
    %Total interest-bearing
liabilities:
    
    
    204,740
    
    
    
    6,722
    
    
    
    3.3
    %
    
    
    194,919
    
    
    
    4,717
    
    
    
    2.4
    %
    
    
    188,548
    
    
    
    3,516
    
    
    
    1.9
    %Non-interest-bearing liabilities
    
    
    1,856
    
    
    
    
    
    
    
    
    
    
    
    2,285
    
    
    
    
    
    
    
    
    
    
    
    2,365Total Liabilities:
    
    
    206,596
    
    
    
    
    
    
    
    
    
    
    
    197,204
    
    
    
    
    
    
    
    
    
    
    
    190,913Equity
    
    
    18,850
    
    
    
    
    
    
    
    
    
    
    
    19,528
    
    
    
    
    
    
    
    
    
    
    
    19,679Total Liabilities and Equity
    
    $
    225,446
    
    
    
    
    
    
    
    
    
    
    $
    216,732
    
    
    
    
    
    
    
    
    
    
    $
    210,592Net interest-earning assets
    
    $
    2,389
    
    
    
    
    
    
    
    
    
    
    $
    4,560
    
    
    
    
    
    
    
    
    
    
    $
    5,257Net interest income
    
    
    
    
    
    $
    6,543
    
    
    
    
    
    
    
    
    
    
    $
    6,842
    
    
    
    
    
    
    
    
    
    
    $
    7,120Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.1
    %
    
    
    
    
    
    
    
    
    
    
    3.4
    %
    
    
    
    
    
    
    
    
    
    
    3.6
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.2
    %
    
    
    
    
    
    
    
    
    
    
    3.4
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %Ratio of average
interest-earning assets tointerest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.2
    %
    
    
    
    
    
    
    
    
    
    
    102.3
    %
    
    
    
    
    
    
    
    
    
    
    102.8
    %
 4




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##### Table of Contents



Lending Activities
 General
     December 31,2006
    
    
    
    
    
    
    2005
    
    
    
    
    

    
    2004(Dollars in thousands)Type of loan:Commercial real estate loans
    
    $
    21,572
    
    
    
    19.0
    %
    
    $
    17,124
    
    
    
    16.1
    %
    
    $
    18,901
    
    
    
    19.0
    %Residential real estate loans,
including equity lines
    
    
    42,990
    
    
    
    37.9
    %
    
    
    45,873
    
    
    
    43.2
    %
    
    
    45,460
    
    
    
    45.6
    %Construction and development loans
    
    
    21,645
    
    
    
    19.0
    %
    
    
    17,993
    
    
    
    16.9
    %
    
    
    12,019
    
    
    
    12.1
    %Commercial business loans
    
    
    16,345
    
    
    
    14.4
    %
    
    
    12,940
    
    
    
    12.2
    %
    
    
    10,807
    
    
    
    10.9
    %Consumer loans
    
    
    12,482
    
    
    
    11.0
    %
    
    
    13,878
    
    
    
    13.1
    %
    
    
    13,709
    
    
    
    13.7
    %LessDiscounts and other
    
    
    163
    
    
    
    0.1
    %
    
    
    169
    
    
    
    0.2
    %
    
    
    129
    
    
    
    0.1
    %Allowance for loan losses
    
    
    1,382
    
    
    
    1.2
    %
    
    
    1,383
    
    
    
    1.3
    %
    
    
    1,167
    
    
    
    1.2
    %Total
    
    $
    113,489
    
    
    
    100.00
    %
    
    $
    106,256
    
    
    
    100.00
    %
    
    $
    99,600
    
    
    
    100.00
    %
 December 31,2003
    
    
    
    
    
    
    2002(Dollars in thousands)Type of loan:Commercial real estate loans
    
    $
    18,854
    
    
    
    17.9
    %
    
    $
    22,300
    
    
    
    18.7
    %Residential real estate loans, including equity lines
    
    
    50,183
    
    
    
    47.6
    %
    
    
    57,889
    
    
    
    48.5
    %Construction and development loans
    
    
    14,060
    
    
    
    13.3
    %
    
    
    15,329
    
    
    
    12.8
    %Commercial business loans
    
    
    10,568
    
    
    
    10.0
    %
    
    
    11,549
    
    
    
    9.7
    %Consumer loans
    
    
    13,444
    
    
    
    12.8
    %
    
    
    13,834
    
    
    
    11.6
    %LessDiscounts and other
    
    
    165
    
    
    
    0.2
    %
    
    
    204
    
    
    
    0.2
    %Allowance for loan losses
    
    
    1,467
    
    
    
    1.4
    %
    
    
    1,322
    
    
    
    1.1
    %Total
    
    $
    105,477
    
    
    
    100.00
    %
    
    $
    119,375
    
    
    
    100.00
    %
 5




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##### Table of Contents



Commercial Real Estate Loans
  Residential Real Estate Loans
   Equity Lines of Credit
 Construction and Development Loans
  6




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##### Table of Contents



Commercial Business Loans
 Consumer Loans
  Loan Originations, Purchases and Sales
  .
  Loan Commitments
 7




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##### Table of Contents



$
  Loan Origination and Other Fees
 Maturity of Loan Portfolio.
 Due One Through
    
    
    DueDue by
    
    
    Five Years After
    
    
    Five Years AfterDecember 31, 2007
    
    
    December 31, 2007
    
    
    December 31, 2007
    
    
    TotalCommercial and
residential real
estate loans,
including equity
lines of
credit
    
    $
    29,893,499
    
    
    $
    29,996,048
    
    
    $
    4,672,808
    
    
    $
    64,562,355Construction and
development
loans
    
    
    19,305,053
    
    
    
    2,340,171
    
    
    
    0
    
    
    
    21,645,224Commercial business
loans
    
    
    13,146,639
    
    
    
    3,091,406
    
    
    
    107,628
    
    
    
    16,345,673Consumer
loans
    
    
    2,607,730
    
    
    
    9,567,062
    
    
    
    307,241
    
    
    
    12,482,033Total
    
    $
    64,952,921
    
    
    $
    44,994,687
    
    
    $
    5,087,677
    
    
    $
    115,035,285
  Floating orPredetermined Rates
    
    
    Adjustable RatesCommercial and residential
real estate loans,
including equity lines
of credit
    
    $
    35,711,831
    
    
    $
    1,297,196Commercial business
loans
    
    
    3,199,034
    
    
    
    Consumer loans
    
    
    9,874,303
    
    
    
    Total
    
    $
    48,785,168
    
    
    $
    1,297,196
 Non-Performing Loans and Asset Classification
  8




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##### Table of Contents



, Accounting for Sales of Real Estate.
  At December 31,(Dollars in thousands)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Loans accounted for on a
nonaccrual basis: (1)Real estate loans
    
    $
    252
    
    
    $
    136
    
    
    $
    422
    
    
    $
    130
    
    
    $
    788Commercial business loans
    
    
    108
    
    
    
    91
    
    
    
    278
    
    
    
    588
    
    
    
    326Consumer loans
    
    
    60
    
    
    
    9
    
    
    
    26
    
    
    
    10
    
    
    
    56Total
    
    $
    420
    
    
    $
    236
    
    
    $
    726
    
    
    $
    728
    
    
    $
    1,170Accruing loans which are
contractually
past due 90 days or more:Real estate loans
    
    $
    15
    
    
    $
    
    
    
    $
    
    
    
    $
    226
    
    
    $
    Commercial business loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    226
    
    
    $
    Total of nonaccrual and 90 days
past due loans
    
    $
    435
    
    
    $
    236
    
    
    $
    726
    
    
    $
    954
    
    
    $
    1,170Percentage of total loans
    
    
    0.37
    %
    
    
    0.22
    %
    
    
    0.73
    %
    
    
    0.68
    %
    
    
    0.98
    %Percentage of total assets
    
    
    0.18
    %
    
    
    0.11
    %
    
    
    0.35
    %
    
    
    0.35
    %
    
    
    0.54
    %Other non-performing assets (2)
    
    $
    209
    
    
    $
    381
    
    
    $
    599
    
    
    $
    1,023
    
    
    $
    1,609
 
 (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.    9




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##### Table of Contents



Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total loansDecember 31,2006
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    2004(Dollars in thousands)Real estate
mortgage loans
    
    $
    680
    
    
    
    74.6
    %
    
    $
    655
    
    
    
    74.8
    %
    
    $
    572
    
    
    
    75.4
    %Commercial business
loans
    
    
    389
    
    
    
    14.4
    %
    
    
    347
    
    
    
    12.2
    %
    
    
    258
    
    
    
    10.9
    %Consumer
loans
    
    
    313
    
    
    
    11.0
    %
    
    
    381
    
    
    
    13.0
    %
    
    
    337
    
    
    
    13.7
    %Total
    
    $
    1,382
    
    
    
    100.0
    %
    
    $
    1,383
    
    
    
    100.0
    %
    
    $
    1,167
    
    
    
    100.0
    %
 Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansDecember 31,2003
    
    
    
    
    
    
    2002(Dollars in thousands)Real estate mortgage loans
    
    $
    472
    
    
    
    77.2
    %
    
    $
    447
    
    
    
    78.8
    %Commercial business loans
    
    
    372
    
    
    
    10.0
    %
    
    
    349
    
    
    
    9.7
    %Consumer loans
    
    
    623
    
    
    
    12.8
    %
    
    
    526
    
    
    
    11.5
    %Total
    
    $
    1,467
    
    
    
    100.0
    %
    
    $
    1,322
    
    
    
    100.0
    %
 10




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##### Table of Contents



Year Ended December 31,Allowance for loan losses
    
    2006
    
    
    2005
    
    
    
    
    
    
    2004
    
    2003
    
    2002(Dollars in thousands)Balance at the beginning of period
    
    $
    1,383
    
    
    $
    1,167
    
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308Loans Charged off:Real estate mortgage loans
    
    
    186
    
    
    
    187
    
    
    
    699
    
    
    
    767
    
    
    
    505Consumer loans
    
    
    434
    
    
    
    330
    
    
    
    372
    
    
    
    281
    
    
    
    242Total charge-offs
    
    
    620
    
    
    
    517
    
    
    
    1,071
    
    
    
    1,048
    
    
    
    747Total recoveries
    
    
    (214
    )
    
    
    (158
    )
    
    
    (183
    )
    
    
    (230
    )
    
    
    (114
    )Net loans charged-off
    
    
    406
    
    
    
    359
    
    
    
    888
    
    
    
    818
    
    
    
    633Provision for loan losses
    
    
    405
    
    
    
    575
    
    
    
    588
    
    
    
    963
    
    
    
    647Balance at end of period
    
    $
    1,382
    
    
    $
    1,383
    
    
    $
    1,167
    
    
    $
    1,467
    
    
    $
    1,322Ratio of net charge-off to
average loans outstanding during
the period
    
    
    0.37
    %
    
    
    0.35
    %
    
    
    0.85
    %
    
    
    0.70
    %
    
    
    1.4
    %
  Investment Activities
   At December 31,2006
    
    
    2005
    
    
    2004(In thousands)Securities available-for-sale:U.S. Government and agency securities
    
    $
    49,219
    
    
    $
    51,764
    
    
    $
    57,918Mortgage-backed securities
    
    
    38,632
    
    
    
    28,889
    
    
    
    31,106Other securities
    
    
    1
    
    
    
    1
    
    
    
    1Total
    
    $
    87,852
    
    
    $
    80,654
    
    
    $
    89,025
 11




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##### Table of Contents



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
    
    $
    
    
    
    
    
    %
    
    $
    50,977
    
    
    
    4.0
    %
    
    $
    
    
    
    
    
    %Other securities(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Mortgage-backed securities (2)
    
    
    
    
    
    
    
    
    
    
    5,612
    
    
    
    4.6
    %
    
    
    24,092
    
    
    
    4.7
    %Total
    
    $
    
    
    
    
    
    %
    
    $
    56,589
    
    
    
    4.1
    %
    
    $
    24,093
    
    
    
    4.7
    %
 After Ten Years
    
    
    TotalWeighted
    
    
    
    
    
    
    Estimated
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. government and agency
    
    $
    
    
    
    
    
    %
    
    $
    50,977
    
    
    $
    49,220
    
    
    
    4.0
    %Other securities(1)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Mortgage-backed securities (2)
    
    
    9,340
    
    
    
    5.4
    %
    
    
    39,044
    
    
    
    38,631
    
    
    
    4.8
    %Total
    
    $
    9,340
    
    
    
    5.4
    %
    
    $
    $90,022
    
    
    $
    87,852
    
    
    
    4.4
    %
 
 (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 maturities. Sources of Funds
 General.
 Deposits.
    12




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##### Table of Contents



CertificatesMaturity Period
    
    of Deposit(In thousands)Three months or less
    
    $
    30,248Over three through six months
    
    
    29,592Over six through twelve months
    
    
    7,479Over twelve months
    
    
    2,550Total
    
    $
    69,869
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageDeposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Non-interest bearing demand deposits
    
    $
    10,851
    
    
    
    
    %
    
    $
    11,474
    
    
    
    
    %
    
    $
    11,044
    
    
    
    
    %Interest bearing demand deposits
    
    
    37,369
    
    
    
    1.8
    
    
    
    32,222
    
    
    
    1.0
    
    
    
    28,951
    
    
    
    .3Savings deposits
    
    
    14,599
    
    
    
    .3
    
    
    
    16,834
    
    
    
    .3
    
    
    
    17,548
    
    
    
    .3Time deposits
    
    
    138,659
    
    
    
    4.1
    
    
    
    128,315
    
    
    
    3.1
    
    
    
    123,753
    
    
    
    2.5Total deposits
    
    $
    $201,478
    
    
    
    3.2
    %
    
    $
    $188,845
    
    
    
    2.3
    %
    
    $
    $181,296
    
    
    
    1.8
    %
  Subordinated Debt
 13




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##### Table of Contents



Borrowed Funds.
 At or for theYear Ended December 31,2006
    
    2005(Dollars in thousands)Amounts outstanding at end of period
    
    $
    
    
    
    $
    Weighted average rate paid at period end
    
    
    
    %
    
    
    4.44
    %Maximum amount of borrowings outstanding at any month end
    
    $
    
    
    
    $
    7,300,000Approximate average amount outstanding for period
    
    $
    
    
    
    $
    572,000Approximate weighted average rate paid during period (1)
    
    
    
    %
    
    
    3.66
    %
 
 (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.  Selected Financial Ratios
  Year Ended December 31,2006
    
    2005
    
    2004Return on Assets (Net Income Divided By
Average Total Assets)
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    0.8
    %Return on Equity (Net Income Divided By
Average Equity)
    
    
    7.2
    %
    
    
    7.8
    %
    
    
    8.8
    %Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)
    
    
    8.4
    %
    
    
    9.0
    %
    
    
    9.3
    %Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)
    
    
    48.0
    %
    
    
    45.0
    %
    
    
    39.0
    %
 14




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##### Table of Contents



Liquidity and Rate Sensitivity
  Over One
    
    
    Over FiveOne Year
    
    
    Through
    
    
    Through
    
    
    Overor Less
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten Years
    
    
    Total(In thousands)Interest-Earning Assets: (1)Loans
    
    $
    64,953
    
    
    $
    44,995
    
    
    $
    3,981
    
    
    $
    1,107
    
    
    $
    115,036Securities
    
    
    
    
    
    
    54,720
    
    
    
    23,858
    
    
    
    9,274
    
    
    
    87,852Interest bearing deposits
    
    
    8,599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,599Total
    
    $
    73,552
    
    
    $
    99,715
    
    
    $
    27,839
    
    
    $
    10,381
    
    
    $
    211,487Interest-Bearing Liabilities:(2)Deposits
    
    $
    179,110
    
    
    $
    27,420
    
    
    $
    40
    
    
    $
    
    
    
    $
    206,570Subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,093
    
    
    
    3,093Borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    179,110
    
    
    $
    27,420
    
    
    $
    40
    
    
    $
    3.,093
    
    
    $
    209,663Interest Sensitivity Gap
    
    $
    (105,558
    )
    
    $
    72,295
    
    
    $
    27,799
    
    
    $
    7,288
    
    
    $
    1,824Cumulative Interest Sensitivity
Gap
    
    $
    (105,558
    )
    
    $
    (33,263
    )
    
    $
    (5,464
    )
    
    $
    1,824
 
 (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   15




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##### Table of Contents



Contractual Obligations
 Over One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Borrowed funds (1)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Subordinated debt (1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,093
    
    
    
    3,093Operating leases
    
    
    84
    
    
    
    148
    
    
    
    85
    
    
    
    258
    
    
    
    575Certificates of deposits
    
    
    117,065
    
    
    
    21,430
    
    
    
    5.990
    
    
    
    40
    
    
    
    144,525Total
    
    $
    117,149
    
    
    $
    21,578
    
    
    $
    6,075
    
    
    $
    3,391
    
    
    $
    148,193
 
 (1)
    
    Refer to notes 7 and 8 in the notes to consolidated financial statements for additional
information about these obligations; including certain redemption features. Commitments
 Over One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Lines of credit
    
    $
    23,571
    
    
    $
    3,273
    
    
    $
    4,024
    
    
    $
    4,748
    
    
    $
    35,616Letters of credit
    
    
    1,500
    
    
    
    65
    
    
    
    208
    
    
    
    0
    
    
    
    1,773Total
    
    $
    25,071
    
    
    $
    3,338
    
    
    $
    4,232
    
    
    $
    4,748
    
    
    $
    37,389
 Rate/Volume Analysis
 .
 Year ended December
    
    
    Year ended December2006 vs. 2005
    
    
    2005 vs 2004Increase (Decrease)
    
    
    Increase (Decrease))Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest Income:Loans
    
    $
    373
    
    
    $
    798
    
    
    $
    1,171
    
    
    $
    (148
    )
    
    $
    579
    
    
    $
    431Securities
    
    
    (393
    )
    
    
    201
    
    
    
    (192
    )
    
    
    260
    
    
    
    139
    
    
    
    399Other interest-earning assets
    
    
    530
    
    
    
    197
    
    
    
    727
    
    
    
    29
    
    
    
    64
    
    
    
    93Total interest earning assets
    
    $
    510
    
    
    $
    1,196
    
    
    $
    1,706
    
    
    $
    141
    
    
    $
    782
    
    
    $
    923Interest Expense:Deposits
    
    $
    384
    
    
    $
    1,714
    
    
    $
    2,098
    
    
    $
    168
    
    
    $
    989
    
    
    $
    1,157Borrowed funds & subordinated debt
    
    
    (137
    )
    
    
    44
    
    
    
    (93
    )
    
    
    (122
    )
    
    
    166
    
    
    
    44Total interest-bearing liabilities
    
    $
    247
    
    
    $
    1,758
    
    
    $
    2,005
    
    
    $
    46
    
    
    $
    1,155
    
    
    $
    1,201
 16




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##### Table of Contents



Competition
    Regulation, Supervision and Governmental Policy
  Sarbanes-Oxley Act of 2002.
  USA Patriot Act
 17




---



##### Table of Contents



Financial Modernization Legislation
    Bank Holding Company Regulation
    18




---



##### Table of Contents



Bank Regulation
    19




---



##### Table of Contents



Deposit Insurance
    Capital Requirements
  20




---



##### Table of Contents



21




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##### Table of Contents



Effects of Governmental Policy
  Check 21 st
 Employees
   Executive Officers of the Registrant
 Name, Age and Position
    
    Business ExperienceRobert B. Nolen, Jr., 49 -
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, 54-
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
  22




---



##### Table of Contents



Item 2. Description of Property
    
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  
 Item 6. Managements Discussion and Analysis or Plan of Operation
  
 Item 7. Financial Statements
 23




---



##### Table of Contents



Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
  
 Item 8A. Controls and Procedures
     
 Item 8B. Other Information
  24




---



##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act .
      
 Item 10. Executive Compensation
  25




---



##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
   Number of Securities to be
    
    
    
    
    
    
    Number of Securitiesissued upon Exercise of
    
    
    Weighted Average Exercise
    
    
    Remaining Available forOutstanding Options,
    
    
    Price of Outstanding Options,
    
    
    Future Issuance Under EquityPlan Category
    
    Warrants and Rights
    
    
    Warrants and Rights
    
    
    Compensation PlansEquity Compensation Plans
Approved by Stockholders(1)
    
    
    17,833
    
    
    $
    10.125
    
    
    
    17,833Equity Compensation Plans Not
Approved by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    17,833
    
    
    $
    10.125
    
    
    
    17,833
 
 (1)
    
    Consists of the Option Plan. (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
  26




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##### Table of Contents



Item 13. Exhibits
 (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 3.1 to
Registrants Current Report on Form 8-K dated March 27, 2007.4.1
    
    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, 1996.4.2
    
    Indenture dated as of December 22, 2003 between the Registrant
and Wells Fargo Bank, National Association, as trustee  Incorporated by
reference to Exhibit 10.2 to Registrants Current Report on Form 8-k dated
December 22, 200310.1
    
    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).10.3
    
    Purchase agreement dated as of December 16, 2003 among Pinnacle
Capital Trust I (Issuer), the Registrant (Sponsor) and Bear, Stearns & Co.,
Inc. (Initial Purchaser)  Incorporated by reference to Exhibit 10-1 to
Registrants Current Report on Form 8-K dated December 22, 2003.13
    
    Annual Report to Stockholders for the year ended December 31,
2006. 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 amended  Incorporated by reference to
Exhibit 14 to the Registrants Annual Report on Form 10-KSB for the year ended
December 31, 2005.21
    
    Subsidiaries.23
    
    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 Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 Item 14 . Principal Accountant Fees and Services
  27




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##### Table of Contents



PINNACLE BANCSHARES, INC.Date: March 30, 2007
    By:
    /s/ Robert B. Nolen, Jr.Robert B. Nolen, Jr., President(Duly Authorized Representative)   By:
    
    /s/ Robert B. Nolen, Jr.Robert B. Nolen, Jr.President and Chief Executive Officer(Principal Executive Officer and PrincipalFinancial Officer)Date:
    
    March 30, 2007By:
    
    /s/ Marie GuthrieMarie GuthrieTreasurer(Principal Accounting Officer)Date:
    
    March 30, 2007By:
    
    /s/ Albert H. SimmonsAlbert H. SimmonsDate:
    
    March 30, 2007By:
    
    /s/ O. H. BrownO. H. BrownDirectorDate:
    
    March 30, 2007By:
    
    /s/ Sam W. MurphySam W. MurphyDirectorDate:
    
    March 30, 2007
 By:
    
    /s/ James W. CannonJames W. CannonChairman of the BoardDate:
    
    March 30, 2007By:
    
    /s/ Max W. Perdue

Max W. PerdueDirectorDate:
    
    March 30, 2007By:
    
    /s/ Greg BatchelorGreg BatchelorDirectorDate:
    
    March 30, 2007By:
    
    /s/ J. T. WaggonerJ. T. WaggonerDirectorDate:
    
    March 30, 2007
   28