<PAGE>
                                                                               .
                                                                               .
                                                                               .

                                                                      EXHIBIT 13

                          BALANCE SHEET AND OTHER DATA

<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                        ----------------------
                                                          2003          2002
                                                        --------      --------
                                                        (Dollars in Thousands)
<S>                                                     <C>           <C>
TOTAL AMOUNT OF:
     Assets                                             $208,574      $218,290
     Loans, net                                          105,477       119,375
     Interest-bearing deposits in other banks              3,519           357
     Securities available-for-sale                        83,325        75,301
     Loans held for sale                                   1,428         4,969
     Deposits                                            179,939       188,955
     Subordinated debt                                     3,093             0
     Borrowed funds                                        3,465         5,940
     Stockholders' equity                                 19,431        19,955
NUMBER OF:
     Real estate loans outstanding                         2,263         2,504
     Savings accounts                                     13,624        14,301
     Full-service offices open                                 6             6
</TABLE>

                          STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                    2003          2002
                                                                  --------      --------
                                                                      (In Thousands)
<S>                                                               <C>           <C>
INTEREST INCOME                                                   $ 11,287      $ 13,103

INTEREST EXPENSE                                                     3,906         5,982
                                                                  --------      --------
   Net interest income before provision for loan losses              7,381         7,121

PROVISION FOR LOAN LOSSES                                              963           647
                                                                  --------      --------
   Net interest income after provision for loan losses               6,418         6,474

NONINTEREST INCOME                                                   2,845         2,157

NONINTEREST EXPENSE                                                  5,569         5,593

INCOME TAX EXPENSE                                                   1,268         1,025
                                                                  --------      --------
Net income                                                        $  2,426      $  2,013
                                                                  ========      ========
</TABLE>

<PAGE>

                                   OTHER DATA

<TABLE>
<CAPTION>
                                                                                                             FOR THE YEARS ENDED
                                                                                                                 DECEMBER 31,
                                                                                                           -----------------------
                                                                                                           2003               2002
                                                                                                           ----               ----
<S>                                                                                                        <C>                <C>
Interest rate spread                                                                                        3.7%               3.5%
Yield on average interest earning assets                                                                    5.7                6.5
Return on assets (net income divided by average total assets)                                               1.1                0.9
Return on equity (net income divided by average equity)                                                    12.4               10.0
Equity-to-assets ratio (average equity divided by total average assets)                                     9.0                9.2
Dividend payout ratio (dividends declared divided by net income)                                           26.2               32.8
</TABLE>

                          YIELDS EARNED AND RATES PAID

         The following table sets forth, for the periods and the dates
indicated, the weighted average yields earned on interest-bearing assets and the
weighted interest rates paid on the Bank's interest-bearing liabilities,
together with the net yield on interest earning assets.

<TABLE>
<CAPTION>
                                                                                                 FOR THE YEARS ENDED
                                                                                                     DECEMBER 31,
                                                                                              -------------------------
                                                                                              2003                 2002
                                                                                              ----                 ----
<S>                                                                                           <C>                  <C>
Weighted average yield on loans................................                                7.1%                 7.5%

Weighted average yield on securities available-
   for-sale....................................................                                3.7                  4.9

Weighted average yield on all interest-earning
   assets......................................................                                5.7                  6.5

Weighted average rate paid on deposits.........................                                2.0                  3.0

Weighted average rate paid on
   borrowed funds..............................................                                3.6                  4.6

Weighted average rate paid on all interest-
   bearing liabilities.........................................                                2.0                  3.0

Interest rate spread (spread between weighted
   average rate on all interest-bearing assets and
   all interest bearing-liabilities)...........................                                3.7                  3.5

Net yield (net interest income as percentage of
   interest-earning assets)....................................                                3.7                  3.5
</TABLE>

                                       2

<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is a discussion and analysis of the consolidated financial
condition of the Company and the results of operations as of the dates and for
the years indicated. It is intended to be read in conjunction with the
consolidated financial statements, and the notes thereto, along with various
other financial data disclosures, both current and historical, contained in this
Annual Report.

Management's discussion and analysis includes certain forward-looking statements
addressing , among other things, the Company's prospects for earnings, asset
growth, and net interest margin. Forward-looking statements are accompanied by,
and identified with, such terms as "anticipates," "believes," "expects,"
"intends," and similar phrases. Management's expectations for the Company's
future necessarily involve a number of assumptions and estimates. Factors that
could cause actual results to differ from the expectations expressed herein
include: substantial changes in interest rates and changes in the general
economy, as well as changes in the Company's strategies for credit-risk
management, interest-rate risk management and investment activities.
Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized.

INTRODUCTION

Pinnacle Bancshares, Inc. (the "Company") is a bank holding company incorporated
under the laws of the State of Delaware. The Company is the holding company for
Pinnacle Bank (the "Bank"), an Alabama chartered commercial bank that maintains
six branches in Jasper, Haleyville, Sumiton, Vestavia and Trussville, Alabama.

The Company generates revenue primarily from net interest margins derived by
soliciting deposits and borrowings, which are used to fund the Company's loan
portfolio and investment securities. The Company also derives revenues from fees
and charges on loans and deposit accounts.

Historically, the Company's business strategy has been to engage primarily in
residential lending, commercial real estate lending and retail consumer lending.
The Company's principal lending area is Walker, Jefferson, Shelby, and Winston
counties. Although the inherent risks associated with geographic concentrations
in the Company's loan portfolio do not appear to have had a significant effect
on the Company's earnings to date, any dramatic fluctuations in the economic
conditions in the Company's market area could have a material effect on the
Company's profitability.

In recent years, the Company has expanded its operations in the Birmingham,
Alabama, metropolitan area. In 1998, the Company established a new branch in
Trussville, Alabama, which is located in the Birmingham market area. The Company
currently intends to expand further in the Birmingham market and other markets
contiguous with the Company's current market area as appropriate opportunities
become available.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level which management
considers to be adequate to absorb losses inherent in the loan portfolio.
Management's estimation of the amount of the allowance is based on a continuing
evaluation of the loan portfolio and includes such factors as economic
conditions, analysis of individual loans, overall portfolio characteristics,
delinquencies and the balance of any impaired loans (generally considered to be
nonperforming loans, excluding residential mortgages and other homogeneous
loans).

Management reviews the adequacy of the allowance for loan losses on a periodic
basis by assessing the quality of the loan portfolio and adjusting the allowance
when appropriate. Management's evaluation of certain specifically identified
loans includes a review of the financial condition and capacity of the borrower,
the value of the collateral, current economic trends, historical losses, workout
and collection arrangements, and possible concentrations of

                                       3

<PAGE>

credit. The loan review process also includes a collective evaluation of credit
quality within the mortgage and installment loan portfolios. In establishing the
allowance, loss percentages are applied to groups of loans with similar risk
characteristics. These loss percentages are determined by historical experience,
portfolio mix, regulatory influence, and other economic factors. Each quarter
this review is quantified in a report to management, which uses it to determine
whether an appropriate allowance is being maintained. This report is then
submitted to the Board of Directors and to the appropriate Board committee
quarterly.

Changes in the allowance can result from changes in economic events or changes
in the creditworthiness of the borrowers. The effect of these changes is
reflected when known. Though management believes the allowance for loan losses
to be adequate, ultimate losses may vary from estimations. Specific allowances
for impaired loans are generally based on comparisons of the carrying values of
the loans to the estimated fair value of the collateral.

REAL ESTATE OWNED

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

The recognition of gains and losses on the sale of real estate owned is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized under
an alternative method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66, Accounting for Sales of Real Estate.

ASSET-LIABILITY MANAGEMENT

The Company's primary market risk is its exposure to interest rate changes.
Interest rate risk management strategies are designed to optimize net interest
income while minimizing fluctuations caused by changes in the interest rate
environment. It is through these strategies that the Company seeks to manage the
maturity and repricing characteristics of its balance sheet.

Interest rate risk management is administered through the Company's
Asset/Liability Committee. This Committee reviews interest rate risk, liquidity,
capital positions, and discretionary on and off-balance sheet activity. All
decisions are made within established risk management guidelines and strategies.

The modeling techniques used by the Company simulate net interest income and
impact on fair values under various rate scenarios. Important elements of these
techniques include the mix of floating versus fixed rate assets and liabilities,
and the scheduled, as well as expected, repricing and maturing volumes and rates
of the existing balance sheet. Under a scenario simulating a hypothetical 100,
200 and 300 basis point rate increase applied to all interest-earning assets and
interest-bearing liabilities, the Company would expect a net loss in fair value
of the equity in the underlying instruments of approximately $1,011,000,
$1,877,000, and $2,799,000, respectively. Under a scenario simulating a
hypothetical 100, 200 and 300 basis point rate increase, the Company would
except a net decrease in projected net income for the first year of
approximately $66,000, $93,000 and $108,000, 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.

Since the beginning of 2001, the Federal Reserve Board continued to reduce the
targeted level for the federal funds rate, reaching an all-time low of 1.00% in
mid-2003 and maintaining this target for the remainder of 2003. As a result,
market interest rates on loans decreased, and the Bank experienced a significant
number of mortgage loan refinancings during the period, including 2003, which
the Bank does not expect to continue even if prevailing rates do not increase
materially. In response to continued rate reductions, the Bank reduced funding
costs through deposit

                                       4

<PAGE>

rate reductions and less aggressive repricing of maturing certificates of
deposits. A continued period of low interest rates may negatively impact the
Bank's net interest margin and net interest income if the Bank is unable to
reduce funding costs further.

FINANCIAL CONDITION

Total assets were $208.6 million, at December 31, 2003, as compared to $218.3
million, at December 31, 2002. Total securities available-for-sale increased
$8.0 million, to $83.3 million at December 31, 2003 from $75.3 million at
December 31, 2002. This increase was primarily due to purchases exceeding calls,
maturities, and sales. The Bank had $35.6 million in agency securities called in
2003. Also during the fiscal year ended December 31, 2003 the Bank sold $46.0
million in agency securities. Gains of $400,000 were realized on these calls and
sales. With the proceeds from these calls, maturities, and sales of securities
available-for-sale, combined with proceeds from loan principal repayments and
Federal Home Loan Bank ("FHLB") Advances, the Bank purchased $96.7 million in
agency securities during fiscal year ended December 31, 2003.

At December 31, 2003, the Company's securities portfolio of $83.3 million
consisted primarily of U.S. Agency securities and mortgage-backed securities.
The entire portfolio is classified as "available-for-sale," causing it to be
carried at fair value with the unrealized gains/losses reflected directly in
stockholders' equity. See "Liquidity and Capital Resources" and Note 2 of Notes
to Consolidated Financial Statements.

Total loans receivable, net decreased $13.9 million, to $105.5 million at
December 31, 2003 from $119.4 million at December 31, 2002. This decrease was
primarily due to refinancing activities of residential mortgages from adjustable
rates to fixed rates, which the Bank sells in the secondary market. See Note 1
of Notes to Consolidated Financial Statements regarding loans held for sale.

Changes in interest rates can affect loans and other interest-earning assets,
including the Bank's investment portfolio. A significant change in interest
rates could have a negative impact on the Company's operating income and
portfolio market value.

Total deposits decreased approximately $9.0 million, to $180.0 million at
December 31, 2003 from $189.0 million at December 31, 2002. This decrease was
primarily a result of interest rate competition within the Company's market
place and a lack of economic growth in a significant portion of the Bank's
primary market area.

On December 22, 2003, the Company established Pinnacle Capital Trust I, (the
"Trust") a wholly-owned statutory business trust. The Company is the sole
sponsor of the trust and owns $93,000 of the Trust's common securities. The
Trust was created for the exclusive purpose of issuing 30-year capital trust
preferred securities ("Trust Preferred Securities") in the aggregate amount of
$3,000,000 and using proceeds from the issuance of the common and preferred
securities to purchase $3,093,000 of junior subordinated debentures
("Subordinated Debentures") issued by the Company. The sole assets of the Trust
are the Subordinated Debentures. The Company's $93,000 investment in the Trust
is included in other assets in the accompanying consolidated balance sheet at
December 31, 2003 and the $3,093,000 obligation of Pinnacle Bancshares, Inc. is
included in subordinated debt.

During the fiscal years ended December 31, 2003 and 2002, the Bank periodically
borrowed funds on a short-term basis from the FHLB of Atlanta. During the fiscal
year ended December 31, 2003, the Bank used proceeds from borrowed funds to
purchase agency securities as part of managing the Bank's investment portfolio.
The maximum amount outstanding during the fiscal years December 31, 2003 and
2002 was $13.5 million and $9.5 million, respectively. The average amount
outstanding during fiscal years December 31, 2003 and 2002 was $2.6 million and
$1.2 million, respectively.

                                       5

<PAGE>

RESULTS OF OPERATIONS

GENERAL

The Company's income is derived principally from net interest income, which is
the difference between interest income on loans and securities, net of
provisions for losses, and interest expense on deposits and borrowings. In
addition, net income is affected by the gain and loss on the sale of loans and
securities, loan servicing income, fee and service charge income, operating
expenses, and income taxes.

NET INCOME

The Company reported net income of $2,426,000 for the fiscal year ended December
31, 2003, compared with net income of $2,013,000 in the prior year, an increase
of approximately 21%. Net interest income after the provision for loan losses
for the year ended December 31, 2003 was $6,418,000, compared with $6,473,000 in
the prior year. A significant portion of the higher net income was related to
non-interest income, which increased from $2,157,000 for the year ended December
31, 2002, to $2,845,000 for fiscal year 2003. The increase was primarily
attributable to increases in net gains on the sale of loans held for sale and
available-for-sale securities of $311,000 and $362,000, respectively.

INTEREST INCOME

Interest income on loans and securities decreased approximately $1.8 million
from the fiscal year ended December 31, 2002 to the fiscal year ended December
31, 2003. The decrease was primarily due to decreases in market interest rates,
causing a decrease in the yield earned, from 6.5% in 2002 to 5.7% in 2003.

Other interest income decreased approximately $49,000 from the fiscal year ended
December 31, 2002 to the fiscal year ended December 31, 2003. The decrease was
primarily due to a decrease in the average balance of interest-bearing deposits
in other banks of approximately $2.2 million as well as a decrease in yields
earned from 1.7% in 2002 to 1.0% in 2003.

INTEREST EXPENSE

Interest expense on deposits decreased approximately $2.1 million from the
fiscal year ended December 31, 2002 compared to the fiscal year ended December
31, 2003. The decrease was primarily due to a decrease in the weighted average
rate paid on deposits, as a result of a decline in average rates offered from
3.0% in 2002 to 2.0% in 2003.

Interest expense on borrowed funds was $195,000 for the fiscal year ended
December 31, 2003, compared to $194,000 for fiscal year ended December 31, 2002.
The average balance of borrowed funds increased $1,203,000 during the fiscal
year ended December 31, 2003. This increase was offset by a decrease in the
weighted average rate paid on borrowed funds from 4.6% in 2002 to 3.6% in 2003.

PROVISIONS FOR LOAN LOSSES

The provision for loan losses is based on management's analysis of the various
factors that affect the loan portfolio and management's desire to maintain the
allowance for loan losses at a level considered adequate to absorb inherent
losses. The provision for losses on loans amounted to $963,400 and $647,300, for
the fiscal years ended December 31, 2003 and 2002, respectively.

Management reviews the adequacy of the allowance for loan losses on a periodic
basis by assessing the quality of the loan portfolio and adjusting the allowance
when appropriate. Management's evaluation of certain specifically identified
loans includes a review of the financial condition and capacity of the borrower,
the value of the collateral, current economic trends, historical losses, workout
and collection arrangements, and possible concentrations of credit. The loan
review process also includes a collective evaluation of credit quality within
the mortgage and installment loan portfolios. In establishing the allowance,
loss percentages are applied to groups of loans with similar risk
characteristics. These loss percentages are determined by historical experience,
portfolio mix, regulatory influence, and other economic factors. Each quarter
this review is quantified in a report to management,

                                       6

<PAGE>

which uses it to determine whether an appropriate allowance is being maintained.
This report is then submitted to the Board of Directors and to the appropriate
Board committee quarterly.

Total non-performing assets as of December 31, 2003 were $1,023,000, as compared
to $1,609,000 at December 31, 2002. This decrease in non-performing assets was
primarily due to a decrease sales of real estate owned exceeding foreclosures.
Total classified assets as of December 31, 2003 were $2,891,000, as compared to
$3,026,000 as of December 31, 2002. This decrease was primarily due to improved
credit quality.

NONINTEREST INCOME

Noninterest income, which includes fees and charges on deposit accounts,
servicing and fee income on loans, income on real estate operations, and gain
(loss) on sale of assets increased $688,000 from the fiscal year ended December
31, 2002 to the fiscal year ended December 31, 2003. The increase was due
primarily to an increase in fees and service charges on deposit accounts of
$121,000, which is due to the Bank instituting new programs generating much
higher insufficient check charges. These new programs are higher risk than the
Bank's previous programs and the Bank closely monitors overdrafts associated
with these new programs. The increase was also due to an increase in the gain on
sale of mortgage loans of $311,000, an increase in the gain on sale of
securities available-for-sale of $362,000, and an increase in all other
non-interest income of $21,000. This increase was offset by a decrease in fees
and charges on loans of $32,000 and a decrease in the gain on sale of real
estate owned of $95,000.

NONINTEREST EXPENSE

Noninterest expense decreased $23,000 from the fiscal year ended December 31,
2002 to the fiscal year ended December 31, 2003. This decrease was due primarily
to a decrease in occupancy expense of $341,000. The decrease in occupancy
expense for the year ended December 31, 2003 was primarily the result of
property tax assessments paid during the year ended December 31, 2002. These
property tax assessments had not been received by the Company from the tax
assessor since 1998 on a branch location amounting to approximately $160,000,
included related interest charges and late penalties. This decrease was offset
by an increase in compensation expense of $181,000, an increase in marketing and
professional expense of $40,000 and an increase in all other non-interest
expense of $97,000.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

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 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 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. See "Market Price and Dividend Information" and
Note 12 of Notes to Consolidated Financial Statements.

In the ordinary course of its business, the Company's primary sources of cash
are interest on loans and securities, loan repayments, maturity or sales of
securities, and loan sales. The entire securities portfolio at December 31,
2003, was classified as "available-for-sale," with a fair value of $83.3
million. See Notes 1 and 2 of Notes to Consolidated Financial Statements. At
December 31, 2003, liquid assets, consisting primarily of cash and cash
equivalents, interest-bearing deposits in other banks, securities
available-for-sale and FHLB stock, totaled approximately $87.8 million, compared
to $80.5 million at December 31, 2002. This increase in liquid assets of $7.3
million was primarily attributable to an increase in securities
available-for-sale.

The Bank's liability base provides liquidity through deposit growth and
accessibility to external sources of funds, including borrowings from the FHLB
Bank and other sources. At December 31, 2003, the Bank had an approved

                                       7

<PAGE>

credit availability of $31.3 million at the FHLB. At December 31, 2003, the Bank
had $700,000 advances on this credit line.

CAPITAL RESOURCES

The Company's capital position is reflected in its stockholders' equity, subject
to certain adjustments for regulatory purposes. Stockholders' equity is a
measure of the Company's net worth, soundness and viability. The capital base of
the Company allows it and the Bank to take advantage of business opportunities,
while maintaining a level of resources deemed appropriate by management to
address business risks inherent in daily operations. Stockholders' equity at
December 31, 2003 was approximately $19.4 million.

Risk-based capital regulations adopted by the Board of Governors of the Federal
Reserve Board and the Federal Deposit Insurance Corporation require bank holding
companies and banks, respectively, to achieve and maintain specified ratios of
capital to risk-weighted assets. The risk-based capital rules are designed to
measure Tier 1 Capital and Total Capital in relation to the credit risk of both
on and off-balance sheet items. Under the guidelines, one of four risk weights
is applied to the different on balance sheet items. Off-balance sheet items,
such as loan commitments on loans to be held in portfolio, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the form
of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill).
At December 31, 2003, the Company and the Bank satisfied the minimum regulatory
capital requirement and were "well-capitalized" within the meaning of federal
regulatory requirements. See Note 12 of Notes to Consolidated Financial
Statements.

As of December 31, 2003, the $3.0 million of Trust Preferred Securities
qualifies as Tier I Capital under current regulatory definitions. If these Trust
Preferred Securities has not been included in the consolidated capital
calculations, the Company would have still been classified as well capitalized.

During the fiscal year ended December 31, 2003 the Bank repurchased 98,800
shares of it capital stock at an average price of $12.61 per share. The Company
pursued an active stock repurchase program in 2003 in order to improve liquidity
in the market for the common stock, to increase per share earnings and book
value, and to provide a higher rate of return for the Company's funds. The
Company will consider additional repurchase programs in the future.

IMPACT OF INFLATION

Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the prices of goods and services, since such prices are
affected by inflation. Liquidity and the maturity structure of the Bank's assets
and liabilities are believed to be critical to the maintenance of desired
performance levels, and management considers the Bank's liquidity sources to be
adequate to meet its current and projected needs.

                                       8

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("FIN 46R"), which addresses
how business enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidated of Variable Interest Entities ("FIN46"), which was issued January
2003. Pinnacle Bancshares, Inc. will be required to apply FIN 46R to all
entities subject to this Interpretation no later than the end of the first
reporting period that end after December 15, 2004. This interpretation must be
applied to those entities that are considered to be special-purpose entities no
later than as of the end of the first reporting period that ends after December
15, 2003.

For any variable interest entities (VIEs) that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
non-controlling interest of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and non-controlling interest of the VIE.

Pinnacle Bancshares, Inc. has applied FIN 46R in accounting for Pinnacle Capital
Trust I ("Trust"), established on December 22, 2003. Accordingly, in the
accompanying balance sheet, the Company has included in other assets, the
investment in the Trust of $93,000 and also included, in subordinated debt, the
balance owed the Trust of $3,093,000. Except as related to the Trust, the
application of this Interpretation is not expected to have a material effect on
Pinnacle Bancshares, Inc.'s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivatives
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of this Statement did not have a material impact on the Company's consolidated
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. On November 7, 2003, the FASB deferred indefinitely the classification and
measurement provisions related to mandatory redeemable non controlling interest.
The adoption of this Statement and the amendment did not have a material impact
on the Company's consolidated financial position or results of operations.

                                       9

<PAGE>

CHANGE IN INDEPENDENT ACCOUNTANTS

Effective July 30, 2002, the Company dismissed its independent accountants,
Arthur Andersen LLP ("Andersen"), and appointed KPMG LLP ("KPMG") as its new
independent accountants. This determination followed the Company's decision to
seek proposals from independent accountant to audit the Company's financial
statements for the fiscal year ended December 31, 2002. The decision to dismiss
Andersen and to retain KPMG was approved by the Company's Board of Directors
upon the recommendation of the Audit Committee. Andersen's report on the
Company's 2001 financial statements was issued in February 2002, in conjunction
with the filing of the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2001.

During the Company's two most recent fiscal years ended December 31, 2001, and
the subsequent interim period through July 30, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter of the disagreement in
connection with its report.

The audit reports of Andersen on the consolidated financial statements of the
Company as of and for the fiscal year ended December 31, 2001 did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope, or accounting principles.

During the Company's year ended December 31 2001, and the subsequent interim
period through July 30, 2002, the Company did not consult with KPMG regarding
any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-B.

The Company requested Andersen to furnish a letter addressed to the Board of
Directors of the Company stating whether Andersen agreed with the above
statements. The Company was informed that Andersen was no longer providing such
letters.

                                       10

<PAGE>

                      MARKET PRICE AND DIVIDEND INFORMATION

The common stock of the Company is traded on the American Stock Exchange under
the symbol "PLE". As of December 31, 2003, the Company had 1,562,611 shares of
common stock outstanding and 368 stockholders of record. This total does not
reflect the number of persons or entities who hold stock in nominee or "street
name" through various brokerage firms.

Following are the high and low sale prices of the Company's common stock for the
periods indicated:

<TABLE>
<CAPTION>
                                                                       Price Range
                                                                      Common Stock
                                                               ---------------------------
                                                                 High               Low
                                                               --------           --------
<S>                                                            <C>                <C>
Fiscal Year Ended December 31, 2003
     First quarter                                             $ 12.000           $ 11.200
     Second quarter                                              14.380             11.800
     Third quarter                                               14.400             13.400
     Fourth quarter                                              16.670             13.900

Fiscal Year Ended December 31, 2002
     First quarter                                             $  9.250           $  7.937
     Second quarter                                              11.187              9.937
     Third quarter                                               11.000              9.500
     Fourth quarter                                              12.937              9.375
</TABLE>

Dividends of $.40 ($.10 in each of the four quarters) were declared and paid
during each of fiscal years 2003 and 2002. Under Alabama law, the approval of
the Superintendent of Banks of the State of Alabama 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. Federal law provides that no insured
depository institution may make any capital distribution (including a cash
dividend) if the institution would not satisfy one or more of its minimum
capital requirements after the distribution.

                                       11

<PAGE>

                          Independent Auditors' Report

The Board of Directors
Pinnacle Bancshares, Inc.

We have audited the accompanying consolidated statements of financial condition
of Pinnacle Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Bancshares,
Inc. and subsidiary as of December 31, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

                                                  /s/ KPMG LLP

Birmingham, Alabama
March 12, 2004

                                       12
<PAGE>

                            PINNACLE BANCSHARES, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                        AS OF DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                           2003             2002
                                                                                      ---------------  ---------------
<S>                                                                                   <C>              <C>
ASSETS:
    Cash and cash equivalents                                                         $     3,519,377  $     3,862,956
    Interest-bearing deposits in other banks                                                  256,294          357,467
    Securities available-for-sale                                                          83,325,381       75,301,227
    FHLB Stock                                                                                732,400          975,000
    Loans held for sale                                                                     1,428,190        4,968,715
    Loans receivable, net of allowance for loan losses
        of $1,467,128 and $1,322,380, respectively                                        105,477,419      119,375,036
    Real estate owned, net                                                                  1,023,026        1,608,710
    Premises and equipment, net                                                             5,790,124        5,654,823
    Goodwill                                                                                  306,488          306,488
    Bank owned life insurance                                                               4,514,902        4,229,280
    Accrued interest receivable                                                             1,362,440        1,318,060
    Other assets                                                                              838,150          332,439
                                                                                      ---------------  ---------------
              Total assets                                                            $   208,574,191  $   218,290,201
                                                                                      ===============  ===============

LIABILITIES AND STOCKHOLDERS' EQUITY:
    Deposits                                                                          $   179,939,397  $   188,954,730
    Subordinated debt                                                                       3,093,000                0
    Borrowed funds                                                                          3,465,000        5,940,000
    Official checks outstanding                                                             1,481,801        1,504,293
    Accrued interest payable                                                                  439,729          614,320
    Other liabilities                                                                         724,068        1,321,380
                                                                                      ---------------  ---------------
              Total liabilities                                                           189,142,995      198,334,723
                                                                                      ---------------  ---------------

STOCKHOLDERS' EQUITY:
    Common stock, par value $.01 per share; 2,400,000 authorized; 1,800,813 and
       1,792,086 issued at December 31, 2003 and 2002 respectively, 1,562,611                  18,008           17,921
       and 1,652,684 outstanding at December 31, 2003 and 2002, respectively.
     Additional paid-in capital                                                             8,219,941        8,131,746
     Treasury shares, at cost (238,202 shares and 139,402 shares at
        December 31, 2003 and 2002, respectively)
                                                                                           (2,743,245)      (1,497,777)
     Retained earnings                                                                     14,508,277       12,716,579
     Accumulated other comprehensive (loss) income, net of tax                               (571,785)         587,009
                                                                                      ---------------  ---------------
              Total stockholders' equity                                                   19,431,196       19,955,478
                                                                                      ---------------  ---------------
              Total liabilities and stockholders' equity                              $   208,574,191  $   218,290,201
                                                                                      ===============  ===============
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       13

<PAGE>

                            PINNACLE BANCSHARES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                           2003            2002
                                                                                      -------------   -------------
<S>                                                                                   <C>             <C>
INTEREST REVENUE:
    Interest on loans                                                                 $   8,299,438   $   9,523,876
    Interest and dividends on securities                                                  2,963,742       3,506,563
    Other interest                                                                           23,795          72,864
                                                                                      -------------   -------------
                                                                                         11,286,975      13,103,303
INTEREST EXPENSE:
    Interest on deposits                                                                  3,710,431       5,788,825
    Interest on borrowed funds                                                              195,095         193,736
                                                                                      -------------   -------------
                                                                                          3,905,526       5,982,561
                                                                                      -------------   -------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES                                      7,381,449       7,120,742
PROVISION FOR LOAN LOSSES                                                                   963,374         647,300
                                                                                      -------------   -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                       6,418,075       6,473,442
                                                                                      -------------   -------------
NONINTEREST INCOME:
    Fees and service charges on deposit accounts                                            963,606         842,633
    Service fee income, net                                                                 162,600         158,205
    Fees and charges on loans                                                               173,824         206,222
    Bank owned life insurance                                                               285,622         281,993
    Net gain (loss) on sale or write-down of:
       Loans held for sale                                                                  901,879         590,941
       Real estate owned                                                                    (55,718)         39,502
       Premises and equipment                                                                13,500               0
       Securities available-for-sale                                                        399,827          37,941
                                                                                      -------------   -------------
                                                                                          2,845,140       2,157,437
                                                                                      -------------   -------------

 NONINTEREST EXPENSE:
    Compensation and benefits                                                             3,215,696       3,034,413
    Occupancy                                                                             1,020,285       1,361,502
    Marketing and professional                                                              249,401         209,809
    Other                                                                                 1,083,881         986,921
                                                                                      -------------   -------------
                                                                                          5,569,263       5,592,645
                                                                                      -------------   -------------
INCOME BEFORE INCOME TAXES                                                                3,693,952       3,038,234
INCOME TAX EXPENSE                                                                        1,267,588       1,025,446
                                                                                      -------------   -------------
NET INCOME                                                                            $   2,426,364   $   2,012,788
                                                                                      =============   =============
Basic earnings per share                                                              $        1.53   $        1.14
Diluted earnings per share                                                            $        1.50   $        1.13
Cash dividends per share                                                              $        0.40   $        0.40
Weighted average basic shares outstanding                                                 1,586,044       1,769,888
Weighted average diluted shares outstanding                                               1,620,302       1,776,444
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       14

<PAGE>

                            PINNACLE BANCSHARES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>

                                                                          COMMON STOCK           ADDITIONAL
                                                                   -------------------------      PAID-IN         TREASURY
                                                                    SHARES        AMOUNT          CAPITAL           STOCK
                                                                   ---------    ------------    ------------    ------------
<S>                                                                <C>          <C>             <C>             <C>
BALANCE, December 31, 2001                                         1,792,086    $     17,921    $  8,131,746    $   (128,075)
    Comprehensive income:
    Net income                                                             0               0               0               0
    Change in unrealized gain (loss) on securities available-
         for-sale, net of tax                                              0               0               0               0

         Comprehensive income
    Cash dividends ($.40 per share)
    Repurchase of 122,700 shares of common stock                           0               0               0      (1,369,702)
                                                                   ---------    ------------    ------------    ------------
BALANCE, December 31, 2002                                         1,792,086    $     17,921    $  8,131,746    $ (1,497,777)

    Comprehensive income:
    Net income                                                             0               0               0               0
    Change in unrealized gain (loss) on securities available-
         for-sale, net of tax                                              0               0               0               0

         Comprehensive income
         Exercise of stock options                                     8,727              87          88,195               0
    Cash dividends ($.40 per share)                                        0               0               0               0
    Repurchase of 98,800 shares of common stock                            0               0               0      (1,245,468)
                                                                   ---------    ------------    ------------    ------------
BALANCE, December 31, 2003                                         1,800,813    $     18,008    $  8,219,941    $ (2,743,245)
                                                                   =========    ============    ============    ============

<CAPTION>
                                                                                  ACCUMULATED
                                                                                    OTHER
                                                                                  COMPREHENSIVE       TOTAL
                                                                     RETAINED    (LOSS) INCOME,   STOCKHOLDERS'
                                                                     EARNINGS      NET OF TAX         EQUITY
                                                                   ------------  --------------   -------------
<S>                                                                <C>           <C>              <C>
BALANCE, December 31, 2001                                         $ 11,413,945    $   (423,671)   $ 19,011,866
    Comprehensive income:
    Net income                                                        2,012,788               0       2,012,788
    Change in unrealized gain (loss) on securities available-
         for-sale, net of tax                                                 0       1,010,680       1,010,680
                                                                                                   ------------
         Comprehensive income                                                                         3,023,468
    Cash dividends ($.40 per share)                                    (710,154)              0        (710,154)
    Repurchase of 122,700 shares of common stock                              0               0      (1,369,702)
                                                                   ------------    ------------    ------------
BALANCE, December 31, 2002                                         $ 12,716,579    $    587,009    $ 19,955,478

    Comprehensive income:
    Net income                                                        2,426,364               0       2,426,364
    Change in unrealized gain (loss) on securities available-
         for-sale, net of tax                                                 0      (1,158,794)     (1,158,794)
                                                                                                   ------------
         Comprehensive income                                                                         1,267,570
         Exercise of stock options                                            0               0          88,282
    Cash dividends ($.40 per share)                                    (634,666)              0        (634,666)
    Repurchase of 98,800 shares of common stock                               0               0      (1,245,468)
                                                                   ------------    ------------    ------------
BALANCE, December 31, 2003                                         $ 14,508,277    $   (571,785)   $ 19,431,196
                                                                   ============    ============    ============
</TABLE>

        See accompanying notes to these consolidated financial statements

                                       15
<PAGE>

                            PINNACLE BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                            2003           2002
                                                                                       ------------   ------------
<S>                                                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                         $  2,426,364   $  2,012,788
    Adjustments to reconcile net income to net cash provided by operating
       activities:
     Depreciation                                                                           477,987        535,123
     Provision for loan losses                                                              963,374        647,300
     Provision for losses on real estate owned                                              111,626              0
     Provision for deferred taxes                                                            44,845         18,481
     Amortization, net                                                                     (219,727)      (346,836)
     Bank owned life insurance, income net                                                 (285,622)      (281,993)
    Net (gain) loss on sale and write-down of:
       Loans held for sale                                                                 (901,879)      (590,941)
       Securities available-for-sale                                                       (399,827)       (37,941)
       Real estate owned                                                                     55,718        (39,502)
       Premises & Equipment                                                                 (13,500)             0
    Proceeds from sales of loans                                                         76,115,402     53,871,446
    Loans originated for sale                                                           (71,672,998)   (54,374,593)
    (Increase) decrease in accrued interest receivable                                      (44,380)       358,155
    Decrease in other assets                                                                283,006        570,850
    Decrease in accrued interest payable                                                   (174,591)      (338,127)
    (Decrease) increase in other liabilities                                               (597,312)       190,870
                                                                                       ------------   ------------
                 Net cash provided by operating activities                                6,168,486      2,195,080
                                                                                       ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Net loan repayments                                                                  12,348,693     10,523,337
    Net change in interest bearing deposits in other banks                                  101,173      2,108,922
    Purchases of securities available-for-sale                                          (96,705,000)   (80,153,622)
    Proceeds from sales of securities available-for-sale                                 46,399,828      3,037,941
    Proceeds from maturing, callable, and payments received on securities                40,753,946     64,334,051
       available-for-sale
    Proceeds from sale of Federal Home Loan Bank stock                                      242,600              0
    Purchases of premises and equipment                                                    (625,998)      (153,881)
    Proceeds from sales of premises and equipment                                            26,210              0
    Investment in unconsolidated subsidiary                                                 (93,000)             0
    Proceeds from sales of real estate owned                                              1,311,160      1,818,009
                                                                                       ------------   ------------
                 Net cash provided by investing activities                                3,759,612      1,514,757
                                                                                       ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in passbook, NOW, and money market deposit accounts                      2,626,313      1,068,904
    Proceeds from sales of time deposits                                                 19,912,231     21,174,033
    Payments on maturing time deposits                                                  (31,553,877)   (26,786,215)
    (Decrease) increase in borrowed funds                                                (2,475,000)     2,840,000
    Proceeds from issuance of subordinated debt                                           3,093,000              0
    Debt issuance cost related to issuance of subordinated debt                             (60,000)             0
    (Decrease) increase in official checks outstanding                                      (22,492)       594,112
    Proceeds from exercise of stock options                                                  88,282              0
    Repurchase of common stock                                                           (1,245,468)    (1,369,702)
    Payments of cash dividends                                                             (634,666)      (710,154)
                                                                                       ------------   ------------
                 Net cash used in financing activities                                  (10,271,677)    (3,189,022)
                                                                                       ------------   ------------
NET (DECREASE) INCREASE IN CASH                                                            (343,579)       520,815

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                            3,862,956      3,342,141
                                                                                       ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                               $  3,519,377   $  3,862,956
                                                                                       ============   ============
SUPPLEMENTAL DISCLOSURES:
    Cash payments for interest                                                         $  4,080,117   $  6,320,688
    Cash payments for income taxes                                                        1,400,938        545,000
    Real estate acquired through foreclosure                                                892,820      1,041,777
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       16

<PAGE>

                            PINNACLE BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2003 AND 2002

1.            SUMMARY OF  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

         Following is a description of the business and the more significant
         accounting policies followed by Pinnacle Bancshares, Inc. (the
         "Company") and its wholly-owned subsidiary Pinnacle Bank (the "Bank")
         in presenting the consolidated financial statements.

         NATURE OF OPERATIONS

         The Bank is primarily in the business of obtaining funds in the form of
         various savings and time deposit products and investing those funds in
         mortgage, consumer, and commercial loans. The Bank operates in six
         offices in the central and northwest portion of Alabama and originates
         its loans in this market area. The Company's principal activities do
         not constitute separate reportable segments of its business, but
         encompass traditional banking activities which offer similar products
         and services within the same primary geographic area and regulatory and
         economic environment.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States of America requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosures of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenue and expenses during the reporting period.
         Actual results may differ from those estimates. The primary estimates
         that are reflected in the consolidated financial statements are the
         valuation allowances for loan losses and real estate owned.

         CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company and the Bank. All significant intercompany transactions and
         accounts have been eliminated in consolidation.

         CASH AND CASH EQUIVALENTS

         Cash and cash equivalents include cash on hand and in banks.

         SECURITIES

         Securities are classified as available-for-sale and are carried at fair
         value. The unrealized difference between amortized cost and fair value
         of securities available-for-sale is excluded from earnings and is
         reported net of deferred taxes as a separate component of stockholders'
         equity in accumulated other comprehensive income. The
         available-for-sale category includes securities that management intends
         to use as part of its asset/liability management strategy or that may
         be sold in response to changes in interest rates, changes in prepayment
         risk, liquidity needs, or for other purposes.

          Amortization of premiums and accretion of discounts is computed using
         the level yield method. The adjusted cost of the specific security sold
         is used to compute gain or loss on the sale of securities.

                                       17

<PAGE>

         LOANS HELD FOR SALE

         Loans held for sale are recorded at the lower of amortized cost or fair
         value, as such loans are not intended to be held to maturity. Net
         unrealized losses measured in the aggregate are recognized in a
         valuation allowance by charges to income. There were no unrealized
         losses at December 31, 2003 or 2002. Gains or losses on loan sales are
         recognized at the time of sale and are determined by the difference
         between net sales proceeds and the carrying value of the loan sold.

         The Company enters into interest rate lock commitments, where customers
         have locked into mortgages at a set interest rate, and forward sales
         commitments, which are sales of mortgage loans to third parties at a
         specified price. These interest rate locks and forward sales
         commitments qualify as derivatives; however, the change in fair value
         of these derivatives during the year did not have a material impact on
         the Company's consolidated financial position or results of operations.

         LOANS RECEIVABLE

         Loans receivable are stated at their unpaid principal balance, less the
         undisbursed portion of loans, unearned interest income, net deferred
         loan fees, and an allowance for loan losses. Unearned interest on
         consumer loans is accreted into income by use of a method, which
         approximates the level yield method over the lives of the related
         loans. Interest accrual on loans is generally discontinued and
         uncollected accrued interest is reversed if principal or interest
         payments become 90 days past due unless the credit is well secured and
         in the process of collection. Past due status is based on the
         contractual terms of the loan. Income is subsequently recognized only
         to the extent that cash payments are received until, in management's
         judgment, the borrower's ability to make interest and principal
         payments has been demonstrated, in which case the loan is returned to
         accrual status.

         ALLOWANCE FOR LOAN LOSSES

         The allowance for loan losses is maintained at a level which management
         considers to be adequate to absorb losses inherent in the loan
         portfolio. Management's estimation of the amount of the allowance is
         based on a continuing evaluation of the loan portfolio and includes
         such factors as economic conditions, analysis of individual loans,
         overall portfolio characteristics, delinquencies and the balance of any
         impaired loans (generally considered to be nonperforming loans,
         excluding residential mortgages and other homogeneous loans). Changes
         in the allowance can result from changes in economic events or changes
         in the creditworthiness of the borrowers. The effect of these changes
         is reflected when known. Though management believes the allowance for
         loan losses to be adequate, ultimate losses may vary from estimations.
         Specific allowances for impaired loans are generally based on
         comparisons of the carrying values of the loans to the estimated fair
         value of the collateral. The Company had no loans designated as
         impaired at December 31, 2003 or 2002.

         LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND PREMIUMS AND DISCOUNTS

         Amortization of loan fees, net of certain direct costs of loan
         origination, are treated as an adjustment to the yield of the related
         loans over the contractual term of the loan adjusted for prepayments as
         they occur. Loan commitment fees are recognized into income upon
         expiration of the commitment period or sale of the loan, unless the
         commitment results in the loan being funded and maintained in the loan
         portfolio.

         REAL ESTATE OWNED

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

                                       18

<PAGE>

         relating to the development and improvement of property are
         capitalized, whereas costs relating to the holding of property are
         expensed.

         The recognition of gains and losses on the sale of real estate owned is
         dependent upon whether the nature and terms of the sale and future
         involvement of the Bank in the property meet certain requirements. If
         the transaction does not meet these requirements, income recognition is
         deferred and recognized under an alternative method in accordance with
         Statement of Financial Accounting Standards ("SFAS") No. 66, Accounting
         for Sales of Real Estate.

         LONG-LIVED ASSETS

         Land is carried at cost. Premises and equipment are stated at cost less
         accumulated depreciation computed on a straight-line basis over the
         estimated service lives of the related assets (30 to 50 years for
         buildings, shorter of lease period or estimated life approximating 10
         to 15 years for leasehold improvements and 3 to 10 years for
         equipment). Expenditures for maintenance and repairs are charged to
         operations as incurred; expenditures for renewals and improvements are
         capitalized and written off through depreciation and amortization
         charges. Equipment retired or sold is removed from the asset and
         related accumulated depreciation amounts and any gain or loss resulting
         therefrom is reflected in the accompanying consolidated statements of
         operations.

         The Company continually evaluates whether events and circumstances have
         occurred that indicate such long-lived assets have been impaired.
         Measurement of any impairment of such long-lived assets is based on
         those assets' fair values and is recognized through a valuation
         allowance with the resulting charge reflected in the accompanying
         consolidated statements of operations. There were no impairment losses
         recorded during any period reported herein.

         GOODWILL

         The Company adopted SFAS No. 142, Goodwill and Other Intangible
         Assets, on January 1, 2002, and ceased amortizing goodwill. Based upon
         the initial goodwill impairment test completed on January 1, 2002, as
         required by SFAS No. 142, no goodwill impairment was indicated. In
         addition, the goodwill impairment testing completed at December 31,
         2003 and 2002, indicated there was no goodwill impairment. Therefore,
         the Company had no changes in the carrying amount of goodwill from
         December 31, 2002 to December 31, 2003.

         BANK OWNED LIFE INSURANCE

         The Company has bank owned life insurance on certain key officers of
         the Company. The life insurance policies were purchased to reduce costs
         associated with certain existing employee benefits. Increases in the
         cash surrender value of the policies, as well as insurance proceeds
         received, are recorded as a component of non-interest income.

         STOCK BASED COMPENSATION

         In accordance with the provision of SFAS No. 123, Accounting for
         Stock-Based Compensation, the Company has elected to continue to record
         compensation cost under APB Opinion No. 25, Accounting for Stock Issued
         to Employees, and accordingly does not recognize compensation cost due
         to the fact that all options granted were priced at the fair value of
         the underlying stock on the date of grant. Had compensation cost been
         determined, consistent with SFAS No. 123, the Company's net income
         would have reflected the following pro forma amounts:

<TABLE>
<CAPTION>
                                                         FISCAL YEAR     FISCAL YEAR
                                                            ENDED           ENDED
                                                          DECEMBER 31,   DECEMBER 31,
                                                         ----------------------------
                                                             2003            2002
                                                         ----------------------------
<S>                                                      <C>             <C>
Net income -- as reported                                $   2,426,364   $  2,012,788
Stock-based compensation expense
                                                                     0         (8,422)
                                                         -------------   ------------
Net Income -- pro forma                                  $   2,426,364   $  2,004,366

Basic earnings per share -- as reported                  $        1.53   $       1.14
Basic earnings per share -- pro forma                             1.53           1.13

Diluted earnings per share -- as reported                $        1.50   $       1.13
Diluted earnings per share -- pro forma                           1.50           1.13
</TABLE>

                                       19

<PAGE>

         EARNINGS PER SHARE

         Basic earnings per share ("EPS") is computed by dividing net income by
         the weighted average number of shares outstanding during the period.
         Diluted EPS reflects the potential dilution that could occur if
         securities or other contracts to issue common stock are exercised and
         converted into common stock and is computed in the same manner, except
         the number of weighted average shares outstanding is adjusted for the
         number of additional common shares that would have been outstanding if
         the potential common shares had been issued.

         The following table represents the earnings per share calculations for
         the years ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                            PER
                                                               NET                         SHARE
          FOR THE YEARS ENDED                                 INCOME           SHARES      AMOUNT
----------------------------------------                  -------------       ---------   ---------
<S>                                                       <C>                 <C>         <C>
December 31, 2003
    Basic earnings per share                              $  2,426,364        1,586,044   $    1.53
    Dilutive securities                                                          34,258
                                                                              ---------
    Diluted earnings per share                            $  2,426,364        1,620,302   $    1.50
                                                          ============        =========   =========
December 31, 2002
    Basic earnings per share                              $  2,012,788        1,769,888   $    1.14
    Dilutive securities                                                           6,556
                                                                              ---------
    Diluted earnings per share                            $  2,012,788        1,776,444   $    1.13
                                                          ============        =========   =========
</TABLE>

         For the years ended December 31, 2003 and 2002, no options were
         excluded from the calculation of diluted EPS, as the exercise price of
         all option was less than the average market price.

         RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2003, the FASB issued FASB Interpretation No. 46 (revised
         December 2003), Consolidation of Variable Interest Entities ("FIN
         46R"), which addresses how business enterprise should evaluate whether
         it has controlling financial interest in an entity through means other
         than voting rights and accordingly should consolidate the entity. FIN
         46R replaces FASB Interpretation No. 46, Consolidated of Variable
         Interest Entities ("FIN46"), which was issued January 2003. Pinnacle
         Bancshares, Inc. will be required to apply FIN 46R to all entities
         subject to this Interpretation no later than the end of the first
         reporting period that end after December 15, 2004. This interpretation
         must be applied to those entities that are considered to be
         special-purpose entities no later than as of the end of the first
         reporting period that ends after December 15, 2003.

         For any variable interest entities (VIEs) that must be consolidated
         under FIN 46R that were created before January 1, 2004, the assets,
         liabilities and non-controlling interest of the VIE initially would be
         measured at their carrying amounts with any difference between the net
         amount added to the balance sheet and any previously recognized
         interest being recognized as the cumulative effect of an accounting
         change. If determining the carrying amounts is not practicable, fair
         value at the date FIN 46R first applies may be used to measure the
         assets, liabilities and non-controlling interest of the VIE.

         Pinnacle Bancshares, Inc. has applied FIN 46R in accounting for
         Pinnacle Capital Trust I ("Trust"), established on December 22, 2003.
         Accordingly, in the accompanying balance sheet the Company has included
         in other assets, our investment in the Trust of $93,000 and also
         included, in subordinated debt, the balance owed the Trust of
         $3,093,000. Except as related to the Trust, the application of this
         Interpretation is not expected to have a material effect on Pinnacle
         Bancshares, Inc.'s consolidated financial statements.

                                       20

<PAGE>

         In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
         on Derivative Instruments and Hedging Activities. The Statement amends
         and clarifies accounting for derivative instruments, including certain
         derivatives instruments embedded in other contracts, and for hedging
         activities under SFAS No. 133, Accounting for Derivative Instruments
         and Hedging Activities. This Statement is effective for contracts
         entered into or modified after June 30, 2003 and for hedging
         relationships designated after June 30, 2003. The adoption of this
         Statement did not have a material impact on the Company's consolidated
         financial position or results of operations.

         In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equity. This Statement establishes standards for how an issuer
         classifies and measures certain financial instruments with
         characteristics of both liabilities and equity. It requires that an
         issuer classify a financial instrument that is within its scope as a
         liability (or an asset in some circumstances). Many of those
         instruments were previously classified as equity. This Statement is
         effective for financial instruments entered into or modified after May
         31, 2003, and otherwise is effective at the beginning of the first
         interim period beginning after June 15, 2003. On November 7, 2003, the
         FASB deferred indefinitely the classification and measurement
         provisions related to mandatory redeemable non controlling interest.
         The adoption of this Statement and the amendment did not have a
         material impact on the Company's consolidated financial position or
         results of operations.

2.       SECURITIES

         The amortized cost, unrealized gross gains and losses, and estimated
         fair value of securities available-for-sale at December 31, 2003 and
         2002 are as follows:

<TABLE>
<CAPTION>
                                                                  December 31, 2003
                                               -----------------------------------------------------------
                                                Amortized      Unrealized     Unrealized           Fair
                                                  Cost         Gross Gain     Gross Loss           Value
                                               -----------     ----------     -----------       -----------
<S>                                            <C>             <C>           <C>               <C>
Securities of U.S. Government Agencies         $75,669,244     $  42,503     ($1,116,652)      $74,595,095
Other Securities                                       716             0               0               716

Mortgage-Backed Securities                       8,563,017       192,088         (25,535)        8,729,570
                                               -----------     ---------     -----------       -----------
                                               $84,232,977     $ 234,591     ($1,142,187)      $83,325,381
                                               ===========     =========     ===========       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                   December 31, 2002
                                               -----------------------------------------------------------
                                                Amortized      Unrealized     Unrealized          Fair
                                                  Cost         Gross Gain     Gross Loss         Value
                                               -----------     ----------    -----------       -----------
<S>                                            <C>             <C>           <C>               <C>
Securities of U.S. Government Agencies         $59,964,682     $ 680,646     $         0       $60,645,328
Other Securities                                       716             0               0               716
Mortgage-Backed Securities                      14,404,068       265,585         (14,470)       14,655,183
                                               -----------     ---------     -----------       -----------
                                               $74,369,466     $ 946,231     $   (14,470)      $75,301,227
                                               ===========     =========     ===========       ===========
</TABLE>

         The amortized cost and estimated fair value of securities
         available-for-sale at December 31, 2003 by contractual maturity are
         shown below. Expected maturities will differ from contractual
         maturities because the issuers may have the right to call or prepay
         obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                      AMORTIZED              FAIR
                                                                        COST                 VALUE
                                                                  ----------------    -----------------
<S>                                                               <C>                 <C>
Due in one year or less                                           $              0    $               0
Due after one year through five years                                   41,191,038           40,771,125
Due after five years through ten years                                  34,478,922           33,824,686
                                                                  ----------------    -----------------
                                                                        75,669,960           74,595,811
Mortgage-Backed Securities                                               8,563,017            8,729,570
                                                                  ----------------    -----------------
                                                                  $     84,232,977    $      83,325,381
                                                                  ================    =================
</TABLE>

                                       21

<PAGE>

         Securities of approximately $26 million and $25 million at December 31,
         2003 and 2002, respectively, were pledged to secure deposits. Deposits
         associated with pledged securities had an aggregate balance of
         approximately $20 million at both December 31, 2003 and 2002. Gross
         gains realized on sales were $399,827 and $37,941 during December 31,
         2003 and 2002, respectively. There were no realized losses on sales
         during 2003 or 2002.

         The following table shows the Company's combined investments' gross
         unrealized losses and fair values, aggregated by investment category
         and length of time that individual securities have been in continuous
         unrealized loss position, at December 31, 2003.

<TABLE>
<CAPTION>
                                              LESS THAN 12 MONTHS
                                              -------------------          12 MONTHS OR MORE              TOTAL
                                                        UNREALIZED         -----------------              -----
                                             FAIR          GROSS         FAIR       UNREALIZED      FAIR       UNREALIZED
                                             VALUE         LOSS          VALUE      GROSS LOSS      VALUE      GROSS LOSS
                                          --------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>           <C>          <C>           <C>
Securities of U. S. Government Agencies   $58,842,333   $ 1,116,652   $         0   $        0   $58,842,333   $ 1,116,652
Other Securities                                    0             0             0            0             0             0
Mortgage Backed Securities                    251,368         3,515     1,348,673       22,020     1,600,041        25,535
                                          -----------   -----------   -----------   ----------   -----------   -----------
                                          $59,093,701   $ 1,120,167   $ 1,348,673   $   22,020   $60,442,374   $ 1,142,187
                                          ===========   ===========   ===========   ==========   ===========   ===========
</TABLE>

         At December 31, 2003, the Company had 38 individual investment
         positions that were in an unrealized loss position or impaired for the
         timeframes indicated above. All of these investment positions'
         impairments are deemed not to be other-than temporary impairments and
         is primarily due to the fact that these securities have experienced
         volatility in their market prices as a result of current market
         conditions, with no credit concerns related to the entities that issued
         the securities. The Company does not expect any other than temporary
         impairment to develop related to these investment positions.

                                       22

<PAGE>

3.       LOANS RECEIVABLE

         Loans receivable, net at December 31, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                      2003                    2002
                                                                                ---------------        ---------------
<S>                                                                             <C>                    <C>
Residential and commercial real estate mortgage loans with variable rates       $    28,109,526        $    30,305,385
Residential and commercial real estate mortgage loans with  fixed rates              40,927,949             49,884,264
Real estate construction loans                                                       14,060,167             15,329,207
Commercial loans                                                                     10,567,871             11,549,032
Consumer loans                                                                       13,444,417             13,833,984
                                                                                ---------------        ---------------
                                                                                    107,109,930            120,901,872
Allowance for loan losses                                                            (1,467,128)            (1,322,380)
Unearned income                                                                        (165,383)              (204,456)
                                                                                ---------------        ---------------
                                                                                $   105,477,419        $   119,375,036
                                                                                ===============        ===============
</TABLE>

         During fiscal years 2003 and 2002, certain executive officers and
         directors of the Bank were loan customers of the Bank. Total loans
         outstanding to these persons at December 31, 2003 and 2002 amounted to
         $942,512 and $1,045,988, respectively. The change from December 31,
         2002 to December 31, 2003 reflects payments amounting to $347,280 and
         advances of $243,804 made during the year.

         The Bank has a credit concentration in residential real estate mortgage
         loans. Approximately $69 million and $80 million at December 31, 2003
         and 2002, respectively, of the Bank's total loan portfolio represented
         first or second mortgage residential real estate loans. Substantially
         all of the Bank's loan customers are located in the Bank's primary
         lending areas of Walker, Winston, Jefferson, and Shelby counties in
         Alabama. Although the Bank believes that its underwriting standards are
         generally conservative, including a policy calling for low loan to
         collateral values, the ability of its borrowers to meet their mortgage
         obligations is dependent upon local economic conditions. At December
         31, 2003, the largest amount loaned by the Bank to one borrower was
         $2.3 million, which was approximately 12% of the Company's
         stockholders' equity.

         A reconciliation of the allowance for loan losses is as follows:


<TABLE>
<CAPTION>
                                               2003           2002
                                            ----------   -----------
<S>                                         <C>          <C>
Balance at beginning of year                $1,322,380   $ 1,308,186
Charge-offs                                 (1,048,617)     (747,194)
Recoveries                                     229,991       114,088
Provision                                      963,374       647,300
                                            ----------   -----------
Balance at end of year                      $1,467,128   $ 1,322,380
                                            ==========   ===========
</TABLE>

         The Bank was servicing first mortgage loans for others totaling
         $64,593,371 and $63,909,302 at December 31, 2003 and 2002,
         respectively. The liability associated with the Company's total
         servicing portfolio at December 31, 2003 and 2002 was not deemed
         significant by the Company.

         At December 31, 2003 the Bank had outstanding loan commitments of
         $25,404,877, including $10,106,927 in undisbursed construction loans in
         process; $11,904,811 in unused lines and letters of credit; and
         $3,393,139 in commitments to originate mortgage loans consisting
         primarily of 30-day commitments. Commitments to originate conventional
         mortgage loans consisted of fixed-rate mortgages all having terms
         ranging from 15 to 30 years.

         The Company had approximately $728,000 and $1,170,000 of loans
         classified as non-accrual at December 31, 2003 and 2002, respectively.
         During the years ended December 31, 2003 and 2002 gross interest income
         of $22,889 and $37,390, respectively, would have been recorded on loans
         accounted for on a non-accrual basis if the loans had been current
         throughout the period. The amount of interest income included in
         current income for these loans was $3,639 and $22,106 for the years
         ended December 31, 2003 and 2002, respectively.

                                       23
<PAGE>

4.       REAL ESTATE OWNED

         Activity in the allowance for losses on real estate owned is as
         follows:

<TABLE>
<CAPTION>
                                      2003          2002
                                      ----          ----
<S>                                <C>           <C>
Balance at beginning of year       $        0    $  206,893
Provision                             111,626             0
Charge-offs, net of recoveries        (46,000)     (206,893)
                                   ----------    ----------
Balance at end of year             $   65,626    $        0
                                   ==========    ==========
</TABLE>

5.       PREMISES AND EQUIPMENT

         Premises and equipment at December 31, 2003 and 2002 are summarized as
         follows:

<TABLE>
<CAPTION>
                                               2003            2002
                                               ----            ----
<S>                                        <C>            <C>
Land                                       $    883,230   $    883,230
Buildings and leasehold improvements          6,522,761      6,311,551
Furniture, fixtures, and equipment            4,773,555      4,397,857
Automobiles                                     111,336        139,636
                                           ------------   ------------
                                             12,290,882     11,732,274

Less accumulated depreciation                (6,500,758)    (6,077,451)
                                           ------------   ------------
                                           $  5,790,124   $  5,654,823
                                           ============   ============
</TABLE>

Depreciation expense for the fiscal years ended December 31, 2003 and 2002 on
premises and equipment was approximately $478,000 and $535,000, respectively.

The Bank had noncancelable operating leases for the main and branch office
sites. Occupancy expenses for the fiscal years ended December 31, 2003 and 2002,
respectively, include rental expense under these leases of $109,527 and
$134,763, respectively. Future rental payments subject to periodic
renegotiations required under these leases are as follows:

<TABLE>
<CAPTION>
At December 31, 2003         Amount
--------------------       ---------
<S>                        <C>
2004                       $  63,965
2005                          64,565
2006                          58,565
2007                          41,687
2008                          14,400
Thereafter                   129,600
                           ---------
       Total               $ 372,782
                           =========
</TABLE>

                                       24
<PAGE>

         The Bank has a lease agreement for the building in which the main
         office branch is located that generated income of $97,836 for the
         fiscal years ended December 31, 2003 and 2002, respectively. The Bank
         also has a lease from a related party for a building that formerly
         housed administrative offices. This lease generated income of $56,000
         for each of the fiscal years ended December 31, 2003 and 2002,
         respectively.

6.       DEPOSITS

         Deposits at December 31, 2003 and 2002 are summarized as follows:

<TABLE>
<CAPTION>
                                                       2003                 2002
                                                       ----                 ----
<S>                                                <C>                 <C>
Passbook accounts                                  $  17,072,161       $  15,538,898
NOW accounts                                          17,323,986          15,920,780
Money market deposit accounts                         11,593,749          11,468,406
Noninterest-bearing accounts                           9,393,376           9,830,290
                                                   -------------       -------------
                                                      55,383,272          52,758,374

Time deposits:

   Fixed-rate certificates less than $100,000         72,755,523          81,421,425
   Fixed-rate certificates greater than $100,000      51,800,602          54,774,931
                                                   -------------       -------------
                                                     124,556,125         136,196,356
                                                   -------------       -------------
                                                   $ 179,939,397       $ 188,954,730
                                                   =============       =============
</TABLE>

         The amounts and scheduled maturities of time deposits at December 31,
         2003 are as follows:

<TABLE>
<S>                      <C>
2004                     $  89,905,490
2005                        13,901,305
2006                         4,539,084
2007                         8,945,620
2008 and thereafter          7,264,626
                         -------------
                         $ 124,556,125
                         =============
</TABLE>

         Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                      2003            2002
                                      ----            ----
<S>                                <C>             <C>
Passbook accounts                  $    55,943     $   186,174
NOW accounts                            28,055         134,766
Money market deposit accounts           55,732         199,683
Time deposits                        3,570,701       5,268,202
                                   -----------     -----------
                                   $ 3,710,431     $ 5,788,825
                                   ===========     ===========
</TABLE>

                                       25
<PAGE>

7.       SUBORDINATED DEBT

         On December 22, 2003, the Company established Pinnacle Capital Trust I
         ("Trust"), a wholly-owned statutory business trust. The Company is the
         sole sponsor of the Trust and acquired the Trust's common securities
         for $93,000. The Trust was created for the exclusive purpose of issuing
         30-year capital trust securities ("Trust Preferred Securities") in the
         aggregate amount of $3,000,000 and using proceeds to purchase
         $3,093,000 of junior subordinated debentures ("Subordinated
         Debentures") issued by the Company. The sole assets of the Trust are
         the Subordinated Debentures. The Company's $93,000 investment in the
         Trust is included in other assets in the accompanying consolidated
         balance sheet and the $3,093,000 obligation of the Company is included
         in subordinated debt.

         The Trust Preferred Securities bear a floating interest rate based on a
         spread over 3-month LIBOR which is set each quarter and matures on
         December 22, 2033. Distributions are payable quarterly. The Trust
         Preferred Securities are subject to mandatory redemption upon repayment
         of the Subordinated Debentures at their stated maturity date or their
         earlier redemption in an amount equal to their liquidation amount plus
         accumulated and unpaid distributions to the date of redemption. The
         Company guarantees the payment of distributions and payments for
         redemption or liquidation of the Trust Preferred Securities to the
         extent of funds held by the Trust. Pinnacle Bancshares, Inc.'s
         obligation under the Subordinated Debentures together with the
         guarantee and other back-up obligation, in aggregate, constitute a full
         and unconditional guarantee by the Company of the obligations of the
         Trust under the Trust Preferred Securities.

         The Subordinated Debentures are unsecured, bear an interest rate based
         on a spread over a 3 month LIBOR (equal to the spread paid by the Trust
         on the Trust Preferred Securities) which is set each quarter and
         matures on December 30, 2033. Interest is payable quarterly. The
         Company may defer the payment of interest at any time for a period not
         exceeding 20 consecutive quarters provided that deferral period does
         not extend past the stated maturity. During any such deferral period,
         distributions on the Trust Preferred Securities will also be deferred
         and the Company's ability to pay dividends on the common shares will be
         restricted.

         Subject to approval by the Federal Reserve Bank of Atlanta, the Trust
         Preferred Securities may be redeemed prior to maturity at our option on
         or after January 7, 2009. The Trust Preferred Securities may also be
         redeemed at any time in whole (but not in part) in the event of
         unfavorable changes in laws or regulations that result in (1) the Trust
         becoming subject to federal income tax on income received on the
         Subordinated Debentures, (2) interest payable by the parent company on
         the Subordinated Debentures becoming non-deductible for federal tax
         purposes, (3) the requirement for Trust Preferred Securities as "Tier I
         Capital" under the Federal Reserve capital adequacy guidelines.

         Debt issuance cost of $60,000 consisting primarily of underwriting
         discounts and professional fees are included in other assets in the
         accompanying consolidated statements of financial condition as of
         December 31, 2003. These debt issuance costs are being amortized over
         30 years using the straight-line method

                                       26
<PAGE>

8.       BORROWED FUNDS

         Borrowed funds at December 31, 2003 and 2002 are summarized as follows:

<TABLE>
<CAPTION>
                                                                         2003          2002
                                                                         ----          ----
<S>                                                                  <C>           <C>
Warrants payable: $185,000 with an interest rate of 5.25%
maturing one year or less; $425,000 with an interest rate of
5.40% maturing greater than one year through 3 years; $490,000
with an interest rate of 5.58% maturing greater than 3 years
through 5 years; $1,665,000 with an interest rate of 6.00%           $ 2,765,000   $ 2,940,000
maturing after 5 years

Short term advances from the Federal Home Loan Bank of Atlanta:
with an interest rate of 1.15%, maturing in 2004                         700,000     3,000,000
                                                                     -----------   -----------

                                                                     $ 3,465,000   $ 5,940,000
                                                                     ===========   ===========
</TABLE>

         The Company has available credit of $31,300,000 at the FHLB of Atlanta,
         Georgia at December 31, 2003. The FHLB notes are payable to the FHLB of
         Atlanta and are secured by FHLB stock owned by the Bank with a carrying
         value of $732,400 as well a pledge of all the real estate loans owned
         by the Bank secured by qualified first liens on one-to-four unit single
         family dwellings. The total carrying value of qualified mortgages owned
         by the Bank at December 31, 2003 was approximately $40,162,023. FHLB
         advances outstanding totaling $700,000 were callable at the discretion
         of the FHLB of Atlanta at December 31, 2003. Interest rates on the
         notes are fixed and interest is payable monthly. Principal on the notes
         is payable at maturity or in semiannual principal reductions until
         maturity. The maximum amount outstanding under advances from the
         Federal Home Loan Bank of Atlanta during 2003 and 2002 was $13,500,000
         and $9,500,000, respectively. The average amount outstanding during
         2003 and 2002 was $2,600,000 and $1,200,000, respectively.

                                       27
<PAGE>

9.       INCOME TAXES

         Income tax expense included in the consolidated statements of
         operations, is comprised of the following:

<TABLE>
<CAPTION>
                                          Federal        State         Total
                                          -------        -----         -----
<S>                                   <C>              <C>          <C>
Year ended December 31, 2003:
    Current                           $   1,078,984    $  143,759   $ 1,222,743
    Deferred                                 37,764         7,081        44,845
                                      -------------    ----------   -----------
                                      $   1,116,748    $  150,840   $ 1,267,588

Year ended December 31, 2002:
    Current                           $     914,967    $   91,998   $ 1,006,965
    Deferred                                 18,312           169        18,481
                                      -------------    ----------   -----------
                                      $     933,279    $   92,167   $ 1,025,446
                                      =============    ==========   ===========
</TABLE>

         Total income tax expense differs from the amount determined by
         multiplying income before income taxes by the statutory federal rate of
         34%, as follows:

<TABLE>
<CAPTION>
                                                      2003          2002
                                                      ----          ----
<S>                                                <C>            <C>
Tax expense at federal income tax rate             $ 1,255,944    $ 1,033,000
Increase (decrease) resulting from:
    State income tax, net of federal tax benefit       101,221         60,830
    Cash surrender value of bank owned life
    insurance, net of premiums                         (97,111)       (95,878)
    Other                                                7,534         27,494
                                                   -----------    -----------
                                                   $ 1,267,588    $ 1,025,446
                                                   ===========    ===========

Effective income tax rate                                 34.3%          33.8%
                                                   ===========    ===========
</TABLE>

         Temporary differences between the consolidated financial statement
         carrying amounts and tax bases of assets and liabilities that give rise
         to significant portions of the net deferred tax asset (liability)
         relate to the following:

<TABLE>
<CAPTION>
                                                      December 31,       December 31,
                                                          2003              2002
                                                          ----              ----
<S>                                                   <C>                <C>
Allowance for loan losses                             $    542,838       $  506,340
Unrealized loss on securities available-for-sale           335,811                0
Other real estate reserves                                  26,356           78,884
Other                                                       63,622           59,308
                                                      ------------       ----------
              Deferred tax assets                          968,627          644,532
                                                      ------------       ----------
Depreciation                                              (553,428)        (487,153)
Unrealized gain on securities available-for-sale                 0         (344,752)
FHLB stock                                                 (93,859)        (129,307)
Other                                                       (3,045)            (743)
                                                      ------------       ----------
              Deferred tax liabilities                    (650,332)        (961,955)
                                                      ------------       ----------
Net deferred tax asset (liability)                    $    318,295       $ (317,423)
                                                      ============       ==========
</TABLE>

                                       28
<PAGE>

         There was no valuation allowance during either 2003 or 2002 due to
         the significant amount of taxes paid in previous years.

10.      COMPENSATION AND BENEFITS

         The Bank maintains a noncontributory profit sharing plan and a
         contributory 401(k) plan. The Company's contributions to these plans
         were $81,679 and $78,198 in fiscal years ended December 31, 2003 and
         2002, respectively.

         The Company and the Bank have an employment agreement with the chief
         executive officer which provides for compensation and benefits in the
         event the chief executive officer is terminated. The maximum aggregate
         liability at December 31, 2003 for termination is approximately
         $385,000.

11.      LONG-TERM INCENTIVE COMPENSATION PLAN

         The Bank maintains the 1996 Stock Option and Incentive Plan ("Option
         Plan") which provides for a number of forms of stock-based compensation
         for key employees of the Company. Under the Option Plan, eligible
         employees may be awarded incentive and nonqualified stock options,
         stock appreciation rights, and restricted stock. The Option Plan
         provides for the issuance of up to 170,000 shares of the Company's
         common stock, 54,500 of which are available to be granted at December
         31, 2003. In addition, each option vests three years after the grant
         date and expires no later than ten years after the grant date. The
         exercise price of each option is determined by the stock option
         committee but, in the case of incentive stock options, the price shall
         not be less than the fair value on the grant date.

         A summary of the status of the Company's stock option plan at December
         31, 2003 and 2002 and the changes during the years then ended is as
         follows:

<TABLE>
<CAPTION>
                                            2003                    2002
                                            ----                    ----
                                                Weighted                Weighted
                                                 Average                 Average
                                                Exercise                Exercise
                                     Shares      Price        Shares      Price
                                     ------     --------      ------    --------
<S>                                 <C>        <C>           <C>       <C>
Outstanding at beginning of year     100,060   $   9.41      103,060   $   9.26
Granted                                    0          0            0          0
Exercised                             (8,727)     10.12            0          0
Forfeited                                  0          0       (3,000)     10.13
                                    --------   --------      -------   --------
Outstanding at end of year            91,333   $   9.34      100,060   $   9.41
                                    ========   ========      =======   ========

Exercisable at end of year            91,333   $   9.34      100,060   $   9.41
                                    ========   ========      =======   ========
Fair value of options granted          N/A                     N/A
                                    ========                 =======
</TABLE>

         The following table summarizes information about these stock options at
         December 31, 2003:


                                       29
<PAGE>

<TABLE>
<CAPTION>
              Number outstanding             Remaining
Exercise              At                    Contractual
 Price        December 31, 2003                Life
-------       ------------------            -----------
<S>           <C>                           <C>
$  8.81            54,500                      3 years

$ 10.13            36,833                    5.4 years
                   ------
                   91,333
                   ======
</TABLE>

                                       30
<PAGE>

12.      STOCKHOLDERS' EQUITY

         Dividends are paid by the Company from funds provided by dividends from
         the Bank. However, certain regulatory restrictions exist regarding the
         ability of the Bank to transfer funds to the Company in the form of
         cash dividends, loans, or advances. As of January 1, 2004 approximately
         $1.6 million of the Bank's retained earnings was available for
         distribution without prior regulatory approval.

         The Company and the Bank are subject to various regulatory capital
         requirements that prescribe quantitative measures of the Company's and
         Bank's assets, liabilities, and certain off-balance sheet items. The
         regulators have also imposed qualitative guidelines for capital amounts
         and classifications such as risk weightings, capital components, and
         other details. The quantitative measures to ensure capital adequacy
         require that the Company and the Bank maintain amounts and ratios, as
         set forth in the schedule below, of Total and Tier I capital (as
         defined in the regulations) to risk-weighted assets (as defined) and of
         Tier I capital to average total assets (as defined). Failure to meet
         minimum capital requirements can initiate certain actions by regulators
         that, if undertaken, could have a direct material effect on the
         Company's financial statements. Management believes, as of December 31,
         2003 and 2002 that the Company and the Bank meet all capital adequacy
         requirements imposed by its regulators.

         As of December 31, 2003 and 2002, the most recent notification from the
         Federal Deposit Insurance Corporation categorized the Bank as well
         capitalized under the regulatory framework for prompt corrective
         action. To be categorized as well capitalized, the Bank must maintain
         minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios
         as set forth in the table. There have been no conditions or events
         since that notification that Management believes have changed the
         institution's category.

         Actual capital amounts as well as required and well capitalized Tier I,
         Total, and Tier I leverage ratios as of December 31 for the Company and
         the Bank are as follows:

<TABLE>
<CAPTION>
                                                                                                       To be Well-Capitalized
                                                                                                            Under Prompt
                                                                            For Capital                      Corrective
                                                      Actual              Adequacy Purposes               Action Provisions
                                                 ---------------   -----------------------------   ------------------------------
                                                  Amount   Ratio        Amount           Ratio          Amount           Ratio
                                                 -------   -----   ---------------    ----------   ---------------   ------------
                                                                           (Dollar Amounts in Thousands)
<S>                                              <C>       <C>     <C>                <C>          <C>               <C>
As of December 31, 2003:
     Total Capital (to Risk Weighted Assets):
          Consolidated                           $24,163    20.1%   > or = $ 9,635    > or = 8.0%              N/A            N/A
          Pinnacle Bank                           20,713    17.2      > or = 9,635    > or = 8.0    > or = $12,043    > or = 10.0%
     Tier I Capital (to Risk Weighted Assets):
          Consolidated                            22,696    18.8      > or = 4,817    > or = 4.0               N/A            N/A
          Pinnacle Bank                           19,246    16.0      > or = 4,817    > or = 4.0      > or = 7,226     > or = 6.0
     Tier I Capital (to Average Assets):
          Consolidated                            22,696    10.8      > or = 8,375    > or = 4.0               N/A            N/A
          Pinnacle Bank                           19,246     9.2      > or = 8,375    > or = 4.0     > or = 10,468     > or = 5.0
As of December 31, 2002:
     Total Capital (to Risk Weighted Assets):
          Consolidated                           $20,384    15.8%   > or = $10,335    > or = 8.0%              N/A            N/A
          Pinnacle Bank                           19,774    15.3     > or = 10,335    > or = 8.0    > or = $12,919    > or = 10.0%
     Tier I Capital (to Risk Weighted Assets):
          Consolidated                            19,062    14.8      > or = 5,168    > or = 4.0               N/A            N/A
          Pinnacle Bank                           18,452    14.3      > or = 5,168    > or = 4.0      > or = 7,751     > or = 6.0
     Tier I Capital (to Average Assets):
          Consolidated                            19,062     8.7      > or = 8,758    > or = 4.0               N/A            N/A
          Pinnacle Bank                           18,452     8.4      > or = 8,758    > or = 4.0     > or = 10,948     > or = 5.0
</TABLE>

                                       31

<PAGE>

         As of December 31, 2003, the $3.0 million of Trust Preferred Securities
         qualifies as Tier I Capital under current regulators definitions. If
         these Trust Preferred Securities had not been included in the
         consolidated capital calculations, the Company would have still been
         classified as well capitalized.

         In 2002, the Company announced a stock repurchase program to acquire up
         to 178,000 shares of common stock. As of December 31, 2002, the Company
         had repurchased 122,700 shares at an average price of $11.16 per share.
         During fiscal year 2003 the Company completed this stock repurchase
         plan by repurchasing 54,000 shares at an average price of $11.58 per
         share. In 2003, the Company announced a stock repurchase program to
         acquire up to 80,000 shares of common stock. As of December 31, 2003
         the Company had repurchased 44,800 shares at an average price of $13.84
         per share.

         COMPREHENSIVE INCOME

         Comprehensive income is the change in equity during a period from
         transactions and other events and circumstances from nonowner sources.
         For the Company, comprehensive income includes changes in unrealized
         gains and losses on securities available-for-sale and net income.

         In the calculation of comprehensive income, certain reclassification
         adjustments are made to avoid double- counting items that are displayed
         as part of net income and accumulated other comprehensive income in
         that period or earlier periods.

         The following table reflects the reclassification amounts and the
         related tax effects for the two years ended December 31:

<TABLE>
<CAPTION>
                                                                  2003
                                               ---------------------------------------
                                                   Before                     After
                                                    Tax           Tax          Tax
                                                   Amount       Effect        Amount
                                               ------------   ----------   -----------
<S>                                            <C>            <C>          <C>
Unrealized losses arising during the year       $(1,439,531)  $  544,622   $  (894,909)
Reclassification for adjustments for
    gains included in net earnings                 (399,826)     135,941      (263,885)
                                                -----------   ----------   -----------
Net change in unrealized losses on securities   $(1,839,357)  $  680,563   $(1,158,794)
                                                ===========   ==========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                 2002
                                                --------------------------------------
                                                   Before                     After
                                                    Tax           Tax          Tax
                                                   Amount       Effect       Amount
                                                -----------   ----------   -----------
<S>                                             <C>           <C>          <C>
Unrealized gains arising during the year        $ 1,613,041   $ (578,016)  $ 1,035,025
Reclassification for adjustments for
    gains included in net earnings                  (37,941)      13,596       (24,345)
                                                -----------   ----------   -----------
Net change in unrealized gains on securities    $ 1,575,100   $ (564,420)  $ 1,010,680
                                                ===========   ==========   ===========
</TABLE>

13.      FAIR VALUES OF FINANCIAL INSTRUMENTS

         SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
         requires disclosure of fair value information about financial
         instruments, whether or not recognized in the balance sheet, for which
         it is practicable to estimate that value. Financial instruments are
         defined as cash, evidence of ownership in an entity, contracts that
         convey either a right to receive cash or other financial instruments or
         an obligation to deliver cash or other financial instruments, or
         contracts that convey the right or obligation to exchange financial
         instruments on potentially favorable or unfavorable terms. The Company
         has a variety of financial instruments, which include items recorded on
         the consolidated statements of financial condition and items which, by
         their nature, are not recorded on the consolidated statements of
         financial condition.

                                       32

<PAGE>

         Quoted market prices, if available, are utilized as an estimate of the
         fair value of financial instruments. In cases where quoted market
         prices are not available, fair values have been estimated using present
         value or other valuation techniques. These methods are highly sensitive
         to the assumptions used by management, such as those concerning
         appropriate discount rates and estimates of future cash flows.
         Different assumptions could significantly affect the estimated fair
         value amounts presented above. In that regard, the derived fair value
         estimates cannot be substantiated by comparison to independent markets
         and, in many cases, could not be realized in the immediate settlement
         of the instrument. Further, assets that are not financial instruments
         are not included in the following table. Accordingly, the aggregate
         estimated fair value amounts presented do not represent the underlying
         value of the Company.

         A summary of the Company's disclosure of fair value of financial
         instruments made in accordance with the requirements of SFAS No. 107 is
         as follows:

<TABLE>
<CAPTION>
                                                At December 31, 2003    At December 31, 2002
                                                ---------------------   ---------------------
                                                Carrying   Estimated    Carrying   Estimated
                                                 Amount    Fair Value    Amount    Fair Value
                                                --------   ----------   --------   ----------
                                                                (In Thousands)
<S>                                             <C>        <C>          <C>        <C>
ASSETS:
     Cash on hand and in banks                  $  3,519   $    3,519   $  3,863   $    3,863
     Interest-bearing deposits in other banks        256          256        357          357
     Securities available-for-sale                83,325       83,325     75,301       75,301
     FHLB stock                                      732          732        975          975
     Loans held for sale                           1,428        1,431      4,969        5,006
     Loans receivable, net                       105,477      107,645    119,375      119,603
     Accrued interest receivable                   1,362        1,362      1,318        1,318

LIABILITIES:
     Deposits                                   $179,939   $  180,447   $188,955   $  189,667
     Subordinated Debt                             3,093        3,093          0            0
     Borrowed funds                                3,465        3,642      5,940        6,894
     Accrued interest payable                        440          440        614          614
</TABLE>

         The following methods and assumptions were used by the Company in
         estimating the fair values provided above:

         CASH ON HAND AND IN BANKS AND INTEREST-BEARING DEPOSITS IN OTHER BANKS.
         The carrying value of highly liquid instruments, such as cash on hand
         and in banks and interest-bearing deposits are considered to
         approximate their fair values. The carrying amount of accrued interest
         in these instruments approximates its fair value.

         SECURITIES AVAILABLE-FOR-SALE AND LOANS HELD FOR SALE. Substantially
         all of the Company's securities available-for-sale and loans held for
         sale, primarily to third-party investors, have a readily determinable
         fair value. Fair values for these securities are based on quoted market
         prices, where available. If not available, fair values are based on
         market prices of comparable instruments. The carrying amount of accrued
         interest on these instruments approximates its fair value.

         FHLB STOCK. The FHLB has historically repurchased their stock at cost,
         as no readily available market exists. Therefore the carrying amount is
         considered a reasonable estimate of its fair value.

         LOANS RECEIVABLE, NET. For loans with rates that are repriced in
         coordination with movements in market rates and with no significant
         credit risk, fair value estimates are based on carrying values. The
         fair value for certain mortgage loans is based on quoted market prices
         of similar loans sold in conjunction with securitization transactions,
         adjusted for differences in loan characteristics. The fair values for
         other loans are estimated by discounting future cash flows using
         current rates at which loans with similar terms would be made to
         borrowers of similar credit ratings. The carrying amount of accrued
         interest on loans approximates its fair value.

                                       33

<PAGE>

         DEPOSITS. The fair value of deposits with no stated maturity, such as
         interest and noninterest-bearing deposits, NOW accounts, savings
         accounts, and money market accounts, is by definition, equal to the
         amount payable on demand at the reporting date (i.e., their carrying
         amounts). Fair values for certificates of deposits are estimated using
         a discounted cash flow analysis that applies rates currently offered
         for certificates of deposits with similar remaining maturities. The
         carrying amount of accrued interest payable on deposits approximates
         its fair value.

         The economic value attributed to the long-term relationship with
         depositors who provide low-cost funds to the Company is considered to
         be a separate intangible asset and is excluded from the presentation.

         SUBORDINATED DEBT The carrying amount of subordinated debt approximates
         its fair value.

         BORROWED FUNDS. The fair value of borrowed funds is estimated using
         discounted cash flow analyses, based on the current rates offered for
         similar borrowing arrangements. The carrying amount of accrued interest
         payable on borrowed funds approximates its fair value.

         OFF-BALANCE SHEET ITEMS. Off-balance sheet financial instruments
         include commitments to extend credit and letters of credit to be held
         in the Bank's loan portfolio. The fair value of such instruments is
         negligible since the arrangements are at current rates, and are for
         short periods, and have no significant credit exposure.

14.      CONTINGENCIES

         The Company and the Bank are parties to litigation and claims arising
         in the normal course of business. Management, after consultation with
         legal counsel, believes that the liabilities, if any, arising from such
         litigation and claims will not be material to the consolidated
         financial statements.

                                       34

<PAGE>

15.      CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

                             STATEMENTS OF CONDITION

                           DECEMBER 31, 2003 AND 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  2003       2002
                                                                 -------   -------
<S>                                                              <C>       <C>
ASSETS:
     Cash and cash equivalents                                   $     6   $   395
     Interest-bearing deposits in other banks                      3,398       227
     Debt issue cost                                                  60         0
     Investment in unconsolidated subsidiary                          93         0
     Investment in subsidiary                                     18,980    19,347
                                                                 -------   -------
                  Total assets                                   $22,537   $19,969
                                                                 =======   =======
LIABILITIES:
     Subordinated debt                                           $ 3,093   $     0
     Other liabilities                                                13        14
                                                                 -------   -------
                  Total liabilities                                3,106        14
                                                                 -------   -------
STOCKHOLDERS' EQUITY:
     Common stock                                                     18        18
     Additional paid in capital                                    8,220     8,132
     Treasury shares, at cost                                     (2,743)   (1,498)
     Retained earnings                                            14,508    12,716
     Accumulated other comprehensive income (loss), net of tax      (572)      587
                                                                 -------   -------
                  Total stockholders' equity                      19,431    19,955
                                                                 -------   -------
                  Total liabilities and stockholders' equity     $22,537   $19,969
                                                                 =======   =======
</TABLE>

                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  2003      2002
                                                -------   -------
<S>                                             <C>       <C>
INCOME:
     Dividend income from Pinnacle Bank         $ 1,636   $ 1,310
     Interest income                                  6        20
                                                -------   -------
            Total income                          1,642     1,330

EXPENSE                                               8        23
                                                -------   -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
     INCOME OF SUBSIDIARY                         1,634     1,307
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY        792       706
                                                -------   -------
           Net income                           $ 2,426   $ 2,013
                                                =======   =======
</TABLE>

                                       35

<PAGE>

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          2003     2002
                                                                        -------   -------
<S>                                                                     <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                         $ 2,426   $ 2,013
     Adjustments to reconcile net income to net cash provided by
          operating activities:
          Undistributed income of subsidiary                               (792)     (706)
          Decrease in other liabilities                                      (1)      (71)
                                                                        -------   -------
                  Net cash provided by operating activities               1,633     1,236
                                                                        -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Investment in trust                                                    (93)        0
     Net change in interest bearing deposits in other banks              (3,171)    1,226
                                                                        -------   -------
                  Net cash provided by (used in) investing activities    (3,264)    1,226
CASH FLOWS FROM FINANCING ACTIVITIES:
     Repurchase of shares of common stock                                (1,245)   (1,370)
     Proceeds from stock options exercised                                   88         0
     Debt issue cost paid                                                   (60)        0
     Proceeds from issuance of subordinated debt                          3,093         3
     Cash dividends paid                                                   (634)     (710)
                                                                        -------   -------
                  Net cash provided by (used in) financing activities     1,242    (2,080)
                                                                        -------   -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                           (389)      382

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              395        13
                                                                        -------   -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                $     6   $   395
                                                                        =======   =======
</TABLE>

16.      INVESTMENT IN AFFILIATED COMPANIES (UNAUDITED)

         Investments in affiliated companies accounted for under the equity
         method consist of 100% of common stock of Pinnacle Capital Trust I
         ("Trust"), a wholly-owned statutory business trust. The Trust was
         formed on December 22, 2003. Summary unaudited financial information
         for the Trust as of December 31, 2003 follows (dollars in thousands):

                                 (In thousands):

<TABLE>
<CAPTION>
                                                                                   2003
                                                                                 -------
<S>                                                                              <C>
ASSETS:
     Investment in subordinated debentures issued by Pinnacle Bancshares, Inc.   $ 3,093
                                                                                 =======
LIABILITIES:
     Trust preferred securities                                                    3,000
                                                                                 -------
EQUITY:
     Common stock (100% owned by Pinnacle Bancshares, Inc.)
                                                                                      93
                                                                                 -------

 TOTAL LIABILITIES & EQUITY                                                      $ 3,093
                                                                                 =======
</TABLE>

                                       36

<PAGE>

SELECTED QUARTERLY INFORMATION  (UNAUDITED)

A summary of unaudited results of operations for each quarter of the years ended
December 31, 2003 and 2002 follows:

<TABLE>
<CAPTION>
                                                             FIRST        SECOND       THIRD       FOURTH
                                                            QUARTER      QUARTER      QUARTER      QUARTER
                                                           ----------   ----------   ----------   ----------
<S>                                                        <C>          <C>          <C>          <C>
Year Ended December 31, 2003:
     Interest revenue                                      $2,923,430   $2,909,968   $2,758,603   $2,694,974
     Interest expense                                       1,113,052    1,031,955      916,249      844,270
     Net interest income after provision for loan losses    1,542,878    1,610,513    1,495,354    1,769,330
     Noninterest income                                       898,611      687,526      775,581      483,422
     Noninterest expense                                    1,363,419    1,391,845    1,404,873     1409,126
     Net income                                               703,677      595,327      571,207      556,153
     Basic earnings per share                                    0.43         0.38         0.36         0.36
     Diluted earnings per share                                  0.42         0.37         0.36         0.35

Year Ended December 31, 2002:
     Interest revenue                                      $3,356,208   $3,302,366   $3,328,950   $3,115,779
     Interest expense                                       1,667,182    1,560,612    1,470,664    1,284,103
     Net interest income after provision for loan losses    1,530,726    1,603,754    1,720,286    1,618,676
     Noninterest income                                       498,554      516,699      511,176      631,008
     Noninterest expense                                    1,367,666    1,340,704    1,520,671    1,363,604
     Net income                                               441,791      515,750      473,025      582,222
     Basic and diluted earnings per share                        0.25         0.29         0.27         0.33
</TABLE>

                                       37

<PAGE>

                              CORPORATE INFORMATION
                     DIRECTORS -- PINNACLE BANCSHARES, INC.
                                AND PINNACLE BANK

                                 Greg Batchelor
                 President, Dependable True Value Hardware, Inc.

                                   O. H. Brown
                      Haynes, Downard, Andra & Jones, LLP

                                 James W. Cannon
                                     Retired

                                   Max Perdue
                                     Retired

                                  Sam W. Murphy
                Chairman of the Board & Chief Executive Officer,
                           Murphy Manufacturing, Inc.

                              Robert B. Nolen, Jr.
                                    President
                            Pinnacle Bancshares, Inc.
                                  Pinnacle Bank

                                  Al H. Simmons
                              Chairman of the Board
                            Pinnacle Bancshares, Inc.
                                  Pinnacle Bank
                   Insurance Agent, Pittman & Associates, Inc.

                              J. T. "Jabo" Waggoner
                                   Consultant,
                      Birmingham Business Consultants, LLC

                               Melvin R. Kacharos
                                     Retired
                               (Director Emeritus)

                 EXECUTIVE OFFICERS -- PINNACLE BANCSHARES, INC.

                              Robert B. Nolen, Jr.
                                    President

                                 Mary Jo Gunter
                      Vice President & Corporate Secretary

                                  Marie Guthrie
                                    Treasurer

                                       38

<PAGE>

                            OFFICERS - PINNACLE BANK

                              Robert B. Nolen, Jr.
                                    President

                                 Mary Jo Gunter
                     Senior Vice President Banking Services
                              & Corporate Secretary

                                   John Kirby
                     Senior Vice President Birmingham Region

                                  Marie Guthrie
                           Vice President & Controller

                                   Alan Grice
                 Vice President - Lending & Business Development

                                   Donna Hyde
                             Vice President- Lending

                                   Rick Brown
                             Vice President- Lending

                                  Jaye Ottinger
                        Vice President - Mortgage Lending

                                 Carl Schoettlin
                            Vice President - Lending

                                  Carmen Sparks
                        Vice President - Data Processing

                                  Brenda Steele
                          Vice President & I.S. Officer
                             & GLBA Security Officer

                                   Pam Elliott
                          Haleyville Regional President

                                    Tracy Rye
                            Vice President - Lending

                               Edward A. Davidson
                          Birmingham Regional President

                                  Susie Roberts
                     Vice President-Office Manager - Sumiton

                                   David Davis
                       Vice President-Secondary Marketing

                                    Ted Smith
               Vice President-Loan Servicing & Compliance Officer

                                       39

<PAGE>

                                     OFFICES

               Main Office, 1811 2nd Avenue/Jasper (205/221-4111)
             Mall Office, 204 Highway 78 East/Jasper (205/221-1322)
           Sumiton Office, 790 Highway 78 East/Sumiton (205/648-6091)
          Haleyville Office, 1012 20th Street/Haleyville (205/486-2225)
          Birmingham South, 2013 Canyon Road/Birmingham (205/822-2265)
        Trussville Office, 2064 Gadsden Highway/Trussville (205/661-9625)

                                 TRANSFER AGENT
                         Registrar & Transfer Co., Inc.
                              Cranford, New Jersey

                                 GENERAL COUNSEL
                     Maddox, MacLaurin, Nicholson & Thornley
                                 Jasper, Alabama

                                    AUDITORS
                                    KPMG LLP
                               Birmingham, Alabama

                             ADDITIONAL INFORMATION
                  Analysts, stockholders and any other parties
                 interested in obtaining additional information
                          may contact Marie Guthrie at
            Post Office Box 1388, Jasper AL 35502-1388 (205/221-4111)

                                 ANNUAL MEETING
         The Annual Meeting of Stockholders of Pinnacle Bancshares, Inc.
                       will be held at CHS Activity Center
                     204 19th Street East, Jasper , Alabama
                          at 11:00 a.m. on May 26, 2004

                                   FORM 10-KSB
      A COPY OF THE PINNACLE BANCSHARES, INC. ANNUAL REPORT ON FORM 10-KSB
           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, AS FILED WITH
             THE SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE TO
               STOCKHOLDERS OF RECORD FOR THE 2004 ANNUAL MEETING
                     WITHOUT CHARGE UPON WRITTEN REQUEST TO
                                  MARIE GUTHRIE
                            PINNACLE BANCSHARES, INC.
                              POST OFFICE BOX 1388
                           JASPER, ALABAMA 35502-1388

                                       40