##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-KSB
 (Mark One) x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______________ to ______________ Commission file number 1-12707 PINNACLE BANCSHARES, INC. 
 Delaware
    
    72-1370314(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1811 Second Avenue, Jasper, Alabama
    
    35502-1388(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number, including area code: (205) 221-4111. Securities registered pursuant to Section 12(b) of the Act: Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredCommon Stock, par value $.01 per share
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None. Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. YES x  
NO o Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. x State issuers revenues for its most recent fiscal year. $14,132,115 The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price $17.00 per share) at which the Common Stock was sold
on March 25, 2004, was approximately $22,509,666. For purposes of this
calculation, the term affiliate refers to all executive officers and
directors of the registrant and all stockholders beneficially owning more than
10% of the registrants Common Stock. As
of the close of business on March 25, 2004, 1,563,678 shares of the
registrants Common Stock were outstanding. Transitional Small Business
Disclosure Format:  YES o  
NO x Documents Incorporated By
Reference   Part III:




---



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




---



##### Table of Contents



Selected Financial and Other Data The following data should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, and other financial
information included elsewhere herein. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Financial Condition and Other Data:Total amount of:Assets
    
    $
    208,574
    
    
    $
    218,290
    
    
    $
    210,020
    
    
    $
    230,269
    
    
    $
    231,032Loans, net
    
    
    105,477
    
    
    
    119,375
    
    
    
    131,284
    
    
    
    152,021
    
    
    
    146,430Interest-bearing deposits in other banks
    
    
    3,519
    
    
    
    357
    
    
    
    2,466
    
    
    
    1,136
    
    
    
    2,177Securities
    
    
    83,325
    
    
    
    75,301
    
    
    
    61,838
    
    
    
    61,069
    
    
    
    64,599Loans held for sale
    
    
    1,428
    
    
    
    4,969
    
    
    
    3,875
    
    
    
    1,337
    
    
    
    894Deposits
    
    
    179,939
    
    
    
    188,955
    
    
    
    193,498
    
    
    
    187,471
    
    
    
    189,175Subordinated
debt
    
    
    3,093
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other borrowed funds
    
    
    3,465
    
    
    
    5,940
    
    
    
    3,100
    
    
    
    20,500
    
    
    
    21,890Stockholders equity
    
    
    19,431
    
    
    
    19,955
    
    
    
    19,012
    
    
    
    19,230
    
    
    
    17,849Number of:Real estate loans outstanding
    
    
    2,263
    
    
    
    2,504
    
    
    
    2,911
    
    
    
    3,209
    
    
    
    3,419Savings accounts
    
    
    13,624
    
    
    
    14,301
    
    
    
    14,485
    
    
    
    14,962
    
    
    
    17,509Full service offices open
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
 Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Operating Data:Interest
income
    
    $
    11,287
    
    
    $
    13,103
    
    
    $
    15,823
    
    
    $
    17,805
    
    
    $
    16,130Interest
expense
    
    
    3,906
    
    
    
    5.982
    
    
    
    9,192
    
    
    
    10,573
    
    
    
    9,238Net interest income before provision for loan losses
    
    
    7,381
    
    
    
    7,121
    
    
    
    6,631
    
    
    
    7,232
    
    
    
    6,892Provision for loan
losses
    
    
    963
    
    
    
    647
    
    
    
    1,942
    
    
    
    530
    
    
    
    177Net interest income after provision for losses
    
    
    6,418
    
    
    
    6,474
    
    
    
    4,689
    
    
    
    6,702
    
    
    
    6,715Noninterest
income
    
    
    2,845
    
    
    
    2,157
    
    
    
    1,758
    
    
    
    1,250
    
    
    
    1,116Noninterest
expense
    
    
    5,569
    
    
    
    5,593
    
    
    
    5,306
    
    
    
    5,152
    
    
    
    5,195Income tax
expense
    
    
    1,268
    
    
    
    1,025
    
    
    
    350
    
    
    
    1,058
    
    
    
    958Income before extraordinary item
    
    
    2,426
    
    
    
    2,013
    
    
    
    791
    
    
    
    1,742
    
    
    
    1,678Extraordinary item, net of tax benefit of $63
    
    
    0
    
    
    
    0
    
    
    
    108
    
    
    
    0
    
    
    
    0Net income
    
    $
    2,426
    
    
    $
    2,013
    
    
    $
    683
    
    
    $
    1,742
    
    
    $
    1,678
 3




---



##### Table of Contents



The following table sets forth certain information relating to the Banks
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, non-accruing loans, if any,
are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented. For the Years Ended December 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    117,465
    
    
    $
    8,299
    
    
    
    7.1
    %
    
    $
    126,507
    
    
    $
    9,524
    
    
    
    7.5
    %
    
    $
    144,485
    
    
    $
    12,340
    
    
    
    8.5
    %Securities available-for-sale
    
    
    79,034
    
    
    
    2,964
    
    
    
    3.8
    %
    
    
    71,735
    
    
    
    3,506
    
    
    
    4.9
    %
    
    
    56,114
    
    
    
    3,265
    
    
    
    5.8
    %Other
    
    
    2,189
    
    
    
    23
    
    
    
    1.1
    %
    
    
    4,328
    
    
    
    73
    
    
    
    1.7
    %
    
    
    5,128
    
    
    
    218
    
    
    
    3.3
    %Total interest earning assets
    
    
    198,688
    
    
    
    11,286
    
    
    
    5.7
    %
    
    
    202,570
    
    
    
    13,103
    
    
    
    6.5
    %
    
    
    205,727
    
    
    
    15,823
    
    
    
    7.7
    %Non-interest-earning assets
    
    
    16,867
    
    
    
    
    
    
    
    
    
    
    
    16.193
    
    
    
    
    
    
    
    
    
    
    
    23,530Total assets
    
    $
    215,555
    
    
    
    
    
    
    
    
    
    
    $
    218,763
    
    
    
    
    
    
    
    
    
    
    $
    229,257Interest-bearing liabilities:Deposits
    
    $
    186,713
    
    
    
    3,710
    
    
    
    2.0
    %
    
    $
    193,073
    
    
    
    5,789
    
    
    
    3.0
    %
    
    $
    191,728
    
    
    
    8,791
    
    
    
    4.6
    %Subordinated
debt
    
    
    76
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Borrowed funds
    
    
    5,384
    
    
    
    195
    
    
    
    3.6
    %
    
    
    4,179
    
    
    
    194
    
    
    
    4.6
    %
    
    
    6,936
    
    
    
    401
    
    
    
    5.8
    %Total interest-bearing
liabilities:
    
    
    192,173
    
    
    
    3,905
    
    
    
    2.0
    %
    
    
    197,252
    
    
    
    5,983
    
    
    
    3.0
    %
    
    
    198,664
    
    
    
    9,192
    
    
    
    4.6
    %Non-interest-bearing liabilities
    
    
    3,887
    
    
    
    
    
    
    
    
    
    
    
    1,464
    
    
    
    
    
    
    
    
    
    
    
    10,891Total Liabilities:
    
    
    196,060
    
    
    
    
    
    
    
    
    
    
    
    198,716
    
    
    
    
    
    
    
    
    
    
    
    209,555Equity
    
    
    19,495
    
    
    
    
    
    
    
    
    
    
    
    20,047
    
    
    
    
    
    
    
    
    
    
    
    19,702Total Liabilities and Equity
    
    $
    215,555
    
    
    
    
    
    
    
    
    
    
    $
    218,763
    
    
    
    
    
    
    
    
    
    
    $
    229,257Net interest-earning assets
    
    $
    6,515
    
    
    
    
    
    
    
    
    
    
    $
    5,318
    
    
    
    
    
    
    
    
    
    
    $
    7,063Net interest income
    
    
    
    
    
    $
    7,381
    
    
    
    
    
    
    
    
    
    
    $
    7,120
    
    
    
    
    
    
    
    
    
    
    $
    6,631Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3,5
    %
    
    
    
    
    
    
    
    
    
    
    3.1
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3.5
    %
    
    
    
    
    
    
    
    
    
    
    3.2
    %Ratio of average
interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    103.4
    %
    
    
    
    
    
    
    
    
    
    
    102.7
    %
    
    
    
    
    
    
    
    
    
    
    103.6
    %
 4




---



##### Table of Contents



Lending Activities General. The Banks net loan portfolio totaled $105,477 million at
December 31, 2003, or 50.6% of its total assets. On that date, $81.5 million,
or 77% of total net loans outstanding, consisted of loans secured by mortgages
on residential and commercial real estate loans, while the remainder of the
loan portfolio consisted of commercial and consumer loans. The principal lending activity of the Bank historically has been the
origination of conventional first mortgage single-family loans. The Bank also
makes commercial real estate, construction, commercial and consumer loans. The
majority of the Banks loans have been originated within its primary market
area. The Banks volume of total loans originated to be retained in the Banks
loan portfolio totaled approximately $63.1 million during the year ended
December 31, 2003, and $68.4 million during the year ended December 31, 2002.
The Bank directly originates most of its mortgage loans through its existing
branches. These loans have been originated predominantly within the Banks
geographical lending area of Walker, Jefferson, Shelby, Winston and Fayette
counties, in Alabama. See   Loan Solicitation and Processing and  Loan
Originations, Purchases and Sales. The Bank seeks to improve the interest rate sensitivity of its mortgage
loan portfolio through the origination of adjustable rate loans, which
constituted approximately 55% of the single-family residential mortgage loans
in the Banks loan portfolio, and 27% of the Banks net loan portfolio at
December 31, 2003. Most adjustable rate mortgage loans are held in the Banks
loan portfolio, while most fixed-rate mortgage loans are either sold as whole
loans to the Federal Home Loan Mortgage Corporation (FHLMC) or the Federal
National Mortgage Association (FNMA) or other investors, or converted into
mortgage-backed securities with servicing retained by the Bank. The
following table sets forth, in dollar amounts and percentages, the
major categories of the Banks loans. December 31,2003
    
    2002
    
    2001(Dollars in thousands)$
    
    %
    
    $
    
    %
    
    $
    
    %Type of loan:Real estate mortgage
loans
    
    $
    69,037
    
    
    
    65.5
    %
    
    $
    80,189
    
    
    
    67.2
    %
    
    $
    86,053
    
    
    
    65.5
    %Construction loans
    
    
    14,060
    
    
    
    13.3
    %
    
    
    15,329
    
    
    
    12.8
    %
    
    
    18,387
    
    
    
    14.0
    %Commercial loans
    
    
    10,568
    
    
    
    10.0
    %
    
    
    11,549
    
    
    
    9.7
    %
    
    
    15,987
    
    
    
    12.2
    %Consumer loans
    
    
    13,444
    
    
    
    12.7
    %
    
    
    13,834
    
    
    
    11.6
    %
    
    
    12,373
    
    
    
    9.4
    %LessDiscounts and other
    
    
    165
    
    
    
    0.2
    %
    
    
    204
    
    
    
    0.2
    %
    
    
    208
    
    
    
    0.1
    %Allowance for loan
losses
    
    
    1,467
    
    
    
    1.3
    %
    
    
    1,322
    
    
    
    1.1
    %
    
    
    1,308
    
    
    
    1.0
    %Total
    
    $
    105,477
    
    
    
    100.00
    %
    
    $
    119,375
    
    
    
    100.00
    %
    
    $
    131,284
    
    
    
    100.00
    %
 December 31,2000
    
    
    
    
    
    1999(Dollars in thousands)$
    
    
    
    %
    
    
    
    $
    
    
    
    %Type of loan:Real estate mortgage
loans
    
    $
    96,592
    
    
    
    63.5
    %
    
    $
    94,288
    
    
    
    64.4
    %Construction loans
    
    
    27,157
    
    
    
    18.0
    %
    
    
    26,866
    
    
    
    18.4
    %Commercial loans
    
    
    16,798
    
    
    
    11.0
    %
    
    
    14,364
    
    
    
    9.8
    %Consumer loans
    
    
    13,099
    
    
    
    8.6
    %
    
    
    12,442
    
    
    
    8.4
    %LessDiscounts and other
    
    
    286
    
    
    
    0.2
    %
    
    
    307
    
    
    
    0.2
    %Allowance for loan
losses
    
    
    1,339
    
    
    
    0.9
    %
    
    
    1,223
    
    
    
    0.8
    %Total
    
    $
    152,021
    
    
    
    100.00
    %
    
    $
    146,430
    
    
    
    100.00
    %
 5




---



##### Table of Contents



Residential Loans. The Banks real estate loan portfolio includes loans
on single family, two-to-four family dwellings, multi-family housing (over four
units), and loans made for the development of unimproved real estate to be used
for residential housing. The loan-to-value ratio, maturity and other provisions of the loans made
by the Bank generally have reflected the policy of making less than the maximum
loan permissible under applicable regulations, in accordance with sound lending
practices, market conditions, and underwriting standards established by the
Bank. Mortgage loans made by the Bank are generally long-term loans, amortized
on a monthly basis, with principal and interest due each month. The initial
contractual loan payment period for residential loans typically ranges from 15
to 30 years. Currently, the Bank offers one-year, adjustable rate loans based
upon the one-year U.S. Treasury Bill rate adjusted to a constant maturity, with
limitations on adjustments of 2% in any one year and 6% over the life of the
loan. Fixed rate loans increase exposure to interest rate risk in a rising rate
environment because interest-bearing liabilities would be subject to repricing
before assets become subject to repricing. Adjustable-rate loans decrease the
risks associated with changes in interest rates but involve other risks. As
interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased payment increases the potential for
default. At the same time, the marketability of the collateral underlying
secured loans may be adversely affected by higher interest rates. In a
declining interest rate environment, there may be an increase in prepayments on
loans as borrowers refinance at lower interest rates. At December 31, 2003, the largest amount loaned by the Bank to one
borrower was $2.3 million which was approximately 12% of the Holding Companys
stockholders equity. Construction and Commercial Real Estate Loans. Construction loans on
residential properties are made primarily to builders and a significant
percentage are made on a speculative basis. The maximum loan to value ratio
generally is 80% of the appraisal value. Residential construction loans are
typically made for one year. At December 31, 2003, the Bank had $21.6 million
outstanding in residential construction loans, compared with $19.4 million in
construction loans on residential properties outstanding at December 31, 2002.
The Bank also offers construction loans on commercial and other properties. At
December 31, 2003, total construction loans were $24.2 million. Approximately
44% of total construction loans were loans to builders for speculative
construction loans. Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the propertys value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be confronted at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment. The ability of a
developer to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing, availability of comparable properties and
economic conditions. The Bank has sought to minimize this speculative risk of
construction financing by limiting construction lending to qualified borrowers
in the Banks market area by obtaining personal guarantees from many of these
borrowers, by requiring the involvement of qualified builders, and by limiting
the aggregate amount of outstanding construction loans. The Bank has historically originated commercial real estate loans within
its primary market area. The Bank either funded or purchased participation
interests in various large commercial real estate projects, one of which was
outside of its primary market area. See   Non-Performing Loans and Asset
Classification and Subsidiary Activities. Since 1984, the Bank has limited
its commercial real estate lending activities to commercial real estate
projects located in its primary market area, with the amount loaned limited to
15% of its net worth. See  Nonperforming Loans and Asset Classification
and Subsidiary Activities. At December 31, 2003, the Bank had $25.0 million
outstanding in commercial real estate loans, including $2.6 million in
commercial construction loans. These loans are typically limited to
owner-occupied financings. 6




---



##### Table of Contents



Construction and commercial real estate lending also is generally
considered to involve a higher level of risk due to the concentration of
principal in a limited number of loans and borrowers. The nature of these
loans is such that they are generally less predictable and more difficult to
evaluate and monitor. Commercial Business Loans. At December 31, 2003, there were approximately
$11.0 million in commercial loans outstanding. The Bank will consider making
these types of loans primarily in its local market area. Commercial business
loans can pose the same increased risks posed by commercial real estate lending
activity. Consumer Loans. The Bank makes various types of consumer loans, including
the loans made for automobile loans, personal loans, educational loans and
loans for home improvement or other purposes. At December 31, 2003 the Bank
had $13.4 million outstanding in consumer loans. Consumer loans tend to be originated at higher interest rates than
mortgage loans and for shorter terms. Consumer loans generally involve more
risk than single-family mortgage loans. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrowers continuing financial stability. Further, various federal and
state laws may limit the amount which may be recovered. In underwriting
consumer loans, the Bank considers the borrowers credit history, income and
ability to repay the loan, and the value of the collateral. However, consumer
loans generally are associated with a higher level of charge-offs than
single-family mortgage loans. Loan Originations, Purchases and Sales. Loan originations come from a
combination of walk-in customers and real estate brokers. The Bank has engaged
in selling in the secondary market certain loans it has originated. Such loans
sold are generally fixed-rate, long-term mortgage loans. These sales, the
majority of which do not allow recourse to the Bank, have been made to FHLMC
and FNMA, which purchases residential mortgage loans from federally insured
financial institutions and certain other lenders. Many of the Banks loans
have been exchanged for FHLMC participation certificates (PCs) or FNMA
mortgage-backed securities. These PCs and mortgage-backed securities are
generally considered to be a more liquid form of asset and are a more widely
accepted form of collateral than the underlying loans. The sale of loans in the secondary mortgage market reduces the Banks risk
that the interest rates it pays will escalate while holding long-term,
fixed-rate loans in its portfolio and allows the Bank to continue to make loans
during periods when savings flows decline or funds are not otherwise available
for lending purposes. In connection with certain sales, the Bank provides
servicing on the loans (i.e., collection of principal and interest payments)
for which it receives a fee payable monthly of 1/4% to 3/8% per annum of the
unpaid balance of each loan. These loan sales will continue as the Bank
attempts to maintain its loan servicing base. As of December 31, 2003, the Bank
was servicing loans for others aggregating approximately $64.6 million. Net
servicing income for the years ended December 31, 2003 and 2002 was
approximately $163,000 and $158,000, respectively. During the years ended December 31, 2003 and 2002, the Bank sold
approximately $76.1 million and $53.9 million, respectively, in whole loans. As
of December 31, 2003, the Bank had approximately $426,000 in commitments
outstanding to package or sell additional loans. The Banks loan policy requires that the Banks loan committee identify,
at the beginning of each quarter, loans which will be held for the portfolio
and loans which will be held for sale. Loans that are designated to be held
for the portfolio may be sold only in unusual circumstances which could not be
reasonably anticipated at the time of their origination or purchase. Loans
held for sale are carried at the lower of cost or market value and are sold as
soon as possible after their origination, as market conditions allow. Loan Commitments. The Bank issues commitments to prospective borrowers to
make loans conditioned upon the occurrence of certain events, which are honored
for 60 days from approval with no additional fees required. The Bank charges a
non-refundable commitment fee equal to 1% of the actual amount of committed
funds on most single-family construction loans. The Bank had outstanding
commitments to originate mortgage 7




---



##### Table of Contents



loans
aggregating $25.4 million at December 31, 2003. Of these commitments, $22.0
million were for adjustable rate mortgages and $3.4 million were for fixed-rate
mortgages. Although the Bank originates most fixed-rate loans for resale in the
secondary mortgage market, a certain amount of interest rate risk exists for
the Bank after a loan is closed until that loan is sold. Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees or points for originating loans. Loan
points are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for creation of the loan. The Bank accounts for loan
origination fees net of direct costs as a yield adjustment over the life of the
loan. See Note 1 of Notes to Consolidated Financial Statements. Maturity of Loan Portfolio.The following table sets forth certain
information at December 31, 2003, regarding the dollar amount of loans maturing
in the Banks portfolio based on their contractual terms to maturity, which may
differ from realized maturities due to prepayments. Demand loans and overdrafts
are reported as due in one year or less. The Bank does not have any loans with
no stated schedule of repayments and no stated maturity. Due One Through
    
    DueDue by
    
    Five Years After
    
    Five Years AfterDecember 31, 2004
    
    December 31, 2003
    
    December 31, 2003
    
    TotalReal estate mortgage
    
    $
    31,938,865
    
    
    $
    28,967,452
    
    
    $
    8,131,158
    
    
    $
    69,037,475Real estate construction
    
    
    14,060,167
    
    
    
    
    
    
    
    
    
    
    
    14,060,167Commercial business loans
    
    
    8,744,859
    
    
    
    1,755,462
    
    
    
    67,550
    
    
    
    10,567,871Consumer
    
    
    3,099,797
    
    
    
    9,754,433
    
    
    
    590,187
    
    
    
    13,444,417Total
    
    $
    57,843,688
    
    
    $
    40,477,347
    
    
    $
    8,788,895
    
    
    $
    107,109,930
 The following table sets forth the dollar amount of all loans due after
one year at December 31, 2003 which have predetermined interest rates and have
floating or adjustable interest rates. Floating orPredetermined Rates
    
    Adjustable RatesReal estate mortgage
    
    $
    34,399,900
    
    
    $
    2,698,710Commercial business loans
    
    
    1,700,294
    
    
    
    122,718Consumer
    
    
    10,344,620
    
    
    
    Total
    
    $
    46,444,814
    
    
    $
    2,821,428
 Non-Performing Loans and Asset Classification. Interest accrued on loans
is generally discontinued and accrued interest is reversed if principal or
interest payments become 90 days past due unless the credit is well secured and
in the process of collection. Past due status is based on the contractual terms
of the loan. Income is subsequently recognized only to the extent that cash
payments are received until, in managements judgment, the borrowers ability
to make periodic interest and principal payments has been demonstrated, in
which case the loan is returned to accrual status. Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time it is
sold. When such property is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan or its fair value less estimated
selling costs. Any write-down of the property at foreclosure is charged to the
allowance for loan losses. Future declines in fair value of the asset less
selling costs below its carrying amount increases a valuation allowance
account. Future increases in fair value of the asset less costs of disposition
above its carrying amount reduces the valuation allowance account, but not
below zero. Increases or decreases in the valuation allowance account are
charged or credited to income. Costs relating to the development and
improvement of property are capitalized, whereas costs relating to the holding
of property are expensed. 8




---



##### Table of Contents



The recognition of gains and losses on the sale of real estate is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized
under an alternative method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate. The following table sets forth information with respect to the Banks
non-performing assets for the periods indicated. At December 31,(Dollars in thousands)2003
    
    2002
    
    2001
    
    2000
    
    1999Loans accounted for on a
nonaccrual basis: (1)Real Estate:Residential
    
    $
    130
    
    
    $
    788
    
    
    $
    588
    
    
    
    2,036
    
    
    
    850Commercial
    
    
    588
    
    
    
    326
    
    
    
    208
    
    
    
    298
    
    
    
    172Consumer
    
    
    10
    
    
    
    56
    
    
    
    71
    
    
    
    37
    
    
    
    70Total
    
    $
    728
    
    
    $
    1,170
    
    
    $
    867
    
    
    $
    2,371
    
    
    $
    1,092Accruing loans which are
contractually
past due 90 days or more:Real Estate:Residential
    
    $
    226
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    226
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total of nonaccrual and 90 days
past due loans
    
    $
    954
    
    
    $
    1,170
    
    
    $
    867
    
    
    $
    2,371
    
    
    $
    1,092Percentage of total loans
    
    
    0.68
    %
    
    
    0.98
    %
    
    
    0.66
    %
    
    
    1.56
    %
    
    
    .75
    %Percentage of total assets
    
    
    0.35
    %
    
    
    0.54
    %
    
    
    0.40
    %
    
    
    1.03
    %
    
    
    .47
    %Other non-performing assets (2)
    
    $
    1,023
    
    
    $
    1,609
    
    
    $
    2,345
    
    
    $
    1,420
    
    
    $
    1,522
   (1)
    
    Nonaccrual status denotes loans on which accrual of interest has been
ceased in accordance with the guidelines discussed previously. Payments
received on a nonaccrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on assessment
of the collectibility of the loan.(2)
    
    Other non-performing assets represent property acquired by the Bank
through foreclosure or repossession. The property is carried at the lower
of its fair value less estimated costs of disposition or the investment
balance of the related loan. Non-performing loans decreased from $1,170,000 at December 31, 2002 to
$728,000 at December 31, 2003. This decrease was primarily due to a decrease in
non-performing loans secured by residential and commercial real estate loans.
Other non-performing assets at December 31, 2003, were $1.0 million as compared
to $1.6 million at December 31, 2002. The decrease in other non-performing
assets is due to sales of real estate owned exceeding foreclosures. 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 nonaccrual 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. It is managements policy to establish an allowance for estimated losses
on loans and real estate owned based upon prior experience, current economic
conditions in its market area, or when it determines that losses are expected
to be incurred on the ultimate disposition of the underlying properties.
Although management believes that it uses the best information available to
make such determinations, future adjustments to allowances may be necessary,
and net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the initial determinations. 9




---



##### Table of Contents



The following table presents an allocation of the allowance for loan
losses by the categories indicated and the percentages that all loans in the
category bear to total loans. This allocation is used by management
to qualify
its evaluation of the loan portfolio. Allocations are merely estimates and are
subject to revisions and conditions change. Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    Category To
    
    
    
    
    
    Category ToAmount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total loansDecember 31,2003
    
    
    
    
    
    2002
    
    
    
    
    
    2001(Dollars in thousands)Real estate mortgage loans
    
    $
    472
    
    
    
    77.2
    %
    
    $
    447
    
    
    
    78.8
    %
    
    $
    589
    
    
    
    78.4
    %Construction loans
    
    
    372
    
    
    
    10.0
    %
    
    
    349
    
    
    
    9.7
    %
    
    
    268
    
    
    
    12.2
    %Other Loans
    
    
    623
    
    
    
    12.8
    %
    
    
    526
    
    
    
    11.5
    %
    
    
    451
    
    
    
    9.4
    %Total
    
    $
    1,467
    
    
    
    100.0
    %
    
    $
    1,322
    
    
    
    100.0
    %
    
    $
    1,308
    
    
    
    100.0
    %
 Percent of
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    Category ToAmount
    
    Total Loans
    
    Amount
    
    Total LoansDecember 31,2000
    
    
    
    
    
    1999(Dollars in thousands)Real estate mortgage loans
    
    $
    547
    
    
    
    80.3
    %
    
    $
    756
    
    
    
    81.7
    %Construction loans
    
    
    289
    
    
    
    11.1
    %
    
    
    189
    
    
    
    9.8
    %Other Loans
    
    
    503
    
    
    
    8.6
    %
    
    
    278
    
    
    
    8.5
    %Total
    
    $
    1,339
    
    
    
    100.0
    %
    
    $
    1,223
    
    
    
    100.0
    %
 The following table sets forth an analysis of the Banks allowance for
loan losses for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Allowance for loan lossesBalance at the beginning of period
    
    $
    1,322
    
    
    $
    1,308
    
    
    $
    1,339
    
    
    $
    1,223
    
    
    
    1,201Loans Charged off:Mortgage
    
    
    767
    
    
    
    505
    
    
    
    1,803
    
    
    
    308
    
    
    
    199Consumer
    
    
    281
    
    
    
    242
    
    
    
    220
    
    
    
    161
    
    
    
    28Total charge-offs
    
    
    1,048
    
    
    
    747
    
    
    
    2,023
    
    
    
    469
    
    
    
    227Total recoveries
    
    
    (230
    )
    
    
    (114
    )
    
    
    (50
    )
    
    
    (55
    )
    
    
    (72
    )Net loans charged-off
    
    
    818
    
    
    
    633
    
    
    
    1,973
    
    
    
    414
    
    
    
    155Provision for loan losses
    
    
    963
    
    
    
    647
    
    
    
    1,942
    
    
    
    530
    
    
    
    177Balance at end of period
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308
    
    
    $
    1,339
    
    
    $
    1,223Ratio of net charge-off to
average loans outstanding during
the period
    
    
    0.70
    %
    
    
    1.4
    %
    
    
    0.28
    %
    
    
    0.28
    %
    
    
    0.10
    %
 10




---



##### Table of Contents



For further information and for an analysis of the Banks allowances for loan
and real estate losses, see Notes 3 and 4 of Notes to Consolidated Financial
Statements. Investment Activities Interest income from cash deposits and securities generally provides the
second largest source of income for the Bank after interest on loans and loan
servicing fees and other fees. At December 31, 2003, the Banks
interest-bearing deposits, FHLB stock, and securities portfolio of
approximately $83.3 million, excluding mortgage-backed securities, consisted
primarily of interest-bearing bank deposits, U.S. government and agency
obligations, corporate securities. It has generally been the Banks policy to maintain a liquidity portfolio
in excess of regulatory requirements in order to shorten the maturities of the
Banks investment portfolio to enable the Bank to better match its short-term
investments and interest rate sensitive savings deposit liabilities. The Bank
also increased its liquidity by selling most of its fixed-rate loans with
maturities of greater than 10 years. Securities have been classified as available-for-sale based on
managements intent and ability. See Note 1 of Notes to Consolidated Financial
Statements. The following table sets forth the carrying value of the Banks investment
securities at the dates indicated. At December 31,2003
    
    2002
    
    2001(In thousands)Securities available-for-sale:U.S. Government and agency securities
    
    $
    74,595
    
    
    $
    60,645
    
    
    $
    50,877Mortgage-backed securities
    
    
    8,729
    
    
    
    14,655
    
    
    
    9,985Other securities
    
    
    1
    
    
    
    1
    
    
    
    1Total
    
    $
    83,325
    
    
    $
    75,301
    
    
    $
    60,863
 The following table sets forth the scheduled maturities, amortized cost,
estimated fair values and weighted average yields for the Banks securities
available-for-sale at December 31, 2003. One Year Or Less
    
    After One Through Five Years
    
    After Five Through Ten YearsWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAmortized
    
    Average
    
    Amortized
    
    Average
    
    Amortized
    
    AverageCost
    
    Yield
    
    Cost
    
    Yield
    
    Cost
    
    Yield(Dollars in thousands)U. S. government and agency
    
    $
    
    
    
    $
    
    
    
    $
    41,191
    
    
    
    3.7
    %
    
    $
    34,478
    
    
    
    3.6
    %Other securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Mortgage-backed securities (3)
    
    
    
    
    
    
    
    
    
    
    1,577
    
    
    
    5.9
    %
    
    
    2,267
    
    
    
    5.5Total
    
    $
    
    
    
    $
    
    
    
    $
    42,768
    
    
    
    3.8
    %
    
    $
    36,746
    
    
    
    3.7
    %
 After Ten Years
    
    TotalWeighted
    
    
    
    
    
    Estimated
    
    WeightedAmortized
    
    Average
    
    Amortized
    
    Fair
    
    AverageCost
    
    Yield
    
    Cost
    
    Value
    
    Yield(Dollars in thousands)U.S. government and agency
    
    $
    
    
    
    
    
    %
    
    $
    75,669
    
    
    $
    74,595
    
    
    
    3.6
    %Other securities(2)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Mortgage-backed securities (3)
    
    
    4,719
    
    
    
    4.1
    
    
    
    8,563
    
    
    
    8,729
    
    
    
    4.8Total
    
    $
    4,719
    
    
    
    4.1
    %
    
    $
    84,233
    
    
    $
    83,325
    
    
    
    3.8
    %
   (1)
    
    Other securities includes the Banks investment in limited partnerships,
at cost, of $1 whose sole purpose is to hold and operate real estate. The
Bank has no loans to these real estate partnerships. These investments
are not readily marketable.(2)
    
    Mortgage-backed securities are reflected in the above table based on
their contractual maturity. 11




---



##### Table of Contents



Sources of Funds General.Deposits are the major source of the Banks funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, advances from the FHLB of Atlanta and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short term
basis to compensate for reductions in the availability of other sources of
funds. They may also be used on a longer term basis for general business
purposes. Deposits.Consumer and commercial deposits are attracted principally from
within the Banks primary market area through the offering of a broad selection
of deposit instruments including NOW accounts, non-interest bearing demand
deposit accounts, money market accounts, regular savings accounts, term
certificate accounts and retirement savings plans. Deposit account terms vary,
with the principal differences being the minimum balance required, the amount
of time the funds must remain on deposit and the interest rate. The Bank offers a full range of accounts including: passbook, money
market, checking, individual retirement accounts (IRAs) and certificate
accounts. The deregulation of various federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and given it more
flexibility to alleviate the risk of net deposit outflows. While the
deregulation of rates payable on deposits has allowed the Bank to be
competitive in the acquisition and retention of funds, it has also resulted in
a more volatile cost of funds. Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank on a weekly basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, and federal regulations. Marketing of the Banks savings programs takes a number of different
forms. All branch offices are provided with brochures which outline the rates
and features of the Banks various accounts. The Bank already offers most of
the services provided by other savings institutions. These services include
consumer and commercial loans, limited lines of credit, all types of checking
and deposit accounts, and IRAs. As of December 31, 2003, the Banks total deposits were $179.9 million. The following table indicates the amount of the Banks certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of December 31, 2003. CertificatesMaturity Period
    
    of Deposit(In thousands)Three months or less
    
    $
    24,907Over three through six months
    
    
    15,627Over six through twelve months
    
    
    3,804Over twelve months
    
    
    7,463Total
    
    $
    51,801
 The following table sets forth the average balances and average interest
rates based on daily balances for deposits for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    AverageDeposits
    
    Rate
    
    Deposits
    
    Rate
    
    Deposits
    
    Rate(Dollars in thousands)Non-interest bearing demand deposits
    
    $
    8,795
    
    
    
    
    %
    
    $
    8,381
    
    
    
    
    %
    
    $
    8,102
    
    
    
    
    %Interest bearing demand deposits
    
    
    28,775
    
    
    
    .3
    
    
    
    29,454
    
    
    
    .6
    
    
    
    25,277
    
    
    
    2.1Savings deposits
    
    
    16,957
    
    
    
    .3
    
    
    
    15,435
    
    
    
    2.3
    
    
    
    14,740
    
    
    
    2.3Time deposits
    
    
    132,186
    
    
    
    2.7
    
    
    
    139,803
    
    
    
    3.8
    
    
    
    143,609
    
    
    
    5.5Total deposits
    
    $
    186,713
    
    
    
    2.0
    %
    
    $
    193,073
    
    
    
    3.0
    %
    
    $
    191,728
    
    
    
    4.6
    %
 For further information on deposits, see Note 6 of Notes to Consolidated
Financial Statements. 12




---



##### Table of Contents



Subordinated Debt. On December 22, 2003, Pinnacle Bancshares, Inc.
established Pinnacle Capital Trust I (Trust), a wholly-owned statutory
business trust. Pinnacle Bancshares, Inc. is the sole sponsor of the Trust and
acquired the Trusts common securities for $93,000. The Trust was created for
the exclusive purpose of issuing 30-year capital trust securities (Trust
Preferred Securities) in the aggregate amount of $3,000,000 and using proceeds
to purchase $3,093,000 of junior subordinated debentures (Subordinated
Debentures) issued by Pinnacle Bancshares. Inc. The sole assets of the Trust
are Subordinated Debentures. Pinnacle Bancshares, Inc.s $93,000 investment in
the Trust is included in other assets in the accompanying consolidated balance
sheet and the $3,093,000 obligation of Pinnacle Bancshares, Inc. is included in
subordinated debt. Borrowed Funds.The Bank relies upon deposits and loan repayments and
sales as its major sources of funds. However, the Bank makes use of FHLB
advances to expand its lending and short-term investment activities and to meet
depositor withdrawals. Advances have been used to supplement deposit flows and
are particularly used when the Bank determines that it can profitably invest
the advances over their term. At or for theYear Ended December 31,2003
    
    2002(Dollars in thousands)Amounts outstanding at end of period
    
    $
    700,000
    
    
    $
    3,000,000Weighted average rate paid at period end
    
    
    1.15
    %
    
    
    1.30
    %Maximum amount of borrowings outstanding at any month end
    
    $
    13,500,000
    
    
    $
    9,500,000Approximate average amount outstanding for period
    
    $
    2,600,000
    
    
    $
    1,200,000Approximate weighted average rate paid during period (1)
    
    
    1.31
    %
    
    
    1.95
    %
   (1)
    
    The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period. For further information on the Banks borrowings, see Note 8 of Notes to
Consolidated Financial Statements. 13




---



##### Table of Contents



Selected Financial Ratios The following table sets forth selected financial ratios of the Bank for
the periods indicated: Year Ended December 31,2003
    
    2002
    
    2001Return on Assets (Net Income Divided By
Average Total Assets)
    
    
    1.1
    %
    
    
    0.9
    %
    
    
    0.3
    %Return on Equity (Net Income Divided By
Average Equity)
    
    
    12.4
    %
    
    
    10.0
    %
    
    
    3.5
    %Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)
    
    
    9.0
    %
    
    
    9.2
    %
    
    
    8.9
    %Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)
    
    
    26.2
    %
    
    
    32.8
    %
    
    
    103.9
    %
 Liquidity and Rate Sensitivity The following table sets forth the maturity distribution of the Banks
interest-earning assets and interest-bearing liabilities as of December 31,
2003, the Banks interest rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities) and the Banks cumulative
interest rate sensitivity gap. Over One
    
    Over FiveOne Year
    
    Through
    
    Through
    
    Overor Less
    
    Five Years
    
    Ten Years
    
    Ten Years
    
    Total(In thousands)Interest-Earning Assets: (1)Loans
    
    $
    57,843
    
    
    $
    40,477
    
    
    $
    6,053
    
    
    $
    2,737
    
    
    $
    107,110Securities
    
    
    
    
    
    
    42,768
    
    
    
    36,746
    
    
    
    4,719
    
    
    
    84,233Interest bearing deposits
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    256Total
    
    $
    58,099
    
    
    $
    83,245
    
    
    $
    42,799
    
    
    $
    7,456
    
    
    $
    191,599Interest-Bearing
Liabilities: (2)Deposits
    
    $
    145,288
    
    
    $
    34,573
    
    
    $
    78
    
    
    $
    
    
    
    $
    179,939Subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,093
    
    
    
    3,093Borrowings
    
    
    885
    
    
    
    915
    
    
    
    1,665
    
    
    
    
    
    
    
    3,465Total
    
    $
    146,173
    
    
    $
    35,488
    
    
    $
    1,743
    
    
    $
    3,093
    
    
    $
    186,497Interest Sensitivity Gap
    
    $
    (88,074
    )
    
    
    47,757
    
    
    $
    41,056
    
    
    $
    4,363
    
    
    $
    5,102Cumulative Interest Sensitivity
Gap
    
    $
    (88,074
    )
    
    $
    (40,317
    )
    
    $
    739
    
    
    $
    5,102
    
    
    $
    5,102
   (1)
    
    Fixed-rate loans are distributed based on their contractual
maturity adjusted for projected or anticipated prepayments, and
variable rate loans are distributed based on the interest rate reset
date and contractual maturity adjusted for prepayments. Loan run-off
and repricing assumes a constant prepayment rate based on coupon rate
and maturity.(2)
    
    Passbook savings and demand deposits are presented in the earliest
repricing period since amounts in these accounts are subject to
withdrawal on demand. Savings certificates are distributed assuming no
withdrawal prior to maturity Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and to provide
funds for operations, as well as future acquisitions if they become available.
Maintaining appropriate levels of liquidity allows the Company to have
sufficient funds available for 14




---



##### Table of Contents



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. 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. The Companys contractual obligations and commitments at December 31, 2003
are summarized in the accompanying tables. Contractual ObligationsOver One
    
    Over ThreeOne Year
    
    Through
    
    Years Through
    
    Overor Less
    
    Three Years
    
    Five Years
    
    Five Years
    
    Total(In thousands)Borrowed
funds (1)
    
    $
    885
    
    
    $
    425
    
    
    $
    490
    
    
    $
    1,665
    
    
    $
    3,465Subordinated debt(1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,093
    
    
    
    3,093Operating leases
    
    
    64
    
    
    
    165
    
    
    
    14
    
    
    
    130
    
    
    
    373Certificates of deposits
    
    
    89,905
    
    
    
    18,441
    
    
    
    16,132
    
    
    
    78
    
    
    
    124,556Total
    
    $
    90,854
    
    
    $
    19,031
    
    
    $
    16,636
    
    
    $
    4,966
    
    
    $
    131,487
  (1)
    
    Refer to notes 7 and 8 in the notes to consolidated financial statements
for additional information about these obligations; including certain
redemption features. CommitmentsOver One
    
    Over ThreeOne Year
    
    Through
    
    Years Through
    
    Overor Less
    
    Three Years
    
    Five Years
    
    Five Years
    
    Total(In thousands)Lines of credit
    
    $
    16,930
    
    
    $
    1,205
    
    
    $
    1,451
    
    
    $
    5,771
    
    
    $
    25,357Letters of credit
    
    
    36
    
    
    
    12
    
    
    
    0
    
    
    
    0
    
    
    
    48Total
    
    $
    16,966
    
    
    $
    1,217
    
    
    $
    1,451
    
    
    $
    5,771
    
    
    $
    25,405
 15




---



##### Table of Contents



Rate/Volume Analysis The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated.
The calculations are based on average month end balances during the respective
periods. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (change in
rate multiplied by the change in volume) have been allocated to the volume and
rate changes based upon the pro-rata amount that rate and volume are to their
total change, before allocation of the rate/volume amount. Both interest
income and interest expense decreased due to rate, a result of interest earning
assets and interest bearing liabilities continuing to reprice downward due to
the general lowering of interest rates which began in 2001. Year ended December
    
    Year ended December2002 vs. 2003
    
    2001 vs. 2002Increase (Decrease)
    
    Increase (Decrease))Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(In thousands)Interest Income:Loans
    
    $
    (661
    )
    
    $
    (564
    )
    
    $
    (1,225
    )
    
    $
    (1,447
    )
    
    $
    (1,369
    )
    
    $
    (2,816
    )Securities
    
    
    237
    
    
    
    (779
    )
    
    
    (542
    )
    
    
    1,926
    
    
    
    (1,685
    )
    
    
    241Other interest-earning assets
    
    
    (31
    )
    
    
    (19
    )
    
    
    (50
    )
    
    
    (16
    )
    
    
    (129
    )
    
    
    (145
    )Total interest earning assets
    
    $
    (455
    )
    
    $
    (1,362
    )
    
    
    (1,817
    )
    
    $
    463
    
    
    $
    (3,183
    )
    
    
    (2,720
    )Interest Expense:Deposits
    
    
    (130
    )
    
    $
    (1,949
    )
    
    $
    (2,079
    )
    
    
    40
    
    
    $
    (3,042
    )
    
    $
    (3,002
    )Borrowed funds & subordinated debt
    
    
    (4
    )
    
    
    5
    
    
    
    1
    
    
    
    (151
    )
    
    
    (55
    )
    
    
    (206
    )Total interest-bearing liabilities
    
    $
    (134
    )
    
    $
    (1,944
    )
    
    $
    (2,078
    )
    
    $
    (111
    )
    
    $
    (3,097
    )
    
    $
    (3,208
    )
 16




---



##### Table of Contents



Competition The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The
Banks most direct competition for deposits has historically come from other
commercial banks and thrift institutions located in its primary market area.
The Bank also has had significant competition from money market mutual funds
and other sources. The Banks competition for real estate loans comes
principally from other commercial banks, thrift institutions, and mortgage
banking companies, insurance companies and other institutional lenders. The Bank competes for loans through the interest rates and loan fees it
charges and the efficiency and quality of the services it provides borrowers,
real estate brokers, and home builders. It competes for deposits by offering a
wide variety of accounts, convenient branch locations, tax-deferred retirement
programs, and other miscellaneous services. Management considers the Banks branch network and reputation for
financial strength and quality service as its major competitive advantage in
attracting and retaining customers in its market area. While the Bank is
subject to competition from other financial institutions which have greater
financial and marketing resources, and expects to be subject to additional
competition from a new local financial institution which has announced that it
will commence operations in 2004, management believes the Bank benefits by its
community orientation and long standing customer relationships. Regulation, Supervision and Governmental Policy The following is a brief summary of certain statutes, rules and
regulations affecting the Holding Company and the Bank. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the SOX Act)
provides for sweeping changes with respect to corporate governance, accounting
policies and disclosure requirements for public companies, and also for their
directors and officers. The SOX Act required the Securities and Exchange
Commission (SEC) to adopt new rules to implement its requirements, including
new financial reporting requirements and rules concerning corporate governance.
New SEC rules require a reporting companys chief executive and chief
financial officers to certify certain financial and other information included
in the companys quarterly and annual reports. The rules also require these
officers to certify that they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of the companys disclosure controls and
procedures; that they have made certain disclosures to the auditors and to the
audit committee of the board of directors about the companys controls and
procedures; and that they have included information in their quarterly and
annual filings about their evaluation and whether there have been significant
changes to the controls and procedures or other factors which would
significantly impact these controls subsequent to their evaluation.
Certifications by the Holding Companys Chief Executive Officer and Chief
Financial Officer of the financial statements and other information are
included as an exhibit to this Annual Report on Form 10-KSB. See Item 8A.-
Controls and Procedures hereof for the Holding Companys evaluation of
disclosure controls and procedures. The certifications required by Section 906
of the SOX Act also have been filed as an exhibit to this Form 10-KSB. USA Patriot Act. The USA Patriot Act authorizes new regulatory powers to
combat international terrorism. The provisions that affect financial
institutions most directly provide the federal government with enhanced
authority to identify, deter, and punish international money laundering and
other crimes. Among other things, the USA Patriot Act prohibits financial
institutions from doing business with foreign shell banks and requires
increased due diligence for private banking transactions and correspondent
accounts for foreign banks. In addition, financial institutions have to follow
new minimum verification of identity standards for all new accounts and are
permitted to share information with law enforcement authorities under
circumstances that were not previously permitted. Financial Modernization Legislation. The Gramm-Leach-Bliley Act of 1999
(the GLB Act) includes a number of provisions intended to modernize and to
increase competition in the American financial services 17




---



##### Table of Contents



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




---



##### Table of Contents



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

insurance funds. Assessment rates for the Bank depend on the capital category
and supervisory category to which they are assigned. Under Alabama law, the approval of the Banking Department is required if
the total of all the dividends declared by the Bank in any calendar year
exceeds the Banks net income as defined for that year combined with its
retained net income for the preceding two calendar years. The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies, including the FDICs capital
adequacy guidelines for state non-member banks. Failure to meet minimum 19




---



##### Table of Contents



capital requirements can initiate certain mandatory  and possibly additional
discretionary  actions by regulators that, if undertaken, could have a direct
material effect on the Banks and the Companys financial statements. See
"Capital Requirements. The FDI Act requires the federal banking agencies to prescribe for all
insured depository institutions standards relating to, among other things,
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality
and compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness (Guidelines) to implement safety and soundness standards
pursuant to the statute. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
The Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. Supervision, regulation and examination of the Holding Company and the
Bank by the bank regulatory agencies are intended primarily for the protection
of depositors rather than for holders of Holding Company stock or of the
Holding Company as the holder of the stock of the Bank. Capital Requirements. The FRB has established guidelines with respect to
the maintenance of appropriate levels of capital by bank holding companies, and
the FDIC has promulgated substantially similar capital adequacy regulations for
state nonmember banks. These capital regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of
specified minimum ratios of capital to risk-weighted assets. The regulations of the FRB and the FDIC require bank holding companies and
state nonmember banks, respectively, to maintain a minimum leverage ratio of
Tier 1 capital (as defined in the risk-based capital guidelines discussed in
the following paragraphs) to total assets of 3.0%. Although setting a minimum
3.0% leverage ratio, the regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1 under the rating
system used by the federal bank regulators, would be permitted to operate at or
near such minimum level of capital. All other bank holding companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the
minimum ratio, depending on the assessment of an individual organizations
capital adequacy by its primary regulator. Any bank or bank holding company
experiencing or anticipating significant growth would be expected to maintain
capital well above the minimum levels. In addition, the FRB has indicated that
whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, it will consider, on a case-by-case basis, the level
of an organizations ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital. The risk-based capital rules of the FRB and the FDIC require bank holding
companies and state nonmember banks, respectively, to maintain minimum
regulatory capital levels based upon a weighing of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two
basic components: a core capital (Tier 1) requirement and a supplementary
capital (Tier 2) requirement. Core capital consists primarily of common
stockholders equity, certain perpetual preferred stock (which must be
noncumulative with respect to banks), and minority interests in the equity
accounts of consolidated subsidiaries; less intangible assets, primarily
goodwill, with limited exceptions for mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements include, subject to
certain limitations, the allowance for losses on loans and leases; perpetual
preferred stock that does not qualify for Tier 1 and long-term preferred stock
with an original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock. The risk-based
capital regulations assign balance sheet assets and credit equivalent amounts
of off-balance sheet obligations to one of four broad risk categories based
principally on the degree of credit risk associated with the obligor. The
assets and off-balance 20




---



##### Table of Contents



sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%.
These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets. The FRB, the FDIC and the other banking agencies have amended the
risk-based capital standards to take account of a banks concentration of
credit risk, the risk of nontraditional activities, and a banks exposure to
declines in the economic value of its capital resulting from changes in
interest rates. The revised capital guidelines do not, however, codify a
measurement framework for assessing the level of a banks interest rate
exposure. The FRB, the FDIC and the other banking agencies have adopted a
joint policy statement requiring that banks adopt comprehensive policies and
procedures for managing interest rate risk and setting forth general standards
for such internal policies. The FDIC classifies insured depository institutions by capital levels and
provide that the applicable agency will take various prompt corrective actions
to resolve the problems of any institution that fails to satisfy the capital
standards. A well-capitalized bank is one that is not subject to any
regulatory order or directive to meet any specific capital level and that has
or exceeds the following capital levels: a total risk-based capital ratio of
10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An
adequately capitalized bank is one that does not qualify as well
capitalized but meets or exceeds the following capital requirements: a total
risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically
undercapitalized depending on the extent to which the banks capital levels
are below these standards. A bank that fails within any of the three
undercapitalized categories will be subject to certain severe regulatory
sanctions under the FDIC prompt corrective action regulation. As of December
31, 2003, the Bank was categorized as well-capitalized by the FDIC. See Item 6, Managements Discussion and Analysis or Plan of Operation,
and Notes to Consolidated Financial Statements contained in the Holding
Companys Annual Report to Stockholders for the year ended December 31, 2003
(Exhibit No. 13) which is incorporated herein by reference. Effects of Governmental Policy. The earnings and business of the Holding
Company and the Bank have been and will be affected by the policies of various
regulatory authorities of the United States, particularly the FRB. Important
functions of the FRB, in addition to those enumerated above, include the
regulation of the supply of money in light of general economic conditions
within the United States. The instruments of monetary policy employed by the
FRB for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits, and the interest
rates paid on liabilities and received on interest-earning assets. Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by the Bank on its deposits
and its other borrowings and the interest received by the Bank on loans
extended to customers and securities held in its investment portfolios
comprises the major portion of the Banks earnings. The earnings and gross
income of the Bank thus have been and will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to monetary
and fiscal policies of the United States and its agencies, particularly the
FRB. The nature and timing of any future changes in such policies and their
impact on the Bank are not predictable. 21




---



##### Table of Contents



Employees As of December 31, 2003, the Holding Company and the Bank had 93 full-time
and 16 part-time employees. The employees are not represented by a collective bargaining agreement.
The Holding Company and the Bank believe their employee relations are good. Executive Officers of the Registrant Name, Age and Position
    

    Business ExperienceRobert
B. Nolen, Jr., 45 -President of the HoldingCompany and the Bank
    
    Mr. Nolen joined the Bank in 1987 as First Vice
President, Chief Financial Officer and Treasurer.
Effective July 1, 1994, Mr. Nolen was appointed
   President and Chief Executive Officer of the Bank.
   As President of the Holding Company and
   Bank, Mr. Nolen is responsible for ensuring that
   the overall operations of the Holding Company and
   the Bank are carried out in accordance with the
   policies and procedures of the Board of Directors.Mary
Jo Gunter, 50-Vice President of theHolding Company and
SeniorVice President - Banking Servicesof the Bank.
    
    Ms. Gunter joined the Bank in September 1976 and
has served in various lending related positions within
the Bank. She is responsible for branch operations,
personnel, loan servicing and other customer service
areas.
 Forward-Looking Statements This Annual Report on Form 10-KSB, including all documents incorporated
herein by reference, contains forward-looking statements. Additional written
or oral forward-looking statements may be made by the Holding Company from time
to time in filings with the Securities and Exchange Commission or otherwise.
The words believe, expect, seek, and intend and similar expressions
identify forward-looking statements, which speak only as of the date the
statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
services of the Holding Company, as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements. The Holding Company does not undertake, and specifically disclaims, any
obligation to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements. 
 Item 2. Description of Property The Holding Companys principal executive offices and the Banks main
office are located at 1811 Second Avenue, Jasper, Alabama. At December 31,
2003 the Bank maintained six branches in Jasper, Haleyville, Sumiton, Vestavia
and Trussville, Alabama. The Haleyville branch is leased. The Bank also
leases an administrative office in Jasper, Alabama, which is currently
subleased to another financial institution. For further information on the Banks lease commitments, see Notes to
Consolidated Financial Statements. 22




---



##### Table of Contents



The total net book value of the Banks investment in premises and
equipment was $5,800,000 at December 31, 2003. See Notes to Consolidated
Financial Statements for further information. 
 Item 3. Legal Proceedings 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 would not be material to the consolidated financial statements. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Holding Company
through a solicitation of proxies or otherwise. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters The information contained under the section captioned Market Price and
Dividend Information in the Holding Companys Annual Report to Stockholders
for the year ended December 31, 2003 (Exhibit No. 13), is incorporated herein
by reference. 
 Item 6. Managements Discussion and Analysis or Plan of Operation The information contained in the section captioned Managements
Discussion and Analysis in the Annual Report to Stockholders for the year
ended December 31, 2003 (Exhibit No. 13) is incorporated herein by reference. 
 Item 7. Financial Statements The financial statements contained in Exhibit No. 13 are incorporated
herein by reference. 
 Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure The information contained in the section captioned Managements
Discussion and Analysis  Change in Independent Accountants in the Annual
Report to Stockholders for the year ended December 31, 2002 (Exhibit No. 13) is
incorporated herein by reference. 
 Item 8A. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
December 31, 2003. Based upon that evaluation, the Companys Principal
Executive Officer and Principal Financial Officer concluded that the Companys
disclosure controls and procedures, as designed and implemented, are effective
in alerting him in a timely manner to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. In addition, the Company reviewed its internal controls. There has been no
change in the Companys internal control over financial reporting during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. Disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports filed by the Company under the Securities
Exchange Act of 1934 is recorded, processed, summarized and 23




---



##### Table of Contents



reported within the time periods specified in the SECs rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is accumulated and
communicated to the Companys management, including the Principal Executive
Officer and Principal Financial Officer to allow timely decisions regarding
required disclosures. Disclosure controls include internal controls that are
designed to provide reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use and
transactions are properly recorded and reported. Any control system, no matter how well conceived and operated, can provide
only reasonable assurance that its objectives are achieved. The design of a
control system inherently has limitations, including the controls cost
relative to their benefits. Additionally, controls can be circumvented. No
cost-effective control system can provide absolute assurance that all control
issues and instances of fraud, if any, will be detected. 
 PART III 
 Item 9. Directors and Executive Officers of the Registrant For information concerning the Board of Directors of the Holding Company,
the information contained under the section captioned Proposal I  Election
of Directors in the Holding Companys definitive proxy statement, to be filed
within 120 days after the end of the fiscal year covered by this Form 10-KSB
(the Proxy Statement), is incorporated herein by reference. For information concerning the executive officers of the Holding Company,
see Item 1. Business  Executive Officers of the Registrant, which is
incorporated herein by reference. Information regarding Section 16(a) beneficial ownership reporting
compliance is omitted from this Report as the Company will file the Proxy
Statement not later than 120 days after December 31, 2003, and the information
included therein under Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated herein by reference. Information regarding audit committee financial compliance is omitted from
this Report and the Company will file the Proxy Statement not later than 120
days after December 31, 2003, and the information contained therein under
Proposal I Election of Directors is incorporated herein by reference. The Company has adopted a code of ethics that applies to all directors and
employees, including without exception, the principal executive officer,
principal financial officer, principal accounting officer and/or controller, or
persons performing similar functions. The code of ethics is attached as
Exhibit 14 to this Form 10-KSB. 
 Item 10. Executive Compensation The information contained under the section captioned Proposal I 
Election of Directors  Executive Compensation in the Proxy Statement is
incorporated herein by reference. 24




---



##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. (a) Equity Compensation Plan Information The following table provides information as of December 31, 2003 with
respect to the shares of the Holding Companys common stock that may be issued
under its existing equity compensation plan. Number of Securities to be
    
    Weighted Average Exercise
    
    Number of Securitiesissued upon Exercise of
    
    Price of Outstanding
    
    Remaining Available forOutstanding Options,
    
    Options, Warrants and
    
    Future Issuance UnderPlan Category
    
    Warrants and Rights
    
    Rights
    
    Equity Compensation PlansEquity Compensation Plans
Approved by Stockholders(1)
    
    
    91,333
    
    
    $
    9.34
    
    
    
    54,500Equity Compensation Plans Not
Approved by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    91,333
    
    
    $
    9.34
    
    
    
    54,500
  (1)
    
    Consists of the Option Plan.  (b)
    
    Security Ownership of Certain Beneficial OwnersInformation required by this item is incorporated herein by reference
to the section captioned Voting Securities and Principal Holders
Thereof of the Proxy Statement.  (c)
    
    Security Ownership of ManagementInformation required by this item is incorporated herein by reference
to the sections captioned Voting Securities and Principal Holders
Thereof and Proposal I  Election of Directors of the Proxy
Statement.  (d)
    
    Changes in ControlManagement of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change of control of
the Registrant. 
 Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference
to the sections captioned Proposal I  Election of Directors and Voting
Securities and Principal Holders Thereof of the Proxy Statement. 25




---



##### Table of Contents



Item 13. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits 3.1
    
    Certificate of Incorporation  -  Incorporated by
reference to Exhibit 3.1 to Registrants Annual Report on Form
10-KSB for the six months ended December 31, 1996.3.2
    
    Bylaws  -  Incorporated by reference to Exhibit 3.2
to Registrants Annual Report on Form 10-KSB for the six
months ended December 31, 1996.4
    
    Form of Stock Certificate  -  Incorporated by
reference to Exhibit 4 to Registrants Annual Report on Form
10-KSB for the six months ended December 31, 1996.10.1
    
    Employment Agreement between the Registrant and
Robert B. Nolen, Jr.  -  Incorporated by reference to Exhibit
10.2 to the Registrants Registration Statement on Form S-4
(File No. 333-11495)10.2
    
    Pinnacle Bank 1996 Stock Option and Incentive
Plan  -  Incorporated by reference to Exhibit 10.4 to the
Registrants Registration Statement on Form S-4 (File No.
333-11495)13
    
    Annual Report to Stockholders for the year ended
December 31, 2002. Except for the portions of the Annual
Report to Stockholders which are expressly incorporated herein
by reference, such Annual Report to Stockholders is furnished
for the information of the SEC and is not to be deemed filed
as part of this Report.14
    
    Code of Ethics21
    
    Subsidiaries23
    
    Consent of Independent Accountants31
    
    Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-KCurrent Reports on Form 8-K dated October 24, 2003, reporting under Item
12 (Results of Operations and Financial Condition) Registrants
results of operations for the quarter and nine months ended September 30,
2003.Current Report on Form 8-K dated December 22, 2003, reporting under Item
5 (Other Events and Regulation FD Disclosure) the issuance of $3.0
million of trust preferred securities by Pinnancle Capital Trust I, and
including as exhibits under Item 7 (Financial Statements and Exhibits)
the related Purchase Agreement and Indenture. 
 Item 14. Principal Accountant
Fees and Services The
information required by this item is incorporated herein by reference
to the section captioned Proposal II    Ratification of Appointment of
Independent Auditors of the Proxy Statement. 26




---



##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. PINNACLE BANCSHARES, INC.Date: March 24, 2004
    
    By:
    
    /s/ Robert B. Nolen, Jr.Robert B. Nolen, Jr., President(Duly Authorized Representative)
 In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated. By:
    
    /s/ Robert B. Nolen, Jr.
    
    By:
    
    /s/ James W. CannonRobert B. Nolen, Jr.
    
    
    
    James W. CannonPresident and Chief Executive Officer
    
    
    
    Director(Principal Executive Officer and Principal
Financial Officer)
    
    Date:
    
    March 24, 2004Date:
    
    March 24, 2004
    
    By:By:
    
    /s/ Marie Guthrie
    
    
    
    Max W. Perdue
DirectorMarie Guthrie
    
    Date:
    
    March 24, 2004Treasurer(Principal Accounting Officer)
    
    By:
    
    /s/ Greg BatchelorDate:
    
    March 24, 2004
    
    
    
    Greg BatchelorDirectorBy:
    

    /s/ Albert H. Simmons
    
    Date:
    
    March 24, 2004Albert H. SimmonsDate:
    
    March 24, 2004
    
    By:
    
    /s/ J. T. WaggonerJ. T. WaggonerBy:
    
    /s/ O. H. Brown
    
    
    
    DirectorO. H. Brown
    
    Date:
    
    March 24, 2004DirectorDate:
    
    March 24 2004By:
    
    /s/ Sam W. MurphySam W. MurphyDirectorDate:
    
    March 24, 2004
 27