##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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)
   Title of Each Class
    
    Name of Each Exchange
on Which RegisteredCommon Stock, par value $.01 per share
    
    American Stock Exchange
  o
 þ o
 o
  o þ
   ,
 o þ




---



TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Managements Discussion and Analysis or Plan of OperationItem 7. Financial StatementsItem 8. Changes In and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESEX-13 ANNUAL REPORT TO SHAREHOLDERSEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF KPMG LLPEX-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
  The Bank
   2




---



##### Table of Contents



Selected Financial and Other Data
  At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Financial Condition and Other Data:Total amount of:Assets
    
    $
    220,249
    
    
    $
    207,832
    
    
    $
    208,574
    
    
    $
    218,290
    
    
    $
    210,020Loans, net
    
    
    106,256
    
    
    
    99,600
    
    
    
    105,477
    
    
    
    119,375
    
    
    
    131,284Interest-bearing deposits in other banks
    
    
    13,369
    
    
    
    485
    
    
    
    256
    
    
    
    357
    
    
    
    2,466Securities
    
    
    80,654
    
    
    
    89,025
    
    
    
    83,325
    
    
    
    75,301
    
    
    
    61,838Loans held for sale
    
    
    374
    
    
    
    1,206
    
    
    
    1,428
    
    
    
    4,969
    
    
    
    3,875Deposits
    
    
    192,552
    
    
    
    179,966
    
    
    
    179,939
    
    
    
    188,955
    
    
    
    193,498Subordinated debt
    
    
    3,093
    
    
    
    3,093
    
    
    
    3,093
    
    
    
    0
    
    
    
    0Other borrowed funds
    
    
    2,375
    
    
    
    2,580
    
    
    
    3,465
    
    
    
    5,940
    
    
    
    3,100Stockholders equity
    
    
    19,410
    
    
    
    19,914
    
    
    
    19,431
    
    
    
    19,955
    
    
    
    19,012Number of:Real estate loans outstanding
    
    
    1,931
    
    
    
    2,116
    
    
    
    2,263
    
    
    
    2,504
    
    
    
    2,911Savings accounts
    
    
    12,930
    
    
    
    13,157
    
    
    
    13,624
    
    
    
    14,301
    
    
    
    14,485Full service offices open
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6
 Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Operating Data:Interest
income
    
    $
    11,559
    
    
    $
    10,636
    
    
    $
    11,287
    
    
    $
    13,103
    
    
    $
    15,823Interest
expense
    
    
    4,717
    
    
    
    3,516
    
    
    
    3,906
    
    
    
    5,982
    
    
    
    9,192Net interest income
before provision
for loan losses
    
    
    6,842
    
    
    
    7,120
    
    
    
    7,381
    
    
    
    7,121
    
    
    
    6,631Provision for loan
losses
    
    
    575
    
    
    
    588
    
    
    
    963
    
    
    
    647
    
    
    
    1,942Net interest income
after provision for
losses
    
    
    6,267
    
    
    
    6,532
    
    
    
    6,418
    
    
    
    6,474
    
    
    
    4,689Noninterest
income
    
    
    1,816
    
    
    
    1,763
    
    
    
    2,845
    
    
    
    2,157
    
    
    
    1,758Noninterest
expense
    
    
    5,875
    
    
    
    5,794
    
    
    
    5,569
    
    
    
    5,593
    
    
    
    5,306Income tax
expense
    
    
    691
    
    
    
    769
    
    
    
    1,268
    
    
    
    1,025
    
    
    
    350Income before
extraordinary
item
    
    
    1,517
    
    
    
    1,732
    
    
    
    2,426
    
    
    
    2,013
    
    
    
    791Extraordinary item,
net of tax benefit
of $63
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    108Net income
    
    $
    1,517
    
    
    $
    1,732
    
    
    $
    2,426
    
    
    $
    2,013
    
    
    $
    683
 3




---



##### Table of Contents



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    
    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
    
    $
    103,640
    
    
    $
    7,725
    
    
    
    7.5
    %
    
    $
    105,583
    
    
    $
    7,294
    
    
    
    6.9
    %
    
    $
    117,465
    
    
    $
    8,299
    
    
    
    7.1
    %Securities available-for-sale
    
    
    91,952
    
    
    
    3,697
    
    
    
    4.0
    %
    
    
    85,318
    
    
    
    3,298
    
    
    
    3.9
    %
    
    
    79,034
    
    
    
    2,964
    
    
    
    3.8
    %Other
    
    
    3,887
    
    
    
    137
    
    
    
    3.5
    %
    
    
    2,904
    
    
    
    44
    
    
    
    1.5
    %
    
    
    2,189
    
    
    
    24
    
    
    
    1.1
    %Total interest earning assets
    
    
    199,479
    
    
    
    11,559
    
    
    
    5.8
    %
    
    
    193,805
    
    
    
    10,636
    
    
    
    5.5
    %
    
    
    198,688
    
    
    
    11,287
    
    
    
    5.7
    %Non-interest-earning assets
    
    
    17,253
    
    
    
    
    
    
    
    
    
    
    
    16,787
    
    
    
    
    
    
    
    
    
    
    
    16,867Total assets
    
    $
    216,732
    
    
    
    
    
    
    
    
    
    
    $
    210,592
    
    
    
    
    
    
    
    
    
    
    $
    215,555Interest-bearing liabilities:Deposits
    
    $
    188,845
    
    
    
    4,357
    
    
    
    2.3
    %
    
    $
    181,296
    
    
    
    3,200
    
    
    
    1.8
    %
    
    $
    186,713
    
    
    
    3,710
    
    
    
    2.0
    %Subordinated debt
    
    
    3,093
    
    
    
    198
    
    
    
    6.4
    %
    
    
    3,093
    
    
    
    143
    
    
    
    4.6
    %
    
    
    0
    
    
    
    0
    
    
    
    0Borrowed funds
    
    
    2,981
    
    
    
    162
    
    
    
    5.4
    %
    
    
    4,159
    
    
    
    173
    
    
    
    4.2
    %
    
    
    5,384
    
    
    
    196
    
    
    
    3.6
    %Total interest-bearing
liabilities:
    
    
    194,919
    
    
    
    4,717
    
    
    
    2.4
    %
    
    
    188,548
    
    
    
    3,516
    
    
    
    1.9
    %
    
    
    192,173
    
    
    
    3,906
    
    
    
    2.0
    %Non-interest-bearing liabilities
    
    
    2,285
    
    
    
    
    
    
    
    
    
    
    
    2,365
    
    
    
    
    
    
    
    
    
    
    
    3,887Total Liabilities:
    
    
    197,204
    
    
    
    
    
    
    
    
    
    
    
    190,913
    
    
    
    
    
    
    
    
    
    
    
    196,060Equity
    
    
    19,528
    
    
    
    
    
    
    
    
    
    
    
    19,679
    
    
    
    
    
    
    
    
    
    
    
    19,495Total Liabilities and Equity
    
    $
    216,732
    
    
    
    
    
    
    
    
    
    
    $
    210,592
    
    
    
    
    
    
    
    
    
    
    $
    215,555Net interest-earning assets
    
    $
    4,560
    
    
    
    
    
    
    
    
    
    
    $
    5,257
    
    
    
    
    
    
    
    
    
    
    $
    6,515Net interest income
    
    
    
    
    
    $
    6,842
    
    
    
    
    
    
    
    
    
    
    $
    7,120
    
    
    
    
    
    
    
    
    
    
    $
    7,381Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.4
    %
    
    
    
    
    
    
    
    
    
    
    3.6
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.4
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %Ratio of average
interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    102.3
    %
    
    
    
    
    
    
    
    
    
    
    102.8
    %
    
    
    
    
    
    
    
    
    
    
    103.4
    %
 4




---



##### Table of Contents



Lending Activities
 General %
     December 31,2005
    
    2004
    
    2003(Dollars in thousands)Type of loan:Residential and commercial
real estate mortgage loans
    
    $
    62,997
    
    
    
    59.3
    %
    
    $
    64,361
    
    
    
    63.6
    %
    
    $
    69,037
    
    
    
    65.5
    %Construction loans
    
    
    17,993
    
    
    
    16.9
    %
    
    
    12,019
    
    
    
    12.4
    %
    
    
    14,060
    
    
    
    13.3
    %Commercial loans
    
    
    12,940
    
    
    
    12.2
    %
    
    
    10,807
    
    
    
    11.2
    %
    
    
    10,568
    
    
    
    10.0
    %Consumer loans
    
    
    13,878
    
    
    
    13.1
    %
    
    
    13,709
    
    
    
    14.2
    %
    
    
    13,444
    
    
    
    12.7
    %LessDiscounts and other
    
    
    169
    
    
    
    0.2
    %
    
    
    129
    
    
    
    0.1
    %
    
    
    165
    
    
    
    0.2
    %Allowance for loan losses
    
    
    1,383
    
    
    
    1.3
    %
    
    
    1,167
    
    
    
    1.3
    %
    
    
    1,467
    
    
    
    1.3
    %Total
    
    $
    106,256
    
    
    
    100.00
    %
    
    $
    99,600
    
    
    
    100.00
    %
    
    $
    105,477
    
    
    
    100.00
    %
 December 31,2002
    
    2001(Dollars in thousands)Type of loan:Residential and Commercial
real estate mortgage loans
    
    $
    80,189
    
    
    
    67.2
    %
    
    $
    86,053
    
    
    
    65.5
    %Construction loans
    
    
    15,329
    
    
    
    12.8
    %
    
    
    18,387
    
    
    
    14.0
    %Commercial loans
    
    
    11,549
    
    
    
    9.7
    %
    
    
    15,987
    
    
    
    12.2
    %Consumer loans
    
    
    13,834
    
    
    
    11.6
    %
    
    
    12,373
    
    
    
    9.4
    %LessDiscounts and other
    
    
    204
    
    
    
    0.2
    %
    
    
    208
    
    
    
    0.1
    %Allowance for loan losses
    
    
    1,322
    
    
    
    1.1
    %
    
    
    1,308
    
    
    
    1.0
    %Total
    
    $
    119,375
    
    
    
    100.00
    %
    
    $
    131,284
    
    
    
    100.00
    %
 Residential and Commercial Real Estate Loans
 5




---



##### Table of Contents



Construction Loans
   Commercial Business Loans
 6




---



##### Table of Contents



Consumer Loans
  Equity Lines of Credit
 Loan Originations, Purchases and Sales
    Loan Commitments
  7




---



##### Table of Contents



Loan Origination and Other Fees
 Maturity of Loan Portfolio.
 Due One Through
    
    
    DueDue by
    
    
    Five Years After
    
    
    Five Years AfterDecember 31, 2006
    
    
    December 31, 2006
    
    
    December 31, 2006
    
    
    TotalReal estate mortgage
    
    $
    30,457,329
    
    
    $
    24,050,323
    
    
    $
    8,490,019
    
    
    $
    62,997,671Real estate construction
    
    
    15,911,548
    
    
    
    2,065,422
    
    
    
    15,613
    
    
    
    17,992,583Commercial business loans
    
    
    10,555,576
    
    
    
    2,171,173
    
    
    
    213,131
    
    
    
    12,939,880Consumer
    
    
    3,577,556
    
    
    
    9,904,422
    
    
    
    395,732
    
    
    
    13,877,710Total
    
    $
    60,502,009
    
    
    $
    38,191,340
    
    
    $
    9,114,495
    
    
    $
    107,807,844
  Floating orPredetermined Rates
    
    
    Adjustable RatesReal estate mortgage
    
    $
    33,237,101
    
    
    $
    1,384,276Commercial business loans
    
    
    2,384,304
    
    
    
    Consumer
    
    
    10,300,154
    
    
    
    Total
    
    $
    45,921,559
    
    
    $
    1,384,276
 Non-Performing Loans and Asset Classification
  , Accounting for Sales of Real Estate.
 8




---



##### Table of Contents



At December 31,(Dollars in thousands)2005
    
    
    2004
    
    
    2003
    
    
    2001
    
    
    2000Loans accounted for on a
nonaccrual basis: (1)Real Estate:Residential
    
    $
    136
    
    
    $
    422
    
    
    $
    130
    
    
    $
    788
    
    
    $
    588Commercial
    
    
    91
    
    
    
    278
    
    
    
    588
    
    
    
    326
    
    
    
    208Consumer
    
    
    9
    
    
    
    26
    
    
    
    10
    
    
    
    56
    
    
    
    71Total
    
    $
    236
    
    
    $
    726
    
    
    $
    728
    
    
    $
    1,170
    
    
    $
    867Accruing 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
    
    $
    236
    
    
    $
    726
    
    
    $
    954
    
    
    $
    1,170
    
    
    $
    867Percentage of total loans
    
    
    0.22
    %
    
    
    0.73
    %
    
    
    0.68
    %
    
    
    0.98
    %
    
    
    0.66
    %Percentage of total assets
    
    
    0.11
    %
    
    
    0.35
    %
    
    
    0.35
    %
    
    
    0.54
    %
    
    
    0.40
    %Other non-performing assets (2)
    
    $
    381
    
    
    $
    599
    
    
    $
    1,023
    
    
    $
    1,609
    
    
    $
    2,345
 
 (1)
    
    Nonaccrual status denotes loans on which accrual of interest has been ceased in accordance
with the guidelines discussed previously. Payments received on a nonaccrual loan are either
applied to the outstanding principal balance or recorded as interest income, depending on
assessment of the collectibility of the loan.(2)
    
    Other non-performing assets represent property acquired by the Bank through foreclosure or
repossession. The property is carried at the lower of its fair value less estimated costs of
disposition or the investment balance of the related loan.     9




---



##### Table of Contents



Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total loansDecember 31,2005
    
    2004
    
    2003(Dollars in thousands)Real estate
mortgage loans
    
    $
    655
    
    
    
    74.8
    %
    
    $
    572
    
    
    
    75.4
    %
    
    $
    472
    
    
    
    77.2
    %Construction
loans
    
    
    347
    
    
    
    12.2
    %
    
    
    258
    
    
    
    10.9
    %
    
    
    372
    
    
    
    10.0
    %Other Loans
    
    
    381
    
    
    
    13.0
    %
    
    
    337
    
    
    
    13.7
    %
    
    
    623
    
    
    
    12.8
    %Total
    
    $
    1,383
    
    
    
    100.0
    %
    
    $
    1,167
    
    
    
    100.0
    %
    
    $
    1,467
    
    
    
    100.0
    %
 Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in EachCategory To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansDecember 31,2002
    
    2001(Dollars in thousands)Real estate mortgage loans
    
    $
    447
    
    
    
    78.8
    %
    
    $
    589
    
    
    
    78.4
    %Construction loans
    
    
    349
    
    
    
    9.7
    %
    
    
    268
    
    
    
    12.2
    %Other Loans
    
    
    526
    
    
    
    11.5
    %
    
    
    451
    
    
    
    9.4
    %Total
    
    $
    1,322
    
    
    
    100.0
    %
    
    $
    1,308
    
    
    
    100.0
    %
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Allowance for loan lossesBalance at the beginning of period
    
    $
    1,167
    
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308
    
    
    $
    1,339Loans Charged off:Mortgage
    
    
    187
    
    
    
    699
    
    
    
    767
    
    
    
    505
    
    
    
    1,803Consumer
    
    
    330
    
    
    
    372
    
    
    
    281
    
    
    
    242
    
    
    
    220Total charge-offs
    
    
    517
    
    
    
    1,071
    
    
    
    1,048
    
    
    
    747
    
    
    
    2,023Total recoveries
    
    
    (158
    )
    
    
    (183
    )
    
    
    (230
    )
    
    
    (114
    )
    
    
    (50
    )Net loans charged-off
    
    
    359
    
    
    
    888
    
    
    
    818
    
    
    
    633
    
    
    
    1,973Provision for loan losses
    
    
    575
    
    
    
    588
    
    
    
    963
    
    
    
    647
    
    
    
    1,942Balance at end of period
    
    $
    1,383
    
    
    $
    1,167
    
    
    $
    1,467
    
    
    $
    1,322
    
    
    $
    1,308Ratio of net charge-off to
average loans outstanding during
the period
    
    
    0.35
    %
    
    
    0.85
    %
    
    
    0.70
    %
    
    
    1.4
    %
    
    
    0.28
    %
  10




---



##### Table of Contents



Investment Activities
    At December 31,2005
    
    
    2004
    
    
    2003(In thousands)Securities available-for-sale:U.S. Government and agency securities
    
    $
    51,764
    
    
    $
    57,918
    
    
    $
    74,595Mortgage-backed securities
    
    
    28,889
    
    
    
    31,106
    
    
    
    8,729Other securities
    
    
    1
    
    
    
    1
    
    
    
    1Total
    
    $
    80,654
    
    
    $
    89,025
    
    
    $
    83,325
  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
    
    $
    3,000
    
    
    
    3.3
    %
    
    $
    47,969
    
    
    
    4.0
    %
    
    $
    3,000
    
    
    
    4.3
    %Other securities(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Mortgage-backed securities (2)
    
    
    
    
    
    
    
    
    
    
    3,575
    
    
    
    4.8
    %
    
    
    19,972
    
    
    
    4.2
    %Total
    
    $
    3,000
    
    
    
    3.3
    %
    
    $
    51,544
    
    
    
    4.0
    %
    
    $
    22,973
    
    
    
    4.2
    %
 After Ten Years
    
    
    
    
    
    
    TotalWeighted
    
    
    
    
    
    
    Estimated
    
    
    WeightedAmortized
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. government and agency
    
    $
    
    
    
    
    
    %
    
    $
    53,969
    
    
    $
    51,764
    
    
    
    4.0
    %Other securities(1)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Mortgage-backed securities (2)
    
    
    6,357
    
    
    
    4.8
    %
    
    
    29,904
    
    
    
    28,889
    
    
    
    4.4
    %Total
    
    $
    6,357
    
    
    
    4.8
    %
    
    $
    83,874
    
    
    $
    80,654
    
    
    
    4.1
    %
 
 (1)
    
    Other securities includes the Banks investment in limited partnerships, at cost, of $1 whose
sole purpose is to hold and operate real estate. The Bank has no loans to these real estate
partnerships. These investments are not readily marketable.(2)
    
    Mortgage-backed securities are reflected in the above table based on their
contractual maturities. 11




---



##### Table of Contents



Sources of Funds
 General.
 Deposits.
     CertificatesMaturity Period
    
    of Deposit(In thousands)Three months or less
    
    $
    29,222Over three through six months
    
    
    14,266Over six through twelve months
    
    
    12,051Over twelve months
    
    
    4,741Total
    
    $
    60,280
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageDeposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Non-interest bearing demand deposits
    
    $
    11,474
    
    
    
    
    %
    
    $
    11,044
    
    
    
    
    %
    
    $
    8,795
    
    
    
    
    %Interest bearing demand deposits
    
    
    32,222
    
    
    
    1.0
    
    
    
    28,951
    
    
    
    .3
    
    
    
    28,775
    
    
    
    .3Savings deposits
    
    
    16,834
    
    
    
    .3
    
    
    
    17,548
    
    
    
    .3
    
    
    
    16,957
    
    
    
    .3Time deposits
    
    
    128,315
    
    
    
    3.1
    
    
    
    123,753
    
    
    
    2.5
    
    
    
    132,186
    
    
    
    2.7Total deposits
    
    $
    188,845
    
    
    
    2.3
    %
    
    $
    181,296
    
    
    
    1.8
    %
    
    $
    186,713
    
    
    
    2.0
    %
  Subordinated Debt
 12




---



##### Table of Contents



Borrowed Funds.
 At or for theYear Ended December 31,2005
    
    2004(Dollars in thousands)Amounts outstanding at end of period
    
    $
    0
    
    
    $
    0Weighted average rate paid at period end
    
    
    4.44
    %
    
    
    1.15
    %Maximum amount of borrowings outstanding at any month end
    
    $
    7,300,000
    
    
    $
    10,000,000Approximate average amount outstanding for period
    
    $
    572,000
    
    
    $
    1,548,000Approximate weighted average rate paid during period (1)
    
    
    3.66
    %
    
    
    1.36
    %
 
 (1)
    
    The approximate weighted average rate paid during the period was computed by dividing the
average amounts outstanding into the related interest expense for the period.  Selected Financial Ratios
  Year Ended December 31,2005
    
    2004
    
    2003Return on Assets (Net Income Divided By Average Total Assets)
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1.1
    %Return on Equity (Net Income Divided By Average Equity)
    
    
    7.8
    %
    
    
    8.8
    %
    
    
    12.4
    %Equity-to-Assets Ratio (Average Equity Divided By Average
Total Assets)
    
    
    9.0
    %
    
    
    9.3
    %
    
    
    9.0
    %Dividend Payout Ratio (Dividends Declared Per Share Divided
By Net Income Per Share)
    
    
    45.0
    %
    
    
    39.0
    %
    
    
    26.2
    %
 13




---



##### Table of Contents



Liquidity and Rate Sensitivity
  Over One
    
    
    Over FiveOne Year
    
    
    Through
    
    
    Through
    
    
    Overor Less
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten Years
    
    
    Total(In thousands)Interest-Earning Assets: (1)Loans
    
    $
    60,502
    
    
    $
    38,191
    
    
    $
    5,537
    
    
    $
    3,578
    
    
    $
    107,808Securities
    
    
    2,977
    
    
    
    49,414
    
    
    
    22,014
    
    
    
    6,249
    
    
    
    80,654Interest bearing deposits
    
    
    13,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,369Total
    
    $
    76,848
    
    
    $
    87,605
    
    
    $
    27,551
    
    
    $
    9,827
    
    
    $
    201,831Interest-Bearing Liabilities:(2)Deposits
    
    $
    146,558
    
    
    $
    45,951
    
    
    $
    43
    
    
    $
    
    
    
    $
    192,552Subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,093
    
    
    
    3,093Borrowings
    
    
    2,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,375Total
    
    $
    148,933
    
    
    $
    45,951
    
    
    $
    43
    
    
    $
    3,093
    
    
    $
    198,020Interest Sensitivity Gap
    
    $
    (72,085
    )
    
    $
    41,654
    
    
    $
    27,508
    
    
    $
    6,734
    
    
    $
    3,811Cumulative Interest Sensitivity
Gap
    
    $
    (72,085
    )
    
    $
    (30,431
    )
    
    $
    (2,923
    )
    
    $
    3,811
 
 (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   14




---



##### Table of Contents



Contractual
Obligations
 Over One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Borrowed funds (1)
    
    $
    220
    
    
    $
    490
    
    
    $
    575
    
    
    $
    1,090
    
    
    $
    2,375Subordinated debt (1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,093
    
    
    
    3,093Operating leases
    
    
    84
    
    
    
    109
    
    
    
    85
    
    
    
    258
    
    
    
    536Certificates of deposits
    
    
    85,626
    
    
    
    33,230
    
    
    
    12,722
    
    
    
    43
    
    
    
    131,621Total
    
    $
    85,930
    
    
    $
    33,829
    
    
    $
    13,382
    
    
    $
    4,484
    
    
    $
    137,625
 
 (1)
    
    Refer to notes 7 and 8 in the notes to consolidated financial statements for additional
information about these obligations; including certain redemption features. Commitments
 Over One
    
    
    Over ThreeOne Year
    
    
    Through
    
    
    Years Through
    
    
    Overor Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Lines of credit
    
    $
    19,112
    
    
    $
    2,468
    
    
    $
    3,144
    
    
    $
    6,370
    
    
    $
    31,094Letters of credit
    
    
    1,243
    
    
    
    679
    
    
    
    0
    
    
    
    0
    
    
    
    1,922Total
    
    $
    20,355
    
    
    $
    3,147
    
    
    $
    3,144
    
    
    $
    6,370
    
    
    $
    33,016
 Rate/Volume Analysis
 .
 Year ended December
    
    
    Year ended December2005 vs. 2004
    
    
    2004 vs 003Increase (Decrease)
    
    
    Increase (Decrease)Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest Income:Loans
    
    $
    (148
    )
    
    $
    579
    
    
    $
    431
    
    
    $
    (836
    )
    
    $
    (169
    )
    
    $
    (1,005
    )Securities
    
    
    260
    
    
    
    139
    
    
    
    399
    
    
    
    238
    
    
    
    96
    
    
    
    334Other interest-earning assets
    
    
    29
    
    
    
    64
    
    
    
    93
    
    
    
    9
    
    
    
    12
    
    
    
    21Total interest earning assets
    
    $
    141
    
    
    $
    782
    
    
    $
    923
    
    
    $
    (589
    )
    
    $
    (61
    )
    
    
    (650
    )Interest Expense:Deposits
    
    $
    168
    
    
    $
    989
    
    
    $
    1,157
    
    
    $
    (98
    )
    
    $
    (412
    )
    
    $
    (510
    )Borrowed funds & subordinated debt
    
    
    (122
    )
    
    
    166
    
    
    
    44
    
    
    
    69
    
    
    
    52
    
    
    
    121Total interest-bearing liabilities
    
    $
    46
    
    
    $
    1,155
    
    
    $
    1,201
    
    
    $
    (29
    )
    
    $
    (360
    )
    
    $
    (389
    )
 15




---



##### Table of Contents



Competition
    Regulation, Supervision and Governmental Policy
  Sarbanes-Oxley Act of 2002.
  USA Patriot Act
 16




---



##### Table of Contents



Financial Modernization Legislation
    Bank Holding Company Regulation
    17




---



##### Table of Contents



Bank Regulation
   18




---



##### Table of Contents



Capital Requirements
   19




---



##### Table of Contents



Effects of Governmental Policy
  20




---



##### Table of Contents



Check 21 st
 Employees
   Executive Officers of the Registrant
 Name, Age and Position
    
    Business ExperienceRobert B. Nolen, Jr., 48 -
  President of the Holding
  Company and the Bank
    
    Mr. Nolen joined the Bank in 1987 as First Vice
President, Chief Financial Officer and Treasurer.
Effective July 1, 1994, Mr. Nolen was appointed
President and Chief Executive Officer of the Bank.
As President of the Holding Company and
Bank, Mr. Nolen is responsible for ensuring that
the overall operations of the Holding Company and
the Bank are carried out in accordance with the policies
and procedures of the Board of Directors.Mary Jo Gunter, 53-
  Vice President of the
  Holding Company and Senior
  Vice President  Banking Services
  of the Bank.
    
    Ms. Gunter joined the Bank in September 1976 and
has served in various lending related positions within
the Bank. She is responsible for branch operations,
personnel, loan servicing and other customer service
areas.
 Forward-Looking Statements
   21




---



##### Table of Contents



Item 2. Description of Property
    
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  
 Item 6. Managements Discussion and Analysis or Plan of Operation
  
 Item 7. Financial Statements
  
 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
  
 Item 8A. Controls and Procedures
  22




---



##### Table of Contents



Item 8B.
Other Information
 
  23




---



##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act .
      
 Item 10. Executive Compensation
  24




---



##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
   Number of Securities to be
    
    
    
    
    
    
    Number of Securitiesissued upon Exercise of
    
    
    Weighted Average Exercise
    
    
    Remaining Available forOutstanding Options,
    
    
    Price of Outstanding Options,
    
    
    Future Issuance Under EquityPlan Category
    
    Warrants and Rights
    
    
    Warrants and Rights
    
    
    Compensation PlansEquity Compensation Plans
Approved by Stockholders(1)
    
    
    62,333
    
    
    $
    9.19
    
    
    
    62,333Equity Compensation Plans Not
Approved by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    62,333
    
    
    $
    9.19
    
    
    
    62,333
 
 (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
  25




---



##### Table of Contents



Item 13. Exhibits
 (a)
    
    Exhibits
 3.1
    
    Certificate of Incorporation  Incorporated by reference to
Exhibit 3.1 to Registrants Annual Report on Form 10-KSB for the six months
ended December 31, 1996.3.2
    
    Bylaws  Incorporated by reference to Exhibit 3.1 to
Registrants Current Report on Form 8-K dated March 22, 2006.4
    
    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,
2005. Except for the portions of the Annual Report to Stockholders which are
expressly incorporated herein by reference, such Annual Report to Stockholders
is furnished for the information of the SEC and is not to be deemed filed as
part of this Report.14
    
    Code of Ethics, as amended  Incorporated by reference to
Exhibit 14 to the Registrants Annual Report on Form 10-KSB for the year ended
December 31, 2005.21
    
    Subsidiaries.23
    
    Consent of Independent Registered Public Accounting Firm.31
    
    Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 Item 14. Principal Accountant Fees and Services
  26




---



##### Table of Contents



PINNACLE BANCSHARES, INC.Date:
    
    March 31, 2006
    
    
    
    By:
    
    /s/ Robert B. Nolen, Jr.Robert B. Nolen, Jr., President(Duly Authorized Representative)
  By:
    
    /s/ Robert B. Nolen, Jr.
    
    
    
    By:
    
    /s/ James W. CannonRobert B. Nolen, Jr.
    
    
    
    
    
    James W. CannonPresident and Chief Executive Officer
    
    
    
    
    
    Director(Principal Executive Officer and Principal
    
    
    
    Date:
    
    March 31, 2006Financial Officer)Date:
    
    March 31, 2006
    
    
    
    By:
    
    /s/ Max W. PerdueMax W. PerdueBy:
    
    /s/ Marie Guthrie
    
    
    
    
    
    DirectorMarie Guthrie
    
    
    
    Date:
    
    March 31, 2006Treasurer(Principal Accounting Officer)
    
    
    
    By:
    
    /s/ Greg BatchelorDate:
    
    March 31, 2006
    
    
    
    
    
    Greg BatchelorDirectorBy:
    
    /s/ Albert H. Simmons
    
    
    
    Date:
    
    March 31, 2006Albert H. SimmonsDate:
    
    March 31, 2006
    
    
    
    By:
    
    /s/ J. T. WaggonerJ. T. WaggonerBy:
    
    /s/ O. H. Brown
    
    
    
    
    
    DirectorO. H. Brown
    
    
    
    Date:
    
    March 31, 2006DirectorDate:
    
    March 31, 2006By:
    
    /s/ Sam W. MurphySam W. MurphyDirectorDate:
    
    March 31, 2006