<PAGE>
================================================================================

                     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, 2001

                                       OR

[ ]  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.
                 (Name of small business issuer in its charter)

<TABLE>
  <S>                                      <C>
             Delaware                                 72-1370314
    -------------------------------        ------------------------------------
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

    1811 Second Avenue, Jasper, Alabama                 35502-1388
    -----------------------------------    ------------------------------------
  (Address of principal executive offices)              (Zip Code)
</TABLE>

         Issuer's telephone number, including area code: (205) 221-4111.

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                                 <C>
                                                     Name of Each Exchange
         Title of Each Class                          on Which Registered
--------------------------------------              -----------------------
Common Stock, par value $.01 per share              American Stock Exchange
</TABLE>

        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 [ ]

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. $17,704,841.

The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price $(9.19 per share) at which the Common Stock was sold
on March 27, 2002, was approximately $14,355,966. 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 27, 2002, 1,775,384 shares of the
registrant's Common Stock were outstanding.

Transitional Small Business Disclosure Format:  YES     NO X
                                                    ---   ---

                       Documents Incorporated By Reference

Part II:
Annual Report to Stockholders for the year ended December 31, 2001.

Part III:
Portions of the definitive proxy statement for the 2002 Annual Meeting of
Stockholders.

================================================================================
<PAGE>
                                     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 and sales of loans. 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 accounts and
borrowings, and general and administrative expenses.

                                       2
<PAGE>
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.

<TABLE>
<CAPTION>
                                                         At December 31,
                                                    -------------------------
                                                      2001             2000
                                                    --------         --------
                                                     (Dollars in thousands)
<S>                                                 <C>              <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
   Assets                                           $218,020         $230,269
   Loans, net                                        131,284          152,021
   Interest-bearing deposits in other banks            2,466            1,136
   Securities                                         61,838           61,069
   Loans held for sale                                 3,875            1,337
   Deposits                                          193,498          187,471
   Borrowed funds                                      3,100           20,500
   Stockholders' equity                               19,012           19,230

Number of:
   Real estate loans outstanding                       2,911            3,209
   Savings accounts                                   14,485           14,962
   Full service offices open                               6                6
</TABLE>

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                             -----------------------
                                                              2001            2000
                                                             -------         -------
                                                                 (In thousands)
<S>                                                          <C>             <C>
OPERATING DATA:
Interest income                                              $15,823         $17,805
Interest expense                                               9,192          10,573
                                                             -------         -------
Net interest income before provision for loan losses           6,631           7,232
Provision for loan losses                                      1,942             530
                                                             -------         -------
Net interest income after provision for losses                 4,689           6,702
Noninterest income                                             1,882           1,250
Noninterest expense                                            5,430           5,152
Income tax expense                                               350           1,058
                                                             -------         -------
Income before extraordinary item                                 791           1,742
Extraordinary item, net of tax benefit of $63                    108               0
                                                             -------         -------
Net income                                                   $   683         $ 1,742
                                                             =======         =======
</TABLE>

                                       3
<PAGE>
     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.

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                                 -----------------------------------------------------------------------------
                                                                 2001                                     2000
                                                 -------------------------------------     -----------------------------------
                                                 Average                     Average        Average                  Average
                                                 Balance      Interest      Yield/Cost      Balance     Interest    Yield/Cost
                                                 --------     --------      ----------     --------     --------    ----------
                                                                              (Dollars in thousands)
<S>                                              <C>          <C>           <C>           <C>          <C>         <C>
Interest-earning assets:
Loans receivable, net                            $144,485     $ 12,340           8.5%       $150,019     $13,895        9.3%
Securities available-for-sale                      56,114        3,265           5.8%         62,810       3,800        6.0%
Other                                               5,128          218           4.3%          1,664         110        6.6%
                                                 --------     --------         -----        --------     -------        ---
Total                                             205,727       15,823           7.7%        214,493      17,805        8.3%
Non-interest-earning assets                        12,293                                     15,586
                                                 --------                                   --------
Total assets                                     $218,020                                   $230,079
                                                 ========                                   ========
Interest-bearing liabilities:
Deposits                                         $191,728        8,791           4.6%       $187,950       9,224        4.9%
Borrowings                                          6,936          401           5.8%         20,963       1,349        6.4%
                                                 --------     --------         -----        --------     -------        ---
Total interest-bearing liabilities:               198,664        9,192           4.6%        208,913      10,573        5.1%
Non-interest-bearing liabilities                      344                                      2,715
                                                 --------                                   --------
Total liabilities:                                199,008                                    211,628
  Equity                                           19,012                                     18,451
                                                 --------                                   --------
  Total liabilities and equity                   $218,020                                   $230,079
                                                 ========                                   ========
Net interest-earning assets                      $  7,063                                   $  5,580
                                                 ========                                   ========
Net interest income                                           $  6,631                                   $ 7,232
                                                              ========                                   =======
Interest rate spread                                                             3.1%                                   3.2%
                                                                               =====                                  =====
Net interest margin                                                              3.2%                                   3.4%
                                                                               =====                                  =====
Ratio of average interest-earning assets
 to interest-bearing liabilities                                               103.6%                                 102.7%
                                                                               =====                                  =====
</TABLE>

                                       4
<PAGE>
LENDING ACTIVITIES

     GENERAL. The Bank's net loan portfolio totaled $131.3 million at December
31, 2001, or 60.2% of its total assets. On that date, $103.0 million, or 78% of
total net loans outstanding, consisted of loans secured by mortgages on single
family, two-to-four family, multi-family residential properties, and commercial
real estate loans, while the remainder of the loan portfolio consisted of
savings account, home improvement and other consumer and commercial loans.

     The principal lending activity of the Bank historically has been the
origination of conventional first mortgage single-family loans. The Bank also
makes loans on two-to-four family dwelling units, multi-family dwelling units,
commercial real estate and other improved real estate. 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 $76.9 million during the year ended
December 31, 2001, and $85.7 million during the year ended December 31, 2000.
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 47% of the single-family residential mortgage loans in
the Bank's loan portfolio, and 24% of the Bank's net loan portfolio at December
31, 2001. 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. At December 31, 2001, the Bank had no
concentrations of loans exceeding 10% of gross loans other than as described
below.

<TABLE>
<CAPTION>
                                                                                December 31,
                                                    ------------------------------------------------------------------
                                                                2001                                2000
                                                    ----------------------------          ----------------------------
                                                       $                     %                $                    %
                                                                          (Dollars in thousands)
<S>                                                 <C>                     <C>           <C>                     <C>
Type of Loan:
Real estate mortgage loans                          $ 60,431                46.0%         $ 66,791                43.9%
Commercial real estate mortgage loans                 25,622                19.5%           29,801                19.6%
Construction                                          26,097                19.9%           39,044                25.7%
loans
Commercial loans                                      15,987                12.2%           16,798                11.0%
Consumer loans                                        12,373                 9.4%           13,099                 8.6%
Less --
  Loans in                                             7,710                 5.9%           11,887                 7.8%
process
  Discounts and                                          208                 0.2%              286                 0.2%
other
  Allowance for loan losses                            1,308                 1.0%            1,339                 0.9%
                                                    --------               ------         --------               ------
     Total                                          $131,284               100.00%        $152,021               100.00%
                                                    ========               ======         ========               ======
</TABLE>

     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


                                       5
<PAGE>
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.

     At December 31, 2001, the largest amount loaned by the Bank to one borrower
was $2.5 million which was approximately 13% of the Holding Company's
stockholders' equity.

     CONSTRUCTION AND COMMERCIAL REAL ESTATE LOANS. Construction loans on
residential properties are made primarily to builders. The maximum loan to value
ratio generally is 80% of the appraisal value. Residential construction loans
are typically made for periods of six months and one year. At December 31, 2001,
the Bank had $24.0 million outstanding in residential construction loans,
compared with $33.9 million in construction loans on residential properties
outstanding at December 31, 2000. The Bank also offers construction loans on
commercial and other properties. At December 31, 2001, total construction loans
were $26.1 million. Approximately 38% of total construction loans were loans to
builders for speculative construction loans. These loans involve significant
additional risks when compared with loans on existing residential properties.

     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 specutlative risk of
construction financing by limiting construction lending to qualified borrowers
in the Bank's market area, 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, 2001, the Bank had $27.8 million outstanding in
commercial real estate loans, including $2.1 million in commercial construction
loans. These loans are typically limited to owner-occupied financings.

     COMMERCIAL BUSINESS LOANS. At December 31, 2001, there were approximately
$16.0 million in commercial loans outstanding. The Bank will consider making
these types of loans primarily in its local market area.

     CONSUMER LOANS. The Bank makes various types of consumer loans, including
the loans made to depositors on the security of their savings accounts, personal
loans, automobile loans, educational loans and loans for home improvement or
other purposes. At December 31, 2001, the Bank had $12.4 million outstanding in
consumer 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, 2001, the Bank was
servicing loans for others aggregating approximately $63.0 million. Net
servicing income for the years ended December 31, 2001 and 2000 was
approximately $159,000 and $171,000, respectively.

     During the years ended December 31, 2001 and 2000, the Bank sold
approximately $57.8 million and $36.0 million, respectively, in whole loans. As
of December 31, 2001, the Bank had approximately $900,000 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


                                       6
<PAGE>
their origination or purchase. Loans held for sale are carried at the lower of
cost or market value and are sold as soon as possible after their origination,
as market conditions allow.

     LOAN COMMITMENTS. The Bank issues commitments to prospective borrowers to
make loans conditioned upon the occurrence of certain events, which are honored
for 60 days from approval with no additional fees required. The Bank charges a
non-refundable commitment fee equal to 1% of the actual amount of committed
funds on most single-family construction loans. The Bank had outstanding
commitments to originate mortgage loans aggregating $18.5 million at December
31, 2001. Of these commitments, $17.0 million were for adjustable rate mortgages
and $1.5 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, 2001, 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.

<TABLE>
<CAPTION>
                                                    Due One Through          Due
                                    Due by          Five Years After   Five Years After
                               December 31, 2002   December 31, 2001   December 31, 2001         Total
                               -----------------   -----------------   -----------------      ------------
<S>                            <C>                 <C>                 <C>                    <C>
Real estate mortgage              $ 8,514,988         $37,460,520         $40,077,166         $ 86,052,674
Real estate construction           18,387,131                  --                  --           18,387,131
Commercial business loans           6,862,688           8,003,148           1,121,059           15,986,895
Consumer                            3,235,832           8,674,737             462,845           12,373,414
                                  -----------         -----------         -----------         ------------
     Total                        $37,000,639         $54,138,405         $41,661,070         $132,800,114
                                  ===========         ===========         ===========         ============
</TABLE>

     The following table sets forth the dollar amount of all loans due after one
year at December 31, 2001 which have predetermined interest rates and have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                      Floating or
                             Predetermined Rates    Adjustable Rates
                             -------------------    ----------------
<S>                          <C>                    <C>
Real estate mortgage              $45,682,736         $31,704,153
Commercial business loans           5,387,004           3,888,000
Consumer                            9,122,062              15,520
                                  -----------         -----------
     Total                        $60,191,802         $35,607,673
                                  ===========         ===========
</TABLE>

     NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans that are 120 days
contractually past due are placed on nonaccrual status and accrued interest
income is reversed. 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 costs of
disposition. 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 costs
of disposition below its carrying amount increases a valuation allowance
account. Future increases in fair value


                                       7
<PAGE>
of the asset less costs of disposition above its carrying amount reduces the
valuation allowance account, but not below zero. Increases or decreases in the
valuation allowance account are charged or credited to income. Costs relating to
the development and improvement of property are capitalized, whereas costs
relating to the holding of property are expensed.

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

     The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.

<TABLE>
<CAPTION>
                                                          At December 31,
                                                       ---------------------
                                                        2001            2000
                                                       ------          ------
                                                       (Dollars in thousands)
<S>                                                    <C>             <C>
Loans accounted for on a nonaccrual basis: (1)
Real Estate:
  Residential                                          $  588          $2,036
  Commercial                                              208             298
Consumer                                                   71              37
                                                       ------          ------
Total                                                  $  867          $2,371
                                                       ======          ======
Accruing loans which are contractually
 past due 90 days or more:
Real Estate:
  Residential                                          $   --          $   --
  Commercial                                               --              --
Consumer                                                   --              --
                                                       ------          ------
Total                                                  $   --          $   --
                                                       ======          ======
  Total of nonaccrual and 90 days
   past due loans                                      $  867           2,371
                                                       ======          ======
Percentage of total loans                                0.66%           1.56%
Percentage of total assets                               0.40%           1.03%
Other non-performing assets(2)                         $2,345          $1,420
</TABLE>
----------
(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, whichever is lower.

     Non-performing loans decreased from $2.3 million at December 31, 2000 to
$900,000 at December 31, 2001. This decrease was primarily due to transfers of
non-performing loans to real estate owned and by loans being brought current.
Non-performing assets at December 31, 2001, were $2.3 million as compared to
$1.4 million at December 31, 2000. The decrease in nonaccrual loans is due to
concerted efforts to manage problem credits, either through work-out
negotiations or foreclosures.

     Management has identified certain loans aggregating approximately $2.9
million at December 31, 2001 (including loans identified in the above table)
which it has determined require special attention due to potential weaknesses.
It is management's opinion that the allowance for loan losses (see below) is
adequate to absorb potential losses related to such loans. Aggressive efforts
are made to continue to reduce principal, secure additional collateral and
improve the overall payment status of their loans.

                                       8
<PAGE>
     During the years ended December 31, 2001 and 2000, gross interest income of
$27,344 and $68,824, 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
$61,394 and $87,362 for the years ended December 31, 2001 and 2000,
respectively.

     It is management's policy to establish an allowance for estimated losses on
loans and real estate owned based upon prior experience, current economic
conditions in its market area, or when it determines that losses are expected to
be incurred on the ultimate disposition of the underlying properties. Although
management believes that it uses the best information available to make such
determinations, future adjustments to allowances may be necessary, and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the initial determinations.

     The following table presents an allocation of the allowance for loan losses
by the categories indicated and the percentage 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 as conditions change.

<TABLE>
<CAPTION>
                                              At December 31,
                          ---------------------------------------------------------
                                     2001                         2000
                          --------------------------    ---------------------------
                                         Percent of                     Percent of
                                       Loans in Each                  Loans in Each
                                        Category to                    Category to
                          Amount        Total Loans     Amount         Total Loans
                          ------       -------------    ------        -------------
                                            (Dollars in thousands)
<S>                       <C>          <C>              <C>           <C>
Real estate loans         $  589            78.4%       $  547            80.3%
Commercial                   268            12.2%          289            11.1%
Other loans                  451             9.4%          503             8.6%
                          ------           -----        ------           -----
  Total                   $1,308           100.0%       $1,339           100.0%
                          ======           =====        ======           =====
</TABLE>

     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                             -----------------------
                                              2001              2000
                                             ------           ------
                                              (Dollars in thousands)
<S>                                          <C>              <C>
<S>                                          <C>              <C>
Balance at beginning of period               $1,339           $1,223
Loans charged-off:
  Consumer                                      220              161
  Mortgage                                    1,803              308
                                             ------           ------
Total charge-offs                             2,023              469
Total recoveries                                 50               55
Net loans charged-off                         1,973              414
Provision for loan losses                     1,942              530
                                             ------           ------
Balance at end of period                     $1,308           $1,339
                                             ======           ======
Ratio of net charge-offs to average
 loans outstanding during the period            1.4%             .28%
                                             ======           ======
</TABLE>

     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.

                                       9
<PAGE>
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, 2001, the Bank's interest-bearing
deposits and securities portfolio of approximately $61.8 million, excluding
mortgage-backed securities, consisted primarily of interest-bearing bank
deposits, U.S. government and agency obligations, corporate securities, and FHLB
of Atlanta stock.

     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 increases its liquidity by selling most of its fixed-rate loans with
maturities of greater than 10 years.

     Securities are classified as either trading, available-for-sale-held to
maturity 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.

<TABLE>
<CAPTION>
                                                    At December 31,
                                                -----------------------
                                                 2001            2000
                                                -------         -------
                                                     (In thousands)
<S>                                             <C>             <C>
Securities available-for-sale:
  U.S. Government and agency securities         $50,877         $46,754
  FHLB stock                                        975             975
  Mortgage-backed securities                      9,985          13,311
  Other securities                                    1              29
                                                -------         -------
Total                                           $61,838         $61,069
                                                =======         =======
</TABLE>

     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, 2001.

<TABLE>
<CAPTION>
                                         One Year Or Less         After One Through Five Years    After Five Through Ten Years
                                    --------------------------    -----------------------------   -----------------------------
                                    Amortized       Weighted      Amortized          Weighted     Amortized          Weighted
                                       Cost      Average Yield      Cost          Average Yield      Cost         Average Yield
                                    ---------    -------------    ----------      -------------   ---------       -------------
                                                                           (Dollars in thousands)
<S>                                 <C>          <C>              <C>             <C>             <C>             <C>
U.S. government and agency             $4,000           5.5%       $5,000              5.9%       $42,604            5.2-%
FHLB of Atlanta stock(1)                   --          --              --               --             --              --
Other securities(2)                        --          --              --               --              1              --
Mortgage-backed securities (3)             --          --              --               --          1,515             6.6
                                       ------           ---        ------              ---        -------             ---
Total                                  $4,000           5.5%       $5,000              5.9%       $44,120             5.2%
                                       ======           ===        ======              ===        =======             ===
</TABLE>

<TABLE>
<CAPTION>
                                           After Ten Years                          Total
                                     ---------------------------  --------------------------------------------
                                     Amortized       Weighted     Amortized       Estimated        Weighted
                                        Cost       Average Yield     Cost         Fair Value     Average Yield
                                     ---------     -------------  ---------       ----------     -------------
                                                              (Dollars in thousands)
<S>                                  <C>           <C>            <C>             <C>            <C>
U.S. government and agency                $--            --%       $51,604         $50,877           5.3%
FHLB of Atlanta stock(1)                  975           6.8            975             975           6.8
Other securities(2)                        --            --              1               1            --
Mortgage-backed securities (3)          8,386           6.2          9,901           9,985           6.3
                                       ------           ---        -------         -------           ---
Total                                  $9,361           6.3%       $62,481         $61,838           5.5%
                                       ======           ===        =======         =======           ===
</TABLE>
----------
(1)  FHLB of Atlanta stock is an equity security. The amount of such stock held
     by the Bank is included under "After Ten Years" as the Bank is required to
     hold such stock as a FHLB of Atlanta member.
(2)  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.
(3)  Mortgage-backed securities are reflected in the above table based on their
     contractual maturity.

                                       10
<PAGE>
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, 2001 the Bank's total deposits were $193.5 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, 2001.

<TABLE>
<CAPTION>
                                    Certificates
Maturity Period                      of Deposit
---------------                    --------------
                                   (In thousands)
<S>                                <C>
Three months or less                   $24,834
Over three through six months            7,148
Over six through twelve months          18,860
Over twelve months                       7,371
                                       -------
     Total                             $58,213
                                       =======
</TABLE>

                                       11
<PAGE>
     The following table sets forth the average balances and average interest
rates based on daily balances for deposits for the periods indicated.

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                            -------------------------------------------------
                                                    2001                        2000
                                            ---------------------       ---------------------
                                            Average       Average        Average      Average
                                            Deposits       Rate         Deposits       Rate
                                            --------      -------       --------      -------
                                                           (Dollars in thousands)
<S>                                         <C>           <C>           <C>           <C>
Non-interest bearing demand deposits        $  8,102        --%         $  7,238        --%
Interest bearing demand deposits              25,277        2.1           24,828        2.5
Savings deposits                              14,740        2.3           14,639        2.5
Time deposits                                143,609        5.5          141,245        5.8
                                            --------        ---         --------        ---
     Total deposits                         $191,728        4.6%        $187,950        4.9%
                                            ========        ===         ========        ===
</TABLE>

     For further information on deposits, see Note 6 of Notes to Consolidated
Financial Statements.

     BORROWINGS. 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.

<TABLE>
<CAPTION>
                                                                         At or for the
                                                                     Year Ended December 31,
                                                                 -------------------------------
                                                                    2001                 2000
                                                                 -----------         -----------
                                                                      (Dollars in thousands)
<S>                                                              <C>                 <C>
Amounts outstanding at end of period                             $        --         $17,250,000
Weighted average rate paid at period end                                  --                6.88%
Maximum amount of borrowings outstanding at any month end        $17,250,000         $22,250,000
Approximate average amount outstanding for period                $ 3,813,000         $17,690,000
Approximate weighted average rate paid during period (1)                5.83%               6.57%
</TABLE>
----------
(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 7 of Notes to
Consolidated Financial Statements.

                                       12
<PAGE>
SELECTED FINANCIAL RATIOS

     The following table sets forth selected financial ratios of the Bank for
the periods indicated:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                -------------------------
                                                 2001                2000
                                                -----               -----
<S>                                             <C>                 <C>
Return on Assets (Net Income Divided By
Average Total Assets)                             0.3%               0.8%
Return on Equity (Net Income Divided By
 Average Equity)                                  3.5%              10.6%
Equity-to-Assets Ratio (Average Equity
 Divided By Average Total Assets)                 8.9%               8.0%
Dividend Payout Ratio (Dividends
 Declared Per Share Divided By Net
 Income Per Share)                              103.9%              40.8%
</TABLE>


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,
2001, 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.

<TABLE>
<CAPTION>
                                                               Over One          Over Five
                                             One Year          Through            Through           Over
                                             or Less          Five Years         Ten Years        Ten Years          Total
                                             ---------        ----------         ---------        ---------         --------
                                                                              (In thousands)
<S>                                          <C>              <C>                <C>              <C>               <C>
Interest-Earning Assets: (1)
  Loans                                      $  37,001          $ 54,138          $ 11,570          $30,091         $132,800
  Securities                                     4,019             5,062            43,313            9,444           61,838
Other assets                                     2,466                --                --               --            2,466
                                             ---------          --------          --------          -------         --------
     Total                                   $  43,486          $ 59,200          $ 54,883          $39,535         $197,104
                                             =========          ========          ========          =======         ========
Interest-Bearing Liabilities:(2)
  Deposits                                   $ 166,090          $ 27,371          $     37          $    --         $193,498
  Borrowings                                       160               785             1,390              765            3,100
                                             ---------          --------          --------          -------         --------
     Total                                   $ 166,250          $ 28,156          $  1,427          $   765         $196,598
                                             =========          ========          ========          =======         ========
Interest Sensitivity Gap                     $(122,764)         $ 31,044          $ 53,456          $38,770         $    506
                                             =========          ========          ========          =======         ========
Cumulative Interest Sensitivity
 Gap                                          (122,764)         $(91,720)         $(38,264)         $   506         $  1,012
                                             =========          ========          ========          =======         ========
</TABLE>
----------
(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.

                                       13
<PAGE>
Maintaining appropriate levels of liquidity allows the Company to have
sufficient funds available for reserve requirements, customer demand for loans,
withdrawal of deposit balances and maturities of deposits and other liabilities.
The Company's primary source of liquidity is dividends paid by the Bank, which
actively manages both assets and liabilities to achieve its desired level of
liquidity. Alabama law imposes restrictions on the amount of dividends that may
be declared by the Bank. Further, any dividend payment by the Bank is subject to
the continuing ability of the Bank to maintain compliance with federal
regulatory capital requirements

     The Company's contractual obligations and commitments at December 31, 2001
are summarized in the accompanying tables.

                             CONTRACTUAL OBLIGATIONS

<TABLE>
<CAPTION>
                                                     Over One         Over Three
                                    One Year           Through       Years Through         Over
                                    or Less         Three Years       Five Years        Five Years           Total
                                    --------        -----------      -------------      ----------         --------
                                                                     (In thousands)
<S>                                 <C>             <C>              <C>                <C>                <C>
Long-term debt                      $    160           $   360           $  425           $2,155           $  3,100
Operating leases                          54                91               86              173                404
Certificates of  deposits            114,401            23,115            4,256               37            141,809
                                    --------           -------            -----            -----           --------
     Total                          $114,615           $23,566            $4,76            $2,36           $145,313
                                    ========           =======            =====            =====           ========
</TABLE>


                                   COMMITMENTS

<TABLE>
<CAPTION>
                                                      Over One        Over Three
                                     One Year          Through       Years Through       Over
                                     or Less         Three Years       Five Years      Five Years           Total
                                     -------         -----------     -------------     ----------           -----
                                                                     (In thousands)
<S>                                  <C>             <C>             <C>               <C>                 <C>
Lines of credit                       $12,090            $390            $500            $5,459            $18,439
Standby letters of credit             $    72            $  0            $  9            $    0            $    81
     Total                            $12,162            $390            $509            $5,459            $18,520
                                      =======            ====            ====            ======            =======
</TABLE>

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.

<TABLE>
<CAPTION>
                                                    Year ended December                      Year Ended December 31,
                                                       2000 vs. 2001                              1999 vs. 2000
                                            ----------------------------------          ----------------------------------
                                                    Increase (Decrease)                       Increase (Decrease)
                                            ----------------------------------          ----------------------------------
                                            Volume         Rate         Total           Volume          Rate         Total
                                            ------        ------        ------          ------          ----        ------
                                                                          (In thousands)
<S>                                         <C>           <C>           <C>             <C>             <C>         <C>
Interest Income:
Loans                                       $ 485         $1,070        $1,555          $1,324          $530        $1,854
Securities                                    401            134           535             (61)          100            39
Other interest-earning assets                (605)           497          (108)           (413)          195          (218)
Total interest earning assets               $ 281         $1,701        $1,982          $  850          $825        $1,675
Interest Expense:
Deposits                                    $(168)        $  601        $  433          $ (235)         $627        $  392
Borrowed Funds                                898             50           948             897            45           942
Total interest-bearing liabilities          $ 730         $  651        $1,381          $  662          $672        $1,334
</TABLE>

                                       14
<PAGE>
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 from thrift institutions located in its primary market area. However,
in recent years the Bank has had significant competition from money market
mutual funds and other sources which are not subject to federal interest rate
limitations. The Bank's competition for real estate loans comes principally from
other commercial banks, and thrift institutions 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.


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.

         Financial Modernization Legislation. In 1999, the Gramm-Leach-Bliley
Act of 1999 (the "GLB Act") was signed into law. The GLB Act includes a number
of provisions intended to modernize and to increase competition in the American
financial services industry, including authority for bank holding companies to
engage in a wider range of nonbanking activities, including securities
underwriting and general insurance activities. Under the GLB Act, a bank holding
company that elects to become a financial holding company may engage in any
activity that the Board of Governors of the Federal Reserve system (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.

                                       15
<PAGE>
     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. 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


                                       16
<PAGE>
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 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


                                       17
<PAGE>
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 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, 2001, the Bank was categorized as
"well-capitalized" by the FDIC.

                                       18
<PAGE>
     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, 2001
(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.


EMPLOYEES

     As of December 31, 2001, the Holding Company and the Bank had 88 full-time
and 15 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

<TABLE>
<CAPTION>
Name, Age and Position                  Business Experience
----------------------                  ---------------------------------------
<S>                                     <C>
Robert B. Nolen, Jr., 43 -              Mr. Nolen joined the Bank in 1987 as
 President of the Holding               First Vice President, Chief Financial
 Company and the Bank                   Officer and Treasurer. Effective July 1,
                                        1994, Mr. Nolen was appointed President
                                        and Chief Executive Officer of the Bank.
                                        As President of each 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, 47 -                    Ms. Gunter joined the Bank in September
 Vice President of the                  1974 and has served in various lending
 Holding Company and Senior             related positions within the Bank.  She
 Vice President - Banking Services      is responsible for branch operations,
 of the Bank.                           personnel, loan servicing and other
                                        customer service areas.
</TABLE>


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,

                                       19
<PAGE>
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.


SIGNIFICANT ACCOUNTING POLICIES

     The accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally accepted
in the United States and with general practices followed by the banking
industry. Significant accounting policies relate to securities, loans, allowance
for loan losses, and intangibles. These policies, which significantly affect the
determination of financial position, results of operations, and cash flows are
summarized in Note 1, Summary of Business and Significant Accounting Policies,
in the Notes to Consolidated Financial Statements, included elsewhere in this
report.


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, 2001,
the Bank maintained six branches in Jasper, Haleyville, Sumiton, Vestavia and
Trussville, Alabama. The Haleyville branch is leased. The Bank also leases an
administrative office in Jasper, Alabama, which is currently subleased to
another financial institution.

     For further information on the Bank's lease commitments, see Notes to
Consolidated Financial Statements.

     The total net book value of the Bank's investment in premises and equipment
was $6,000,000 at December 31, 2001. 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 will 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, 2001 (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, 2001 (Exhibit No. 13) is incorporated herein by reference.

                                       20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

     The financial statements contained in the Annual Report to Stockholders for
the year ended December 31, 2001 (Exhibit No. 13) are incorporated herein by
reference.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

     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.


ITEM 10. EXECUTIVE COMPENSATION

     The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     (a)  Security Ownership of Certain Beneficial Owners

          Information required by this item is incorporated herein by reference
          to the section captioned "Voting Securities and Principal Holders
          Thereof" of the Proxy Statement.

     (b)  Security Ownership of Management

          Information 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.

     (c)  Changes in Control

          Management 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.


ITEM 13. EXHIBITS, LIST 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.

                                       21
<PAGE>
          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,
               2001. 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.

          21   Subsidiaries

          23   Consent of Independent Accountants

          99   Letter to Securities and Exchange Commission pursuant to
               Temporary Note 3-T

(b)  Not applicable.

                                       22
<PAGE>
                                   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 28, 2002                        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.

<TABLE>
<S>                                                    <C>
By:   /s/ Robert B. Nolen, Jr.                         By:
      ------------------------------------------             -----------------------------------
      Robert B. Nolen, Jr.                                   James W. Cannon
      President and Chief Executive Officer                  Director
      (Principal Executive Officer, Principal          Date:
      Financial Officer and Principal Accounting
      Officer)                                         By:   /s/ Max W. Perdue
Date: March 28, 2002                                         -----------------------------------
                                                             Max W. Perdue
By:   /s/ Albert H. Simmons                                  Director
      ------------------------------------------       Date: March 28, 2002
      Albert H. Simmons
      Chairman of the Board                            By:   /s/ Greg Batchelor
Date: March 28, 2002                                         -----------------------------------
                                                             Greg Batchelor
By:   /s/ O. H. Brown                                        Director
      ------------------------------------------       Date: March 28, 2002
      O. H. Brown
      Director
Date: March 28, 2002

By:   /s/ Sam W. Murphy
      ------------------------------------------
      Sam W. Murphy
      Director
Date: March 28, 2002

By:   /s/ J.T. Waggoner
      ------------------------------------------
      J. T. Waggoner
      Director
Date: March 28, 2002
</TABLE>