<PAGE>
                                                                               .
                                                                               .
                                                                               .

                                                                      EXHIBIT 13

                          BALANCE SHEET AND OTHER DATA

<TABLE>
<CAPTION>

                                                               AT DECEMBER 31,
                                                            ----------------------
                                                               2005        2004
                                                            ---------    ---------
                                                            (Dollars in Thousands)
<S>                                                         <C>          <C>
TOTAL AMOUNT OF:
   Assets                                                   $ 220,249    $ 207,832
   Loans, net                                                 106,256       99,600
   Interest-bearing deposits in other banks                    13,369          485
   Securities available-for-sale                               80,654       89,025
   Loans held for sale                                            374        1,206
   Deposits                                                   192,552      179,966
   Subordinated debt                                            3,093        3,093
   Borrowed funds                                               2,375        2,580
   Stockholders' equity                                        19,410       19,914
NUMBER OF:
   Real estate loans outstanding                                1,931        2,116
   Savings accounts                                            12,930       13,157
   Full-service offices open                                        6            6
</TABLE>

                          STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                        -------------------------------
                                                               2005        2004
                                                            ---------    ---------
                                                                (In Thousands)
<S>                                                         <C>          <C>
INTEREST INCOME                                             $  11,559    $  10,636

INTEREST EXPENSE                                                4,717        3,516
                                                            ---------    ---------
  Net interest income before provision for loan losses          6,842        7,120

PROVISION FOR LOAN LOSSES                                         575          588
                                                            ---------    ---------
  Net interest income after provision for loan losses           6,267        6,532

NONINTEREST INCOME                                              1,816        1,763

NONINTEREST EXPENSE                                             5,875        5,794

INCOME TAX EXPENSE                                                691          769
                                                            ---------    ---------

Net income                                                  $   1,517    $   1,732
                                                            =========    =========
</TABLE>

<PAGE>

                                   OTHER DATA

<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED
                                                                       DECEMBER 31,
                                                                   -------------------

                                                                     2005       2004
                                                                   --------   --------
<S>                                                                <C>        <C>
Interest rate spread                                                  3.4%      3.6%
Yield on average interest earning assets                              5.8       5.5
Return on average assets (net income divided by average total         .70       .82
   assets)
Return on average equity (net income divided by average equity)       7.8       8.8
Equity-to-assets ratio (average equity divided by total average       9.0       9.3
   assets)
Dividend payout ratio (dividends declared divided
   by net income)                                                    45.0      39.0
</TABLE>

                          YIELDS EARNED AND RATES PAID

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

<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED
                                                                      DECEMBER 31,
                                                                   -------------------
                                                                     2005       2004
                                                                   --------   --------
<S>                                                                <C>        <C>
Weighted average yield on loans................                      7.5%       6.9%

Weighted average yield on securities available-
  for-sale.....................................                      4.0        3.9

Weighted average yield on all interest-earning
  assets.......................................                      5.8        5.5

Weighted average rate paid on deposits                               2.3        1.8

Weighted average rate paid on
  borrowed funds...............................                      5.4        4.2

Weighted average rate paid on all interest-
  bearing liabilities..........................                      2.4        1.9

Weighted average rate paid on subordinated-
  Debentures...................................                      6.4        4.6

Interest rate spread (spread between weighted
  average rate on all interest-bearing assets
  and all interest bearing-liabilities)........                      3.4        3.6


Net yield (net interest income as percentage of
  interest-earning assets).....................                      3.4        3.7
</TABLE>

                                       2
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

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

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

INTRODUCTION

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

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

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

In recent years, the Company has expanded its operations in the Birmingham,
Alabama metropolitan area. The Company anticipates that a new full-service
branch office in Gardendale, Alabama will open during the later half of 2006.
Additional annual expenses associated with the new branch and additional
commercial lending personnel are expected to be approximately $500,000 in 2006.
The Company currently intends to expand further in the Birmingham market and
other markets contiguous with the Company's current market area as appropriate
opportunities become available.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

ALLOWANCE FOR LOAN LOSSES

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

Management reviews the adequacy of the allowance for loan losses on a periodic
basis by assessing the quality of the loan portfolio and adjusting the allowance
when appropriate. Management's evaluation of certain specifically

                                       3
<PAGE>

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

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

REAL ESTATE OWNED

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

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

ASSET-LIABILITY MANAGEMENT

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

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

The modeling techniques used by the Company simulate net interest income and
impact on fair values under various rate scenarios. Important elements of these
techniques include the mix of floating versus fixed rate assets and liabilities,
and the scheduled, as well as expected, repricing and maturing volumes and rates
of the existing balance sheet. Under a scenario simulating hypothetical 50, 100
and 200 basis point rate increases applied to all interest- earning assets and
interest-bearing liabilities, the Company would expect net losses in fair value
of the equity in the underlying instruments of approximately ($295,000),
($582,000) and ($1,246,000), respectively. Under a scenario simulating
hypothetical 50, 100 and 200 basis point rate decreases, the Company would
expect net changes in projected net income for the first year of approximately
$558,000, 1,046,000 and $957,000, respectively. This hypothetical is not a
precise indicator of future events. Instead, it is a reasonable estimate of the
results anticipated if the assumptions used in the modeling techniques were to
occur.

The rate environment is a function of the monetary policy of the Federal Reserve
Board ("FRB"). The principal tools of the FRB for implementing monetary policy
are open market operations, or the purchases and sales of U.S. Treasury and
federal agency securities. The FRB's objective for open market operations has
varied over the years,

                                       4
<PAGE>

but the focus has gradually shifted toward attaining a specified level of the
federal funds rate to achieve the long-run goals of price stability and
sustainable economic growth. The federal funds rate is the basis for overnight
funding and drives the short end of the yield curve. Longer maturities are
influenced by FRB purchases and sales and also expectations of monetary policy
going forward. The FRB began to increase the targeted level for the federal
funds rate in June 2004 after reaching an all-time low of 1.00% in mid-2003. The
targeted fed funds rate increased at each Federal Open Market Committee meeting
by 25 basis points and ended 2005 at 4.25%. Each FRB rate increase becomes more
challenging to offset. The ability to delay deposit rate increases and less
aggressive repricing of the maturing certificate of deposit portfolio has
allowed the Company to offset the negative impact of recent FRB rate movements.
Although management believes that the Company's operating results are not
significantly affected by changes in interest rates over an extended period of
time, the continued flattening of the yield curve has exerted downward pressure
on the net interest margin and net interest income. The Company is most impacted
at this time by the increase in short term interest rates which continues to put
upward pressure on transaction deposit rates and short term borrowings from the
Federal Home Loan Bank (FHLB") of Atlanta. Under traditional measures of
interest rate gap positions, the Company believes that it is moderately
liability sensitive in the short-term. Changes in interest rates can affect
loans and other interest-earning assets, including the Bank's investment
portfolio. A significant change in interest rates could have a negative impact
on the Company's operating income and portfolio market value.

FINANCIAL CONDITION

Total assets were $220.2 million, at December 31, 2005, as compared to $207.8
million, at December 31, 2004. Total securities available-for-sale decreased
$8.4 million, to $80.6 million at December 31, 2005 from $89.0 million at
December 31, 2004. This decrease was primarily due to calls, maturities, and
sales exceeding purchases. The Bank had $9.4 million in agency securities called
or maturing in 2005. Also during the fiscal year ended December 31, 2005 the
bank sold $10.0 million in agency securities. The Bank restructured its
securities portfolio in response to interest rates and incurred losses of
$350,591 on these sales in the fourth quarter of 2005. The proceeds from these
calls, maturities, and sales of securities available-for-sale, combined with
proceeds from loan principal repayments and FHLB Advances, the Bank purchased
$13.2 million in agency securities with an average yield of 4.34% during fiscal
year ended December 31, 2005.

At December 31, 2005, the Company's securities portfolio of $80.6 million
consisted primarily of U.S. Agency securities and mortgage-backed securities.
The entire portfolio is classified as "available-for-sale," causing it to be
carried at fair value with the unrealized gains/losses, net of income tax
effect, to be reflected directly in stockholders' equity. See "Liquidity and
Capital Resources" and Note 2 of Notes to Consolidated Financial Statements.

Total loans receivable, net increased $6.7 million, to $106.3 million at
December 31, 2005, from $99.6 million at December 31, 2004. This increase was
primarily due an increase in construction and commercial loans.

Total deposits increased $12.6 million, to $192.6 million at December 31, 2005,
from $180.0 million at December 31, 2004. This increase was due to an increase
in time deposits of approximately $9.3 million and an increase in all other
interest bearing deposits of approximately $3.3 million. These increases were
due to more competitive rates offered by the Company.

On December 22, 2003, the Company established Pinnacle Capital Trust I, (the
"Trust") a wholly-owned statutory business trust. The Company is the sole
sponsor of the trust and owns $93,000 of the Trust's common securities. The
Trust was created for the exclusive purpose of issuing 30-year capital trust
preferred securities ("Trust Preferred Securities") in the aggregate amount of
$3,000,000 and using proceeds from the issuance of the common and preferred
securities to purchase $3,093,000 of junior subordinated debentures
("Subordinated Debentures") issued by the Company. The sole assets of the Trust
are the Subordinated Debentures. The Company's $93,000 investment in the Trust
is included in other assets in the accompanying consolidated balance sheet at
December 31, 2005 and the $3,093,000 obligation of the Company is included in
subordinated debt. See "Interest Expense" below.

During the fiscal years ended December 31, 2005 and 2004, the Bank periodically
borrowed funds on a short-term basis from the FHLB of Atlanta. and used a
portion of the proceeds from these borrowed funds to purchase agency securities
as part of managing the Bank's investment portfolio. The maximum amount
outstanding during the fiscal

                                       5
<PAGE>

years December 31, 2005 and 2004 was $7.3 million and $10.0 million,
respectively. The average amount outstanding during fiscal years December 31,
2005 and 2004 was $572,000 and $1.5 million, respectively.

RESULTS OF OPERATIONS

GENERAL

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

NET INCOME

The Company reported net income of $1,517,000 for the year ended December 31,
2005, compared with net income of $1,732,000 in the prior year, a decrease of
approximately 12%. The decrease in net income was attributable in part to a
decrease in the Company's net interest margin due to increases in market
interest rates. As market rates increased during the year ended December 31,
2005, the Company's cost of funds increased more rapidly than rates on
investments. As a result, the Company's net interest margin was 3.43% for 2005,
as compared to 3.67% for 2004. If market rates continue to increase, the Company
expects that the margin will continue to decline.

INTEREST INCOME

Interest income on loans and securities increased approximately $830,000 from
the fiscal year ended December 31, 2004 to the fiscal year ended December 31,
2005. The increase was primarily due to an increase in the average balance of
loans and securities of approximately $4.7 million and increases in market
interest rates.

Other interest income increased approximately $93,000 from the fiscal year ended
December 31, 2004 to the fiscal year ended December 31, 2005. This increase was
primarily due to an increase in the average balance of interest-bearing deposits
in other banks of approximately $1.0 million as well as an increase in yields
earned from 1.5% in 2004 to 3.5% in 2005.

INTEREST EXPENSE

Interest expense on deposits increased approximately $1.2 million from the year
ended December 31, 2004 compared to the year ended December 31, 2005. This
increase was primarily due to an increase in the average balance of deposits of
approximately $7.5 million, as well as an increase in the weighted average rate
paid on deposits due to an increase in average rates offered from 1.8% in 2004
to 2.3% in 2005.

Interest expense on borrowed funds was $162,000 for the year ended December 31,
2005, compared to $173,000 for year ended December 31, 2004. The decrease was
primarily due to a decrease in the average balance of borrowed funds of
approximately $1,178,000. This decrease was offset by an increase in the
weighted average rate paid on borrowed funds from 4.2% in 2004 to 5.4% in 2005.

Interest expense on Subordinated Debentures was $198,000 and $144,000 for the
years ended December 31, 2005 and 2004, respectively. The increase was due to an
increase in the average rate paid from 4.6% in 2004 to 6.4% in 2005.

PROVISION FOR LOAN LOSSES

The provision for loan losses is based on management's analysis of the various
factors that affect the loan portfolio and management's desire to maintain the
allowance for loan losses at a level considered adequate to absorb inherent
losses. The provisions for losses on loans amounted to $575,500 and $588,000,
for the years ended December 31, 2005 and 2004, respectively. This decrease was
primarily due to improved credit quality.

                                       6
<PAGE>

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

Total non-performing assets as of December 31, 2005 were $381,000, as compared
to $599,000 at December 31, 2004. This decrease in non-performing assets was
primarily due to sales of real estate owned exceeding foreclosures. Total
classified assets as of December 31, 2004 were $1,626,000 as compared to
$981,000 as of December 31, 2005. This decrease was primarily due to improved
credit quality.

NONINTEREST INCOME

Noninterest income, which includes fees and charges on deposit accounts,
servicing and fee income on loans, income on real estate operations, and gain
(loss) on sales of assets increased $52,000 from the year ended December 31,
2004 to the year ended December 31, 2005. The increase was due primarily to an
increase in the gain on sale of real estate owned of $232,000, a decrease in the
loss on sale of securities available-for-sale of $23,000 and an increase in all
other noninterest income of $20,000. The increase was offset by a decrease in
the gain on sale of mortgage loans of $115,000, a decrease in fees and service
charges on deposit accounts of $56,000, a decrease in fees and charges on loan
of $37,000 and a decrease in service fee income, nets of $15,000.

NONINTEREST EXPENSE

NonInterest expense increased $80,000 from the year ended December 31, 2004 to
the year ended December 31, 2005. The increase was due primarily to an increase
in marketing & professional expense of $148,000, and an increase in occupancy
expense of $36,000, These increases were offset by a decrease in compensation
expense of $94,000 and a decrease in all other non-interest expense of $10,000.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Liquidity refers to the ability or the financial flexibility to manage future
cash flows to meet the needs of depositors and borrowers and to provide funds
for operations, as well as future acquisitions if they become available.
Maintaining appropriate levels of liquidity allows the Company to have
sufficient funds available for reserve requirements, customer demand for loans,
withdrawal of deposit balances and maturities of deposits and other liabilities.
The Company's primary source of liquidity is dividends paid by the Bank, which
actively manages both assets and liabilities to achieve its desired level of
liquidity. Alabama law imposes restrictions on the amount of dividends that may
be declared by the Bank. Further, any dividend payment by the Bank is subject to
the continuing ability of the Bank to maintain compliance with federal
regulatory capital requirements. See "Market Price and Dividend Information" and
Note 12 of Notes to Consolidated Financial Statements.

In the ordinary course of its business, the Company's primary sources of cash
are interest on loans and securities, loan repayments, maturities or sales of
securities, and loan sales. The entire securities portfolio at December 31,
2005, was classified as "available-for-sale," with a fair value of $80.6
million. See Notes 1 and 2 of Notes to Consolidated Financial Statements. At
December 31, 2005, liquid assets, consisting primarily of cash and cash
equivalents, interest-bearing deposits in other banks, securities
available-for-sale, First National Bankers Bancshares ("FNBB") stock, and FHLB
stock, totaled approximately $98.8 million, compared to $93.4 million at
December 31, 2004. This increase in liquid assets of $5.4 million was primarily
attributable to an increase in interest-bearing deposits in other banks.

                                       7
<PAGE>

The Bank's liability base provides liquidity through deposit growth and
accessibility to external sources of funds, including borrowings from the FHLB
Bank and other sources. At December 31, 2005, the Bank had an approved credit
availability of $33.1 million at the FHLB. At December 31, 2005, the Bank had no
advances on this credit line.

CAPITAL RESOURCES

The Company's capital position is reflected in its stockholders' equity, subject
to certain adjustments for regulatory purposes. Stockholders' equity is a
measure of the Company's net worth, soundness and viability. The capital base of
the Company allows it and the Bank to take advantage of business opportunities,
while maintaining a level of resources deemed appropriate by management to
address business risks inherent in daily operations. Stockholders' equity at
December 31, 2005 was approximately $19.4 million.

Risk-based capital regulations adopted by the Board of Governors of the Federal
Reserve Board and the Federal Deposit Insurance Corporation require bank holding
companies and banks, respectively, to achieve and maintain specified ratios of
capital to risk-weighted assets. The risk-based capital rules are designed to
measure Tier 1 Capital and Total Capital in relation to the credit risk of both
on and off-balance sheet items. Under the guidelines, one of four risk weights
is applied to the different on balance sheet items. Off-balance sheet items,
such as loan commitments on loans to be held in portfolio, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the form
of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill).
At December 31, 2005, the Company and the Bank satisfied the minimum regulatory
capital requirement and were "well-capitalized" within the meaning of federal
regulatory requirements. See Note 12 of Notes to Consolidated Financial
Statements.

As of December 31, 2005, the $3.0 million of Trust Preferred Securities
qualifies as Tier I Capital under current regulatory definitions. If these Trust
Preferred Securities had not been included in the consolidated capital
calculations, the Company would have still been classified as well capitalized.

During the year ended December 31, 2005, the Company repurchased 18,633 shares
of its capital stock at an average price of $14.38 per share. On June 10, 2004,
the Company announced a supplemental stock repurchase program to acquire an
additional 5% of the Company's outstanding shares outstanding upon completion of
its current repurchase program, or 63,936 shares. The stock repurchase program
is intended to improve liquidity in the market for the common stock, to increase
per share earnings and book value, and to provide a higher rate of return for
the Company's funds. The Company may consider additional repurchase programs in
the future.

                                       8
<PAGE>

The following table details purchases under the Company's stock repurchase
program during year ended December 31, 2005.

<TABLE>
<CAPTION>
                                                                            MAXIMUM NUMBER
                         TOTAL                       TOTAL NUMBER OF      OF SHARES THAT MAY
                        NUMBER                       SHARES PURCHASED      YET BE PURCHASED
                       OF SHARES   AVERAGE PRICE    AS PART OF PUBLICLY       UNDER THE
      PERIOD           PURCHASED   PAID PER SHARE   ANNOUNCED PROGRAMS         PROGRAMS
--------------------   ---------   --------------   -------------------   ------------------
<S>                    <C>         <C>              <C>                   <C>
January 1-31, 2005       3,000        $ 15.47              3,000               79,569
February 1-28, 2005          0              0                  0                    0
March 1-31, 2005         1,000        $ 15.19              1,000               78,569
April 1-30, 2005             0              0                  0                    0
May 1-31, 2005           2,400        $ 14.27              2,400               76,169
June 1-30, 2005          4,933        $ 14.31              4,933               71,236
July 1-31, 2005              0              0                  0                    0
August 1-31, 2005        4,900        $ 13.60              4,900               66,336
September 1-30, 2005         0              0                  0                    0
October 1-31, 2005           0              0                  0                    0
November 1-30, 2005      1,000        $ 14.68              1,000               65,336
December 1-31, 2005      1,400        $ 14.87              1,400               63,936
          Total         18,633        $ 14.38             18,633               63,936
</TABLE>

IMPACT OF INFLATION

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

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is considered
other-than-temporary unless: (i) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for an anticipated
recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the
Company began presenting the new disclosure requirements in its consolidated
financial statements for the year ended December 31, 2003. The recognition and
measurement provisions were initially effective for other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was delayed
until the finalization of a FASB Staff Position (FSP) to provide additional
implementation guidance. On November 3, 2005, the FASB issued FASB Staff
Position (FSP) FAS 115-1 and FAS 124-1. "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The FSP addresses
determining when an investment is considered impaired and whether the impairment
is other than temporary, and measuring an impairment loss. The FSP also
addresses the accounting after an entry recognizes an other-than-temporary
impairment, and requires certain disclosures about

                                       9
<PAGE>

unrealized losses that the entry did not recognize as other-than-temporary
impairments. The FSP is effective for reporting periods beginning after December
15, 2005. The Company does not expect the adoption of this FSP to have a
material impact on the consolidated balance sheet or statement of income for the
Company.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation.
This statement supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based compensation transactions using APB 25 and
requires that the compensation costs relating to such transactions be recognized
in the consolidated statement of operations. The Company adopted SFAS No. 123(R)
on January 1, 2006. The impact of its adoption did not have a material impact on
the consolidated statements of financial condition or statements of operations
for the Company.

On March 25, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107").
SAB 107 provides guidance regarding the valuation of share-based payment
arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS No. 123(R) in an interim period,
capitalization of compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), the modification of employee share options prior to
adoption of SFAS No. 123(R) and disclosures in Management's Discussion and
Analysis subsequent to adoption of SFAS No. 123(R). The Company does not expect
this Staff Accounting Bulletin to have a material impact on the consolidated
statements of financial condition or statements of operations for the Company.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 requires restatement of prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. Also, SFAS No. 154 requires that retrospective application of a change
in accounting principle be limited to the direct effects of the change. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect this
statement to have a material impact on the consolidated statements of financial
condition or statements of operations for the Company.

                                       10
<PAGE>

                      MARKET PRICE AND DIVIDEND INFORMATION

The common stock of the Company is traded on the American Stock Exchange under
the symbol "PLE". As of December 31, 2005, the Company had 1,541,178 shares of
common stock outstanding and 334 stockholders of record. This total does not
reflect the number of persons or entities who hold stock in nominee or "street
name" through various brokerage firms.

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

<TABLE>
<CAPTION>
                                           Price Range
                                           Common Stock
                                       --------------------
                                         High        Low
                                       --------    --------
<S>                                    <C>         <C>
Fiscal Year Ended December 31, 2005
   First quarter                       $ 15.750   $  14.650
   Second quarter                        14.700      13.500
   Third quarter                         14.900      13.250
   Fourth quarter                        15.100      12.750

Fiscal Year Ended December 31, 2004
   First quarter                       $ 18.500    $ 16.050
   Second quarter                        17.100      13.500
   Third quarter                         15.500      14.050
   Fourth quarter                        16.400      14.250
</TABLE>

Dividends of $.44 ($.11 in each of the four quarters) were declared and paid
during 2005. Dividends of $.43 ($.10 in the first quarter and $.11 in the
second, third and fourth quarters) were declared and paid during 2004. Under
Alabama law, the approval of the Superintendent of Banks of the State of Alabama
is required if the total of all the dividends declared by the Bank in any
calendar year exceeds the Bank's net income as defined for that year combined
with its retained net income for the preceding two calendar years. Federal law
provides that no insured depository institution may make any capital
distribution (including a cash dividend) if the institution would not satisfy
one or more of its minimum capital requirements after the distribution.

                                       11
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors
Pinnacle Bancshares, Inc.

We have audited the accompanying consolidated statements of financial condition
of Pinnacle Bancshares, Inc. and subsidiary (the Company) as of December 31,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Bancshares,
Inc. and subsidiary as of December 31, 2005 and 2004 and the results of their
operations and their cash flows for the years then ended, in conformity with U.
S. generally accepted accounting principles.

                                                 /s/ KPMG LLP
Birmingham, Alabama
March 14, 2006

                                       12
<PAGE>

                            PINNACLE BANCSHARES, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                        AS OF DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                             2005            2004
                                                        -------------    -------------
<S>                                                     <C>              <C>
ASSETS:
   Cash and cash equivalents                            $   3,784,867    $   3,451,046
   Interest-bearing deposits in other banks                13,368,882          484,958
   Securities available-for-sale                           80,653,931       89,025,401
   Federal Home Loan Bank Stock                               507,300          417,000
   First National Bankers Bancshares Stock                    525,000                0
   Loans held for sale                                        374,192        1,206,322
   Loans receivable, net of allowance for loan losses
       of $1,383,410 and $1,167,263, respectively         106,255,517       99,599,999
   Real estate owned, net                                     381,229          598,642
   Premises and equipment, net                              5,892,093        5,723,120
   Goodwill                                                   306,488          306,488
   Bank owned life insurance                                5,096,157        4,797,758
   Accrued interest receivable
   Other assets
                                                            1,372,733        1,254,307
                                                            1,730,328          967,308
                                                        -------------    -------------
           Total assets                                 $ 220,248,717    $ 207,832,349
                                                        =============    ============-

LIABILITIES AND STOCKHOLDERS' EQUITY:
   Deposits                                             $ 192,551,915    $ 179,965,635
   Subordinated debt                                        3,093,000        3,093,000
   Borrowed funds                                           2,375,000        2,580,000
   Official checks outstanding                              1,088,302        1,103,521
   Accrued interest payable                                   786,133          498,656
   Other liabilities                                          944,393          677,107
                                                        -------------    -------------
           Total liabilities                              200,838,743      187,917,919
                                                        =============    =============

STOCKHOLDERS' EQUITY:
   Common stock, par value $.01 per share; 2,400,000
    authorized; 1,827,813 and 1,821,780 issued at
    December 31, 2005 and 2004 respectively,
    1,541,178 and 1,553,778 outstanding at December
    31, 2005 and 2004, respectively.                           18,278           18,218
   Additional paid-in capital                               8,479,921        8,418,897
   Treasury stock, at cost (286,635 shares and
    268,002 shares at December 31, 2005 and 2004,
    respectively)                                          (3,488,724)      (3,220,730)
   Retained earnings                                       16,405,863       15,571,155
   Accumulated other comprehensive loss, net of tax        (2,005,364)        (873,110)
                                                        -------------    -------------
           Total stockholders' equity                      19,409,974       19,914,430
                                                        -------------    -------------
           Total liabilities and stockholders' equity   $ 220,248,717    $ 207,832,349
                                                        =============    =============
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       13
<PAGE>

                           PINNACLE BANCSHARES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                            2005            2004
                                                        ------------    ------------
<S>                                                     <C>             <C>
INTEREST REVENUE:
   Interest on loans                                    $  7,725,348    $  7,293,812
   Interest and dividends on securities                    3,697,136       3,298,187
   Other interest                                            137,099          44,212
                                                        ------------    ------------
                                                          11,559,583      10,636,211

INTEREST EXPENSE:
   Interest on deposits                                    4,357,495       3,199,205
   Interest on borrowed funds                                162,059         173,181
   Interest on subordinated debentures                       197,747         143,823
                                                        ------------    ------------
                                                           4,717,301       3,516,209
                                                        ------------    ------------

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES       6,842,282       7,120,002
PROVISION FOR LOAN LOSSES                                    575,500         588,000
                                                        ------------    ------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES        6,266,782       6,532,002
                                                        ------------    ------------
NONINTEREST INCOME:
   Fees and service charges on deposit accounts              893,008         948,765
   Service fee income, net                                   149,440         163,953
   Fees and charges on loans                                 152,590         189,196
   Bank owned life insurance                                 293,539         282,856
   Net gain (loss) on sale or write-down of:
      Loans held for sale                                    426,600         541,447
      Real estate owned                                      243,512          11,037
      Premises and equipment                                   7,693               0
      Securities available-for-sale                         (350,591)       (373,841)
                                                        ------------    ------------
                                                           1,815,791       1,763,413
                                                        ------------    ------------

 NONINTEREST EXPENSE:
   Compensation and benefits                               3,313,613       3,407,562
   Occupancy                                               1,095,162       1,059,261
   Marketing and professional                                387,436         239,117
   Other                                                   1,078,568       1,088,560
                                                        ------------    ------------
                                                           5,874,779       5,794,500
                                                        ------------    ------------

INCOME BEFORE INCOME TAXES                                 2,207,794       2,500,915
INCOME TAX EXPENSE                                           691,247         768,735
                                                        ------------    ------------
NET INCOME                                              $  1,516,547    $  1,732,180
                                                        ------------    ------------
Basic earnings per share                                $       0.98    $       1.11
Diluted earnings per share                              $       0.96    $       1.09
Cash dividends per share                                $       0.44    $       0.43
Weighted average basic shares outstanding                  1,547,381       1,557,454
Weighted average diluted shares outstanding                1,576,041       1,596,253
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       14
<PAGE>

                            PINNACLE BANCSHARES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                                                         ACCUMULATED
                                                                                                           OTHER
                                              COMMON STOCK     ADDITIONAL                               COMPREHENSIVE     TOTAL
                                          -------------------   PAID-IN       TREASURY      RETAINED    (LOSS)INCOME,  STOCKHOLDERS'
                                            SHARES    AMOUNT    CAPITAL        STOCK        EARNINGS     NET OF TAX      EQUITY
                                          ---------  --------  ----------- ------------  ------------  -------------   -------------
<S>                                       <C>        <C>       <C>          <C>           <C>           <C>            <C>
BALANCE, December 31, 2003                1,800,813  $ 18,008  $ 8,219,941  $(2,743,245)  $14,508,277   $ (571,785)    $ 19,431,196
   Comprehensive income:
      Net Income                                  0         0            0            0     1,732,180            0        1,732,180
      Change in unrealized gain (loss) on
       securities available- for-sale,
       net of tax                                 0         0            0            0             0     (301,325)        (301,325)
                                                                                                                       ------------
      Comprehensive income                                                                                                1,430,855
   Exercise of stock options                 20,967       210      198,956            0             0            0          199,166
   Cash dividends ($.43 per share)                0         0            0            0      (669,302)           0         (669,302)
   Repurchase of 29,800 shares of common
    stock                                         0         0            0     (477,485)            0            0         (477,485)
                                          -----------------------------------------------------------------------------------------
BALANCE, December 31, 2004                1,821,780    18,218    8,418,897   (3,220,730)   15,571,155     (873,110)      19,914,430
   Comprehensive income:
      Net Income                                  0         0            0            0     1,516,547            0        1,516,547
      Change in unrealized gain (loss) on
       securities available-for-sale,
       net of tax                                 0         0            0            0             0   (1,132,254)      (1,132,254)
                                                                                                                       ------------
      Comprehensive income                                                                                                  384,293
   Exercise of stock options                  6,033        60       61,024            0             0            0           61,084
   Cash dividends ($.44 per share)                0         0            0            0      (681,839)           0         (681,839)
   Repurchase of  18,633 shares of common
    stock                                         0         0            0     (267,994)            0            0         (267,994)
                                          -----------------------------------------------------------------------------------------
BALANCE, December 31, 2005                1,827,813  $ 18,278  $ 8,479,921  $(3,488,724)  $16,405,863   $(2,005,364)   $ 19,409,974
                                          -----------------------------------------------------------------------------------------
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       15
<PAGE>

                           PINNACLE BANCSHARES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                          2005             2004
                                                                      ------------    -------------
<S>                                                                   <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                         $  1,516,547    $   1,732,180
   Adjustments to reconcile net income to net cash provided by
      operating activities:
    Depreciation                                                           493,935          496,550
    Provision for loan losses                                              575,500          588,000
    (Benefit) provision for deferred taxes                                 (44,363)          18,958
    Accretion, net                                                        (171,031)        (525,758)
    Bank owned life insurance income, net                                 (293,539)        (282,856)
   Net (gain) loss on sale or write-down of:

      Loans held for sale                                                 (426,600)        (541,447)
      Securities available-for-sale                                        350,591          373,841
      Real estate owned                                                   (243,512)         (11,037)
      Premises and Equipment                                                (7,693)               0
   Proceeds from sales of loans                                         34,107,645       39,601,726
   Loans originated for sale                                           (32,848,915)    (38,838,411)
   (Increase) decrease in accrued interest receivable                     (118,426)         108,133
   Increase in other assets                                               (127,413)        (146,116)
   Increase in accrued interest payable                                    287,477           58,927
   Increase (decrease) in other liabilities                                267,286         (348,287)
                                                                      ------------    -------------
              Net cash provided by operating activities                  3,317,489        2,284,403
                                                                      ------------    -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net loan (originations) repayments                                   (7,700,188)       5,021,545
   Net change in interest bearing deposits in other banks              (12,883,924)        (228,664)
   Purchases of securities available-for-sale                          (13,191,025)     (69,726,158)
   Proceeds from sales of securities available-for-sale                 10,000,000       46,689,977
   Proceeds from maturing or callable securities available-for-sale      9,367,825       17,180,280
   Proceeds from sale of Federal Home Loan Bank Stock                      222,000          315,400
   Purchases of First National Banker Bancshares Stock                    (525,000)               0
   Purchases of Federal Home Loan Bank Stock                              (312,300)               0
   Purchases of premises and equipment, net                               (655,215)        (429,546)
   Proceeds from sales of real estate owned                              1,216,847        1,009,094
                                                                      ------------    -------------
              Net cash used in investing activities                    (14,460,980)        (168,072)
                                                                      ------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in passbook, NOW, and money market deposit accounts      3,172,184        2,256,791
   Proceeds from sales of time deposits                                 27,679,209       19,460,382
   Payments on maturing time deposits                                  (18,265,113)     (21,690,935)
   Decrease in borrowed funds                                             (205,000)        (885,000)
   Decrease in official checks outstanding                                 (15,219)        (378,280)
   Proceeds from exercise of stock options                                  61,084          199,166
   Repurchase of common stock                                             (267,994)        (477,485)
   Payments of cash dividends                                             (681,839)        (669,302)
                                                                      ------------    -------------
              Net cash provided by (used in) financing activities       11,477,312       (2,184,663)
                                                                      ------------    -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       333,821          (68,331)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                           3,451,046        3,519,377
                                                                      ------------    -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                              $  3,784,867    $   3,451,046
                                                                      ============    =============
SUPPLEMENTAL DISCLOSURES:
   Cash payments for interest                                         $  4,429,824    $   3,457,282
   Cash payments for income taxes                                          680,013          645,000
   Real estate acquired through foreclosure                                755,922          573,673
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       16
<PAGE>

                            PINNACLE BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2005 AND 2004

1.    SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

      NATURE OF OPERATIONS

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

      USE OF ESTIMATES

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

      CONSOLIDATION

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

      CASH AND CASH EQUIVALENTS

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

      SECURITIES

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

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

                                       17
<PAGE>

      LOANS HELD FOR SALE

      Loans held for sale are recorded at the lower of amortized cost or fair
      value, as such loans are not intended to be held to maturity. Net
      unrealized losses measured in the aggregate are recognized in a valuation
      allowance by charges to income. There were no unrealized losses at
      December 31, 2005 or 2004. Gains or losses on loan sales are recognized at
      the time of sale and are determined by the difference between net sales
      proceeds and the carrying value of the loan sold.

      The Company enters into interest rate lock commitments, where customers
      have locked into mortgages at a set interest rate, and forward sales
      commitments, which are sales of mortgage loans to third parties at a
      specified price. These interest rate locks and forward sales commitments
      qualify as derivatives; however, the change in fair value of these
      derivatives during the years ended December 31, 2005 and 2004 did not have
      a material impact on the Company's consolidated financial position or
      results of operations.

      LOANS RECEIVABLE

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

      ALLOWANCE FOR LOAN LOSSES

      The allowance for loan losses is maintained at a level which management
      considers to be adequate to absorb losses inherent in the loan portfolio.
      Management's estimation of the amount of the allowance is based on a
      continuing evaluation of the loan portfolio and includes such factors as
      economic conditions, analysis of individual loans, overall portfolio
      characteristics, delinquencies and the balance of any impaired loans
      (generally considered to be nonperforming loans, excluding residential
      mortgages and other homogeneous loans). Changes in the allowance can
      result from changes in economic events or changes in the creditworthiness
      of the borrowers. The effect of these changes is reflected when known.
      Though management believes the allowance for loan losses to be adequate,
      ultimate losses may vary from estimations. Specific allowances for
      impaired loans are generally based on comparisons of the carrying values
      of the loans to the estimated fair value of the collateral. The Company
      had no loans designated as impaired at December 31, 2005 or 2004.

      LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND PREMIUMS AND DISCOUNTS

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

      REAL ESTATE OWNED

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

                                       18
<PAGE>

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

      LONG-LIVED ASSETS

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

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

      GOODWILL

      The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
      January 1, 2002, and ceased amortizing goodwill. Based upon the initial
      goodwill impairment test completed on January 1, 2002, as required by SFAS
      No. 142, no goodwill impairment was indicated. In addition, the goodwill
      impairment testing completed at December 31, 2005 and 2004, indicated
      there was no goodwill impairment. Therefore, the Company has no changes in
      the carrying amount of goodwill from December 31, 2003 to December 31,
      2005.

      BANK OWNED LIFE INSURANCE

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

      STOCK-BASED COMPENSATION

      In accordance with the provisions of SFAS No. 123, Accounting for
      Stock-Based Compensation, the Company recorded compensation cost under APB
      Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly,
      has not recognized compensation cost through December 31, 2005 due to the
      fact that all options granted were priced at the fair value of the
      underlying stock on the date of grant. Had compensation cost been
      determined, consistent with SFAS No. 123, the impact on the Company's net
      income would not have been material. As further discussed herein, the
      company adopted SFAS No. 123 (R), Share Based Payment on January 1, 2006.

      EARNINGS PER SHARE

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

                                       19
<PAGE>

      The following table represents the earnings per share calculations for the
      years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                            PER
                                     NET                   SHARE
      FOR THE YEARS ENDED          INCOME       SHARES     AMOUNT
-----------------------------    -----------   ---------   ------
<S>                              <C>           <C>        <C>
December 31, 2005
   Basic earnings per share      $ 1,516,547   1,547,381   $ 0.98
                                 -----------               ------
   Dilutive securities                            28,660
                                               ---------
   Diluted earnings per share    $ 1,516,547   1,576,041   $ 0.96
                                 ===========   =========   ======

December 31, 2004
   Basic earnings per share      $ 1,732,180   1,557,454   $ 1.11
                                 -----------               ------
   Dilutive securities                            38,799
                                               ---------
   Diluted earnings per share    $ 1,732,180   1,596,253   $ 1.09
                                 ===========   =========   ======
</TABLE>

For the years ended December 31, 2005 and 2004, no options were excluded from
the calculation of diluted EPS, as the exercise price of all option was less
than the average market price.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is considered
other-than-temporary unless: (i) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for an anticipated
recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the
Company began presenting the new disclosure requirements in its consolidated
financial statements for the year ended December 31, 2003. The recognition and
measurement provisions were initially effective for other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004.
However, in September 2004, the effective date of these provisions was delayed
until the finalization of a FASB Staff Position (FSP) to provide additional
implementation guidance. On November 3, 2005, the FASB issued FASB Staff
Position (FSP) FAS 115-1 and FAS 124-1. "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The FSP addresses
determining when an investment is considered impaired and whether the impairment
is other than temporary, and measuring an impairment loss. The FSP also
addresses the accounting after an entry recognizes an other-than-temporary
impairment, and requires certain disclosures about unrealized losses that the
entry did not recognize as other-than-temporary impairments. The FSP is
effective for reporting periods beginning after December 15, 2005. The Company
does not expect the adoption of this FSP to have a material impact on the
consolidated balance sheet or statement of income for the Company.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation.
This statement supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based compensation transactions using APB 25 and
requires that the compensation costs relating to such transactions be recognized
in the consolidated statement of operations. The Company adopted SFAS No. 123(R)
on January 1, 2006. The impact of its adoption did not have a material impact on
the consolidated statements of financial condition or statements of operations
for the Company.

                                       20
<PAGE>

On March 25, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107").
SAB 107 provides guidance regarding the valuation of share-based payment
arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS No. 123(R) in an interim period,
capitalization of compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), the modification of employee share options prior to
adoption of SFAS No. 123(R) and disclosures in Management's Discussion and
Analysis subsequent to adoption of SFAS No. 123(R). The Company does not expect
this Staff Accounting Bulletin to have a material impact on the consolidated
statements of financial condition or statements of operations for the Company.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 requires restatement of prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. Also, SFAS No. 154 requires that retrospective application of a change
in accounting principle be limited to the direct effects of the change. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect this
statement to have a material impact on the consolidated statements of financial
condition or statements of operations for the Company.

                                       21
<PAGE>

2.    SECURITIES

      The amortized cost, unrealized gross gains and losses, and estimated fair
      value of securities available-for-sale at December 31, 2005 and 2004 are
      as follows:

<TABLE>
<CAPTION>
                                                             December 31, 2005
                                         -----------------------------------------------------
                                          Amortized    Unrealized    Unrealized       Fair
                                            Cost       Gross Gain    Gross Loss       Value
                                         -----------   ----------    -----------   -----------
<S>                                      <C>           <C>           <C>           <C>
Securities of U.S. Government Agencies   $53,969,115   $        0    ($2,205,136)  $51,763,979
Other Securities                                 716            0              0           716
Mortgage-Backed Securities                29,903,921       35,575     (1,050,260)   28,889,236
                                         -----------   ----------    -----------   -----------
                                         $83,873,752   $   35,575    ($3,255,396)  $80,653,931
                                         ===========   ==========    ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                             December 31, 2004
                                         -----------------------------------------------------
                                          Amortized    Unrealized    Unrealized       Fair
                                             Cost      Gross Gain    Gross Loss       Value
                                         -----------   ----------    -----------   -----------
<S>                                      <C>           <C>           <C>           <C>
Securities of U.S. Government Agencies   $58,957,618   $        0    ($1,039,671)  $57,917,947
Other Securities                                 716            0              0           716
Mortgage-Backed Securities                31,460,672      135,454       (489,388)   31,106,738
                                         -----------   ----------    -----------   -----------
                                         $90,419,006   $  135,454    ($1,529,059)  $89,025,401
                                         ===========   ==========    ===========   ===========
</TABLE>

      The amortized cost and estimated fair value of securities
      available-for-sale at December 31, 2005 by contractual maturity are shown
      below. Expected maturities will differ from contractual maturities because
      the issuers may have the right to call or prepay obligations with or
      without call or prepayment penalties.

<TABLE>
<CAPTION>
                                          Amortized       Fair
                                             Cost         Value
                                         -----------   -----------
<S>                                      <C>           <C>
Due in one year or less                  $ 3,000,000   $ 2,977,015
Due after one year through five years     47,969,115    45,922,046
Due after five years through ten years     3,000,716     2,865,634
                                         -----------   -----------
                                          53,969,831    51,764,695
Mortgage-Backed Securities                29,903,921    28,889,236
                                         -----------   -----------
                                         $83,873,752   $80,653,931
                                         ===========   ===========
</TABLE>

      Securities of approximately $30 million and $26 million at December 31,
      2005 and 2004, respectively, were pledged to secure deposits. Deposits
      associated with pledged securities had aggregate balances of approximately
      $23 million and $19 million at December 31, 2005 and 2004, respectively.

      Proceeds from the sale of available-for-sale securities during the
      year-ended December 31, 2005 and 2004 were $10.0 million and $46.7
      million, respectively. Gross realized gains on sales of available-for-sale
      securities were $0 and $35,278 during 2005 and 2004, respectively. Gross
      realized losses on sales of available-for-sale securities were $350,591
      and $409,119 during 2005 and 2004, respectively.

                                       22

<PAGE>

      The following table shows the Company's combined investments' gross
      unrealized losses and fair values, aggregated by investment category and
      length of time that individual securities have been in continuous
      unrealized loss position, at December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                  DECEMBER 31, 2005
                                                  --------------------------------------------------
                                                    LESS THAN 12 MONTHS         12 MONTHS OR MORE       TOTAL
                                                  -----------------------   ------------------------  ----------
                                        Fair      Unrealized     Fair       Unrealized      Fair      Unrealized
                                        Value     Gross Loss     Value      Gross Loss      Value     Gross Loss
                                     -----------  ----------  -----------   -----------  -----------  ----------
<S>                                  <C>          <C>         <C>           <C>          <C>          <C>
Securities of U.S. Government
  Agencies                           $ 5,829,401  $   43,004  $45,934,536   $ 2,162,132  $51,763,937  $2,205,136
Mortgage-Backed Securities             7,470,940     204,464   20,526,037       845,796   27,996,977   1,050,260
                                     -----------  ----------  -----------   -----------  -----------  ----------
                                     $13,300,341  $  247,468  $66,460,573   $ 3,007,928  $79,760,914  $3,255,396
                                     ===========  ==========  ===========   ===========  ===========  ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                  DECEMBER 31, 2004
                                                  --------------------------------------------------
                                                    LESS THAN 12 MONTHS         12 MONTHS OR MORE       TOTAL
                                                  -----------------------   ------------------------  ----------
                                        Fair      Unrealized     Fair       Unrealized      Fair      Unrealized
                                        Value     Gross Loss     Value      Gross Loss      Value     Gross Loss
                                     -----------  ----------  -----------   -----------  -----------  ----------
<S>                                  <C>          <C>         <C>           <C>          <C>          <C>
Securities of U.S. Government
     Agencies                        $47,268,066  $  685,135  $10,640,077   $   354,536  $57,908,143  $1,039,671
Mortgage-Backed Securities            25,039,575     475,608    1,134,323        13,780   26,173,898     489,388
                                     -----------  ----------  -----------   -----------  -----------  ----------
                                     $72,307,641  $1,160,743  $11,774,400   $   368,316  $84,082,041  $1,529,059
                                     ===========  ==========  ===========   ===========  ===========  ==========
</TABLE>

      At December 31, 2005, the Company had 37 individual investment positions
      that were in an unrealized loss position or impaired for more than twelve
      months. At December 31, 2004, the Company had 9 individual investment
      positions that were in an unrealized loss position or impaired for more
      than twelve months. All of these investment positions' impairments are
      deemed not to be other-than temporary impairments and are primarily due to
      the fact that these securities have experienced volatility in their fair
      value as a result of current market conditions, with no credit concerns
      related to the entities that issued the securities. The Company does not
      expect any other than temporary impairment to develop related to these
      investment securities and has the ability and intent to hold these
      securities until maturity or a market price recovery.

3.    LOANS RECEIVABLE

      Loans receivable, net at December 31, 2005, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                    2005                 2004
                                                                                ------------        -------------
<S>                                                                             <C>                 <C>
Residential and commercial real estate mortgage loans with variable rates       $ 27,572,764        $  29,688,078
Residential and commercial real estate mortgage loans with fixed rates            35,424,907           34,672,845
Real estate construction loans                                                    17,992,583           12,019,555
Commercial loans                                                                  12,939,880           10,806,851
Consumer loans                                                                    13,877,710           13,709,262
                                                                                ------------        -------------
                                                                                 107,807,844          100,896,591
Allowance for loan losses                                                         (1,383,410)          (1,167,263)
Unearned income                                                                     (168,917)            (129,329)
                                                                                ------------        -------------
                                                                                $106,255,517        $  99,599,599
                                                                                ============        =============
</TABLE>

                                       23

<PAGE>

      During fiscal years 2005 and 2004, certain executive officers and
      directors of the Bank were loan customers of the Bank. Total loans
      outstanding to these persons at December 31, 2005 and 2004 amounted to
      $814,214 and $884,367, respectively. The change from December 31, 2004 to
      December 31, 2005 reflects payments amounting to $120,833 and advances of
      $50,680 made during the year.

      The Bank has a credit concentration in residential and commercial real
      estate mortgage loans. Approximately $63 million and $64 million at
      December 31, 2005 and 2004, respectively, of the Bank's total loan
      portfolio represented first or second mortgage residential and commercial
      real estate loans. Substantially all of the Bank's loan customers are
      located in the Bank's primary lending areas of Walker, Winston, Jefferson,
      and Shelby counties in Alabama. Although the Bank believes that its
      underwriting standards are generally conservative, including a policy
      calling for low loan to collateral values, the ability of its borrowers to
      meet their mortgage obligations is dependent upon local economic
      conditions. At December 31, 2005, the largest amount loaned by the Bank to
      one borrower was $2.4 million, which was approximately 12% of the
      Company's stockholders' equity.

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

<TABLE>
<CAPTION>
                                               2005          2004
                                           -----------   -----------
<S>                                        <C>           <C>
Balance at beginning of year               $ 1,167,263   $ 1,467,128
Charge-offs                                   (517,003)   (1,070,765)
Recoveries                                     157,650       182,900
Provision                                      575,500       588,000
                                           -----------   -----------
Balance at end of year                     $ 1,383,410   $ 1,167,263
                                           ===========   ===========
</TABLE>

      The Bank was servicing first mortgage loans for others totaling
      $56,301,424 and $65,602,308 at December 31, 2005 and 2004, respectively.
      The liability associated with the Company's total servicing portfolio at
      December 31, 2005 and 2004 was not deemed significant by the Company.

      At December 31, 2005, the Bank had outstanding loan commitments of
      $33,015,836, including $8,208,470 in undisbursed construction loans in
      process; $22,695,166 in unused lines and letters of credit; and $2,112,200
      in commitments to originate mortgage loans consisting primarily of 30-day
      commitments. Commitments to originate conventional mortgage loans
      consisted of fixed-rate mortgages all having terms ranging from 15 to 30
      years.

      The Company had approximately $236,172 and $726,000 of loans classified as
      non-accrual at December 31, 2005 and 2004, respectively. During the years
      ended December 31, 2005 and 2004, gross interest income of $4,888 and
      $8,941, respectively, would have been recorded on loans accounted for on a
      non-accrual basis if the loans had been current throughout the period. The
      amount of interest income included in current income for these loans was
      $3,161 and $5,743 for the years ended December 31, 2005 and 2004,
      respectively.

4.    REAL ESTATE OWNED

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

<TABLE>
<CAPTION>
                                                  2005             2004
                                               ---------         --------
<S>                                            <C>               <C>
Balance at beginning of year                   $  61,626         $ 65,626
Provision                                              0                0
Charge-offs, net of recoveries                    (7,321)          (4,000)
                                               ---------         --------
Balance at end of year                         $  54,305         $ 61,626
                                               =========         ========
</TABLE>

                                       24

<PAGE>

5.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 2005 and 2004 are summarized as
      follows:

<TABLE>
<CAPTION>
                                                 2005             2004
                                             -----------      -----------
<S>                                          <C>              <C>
Land                                         $ 1,196,928      $   883,230
Buildings and leasehold improvements           6,767,526        6,677,797
Furniture, fixtures, and equipment             5,228,973        5,034,866
Construction in Process                           61,777                0
Automobiles                                       96,014          113,014
                                             -----------      -----------
                                              13,351,218       12,708,907
Less accumulated depreciation                 (7,459,125)      (6,985,787)
                                             -----------      -----------
                                             $ 5,892,093      $ 5,723,120
                                             ===========      ===========
</TABLE>

      Depreciation expense for the fiscal years ended December 31, 2005 and 2004
      on premises and equipment was approximately $494,000 and $497,000,
      respectively.

      The Bank had noncancelable operating leases for the main and branch office
      sites. Occupancy expenses for the fiscal years ended December 31, 2005 and
      2004, respectively, include rental expense under these leases of $121,616
      and $108,061, respectively. Future rental payments subject to periodic
      renegotiations required under these leases are as follows:

<TABLE>
<CAPTION>
At December 31, 2005                          Amount
--------------------                         --------
<S>                                          <C>
2006                                         $ 84,058
2007                                           67,944
2008                                           41,445
2009                                           42,256
2010                                           43,092
Thereafter                                    257,700
                                             --------
         Total                               $536,495
                                             ========
</TABLE>

      The Bank has a lease agreement for the building in which the main office
      branch is located that generated income of $97,836 for the fiscal years
      ended December 31, 2005 and 2004, respectively. The Bank also has a lease
      from a related party for a building that formerly housed administrative
      offices. This lease generated income of $56,000 for each of the fiscal
      years ended December 31, 2005 and 2004, respectively.

                                       25

<PAGE>

6.    DEPOSITS

      Deposits at December 31, 2005 and 2004 are summarized as follows:

<TABLE>
<CAPTION>
                                                        2005             2004
                                                   -------------    -------------
<S>                                                <C>              <C>
Passbook accounts                                  $  15,434,075    $  18,047,218
NOW accounts                                          27,499,565       19,635,415
Money market deposit accounts                          7,310,568        8,934,786
Noninterest-bearing accounts                          10,686,517       11,022,644
                                                   -------------    -------------
                                                      60,930,725       57,640,063

Time deposits:
   Fixed-rate certificates less than $100,000         71,341,503       69,037,464
   Fixed-rate certificates greater than $100,000      60,279,687       53,288,108
                                                   -------------    -------------
                                                     131,621,190      122,325,572
                                                   -------------    -------------
                                                   $ 192,551,915    $ 179,965,635
                                                   =============    =============
</TABLE>

      The amounts and scheduled maturities of time deposits at December 31, 2005
      are as follows:

<TABLE>
<S>                                                <C>
2006                                               $  85,626,450
2007                                                  24,786,814
2008                                                   8,443,577
2009                                                   9,330,483
2010 and thereafter                                    3,433,866
                                                   -------------
                                                   $ 131,621,190
                                                   =============
</TABLE>

      Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                                       2005              2004
                                                   -------------    -------------
<S>                                                <C>              <C>
Passbook accounts                                  $      58,434    $      59,200
NOW accounts                                             154,106           26,837
Money market deposit accounts                            156,543           58,034
Fixed-rate certificates less than $100,000             2,105,852        1,766,818
Fixed-rate certificates greater than $100,000          1,882,560        1,288,316
                                                   -------------    -------------
                                                   $   4,357,495    $   3,199,205
                                                   =============    =============
</TABLE>

                                       26

<PAGE>

7.    SUBORDINATED DEBT

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

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

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

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

      Debt issuance cost of $56,000 consisting primarily of underwriting
      discounts and professional fees are included in other assets in the
      accompanying consolidated statements of financial condition as of December
      31, 2005. These debt issuance costs are being amortized over 30 years
      using the straight-line method.

                                       27

<PAGE>

8.    BORROWED FUNDS

      Borrowed funds at December 31, 2005 and 2004 are summarized as follows:

<TABLE>
<CAPTION>
                                                                     2005          2004
                                                                  ----------    ----------
<S>                                                               <C>           <C>
Warrants payable: $2,375,000 with an interest rate of 5.86%,
maturing, one year or less.                                       $2,375,000    $2,580,000

Short term advances from the Federal Home Loan Bank of Atlanta:            0             0
                                                                  ----------    ----------
                                                                  $2,375,000    $2,580,000
                                                                  ==========    ==========
</TABLE>

      The Company has available credit of $33,100,000 at the FHLB of Atlanta,
      Georgia at December 31, 2005. The FHLB notes are payable to the FHLB of
      Atlanta and are secured by FHLB stock owned by the Bank with a carrying
      value of $507,300, as well a pledge of all the real estate loans owned by
      the Bank secured by qualified first liens on one-to-four unit single
      family dwellings. The total carrying value of qualified mortgages owned by
      the Bank at December 31, 2005 was $28,298,000 There were no FHLB advances
      outstanding at December 31, 2005. Interest rates on the notes are fixed
      and interest is payable monthly. Principal on the notes is payable at
      maturity or in semiannual principal reductions until maturity. The maximum
      amounts outstanding under advances from the Federal Home Loan Bank of
      Atlanta during 2005 and 2004 were $7,300,000 and $10,000,000,
      respectively. The average amounts outstanding during 2005 and 2004 were
      $572,000 and $1,548,000, respectively.

                                       28

<PAGE>

9.    INCOME TAXES

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

<TABLE>
<CAPTION>
                                     Federal       State         Total
                                   ----------   ----------    ----------
<S>                                <C>          <C>           <C>
Year ended December 31, 2005:
    Current                        $  674,602   $   61,008    $  735,610
    Deferred                          (37,300)      (7,063)      (44,363)
                                   ----------   ----------    ----------
                                   $  637,302   $   53,945    $  691,247
                                   ==========   ==========    ==========

Year ended December 31, 2004:
    Current                        $  693,690   $   56,087    $  749,777
    Deferred                           15,965        2,993        18,958
                                   ----------   ----------    ----------
                                   $  709,655   $   59,080    $  768,735
                                   ==========   ==========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   2005          2004
                                                ----------    ----------
<S>                                             <C>           <C>
Tax expense at federal income tax rate          $  750,650    $  850,311
Increase (decrease) resulting from:
  State income tax, net of federal tax benefit      35,603        38,994
  Cash surrender value of bank owned life
  insurance, net of premiums                       (99,803)      (94,597)
  Other                                              4,797       (25,973)
                                                ----------    ----------
                                                $  691,247    $  768,735
                                                ==========    ==========

Effective income tax rate                             31.3%         30.7%
                                                ==========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                               December 31,  December 31,
                                                   2005          2004
                                               ------------  ------------
<S>                                            <C>           <C>
Allowance for loan losses                       $  511,862    $  431,888
Unrealized loss on securities
 available-for-sale                              1,223,532       529,570
Other real estate                                    9,698        25,572
Other                                               77,444        70,873
                                                ----------    ----------
              Deferred tax assets                1,822,536     1,057,903
                                                ==========    ==========
Premises & equipment, net                         (566,130)     (511,370)
FHLB stock                                         (24,985)      (53,437)
                                                ----------    ----------
              Deferred tax liabilities            (591,115)     (564,807)
                                                ----------    ----------
Net deferred tax assets                         $1,231,421    $  493,096
                                                ==========    ==========
</TABLE>

      In assessing the realizability of deferred tax assets, management
      considers whether it is more likely than not that some portion or all of
      the deferred tax assets will not be realized. The ultimate realization of
      deferred tax assets is dependent upon the generation of future taxable
      income during the periods in which those temporary differences become
      deductible. Management considers the scheduled reversal of deferred tax
      liabilities, projected future taxable income, and tax planning strategies
      in making this assessment. Based upon the level of historical taxable
      income and projection for future taxable income over the periods which the
      temporary differences resulting in the deferred tax and assets are
      deductible, management believes it is more likely than not that the
      Company will realize the benefits of these deductible differences.

                                       29

<PAGE>

10.   COMPENSATION AND BENEFITS

      The Bank maintains a noncontributory profit sharing plan and a
      contributory 401(k) plan. The Company's contributions to these plans were
      $81,415 and $86,144 in fiscal years ended December 31, 2005 and 2004,
      respectively.

      The Company and the Bank have an employment agreement with the chief
      executive officer which provides for compensation and benefits in the
      event the chief executive officer is terminated. The maximum aggregate
      liability at December 31, 2005 for termination is approximately $412,067.

11.   LONG-TERM INCENTIVE COMPENSATION PLAN

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

      A summary of the status of the Company's stock option plan at December 31,
      2005 and 2004 and the changes during the years then ended is as follows:

<TABLE>
<CAPTION>
                                              2005                     2004
                                        -----------------       ------------------
                                                 Weighted                 Weighted
                                                 Average                  Average
                                                 Exercise                 Exercise
                                        Shares     Price        Shares     Price
                                        ------   --------       -------   --------
<S>                                     <C>      <C>            <C>       <C>
Outstanding at beginning of year        70,366   $   9.30        91,333   $    9.34
Granted                                      0          0             0           0
Exercised                               (6,033)     10.13       (20,967)       9.44
Forfeited                               (2,000)     10.13             0           0
                                        ------   --------       -------   --------
Outstanding at end of year              62,333   $   9.19        70,366   $    9.30
                                        ======   ========       =======   ========

Exercisable at end of year              62,333   $   9.19        70,366   $    9.30
                                        ======   ========       =======   ========
Fair value of options granted              N/A                      N/A
                                        ======                  =======
</TABLE>

      The following table summarizes information about these stock options at
      December 31, 2005:

<TABLE>
<CAPTION>
                    Number outstanding       Remaining
Exercise                   At               Contractual
 Price              December 31, 2005           Life
--------            ------------------      -----------
<S>                 <C>                     <C>
$  8.81                   44,500               1 years

$ 10.13                   17,833             3.4 years
                          ------
                          62,333
                          ======
</TABLE>

12.   STOCKHOLDERS' EQUITY

      Dividends are paid by the Company from funds provided by dividends from
      the Bank. However, certain regulatory restrictions exist regarding the
      ability of the Bank to transfer funds to the Company in the form of cash
      dividends,

                                       30

<PAGE>

      loans, or advances. As of January 1, 2006, approximately $2.0 million of
      the Bank's retained earnings was available for distribution without prior
      regulatory approval.

      The Company and the Bank are subject to various regulatory capital
      requirements that prescribe quantitative measures of the Company's and
      Bank's assets, liabilities, and certain off-balance sheet items. The
      regulators have also imposed qualitative guidelines for capital amounts
      and classifications such as risk weightings, capital components, and other
      details. The quantitative measures to ensure capital adequacy require that
      the Company and the Bank maintain amounts and ratios, as set forth in the
      schedule below, of Total and Tier I capital (as defined in the
      regulations) to risk-weighted assets (as defined) and of Tier I capital to
      average total assets (as defined). Failure to meet minimum capital
      requirements can initiate certain actions by regulators that, if
      undertaken, could have a direct material effect on the Company's financial
      statements. Management believes, as of December 31, 2005 and 2004, that
      the Company and the Bank meet all capital adequacy requirements imposed by
      its regulators.

      As of December 31, 2005 and 2004, the most recent notification from the
      Federal Deposit Insurance Corporation categorized the Bank as well
      capitalized under the regulatory framework for prompt corrective action.
      To be categorized as well capitalized, the Bank must maintain minimum
      Total risk-based, Tier I risk-based, and Tier I leverage ratios as set
      forth in the table. There have been no conditions or events since that
      notification that Management believes have changed the institution's
      category.

      Actual capital amounts as well as required and well capitalized Tier I,
      Total, and Tier I leverage ratios as of December 31, 2005 for the Company
      and the Bank are as follows:

<TABLE>
<CAPTION>
                                                                                                      To be Well-Capitalized
                                                                                For                        Under Prompt
                                                                              Capital                       Corrective
                                                     Actual              Adequacy Purposes               Action Provisions
                                               -----------------     --------------------------     ----------------------------
                                                Amount     Ratio        Amount          Ratio          Amount           Ratio
                                               -------     -----     -------------    ---------     -------------    -----------
                                                                 (Dollar Amounts in Thousands)
<S>                                            <C>         <C>       <C>              <C>           <C>              <C>
As of December 31, 2005:
    Total Capital (to Risk Weighted Assets):
       Consolidated                            $25,491      19.9%    = or >$10,259    = or >8.0%              N/A            N/A
       Pinnacle Bank                            22,491      17.5     = or >$10,259    = or >8.0     = or >$12,824     = or >10.0%
    Tier I Capital (to Risk Weighted Assets):
       Consolidated                             24,108      18.8       = or >5,130    = or >4.0               N/A            N/A
       Pinnacle Bank                            21,108      16.5       = or >5,130    = or >4.0       = or >7,694      = or >6.0
    Tier I Capital (to Average Assets):
       Consolidated                             24,108      11.0       = or >8,784    = or >4.0               N/A            N/A
       Pinnacle Bank                            21,108       9.6       = or >8,784    = or >4.0      = or >10,981      = or >5.0
As of December 31, 2004:
    Total Capital (to Risk Weighted Assets):
       Consolidated                            $24,647      20.8%    = or >$ 9,459    = or >8.0%              N/A            N/A
       Pinnacle Bank                            21,647      18.3      = or > 9,459    = or >8.0     = or >$11,824     = or >10.0%
    Tier I Capital (to Risk Weighted Assets):
       Consolidated                             23,480      19.9       = or >4,729    = or >4.0               N/A            N/A
       Pinnacle Bank                            20,480      17.3       = or >4,729    = or >4.0       = or >7,094      = or >6.0
    Tier I Capital (to Average Assets):
       Consolidated                             23,480      11.2       = or >8,391    = or >4.0               N/A            N/A
       Pinnacle Bank                            20,480       9.8       = or >8,391    = or >4.0      = or >10,489      = or >5.0
</TABLE>

      As of December 31, 2005, the $3.0 million of Trust Preferred Securities
      qualifies as Tier I Capital under current regulators definitions. If these
      Trust Preferred Securities had not been included in the consolidated
      capital calculations, the Company would have still been classified as well
      capitalized.

      On April 25, 2003, the Company announced a stock repurchase program to
      acquire up to 80,000 shares of common stock. The Company completed this
      plan on May 20, 2005. On June 10, 2004, the Company announced a

                                       31

<PAGE>

      supplemental stock repurchase program to acquire an additional 5% of the
      Company's outstanding shares outstanding upon completion of its current
      repurchase program, or 77,169 shares. For the year ended December 31,
      2005, under both plans the Company had repurchased 18,633 shares at an
      average price of $14.38 per share. The repurchase programs are dependent
      upon market conditions and other requirements, and there is no guarantee
      as to the exact number of shares to be repurchased by the Company.

      COMPREHENSIVE INCOME

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

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

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

<TABLE>
<CAPTION>
                                                                       2005
                                                   --------------------------------------------
                                                      Before                          After
                                                        Tax              Tax           Tax
                                                      Amount            Effect        Amount
                                                   ------------       ---------    ------------
<S>                                                <C>                <C>          <C>
Unrealized losses arising during the year          $ (2,176,807)      $ 823,681    $ (1,353,126)

Reclassification for adjustments for
    losses included in net earnings                     350,591        (129,719)        220,872
                                                   ------------       ---------    ------------
Net change in unrealized losses on securities      $ (1,826,216)      $ 693,962    $ (1,132,254)
                                                   ============       =========    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                       2004
                                                   --------------------------------------------
                                                      Before                           After
                                                       Tax               Tax            Tax
                                                      Amount            Effect         Amount
                                                   ------------       ---------    ------------
<S>                                                <C>                <C>          <C>
Unrealized gains arising during the year           $   (859,850)      $ 311,790    $   (548,060)
Reclassification for adjustments for
    gains included in net earnings                      373,841        (127,106)        246,735
                                                   ------------       ---------    ------------
Net change in unrealized gains on securities       $   (486,009)      $ 184,684    $   (301,325)
                                                   ============       =========    ============
</TABLE>

13.   FAIR VALUES OF FINANCIAL INSTRUMENTS

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

      Quoted market prices, if available, are utilized as an estimate of the
      fair value of financial instruments. In cases where quoted market prices
      are not available, fair values have been estimated using present value or
      other valuation techniques. These methods are highly sensitive to the
      assumptions used by management, such as those concerning appropriate
      discount rates and estimates of future cash flows. Different assumptions
      could significantly affect the estimated fair value amounts presented
      above. In that regard, the derived fair value estimates cannot be

                                       32

<PAGE>

      substantiated by comparison to independent markets and, in many cases,
      could not be realized in the immediate settlement of the instrument.
      Further, assets that are not financial instruments are not included in the
      following table. Accordingly, the aggregate estimated fair value amounts
      presented do not represent the underlying value of the Company.

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

<TABLE>
<CAPTION>
                                                       AT DECEMBER 31, 2005          AT DECEMBER 31, 2004
                                                   --------------------------     -------------------------
                                                     CARRYING     ESTIMATED        CARRYING      ESTIMATED
                                                      AMOUNT      FAIR VALUE        AMOUNT       FAIR VALUE
                                                   -----------   ------------     ----------     ----------
                                                                        (IN THOUSANDS)
<S>                                                <C>           <C>              <C>            <C>
ASSETS:
    Cash on hand and in banks                      $     3,785   $      3,785     $    3,451     $    3,451
    Interest-bearing deposits in other banks            13,369         13,369            485            485
    Securities available-for-sale                       80,654         80,654         89,025         89,025
    FHLB stock                                             507            507            417            417
    FNBB stock                                             525            525              0              0
    Loans held for sale                                    374            374          1,206          1,206

    Loans receivable, net                              106,255        106,912         99,600        101,258
    Accrued interest receivable                          1,373          1,373          1,254          1,254

LIABILITIES:
    Deposits                                       $   192,552   $    192,069     $  179,966     $  180,781
    Subordinated Debt                                    3,093          3,093          3,093          3,093
    Borrowed funds                                       2,375          2,841          2,580          3,126
    Accrued interest payable                               786            786            499            499
</TABLE>

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

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

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

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

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

      DEPOSITS. The fair value of deposits with no stated maturity, such as
      interest and noninterest-bearing deposits, NOW accounts, savings accounts,
      and money market accounts, is by definition, equal to the amount payable
      on demand at the reporting date (i.e., their carrying amounts). Fair
      values for certificates of deposits are estimated

                                       33

<PAGE>

      using a discounted cash flow analysis that applies rates currently offered
      for certificates of deposits with similar remaining maturities. The
      carrying amount of accrued interest payable on deposits approximates its
      fair value.

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

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

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

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

14.   CONTINGENCIES

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

                                       34

<PAGE>

15.   CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

                             STATEMENTS OF CONDITION

                           DECEMBER 31, 2005 AND 2004
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             2005         2004
                                                           -------      -------
<S>                                                        <C>          <C>
ASSETS:
    Cash and cash equivalents                              $     1      $    12
    Interest-bearing deposits in other banks                 2,729        3,035
    Debt issue cost                                             56           58
    Investment in unconsolidated subsidiary                     93           93
    Investment in Pinnacle  Bank                            19,590       19,811
    Other assets                                                89           43
                                                           -------      -------
              Total assets                                 $22,558      $23,052
                                                           =======      =======

LIABILITIES:
    Subordinated debt                                      $ 3,093      $ 3,093
    Other liabilities                                           55           45
                                                           -------      -------
               Total liabilities                             3,148        3,138
                                                           -------      -------

STOCKHOLDERS' EQUITY:
    Common stock                                                18           18
    Additional paid in capital                               8,480        8,419
    Treasury shares at cost                                 (3,489)      (3,221)
    Retained earnings                                       16,406       15,571
    Accumulated other comprehensive loss, net of tax        (2,005)        (873)
                                                           -------      -------
              Total stockholders' equity                    19,410       19,914
                                                           -------      -------
              Total liabilities and stockholders' equity   $22,558      $23,052
                                                           =======      =======
</TABLE>

                                       35

<PAGE>

                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            2005         2004
                                                          -------       -------
<S>                                                       <C>           <C>
INCOME:
    Dividend income from Pinnacle Bank                    $   682       $   669
    Interest income                                            83            40
                                                          -------       -------
           Total income                                       765           709

EXPENSE                                                       204           149
                                                          -------       -------

INCOME BEFORE EQUITY IN UNDISTRIBUTED
     INCOME OF SUBSIDIARY                                     561           560
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY                  956         1,172
                                                          -------       -------
           Net income                                     $ 1,517       $ 1,732
                                                          =======       =======
</TABLE>

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            2005          2004
                                                          -------       -------
<S>                                                       <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                            $ 1,517       $ 1,732
    Adjustments to reconcile net income to net
       cash provided by operating activities:
       Undistributed income of subsidiary                    (956)       (1,172)
       Increase in other assets                               (46)          (43)
       Increase in other liabilities                           57            73
                                                          -------       -------
              Net cash provided by operating activities       572           590
                                                          -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Net change in interest bearing deposits
       in other banks                                         306           363
                                                          -------       -------
              Net cash provided by  investing activities      306           363
                                                          -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repurchase of shares of common stock                     (268)         (477)
    Proceeds from stock options exercised                      61           199
    Cash dividends paid                                      (682)         (669)
                                                          -------       -------
              Net cash (used in) provided by
                 financing activities                        (889)         (947)
                                                          -------       -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (11)            6

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                 12             6
                                                          -------       -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                  $     1       $    12
                                                          =======       =======
</TABLE>

                                       36

<PAGE>

16.   INVESTMENT IN AFFILIATED COMPANIES (UNAUDITED)

      Investments in affiliated companies accounted for under the equity method
      consist of 100% of common stock of Pinnacle Capital Trust I ("Trust"), a
      wholly-owned statutory business trust. The Trust was formed on December
      22, 2003. Summary unaudited financial information for the Trust as of
      December 31, 2005 and 2004 follows (dollars in thousands):

                              SUMMARY BALANCE SHEET

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  2005         2004
                                                                 -------      -------
<S>                                                              <C>          <C>
ASSETS:
    Investment in subordinated debentures issued by
        Pinnacle Bancshares, Inc.                                $ 3,093      $ 3,093
                                                                 =======      =======

LIABILITIES:                                                     $     0      $     0

EQUITY:
    Trust preferred securities                                     3,000        3,000
    Common stock (100% owned by Pinnacle Bancshares, Inc.)            93           93
                                                                 -------      -------
    TOTAL EQUITY                                                   3,093        3,093
                                                                 -------      -------
TOTAL LIABILITIES & EQUITY                                       $ 3,093      $ 3,093
                                                                 -------      -------
</TABLE>

                            SUMMARY INCOME STATEMENT

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  2005         2004
                                                                 -------      -------
<S>                                                              <C>          <C>
INCOME:
    Interest income from subordinated debentures issued
      by Pinnacle Bancshares, Inc.                               $   198      $   144
                                                                 -------      -------

NET INCOME                                                       $   198      $   144
                                                                 =======      =======
</TABLE>

                                       37

<PAGE>

SELECTED QUARTERLY INFORMATION (UNAUDITED)

A summary of unaudited results of operations for each quarter of the years ended
December 31, 2005 and 2004 follows:

<TABLE>
<CAPTION>
                                                              FIRST           SECOND          THIRD      FOURTH
                                                             QUARTER          QUARTER        QUARTER     QUARTER
                                                            ----------      ----------     ----------   ----------
<S>                                                         <C>             <C>            <C>          <C>
Year Ended December 31, 2005:
    Interest revenue                                        $2,689,858      $2,814,367     $2,970,511   $3,084,847
    Interest expense                                         1,002,142       1,094,753      1,240,265    1,380,141
    Net interest income after provision for loan losses      1,531,716       1,572,614      1,592,746    1,569,706
    Noninterest income                                         447,435         469,070        560,922      338,364
    Noninterest expense                                      1,511,035       1,446,521      1,471,387    1,445,836
    Net income                                                 326,055         406,769        461,508      322,215
    Basic earnings per share                                      0.21            0.26           0.30         0.21
    Diluted earnings per share                                    0.21            0.26           0.29         0.21

Year Ended December 31, 2004:
    Interest revenue                                        $2,617,329      $2,692,624     $2,663,150   $2,663,108
    Interest expense                                           856,603         863,679        876,902      919,025
    Net interest income after provision for loan losses      1,613,726       1,681,945      1,639,248    1,597,083
    Noninterest income                                         441,345         617,758        197,957      506,353
    Noninterest expense                                      1,427,453       1,458,537      1,382,914    1,525,596
    Net income                                                 418,679         553,121        309,358      451,022
    Basic earnings per share                                      0.27            0.35           0.20         0.29
    Diluted earnings per share                                    0.26            0.35           0.20         0.28
</TABLE>

                                       38

<PAGE>

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

                                 Greg Batchelor
                 President, Dependable True Value Hardware, Inc.

                                   O. H. Brown
                               Haynes Downard LLP

                                  Al H. Simmons
                   Insurance Agent, Pittman & Associates, Inc.

                                   Max Perdue
                                     Retired

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

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

                                 James W. Cannon
                                     Retired
                              Chairman of the Board
                            Pinnacle Bancshares, Inc.
                                  Pinnacle Bank

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

                 EXECUTIVE OFFICERS -- PINNACLE BANCSHARES, INC.

                              Robert B. Nolen, Jr.
                                    President

                                 Mary Jo Gunter
                      Vice President & Corporate Secretary

                                  Marie Guthrie
                                    Treasurer

                                       39

<PAGE>

                            OFFICERS - PINNACLE BANK

                              Robert B. Nolen, Jr.
                                    President

                                 Mary Jo Gunter
                     Senior Vice President Banking Services
                              & Corporate Secretary

                                  Marie Guthrie
                           Vice President & Controller

                                   Alan Grice
                 Vice President - Lending & Business Development

                                   Donna Hyde
                             Vice President- Lending

                                   Rick Brown
                         Vice President- Loan Servicing
                              & Compliance Officer

                                  Jaye Ottinger
                        Vice President - Mortgage Lending

                                 Carl Schoettlin
                            Vice President - Lending

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

                                   Pam Elliott
                          Haleyville Regional President

                                    Tracy Rye
                            Vice President - Lending

                               Edward A. Davidson
                          Birmingham Regional President

                                Clifton A. Rhodes
                                 Vice President

                                 William G. Bond
                     Vice President-Commercial Loan Officer

                                  Susie Roberts
                     Vice President-Office Manager - Sumiton

                                   David Davis
                       Vice President-Secondary Marketing

                                       40

<PAGE>

                                     OFFICES

        Main Office, 1811 2nd Avenue/Jasper, AL 35502-1388 (205/221-4111)
        Mall Office, 204 Highway 78 East/Jasper, AL 35501 (205/221-1322)
      Sumiton Office, 790 Highway 78 East/Sumiton, AL 35148 (205/648-6091)
    Haleyville Office, 1012 20th Street/Haleyville, AL 35565 (205/486-2225)
      Vestavia Office, 2039 Canyon Road/Birmingham, AL 35216 (205/822-2265)
  Trussville Office, 2064 Gadsden Highway/Trussville, AL 35235 (205/661-9625)

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

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

                                    AUDITORS
                                    KPMG LLP
                               Birmingham, Alabama

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

                                 ANNUAL MEETING
         The Annual Meeting of Stockholders of Pinnacle Bancshares, Inc.
                       will be held at CHS Activity Center
                      204 19th Street East, Jasper, Alabama
                          at 11:00 a.m. on May 24, 2006

                                   FORM 10-KSB
      A COPY OF THE PINNACLE BANCSHARES, INC. ANNUAL REPORT ON FORM 10-KSB
           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005, AS FILED WITH
             THE SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE TO
               STOCKHOLDERS OF RECORD FOR THE 2006 ANNUAL MEETING
                     WITHOUT CHARGE UPON WRITTEN REQUEST TO
                                  MARIE GUTHRIE
                            PINNACLE BANCSHARES, INC.
                              POST OFFICE BOX 1388
                           JASPER, ALABAMA 35502-1388

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