<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002
                          ------------------
                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number                    1-12707
                       --------------------------------------------

                            PINNACLE BANCSHARES, INC.
                 (Name of small business issuer in its charter)

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

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

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

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

                                                        Name of Each Exchange
         Title of Each Class                             on Which Registered
--------------------------------------              ----------------------------
Common Stock, par value $.01 per share                 American Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None.

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES  X   NO
    ---     ---

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year.  $15,260,740.

The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price $(11.49 per share) at which the Common Stock was sold
on March 24, 2003, was approximately $16,773,091. For purposes of this
calculation, the term "affiliate" refers to all executive officers and directors
of the registrant and all stockholders beneficially owning more than 10% of the
registrant's Common Stock.

As of the close of business on March 27, 2003, 1,598,684 shares of the
registrant's Common Stock were outstanding.

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

                       Documents Incorporated By Reference

Part II:
Annual Report to Stockholders for the year ended December 31, 2002.

Part III:
Portions of the definitive proxy statement for the 2003 Annual Meeting of
Stockholders.


<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         THE HOLDING COMPANY. Pinnacle Bancshares, Inc. (the "Holding Company")
is a bank holding company incorporated under the laws of the State of Delaware.
The Holding Company is registered under the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). The Holding Company is the holding company
for Pinnacle Bank (the "Bank"), which was chartered by the State of Alabama and
acquired by the Holding Company on January 31, 1997.

         The Holding Company's executive offices and the main office of the Bank
are located at 1811 Second Avenue, Jasper, Alabama 35502. The Holding Company's
telephone number is (205) 221-4111.

         THE BANK. The Bank is an Alabama-chartered commercial bank with six
offices located in Central and Northwest Alabama. The Bank converted from a
federal stock savings bank to an Alabama-chartered commercial bank on January
31, 1997 in connection with the holding company reorganization. The Bank has its
main office at 1811 Second Avenue, Jasper, Alabama, and also has a branch office
in Jasper, Alabama, with other branch offices in Sumiton, Haleyville, Vestavia
and Trussville, Alabama.

         The Bank is primarily engaged in the business of obtaining funds in the
form of savings deposits and investing such funds in mortgage loans on
single-family residential real estate. To a lesser extent the Bank is engaged in
making consumer loans, commercial real estate loans, and other commercial loans.

         The principal sources of funds for the Bank's lending activities are
savings deposits, Federal Home Loan Bank ("FHLB") of Atlanta advances, principal
repayments of loans, sales of loans, and maturities and sales of
available-for-sale securities. The Bank's principal sources of income are
interest on loans, servicing and commitment fees, and interest and dividends on
securities. Its principal expenses are interest on savings deposit accounts and
borrowings, and general and administrative expenses.








                                       2
<PAGE>

SELECTED FINANCIAL AND OTHER DATA

         The following data should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, and other financial
information included elsewhere herein.

<TABLE>
<CAPTION>
                                                                                At December 31,
                                                       -----------------------------------------------------

                                                        2002        2001        2000         1999        1998
                                                        ----        ----        ----         ----        ----
                                                                 (Dollars in thousands)
<S>                                                    <C>         <C>         <C>         <C>         <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
   Assets .........................................    $218,290    $210,020    $230,269    $231,032    $218,086
   Loans, net .....................................     119,375     131,284     152,021     146,430     128,962
   Interest-bearing deposits in other banks........         357       2,466       1,136       2,177      30,845
   Securities .....................................      75,301      61,838      61,069      64,599      40,415
   Loans held for sale ............................       4,969       3,875       1,337         894       2,986
   Deposits .......................................     188,955     193,498     187,471     189,175     194,687
   Borrowed funds .................................       5,940       3,100      20,500      21,890       3,520
   Stockholders' equity ...........................      19,955      19,012      19,230      17,849      17,612

Number of:
   Real estate loans outstanding ..................       2,504       2,911       3,209       3,419       3,589
   Savings accounts ...............................      14,301      14,485      14,962      17,509      16,136
   Full service offices open ......................           6           6           6           6           6
</TABLE>





<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                          -----------------------------------------------------

                                                          2002       2001         2000         1999        1998
                                                          ----       ----         ----         ----        ----
                                                                                           (In thousands)
<S>                                                     <C>         <C>          <C>         <C>         <C>
OPERATING DATA:
Interest income ....................................    $13,103     $15,823      $17,805     $16,130     $15,921
Interest expense ...................................      5,982       9,192       10,573       9,238       9,251
                                                        -------     -------      -------     -------     -------
Net interest income before provision for loan losses      7,121       6,631        7,232       6,892       6,670
Provision for loan losses ..........................        647       1,942          530         177         637
                                                        -------     -------      -------     -------     -------
Net interest income after provision for losses .....      6,474       4,689        6,702       6,715       6,033
Noninterest income .................................      2,157       1,758        1,250       1,116       1,060
Noninterest expense ................................      5,593       5,306        5,152       5,195       4,813
Income tax expense .................................      1,025         350        1,058         958         778
                                                        -------     -------      -------     -------     -------
Income before extraordinary item ...................      2,013         791        1,742       1,678       1,502
Extraordinary item, net of tax benefit of $63 ......          0         108            0           0           0
                                                        -------     -------      -------     -------     -------
Net income .........................................    $ 2,013     $   683      $ 1,742     $ 1,678     $ 1,502
                                                        =======     =======      =======     =======     =======
</TABLE>






                                       3
<PAGE>


         The following table sets forth certain information relating to the
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if
any, are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.

<TABLE>
<CAPTION>
                                                                           For the Years Ended December 31,
                                                      2002                               2001                          2000
                                                -------------------              -------------------            ------------------
                                                            Average                         Average                         Average
                                      Average               Yield/    Average               Yield/   Average                Yield/
                                      Balance   Interest     Cost     Balance    Interest    Cost    Balance    Interest     Cost
                                      -------   --------    ------    -------    --------   -------  -------    --------    ------
<S>                                  <C>        <C>         <C>    <C>           <C>        <C>      <C>        <C>         <C>
Interest-earning assets:                                           (dollars in thousands)
Loans receivable, net                $126,507   $  9,524     7.5%    $144,485    $ 12,340    8.5%    $150,019   $ 13,895     9.3%
Securities available-for-sale          71,735      3,506     4.9%      56,114       3,265    5.8%      62,810      3,800     6.0%
Other                                   4,328         73     1.7%       5,128         218    4.3%       1,664        110     6.6%
                                     --------   --------     ---     --------    --------    ---     --------   --------     ---
Total interest earning assets         202,570     13,103     6.5%     205,727      15,823    7.7%     214,493     17,805     8.3%
Non-interest earning assets            15,720                          12,293                          15,586
                                     --------                        --------                        --------
Total assets                         $218,290                        $218,020                        $230,079
                                     ========                        ========                        ========

Interest-bearing liabilities:
Deposits                              193,073      5,789     3.0%     191,728       8,791    4.6%     187,950      9,224     4.9%
Borrowings                              4,179        194     4.6%       6,936         401    5.8%      20,963      1,349     6.4%
                                      -------     ------     ---      -------      ------    ---      -------     ------     ---
Total Interest-bearing liabilities    197,252      5,983     3.0%     198,664       9,192    4.6%     208,913     10,573     5.1%
Non-interest bearing liabilities        1,083                             344                           2,715
                                     --------                        --------                        --------
Total liabilities                     198,335                         199,008                         211,628
Equity                                 19,955                          19,012                          18,451
Total Liabilities and equity         $218,290                        $218,020                        $230,079
                                     ========                        ========                        ========
Net-interest earning assets             5,318                           7,063                           5,580
                                     ========   --------             ========    --------            ========    -------
Net interest income                             $  7,120                         $  6,631                        $ 7,232
                                                ========                         ========                        =======
Interest rate spread                                         3.5%                            3.1%                            3.2%
                                                           =====                                                           =====
Net interest margin                                          3.5%                            3.2%                            3.4%
                                                           =====                                                           =====
Ratio of average interest-earning
  assets to interest-bearing
  liabilities                                              102.7%                          103.6%                          102.7%
                                                           =====                           =====                           =====
</TABLE>




























                                       4
<PAGE>


LENDING ACTIVITIES

         GENERAL. The Bank's net loan portfolio totaled $119.4 million at
December 31, 2002, or 54.7% of its total assets. On that date, $94.0 million, or
79% of total net loans outstanding, consisted of loans secured by mortgages on
residential and commercial real estate loans, while the remainder of the loan
portfolio consisted of commercial and consumer loans.

         The principal lending activity of the Bank historically has been the
origination of conventional first mortgage single-family loans. The Bank also
makes commercial real estate, construction, commercial and consumer loans. The
majority of the Bank's loans have been originated within its primary market
area.

         The Bank's volume of total loans originated to be retained in the
Bank's loan portfolio totaled approximately $68.4 million during the year ended
December 31, 2002, and $76.9 million during the year ended December 31, 2001.
The Bank directly originates most of its mortgage loans through its existing
branches. These loans have been originated predominantly within the Bank's
geographical lending area of Walker, Jefferson, Shelby, Winston and Fayette
counties, in Alabama. See " -- Loan Solicitation and Processing" and "-- Loan
Originations, Purchases and Sales."

         The Bank seeks to improve the interest rate sensitivity of its mortgage
loan portfolio through the origination of adjustable rate loans, which
constituted approximately 50% of the single-family residential mortgage loans in
the Bank's loan portfolio, and 25% of the Bank's net loan portfolio at December
31, 2002. Most adjustable rate mortgage loans are held in the Bank's loan
portfolio, while most fixed-rate mortgage loans are either sold as whole loans
to the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA") or other investors, or converted into
mortgage-backed securities with servicing retained by the Bank.

         The following table sets forth, in dollar amounts and percentages, the
major categories of the Bank's loans.

<TABLE>
<CAPTION>
                                                                  December 31,
                                2002                 2001                 2000                 1999                1998
                                ----                 ----                 ----                 ----                ----
Type of Loan:                    $          %          $         %          $         %          $        %          $         %
<S>                           <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>      <C>        <C>
Real estate mortgage loans    $ 80,189     67.2%   $ 86,053     65.5%   $ 96,592    63.5%    $ 94,288    64.4%   $ 86,956    67.4%
Construction loans              15,329     12.8%     18,387     14.0%     27,157    18.0%      26,866    18.4%     21,120    16.4%
Commercial loans                11,549      9.7%     15,987     12.2%     16,798    11.0%      14,364     9.8%     12,248     9.5%
Consumer Loans                  13,834     11.6%     12,373      9.4%     13,099     8.6%      12,442     8.4%     10,069     7.8%
Less--
  Discounts and other              204      0.2%        208      0.1%        286     0.2%         307     0.2%        231     0.2%
  Allowance for loan losses      1,322      1.1%      1,308      1.0%      1,339     0.9%       1,223     0.8%      1,201     0.9%
                              --------   ------    --------   ------    --------   -----     --------   -----    --------   -----
    Total                     $119,375    100.0%   $131,284    100.0%   $152,021   100.0%    $146,430   100.0%   $128,961   100.0%
                              ========   ======    ========   ======    ========   =====     ========   =====    ========   =====
</TABLE>

         RESIDENTIAL LOANS. The Bank's real estate loan portfolio includes loans
on single family, two-to-four family dwellings, multi-family housing (over four
units), and loans made for the development of unimproved real estate to be used
for residential housing.

         The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions, and underwriting standards established by
the Bank. Mortgage loans made by the Bank are generally long-term loans,
amortized on a monthly basis, with principal and interest due each month. The
initial contractual loan payment period for residential loans typically ranges
from 15 to 30 years. Currently, the Bank offers one-year, adjustable rate loans
based upon the one-year U.S. Treasury Bill rate adjusted to a constant maturity,
with limitations on adjustments of 2% in any one year and 6% over the life of
the loan.



                                       5
<PAGE>

         Fixed rate loans increase exposure to interest rate risk in a rising
rate environment because interest-bearing liabilities would be subject to
repricing before assets become subject to repricing. Adjustable-rate loans
decrease the risks associated with changes in interest rates but involve other
risks. As interest rates rise, the payment by the borrower rises to the extent
permitted by the terms of the loan, and the increased payment increases the
potential for default. At the same time, the marketability of the collateral
underlying secured loans may be adversely affected by higher interest rates. In
a declining interest rate environment, there may be an increase in prepayments
on loans as borrowers refinance at lower interest rates.

         At December 31, 2002, the largest amount loaned by the Bank to one
borrower was $2.3 million which was approximately 12% of the Holding Company's
stockholders' equity.

         CONSTRUCTION AND COMMERCIAL REAL ESTATE LOANS. Construction loans on
residential properties are made primarily to builders and a significant
percentage are made on a speculative basis. The maximum loan to value ratio
generally is 80% of the appraisal value. Residential construction loans are
typically made for one year. At December 31, 2002, the Bank had $19.4 million
outstanding in residential construction loans, compared with $24.0 million in
construction loans on residential properties outstanding at December 31, 2001.
The Bank also offers construction loans on commercial and other properties. At
December 31, 2002, total construction loans were $22.7 million. Approximately
41% of total construction loans were loans to builders for speculative
construction loans.

         Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be confronted at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this
speculative risk of construction financing by limiting construction lending to
qualified borrowers in the Bank's market area by obtaining personal guarantees
from many of these borrowers, by requiring the involvement of qualified
builders, and by limiting the aggregate amount of outstanding construction
loans.

         The Bank has historically originated commercial real estate loans
within its primary market area. The Bank either funded or purchased
participation interests in various large commercial real estate projects, one of
which was outside of its primary market area. See " -- Non-Performing Loans and
Asset Classification" and "Subsidiary Activities." Since 1984, the Bank has
limited its commercial real estate lending activities to commercial real estate
projects located in its primary market area, with the amount loaned limited to
15% of its net worth. See "-- Nonperforming Loans and Asset Classification" and
"Subsidiary Activities." At December 31, 2002, the Bank had $29.1 million
outstanding in commercial real estate loans, including $3.3 million in
commercial construction loans. These loans are typically limited to
owner-occupied financings.

         Construction and commercial real estate lending also is generally
considered to involve a higher level of risk due to the concentration of
principal in a limited number of loans and borrowers. The nature of these loans
is such that they are generally less predictable and more difficult to evaluate
and monitor.

         COMMERCIAL BUSINESS LOANS. At December 31, 2002, there were
approximately $12.0 million in commercial loans outstanding. The Bank will
consider making these types of loans primarily in its local market area.
Commercial business loans can pose the same increased risks posed by commercial
real estate lending activity.

         CONSUMER LOANS. The Bank makes various types of consumer loans,
including the loans made for automobile loans, personal loans, educational loans
and loans for home improvement or other purposes. At December 31, 2002, the Bank
had $13.9 million outstanding in consumer loans.

         Consumer loans tend to be originated at higher interest rates than
mortgage loans and for shorter terms. Consumer loans generally involve more risk
than single-family mortgage loans. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of damage,



                                       6
<PAGE>

loss or depreciation, and the remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability.
Further, various federal and state laws may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, income and ability to repay the loan, and the value of the
collateral. However, consumer loans generally are associated with a higher level
of charge-offs than single-family mortgage loans.

         LOAN ORIGINATIONS, PURCHASES AND SALES. Loan originations come from a
combination of walk-in customers and real estate brokers. The Bank has engaged
in selling in the secondary market certain loans it has originated. Such loans
sold are generally fixed-rate, long-term mortgage loans. These sales, the
majority of which do not allow recourse to the Bank, have been made to FHLMC and
FNMA, which purchases residential mortgage loans from federally insured
financial institutions and certain other lenders. Many of the Bank's loans have
been exchanged for FHLMC participation certificates ("PCs") or FNMA
mortgage-backed securities. These PCs and mortgage-backed securities are
generally considered to be a more liquid form of asset and are a more widely
accepted form of collateral than the underlying loans.

         The sale of loans in the secondary mortgage market reduces the Bank's
risk that the interest rates it pays will escalate while holding long-term,
fixed-rate loans in its portfolio and allows the Bank to continue to make loans
during periods when savings flows decline or funds are not otherwise available
for lending purposes. In connection with certain sales the Bank provides
servicing on the loans (i.e., collection of principal and interest payments) for
which it receives a fee payable monthly of 1/4% to 3/8% per annum of the unpaid
balance of each loan. These loan sales will continue as the Bank attempts to
maintain its loan servicing base. As of December 31, 2002, the Bank was
servicing loans for others aggregating approximately $64.0 million. Net
servicing income for the years ended December 31, 2002 and 2001 was
approximately $158,000 and $159,000, respectively.

         During the years ended December 31, 2002 and 2001, the Bank sold
approximately $53.9 million and $57.8 million, respectively, in whole loans. As
of December 31, 2002, the Bank had approximately $1.8 million in commitments
outstanding to package or sell additional loans.

         The Bank's loan policy requires that the Bank's loan committee
identify, at the beginning of each quarter, loans which will be held for the
portfolio and loans which will be held for sale. Loans that are designated to be
held for the portfolio may be sold only in unusual circumstances which could not
be reasonably anticipated at the time of their origination or purchase. Loans
held for sale are carried at the lower of cost or market value and are sold as
soon as possible after their origination, as market conditions allow.

         LOAN COMMITMENTS. The Bank issues commitments to prospective borrowers
to make loans conditioned upon the occurrence of certain events, which are
honored for 60 days from approval with no additional fees required. The Bank
charges a non-refundable commitment fee equal to 1% of the actual amount of
committed funds on most single-family construction loans. The Bank had
outstanding commitments to originate mortgage loans aggregating $20.8 million at
December 31, 2002. Of these commitments, $18.3 million were for adjustable rate
mortgages and $2.5 million were for fixed-rate mortgages.

         Although the Bank originates most fixed-rate loans for resale in the
secondary mortgage market, a certain amount of interest rate risk exists for the
Bank after a loan is closed until that loan is sold.

         LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
which are charged to the borrower for creation of the loan. The Bank accounts
for loan origination fees net of direct costs as a yield adjustment over the
life of the loan. See Note 1 of Notes to Consolidated Financial Statements.



                                       7
<PAGE>

         MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 2002, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, which may
differ from realized maturities due to prepayments. Demand loans and overdrafts
are reported as due in one year or less. The Bank does not have any loans with
no stated schedule of repayments and no stated maturity.

<TABLE>
<CAPTION>
                                                  Due One Through         Due
                                   Due by         Five Years After  Five Years After
                             December 31, 2003   December 31, 2002  December 31, 2002         Total
                             -----------------   -----------------  -----------------         -----
<S>                          <C>                 <C>                <C>                  <C>
Real estate mortgage .......    $27,625,245        $43,013,514        $ 9,550,890        $ 80,189,649
Real estate construction ...     15,329,207                 --                 --          15,329,207
Commercial business loans ..      8,653,296          2,570,944            324,792          11,549,032
Consumer ...................      3,341,511         10,152,516            339,957          13,833,984
                                -----------        -----------        -----------        ------------
   Total ...................    $54,949,259        $55,736,974        $10,215,639        $120,901,872
                                ===========        ===========        ===========        ============
</TABLE>

         The following table sets forth the dollar amount of all loans due after
one year at December 31, 2002 which have predetermined interest rates and have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                                     Floating or
                                                         Predetermined Rates       Adjustable Rates
<S>                                                      <C>                       <C>
              Real estate mortgage...................      $   46,435,513            $  6,128,891
              Commercial business loans..............           2,772,188                 123,548
              Consumer...............................          10,492,473                      --
                                                           --------------            ------------
                Total................................      $   59,700,174            $  6,252,439
                                                           ==============            ============
</TABLE>


         NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans that are 120 days
contractually past due are placed on nonaccrual status and accrued interest
income is reversed. Income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has been demonstrated,
in which case the loan is returned to accrual status.

         Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time it is
sold. When such property is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated selling
costs. Any write-down of the property at foreclosure is charged to the allowance
for loan losses. Future declines in fair value of the asset less selling costs
below its carrying amount increases a valuation allowance account. Future
increases in fair value of the asset less costs of disposition above its
carrying amount reduces the valuation allowance account, but not below zero.
Increases or decreases in the valuation allowance account are charged or
credited to income. Costs relating to the development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.

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






                                       8
<PAGE>

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

<TABLE>
<CAPTION>
                                                        At December 31,
                                        -------------------------------------------------
                                                     (Dollars in thousands)
                                         2002      2001      2000       1999       1998
                                         ----      ----      ----       ----       ----
<S>                                     <C>       <C>       <C>        <C>       <C>
Loans accounted for on a nonaccrual
  basis:(1)
Real Estate:
   Residential........................  $  788    $  588    $2,036    $   850    $    521
   Commercial.........................     326       208       298        172         610
Consumer..............................      56        71        37         70          87
                                        ------    ------    ------    -------    --------
Total.................................  $1,170    $  867    $2,371    $ 1,092    $  1,218
                                        ======    ======    ======    =======    ========

Accruing loans which are contractually
  past due 90 days or more:
Real Estate:
   Residential........................  $   --    $   --    $   --    $    --    $  2,915
   Commercial.........................      --        --        --         --         656
Consumer..............................      --        --        --         --          --
                                        ------    ------    ------    -------    --------
Total.................................  $   --    $   --    $   --    $    --    $  3,571
                                        ======    ======    ======    =======    ========
   Total of nonaccrual and 90 days
     past due loans...................  $1,170    $  867    $2,371    $ 1,092    $  4,789
                                        ======    ======    ======    =======    ========

Percentage of total loans.............    0.98%     0.66%     1.56%       .75%      3.71%

Percentage of total assets............    0.54%     0.40%     1.03%       .47%      2.20%

Other non-performing assets(2)........  $1,609    $2,345    $1,420    $ 1,522    $  2,175
</TABLE>

------------
(1)  Nonaccrual status denotes loans on which accrual of interest has been
     ceased in accordance with the guidelines discussed previously. Payments
     received on a nonaccrual loan are either applied to the outstanding
     principal balance or recorded as interest income, depending on assessment
     of the collectibility of the loan.

(2)  Other non-performing assets represent property acquired by the Bank through
     foreclosure or repossession. The property is carried at the lower of its
     fair value less estimated costs of disposition or the investment balance of
     the related loan, whichever is lower.

         Non-performing loans increased from $867,000 at December 31, 2001 to
$1,170,000 at December 31, 2002. This increase was primarily due to an increase
in non-performing loans secured by real estate and commercial loans.
Non-performing assets at December 31, 2002, were $1.6 million as compared to
$2.3 million at December 31, 2001. The decrease in non-performing is due to
sales of real estate owned exceeding foreclosures.

         During the years ended December 31, 2002 and 2001 gross interest income
of $37,390 and $27,344, respectively, would have been recorded on loans
accounted for on a nonaccrual basis if the loans had been current throughout the
period. The amount of interest income included in current income for these loans
was $22,016 and $61,394 for the years ended December 31, 2002 and 2001,
respectively.

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






                                       9
<PAGE>
         The following table presents an allocation of the allowance for loan
losses by the categories indicated and the percentages that all loans in the
category bear to total loans. This allocation is used by management to qualify
its evaluation of the loan portfolio. Allocations are merely estimates and are
subject to revisions and conditions change.

<TABLE>
<CAPTION>
                             At December 31,        At December 31,      At December 31,       At December 31,       At December 31,
                             ---------------        ---------------      ---------------       ---------------       ---------------

                       2002                  2001                  2000                  1999                  1998
                       ----                  ----                  ----                  ----                  ----
                               Percent of            Percent of            Percent of            Percent of            Percent of
                             Loans in Each          Loans in Each         Loans in Each         Loans in Each         Loans in Each
                              Category to            Category to           Category to           Category to           Category to
                      Amount  Total Loans   Amount   Total Loans  Amount   Total Loans  Amount   Total Loans  Amount   Total Loans
                      ------  -----------   ------   -----------  ------   -----------  ------   -----------  ------   -----------
<S>                   <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>
Real estate loans     $  447      78.8%     $  589      78.4%     $  547      80.3%     $  756      81.7%     $  618      83.7%
Commercial               349       9.7%        268      12.2%        289      11.1%        189       9.8%        123      10.1%
unallocated               --        --          --        --          --        --          --        --         251       6.2%
Other loans              526      11.5%        451       9.4%        503       8.6%        278       8.5%        209       0.0%
                      ------     -----      ------     -----      ------     -----      ------     -----      ------     -----
  Total               $1,322     100.0%     $1,308     100.0%     $1,339     100.0%     $1,223     100.0%     $1,201     100.0%
                      ======     =====      ======     =====      ======     =====      ======     =====      ======     =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                              -------------------------------------------------------------------
Allowance for loan losses
                                                2002           2001           2000           1999           1998
                                              -------        -------        -------        -------        -------
<S>                                           <C>            <C>            <C>            <C>            <C>
Balance at beginning of period                $ 1,308        $ 1,339        $ 1,223        $ 1,201        $ 1,234

Loans charged off:
 Mortgage                                         505          1,803            308            199            651
 Consumer                                         242            220            161             28             67
                                              -------        -------        -------        -------        -------
 Total charge-offs                                747          2,023            469            227            718

 Total recoveries                                (114)           (50)           (55)           (72)           (48)

Net loan charged-off                              633          1,973            414            155            670

Provision for  loan losses                        647          1,942            530            177            637
                                              -------        -------        -------        -------        -------
Balance at end of period                      $ 1,322        $ 1,308        $ 1,339        $ 1,223        $ 1,201
                                              =======        =======        =======        =======        =======

Ratio of net charge-off to average loans
outstanding during the period                    0.50%           1.4%          0.28%          0.10%          0.53%
                                              =======        =======        =======        =======        =======
</TABLE>

         For further information and for an analysis of the Bank's allowances
for loan and real estate losses, see Notes 3 and 4 of Notes to Consolidated
Financial Statements.

INVESTMENT ACTIVITIES

         Interest income from cash deposits and securities generally provides
the second largest source of income for the Bank after interest on loans and
loan servicing fees and other fees. At December 31, 2002, the Bank's
interest-bearing deposits, FHLB stock, and securities portfolio of approximately
$76.3 million, excluding mortgage-backed securities, consisted primarily of
interest-bearing bank deposits, U.S. government and agency obligations,
corporate securities.


                                       10
<PAGE>

        It has generally been the Bank's policy to maintain a liquidity
portfolio in excess of regulatory requirements in order to shorten the
maturities of the Bank's investment portfolio to enable the Bank to better match
its short-term investments and interest rate sensitive savings deposit
liabilities. The Bank also increased its liquidity by selling most of its
fixed-rate loans with maturities of greater than 10 years.

        Securities have been classified as available-for-sale based on
management's intent and ability. See Note 1 of Notes to Consolidated Financial
Statements.

        The following table sets forth the carrying value of the Bank's
investment securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                    At December 31,
                                                    ----------------------------------------------
                                                       2002              2001              2000
                                                       ----              ----              ----
                                                                       (In thousands)
<S>                                                 <C>               <C>               <C>
Securities available-for-sale:
   U.S. Government and agency securities.........   $  60,645         $   50,877        $   46,754
   Mortgage-backed securities....................      14,655              9,985            13,311
   Other securities..............................           1                  1                29
                                                    ---------         ----------        ----------
Total............................................   $  75,301         $   60,863        $   60,094
                                                    =========         ==========        ==========
</TABLE>

         The following table sets forth the scheduled maturities, amortized
cost, estimated fair values and weighted average yields for the Bank's
securities available-for-sale at December 31, 2002.

<TABLE>
<CAPTION>
                                          One Year Or Less       After One Through Five Years  After Five Through Ten Years
                                   ---------------------------  -----------------------------  -----------------------------
                                    Amortized       Weighted       Amortized       Weighted     Amortized        Weighted
                                      Cost       Average Yield       Cost       Average Yield     Cost         Average Yield
                                      ----       -------------       ----       -------------     ----         -------------
                                                                  (Dollars in thousands)
<S>                                <C>           <C>             <C>            <C>            <C>             <C>
U.S. government and agency....     $    1,000         5.6%       $   55,964           3.9%     $    3,000             5.0%
Other securities(2)...........             --          --                --            --               1              --
Mortgage-backed securities (3)             --          --                --            --           3,540             5.8
                                   ----------      ------        ----------        ------      ----------         -------
Total.........................     $    1,000         5.6%       $   55,964           3.9%     $    6,541             5.5%
                                   ==========      ======        ==========        ======      ==========         =======
</TABLE>


<TABLE>
<CAPTION>
                                            After Ten Years                            Total
                                   ---------------------------   ----------------------------------------------
                                     Amortized      Weighted       Amortized      Estimated        Weighted
                                       Cost      Average Yield       Cost         Fair Value     Average Yield
                                       ----      -------------       ----         ----------     -------------
                                                              (Dollars in thousands)
<S>                                <C>           <C>             <C>              <C>            <C>
U.S. government and agency....     $       --          --%           59,964        $  60,645            4.0%
Other securities(2)...........             --          --                 1                1             --
Mortgage-backed securities (3)         10,864         5.2            14,404           14,655            5.3
                                   ----------      ------        ----------        ---------        -------
Total.........................     $   10,864         5.2%       $   74,369        $  75,301            4.3%
                                   ==========      ======        ==========        =========      ==========
</TABLE>

-----------------
(1)  Other securities includes the Bank's investment in limited partnerships, at
     cost, of $1 whose sole purpose is to hold and operate real estate. The Bank
     has no loans to these real estate partnerships. These investments are not
     readily marketable.

(2)  Mortgage-backed securities are reflected in the above table based on their
     contractual maturity.

SOURCES OF FUNDS

         GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, advances from the FHLB of Atlanta and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short term basis
to compensate for reductions in the availability of other sources of funds. They
may also be used on a longer term basis for general business purposes.



                                       11
<PAGE>

         DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, non-interest bearing
demand deposit accounts, money market accounts, regular savings accounts, term
certificate accounts and retirement savings plans. Deposit account terms vary,
with the principal differences being the minimum balance required, the amount of
time the funds must remain on deposit and the interest rate.

         The Bank offers a full range of accounts including: passbook, money
market, checking, individual retirement accounts ("IRAs") and certificate
accounts. The deregulation of various federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and given it more
flexibility to alleviate the risk of net deposit outflows. While the
deregulation of rates payable on deposits has allowed the Bank to be competitive
in the acquisition and retention of funds, it has also resulted in a more
volatile cost of funds.

         Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a weekly basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, and federal regulations.

         Marketing of the Bank's savings programs takes a number of different
forms. All branch offices are provided with brochures which outline the rates
and features of the Bank's various accounts. The Bank already offers most of the
services provided by other savings institutions. These services include consumer
and commercial loans, limited lines of credit, all types of checking and deposit
accounts, and IRAs.

         As of December 31, 2002 the Bank's total deposits were $189.0 million.

         The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                        Certificates
                Maturity Period                                          of Deposit
                ---------------                                          ----------
                                                                       (In thousands)
<S>                                                                  <C>
                Three months or less........................         $     25,341
                Over three through six months...............                8,273
                Over six through twelve months..............                9,733
                Over twelve months..........................               11,428
                                                                     ------------
                  Total.....................................         $     54,775
                                                                     ============
</TABLE>


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

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,

                                            2002                           2001                           2000
                                            ----                           ----                           ----
                                          Average      Average           Average      Average           Average       Average
                                          Deposits       Rate            Deposits       Rate            Deposits       Rate
                                          --------       ----            --------       ----            --------       ----
                                                      (Dollars in thousands)
<S>                                     <C>             <C>            <C>            <C>             <C>             <C>
Non-interest baring demand deposits...  $      8,381         --%       $      8,102        --%        $      7,238         --%
Interest bearing demand deposits......        29,454         .6              25,277       2.1               24,828        2.5
Savings deposits......................        15,435        2.3              14,740       2.3               14,639        2.5
Time deposits.........................       139,803        3.8             143,609       5.5              141,245        5.8
                                        ------------    -------        ------------   -------         ------------     ------
   Total deposits.....................  $    193,073        3.0%       $    191,728       4.6%        $    187,950        4.9%
                                        ============    =======        ============   =======         ============     ======
</TABLE>



                                       12


<PAGE>


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

         BORROWINGS. The Bank relies upon deposits and loan repayments and sales
as its major sources of funds. However, the Bank makes use of FHLB advances to
expand its lending and short-term investment activities and to meet depositor
withdrawals. Advances have been used to supplement deposit flows and are
particularly used when the Bank determines that it can profitably invest the
advances over their term.

<TABLE>
<CAPTION>
                                                                                          At or for the
                                                                                      Year Ended December 31,
                                                                                    --------------------------
                                                                                    2002                  2001
                                                                                    ----                  ----
                                                                                        (Dollars in thousands)
<S>                                                                              <C>                    <C>
   Amounts outstanding at end of period.....................................     $3,000,000             $        --

   Weighted  average rate paid at period end................................           1.30%                     --

   Maximum amount of borrowings outstanding at any month end................     $9,500,000             $17,250,000

   Approximate average amount outstanding for period........................     $1,200,000             $ 3,813,000

   Approximate weighted average rate paid during period (1).................           1.95%                   5.83%
</TABLE>

----------
(1)  The approximate weighted average rate paid during the period was computed
     by dividing the average amounts outstanding into the related interest
     expense for the period.

         For further information on the Bank's borrowings, see Note 7 of Notes
to Consolidated Financial Statements.

SELECTED FINANCIAL RATIOS

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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                     --------------------------------------------
                                                       2002              2001              2000
                                                       ----              ----              ----
<S>                                                    <C>             <C>                <C>
Return on Assets (Net Income Divided By
   Average Total Assets) ...................            0.9%             0.3%              0.8%
Return on Equity (Net Income Divided By
   Average Equity)..........................           10.0%             3.5%             10.6%
Equity-to-Assets Ratio (Average Equity
   Divided By Average Total Assets).........            9.2%             8.9%              8.0%
Dividend Payout Ratio (Dividends
   Declared Per Share Divided By Net
   Income Per Share)........................           32.8%           103.9%             40.8%
</TABLE>




                                       13

<PAGE>

LIQUIDITY AND RATE SENSITIVITY

         The following table sets forth the maturity distribution of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
2002, the Bank's interest rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities) and the Bank's cumulative
interest rate sensitivity gap.

<TABLE>
<CAPTION>
                                                         Over One         Over Five
                                         One Year         Through          Through           Over
                                         or Less        Five Years        Ten Years       Ten Years         Total
                                         -------        ----------        ---------       ---------         -----
                                                                       (In thousands)
<S>                                   <C>             <C>              <C>               <C>             <C>
Interest-Earning Assets:(1)
   Loans.......................       $     54,949    $     55,736     $       6,673     $     3,543     $   120,901
   Securities..................              1,038          56,570             6,663          11,029          75,300
Other assets...................                357              --               --               --             357
                                      ------------    ------------     -------------     -----------     -----------
     Total.....................       $     56,344    $    112,306     $      13,336     $    14,572     $   196,558
                                      ============    ============     =============     ===========     ===========

Interest-Bearing Liabilities:(2)
   Deposits....................       $    153,297    $     35,570     $          88     $        --     $   188,955
   Borrowings..................                175             845             1,505             415           2,940
                                      ------------    ------------     -------------     -----------     -----------
     Total.....................       $    153,472    $     36,415     $       1,593     $       415     $   191,895
                                      ============    ============     =============     ===========     ===========

Interest Sensitivity Gap.......       $   ( 97,128)         75,891     $      11,743     $    14,157     $     4,663
                                      ============    ============     =============     ===========     ===========
Cumulative Interest Sensitivity
   Gap.........................       $   ( 97,128)   $    (21,237)    $      (9,494)    $     4,663     $     4,663
                                      ============    ============     =============     ===========     ===========
</TABLE>

-------------
(1)     Fixed-rate loans are distributed based on their contractual maturity
        adjusted for projected or anticipated prepayments, and variable rate
        loans are distributed based on the interest rate reset date and
        contractual maturity adjusted for prepayments. Loan run-off and
        repricing assumes a constant prepayment rate based on coupon rate and
        maturity.

(2)     Passbook savings and demand deposits are presented in the earliest
        repricing period since amounts in these accounts are subject to
        withdrawal on demand. Savings certificates are distributed assuming no
        withdrawal prior to maturity


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

     The modeling techniques used by the Company simulate net interest income
and impact on fair values under various rate scenarios. Important elements of
these techniques include the mix of floating versus fixed rate assets and
liabilities, and the scheduled, as well as expected, repricing and maturing
volumes and rates of the existing balance sheet. Under a scenario simulating a
hypothetical 100, 200 and 300 basis point rate increase applied to all fixed
rate interest earning assets and interest-bearing liabilities, the Company would
expect a net loss in fair value of the underlying instruments of approximately
$188,000, $538,000, and $946,000, respectively. Under a scenario simulating a
hypothetical 100, 200 and 300 basis point rate decrease applied to all fixed
rate interest earning assets and interest-bearing liabilities, the Company would
expect a net loss in fair value of the underlying instruments of approximately
$1,027,000, $1,949,000, and



                                       14
<PAGE>

$2,831,000, respectively This hypothetical gain or loss is not a precise
indicator of future events. Instead, it is a reasonable estimate of the results
anticipated if the assumptions used in the modeling techniques were to occur.

     The Company's contractual obligations and commitments at December 31, 2002
are summarized in the accompanying tables.

                             Contractual obligations

<TABLE>
<CAPTION>
                                                Over One      Over Three
                                One Year        Through     Years Through      Over
                                or Less       Three Years     Five Years    Five Years       Total
                                --------      -----------   -------------   ----------      --------
                                                          (In thousands)
<S>                             <C>           <C>           <C>              <C>            <C>
Long-term debt ...........      $  3,175        $   390        $   455        $1,920        $  5,940
Operating leases .........            73            128            101           144             446
Certificates of deposits..       100,630         25,110         10,367            88         136,195
                                --------        -------        -------        ------        --------
     Total ...............      $103,878        $25,628        $10,923        $2,152        $142,581
                                ========        =======        =======        ======        ========
</TABLE>



                                   Commitments

<TABLE>
<CAPTION>
                                                Over One      Over Three
                                One Year        Through     Years Through      Over
                                or Less       Three Years     Five Years    Five Years       Total
                                --------      -----------   -------------   ----------      --------
                                                          (In thousands)
<S>                             <C>           <C>           <C>              <C>            <C>
Lines of credit .........       $ 15,303        $   328        $   685        $4,394        $ 20,710
Standby letters of credit             94              0              9             0             103
                                --------        -------        -------        ------        --------
     Total ..............       $ 15,397        $   328        $   694        $4,394        $ 20,813
                                ========        =======        =======        ======        ========
</TABLE>


RATE/VOLUME ANALYSIS

         The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. The
calculations are based on average month end balances during the respective
periods. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (change in
rate multiplied by the change in volume) have been allocated to the volume and
rate changes based upon the pro-rata amount that rate and volume are to their
total change, before allocation of the rate/volume amount.

<TABLE>
<CAPTION>
                                                 Year ended December                     Year ended December
                                                     2001 vs. 2002                          2000 vs. 2001
                                          ---------------------------------        ------------------------------
                                                  Increase (Decrease)                   Increase (Decrease)
                                                  -------------------                   -------------------
                                          Volume         Rate         Total        Volume       Rate        Total
                                          ------         ----         -----        ------       ----        -----
                                                                          (In thousands)
<S>                                      <C>           <C>           <C>           <C>         <C>         <C>
Interest Income:
Loans .............................      $(1,447)      $(1,369)      $(2,816)      $ 485       $1,070      $ 1,555

Securities ........................        1,926        (1,685)          241         401          134          535

Other interest-earning assets .....          (16)         (129)         (145)       (605)         497         (108)
                                         -------       -------       -------       -----       ------      -------

Total interest earning assets .....      $   463       $(3,183)       (2,720)      $ 281       $1,701      $ 1,982
                                         =======       =======       =======       =====       ======      =======

Interest Expense:
Deposits ..........................          (40)      $ 3,042       $ 3,002       $(168)      $  601      $   433

Borrowed Funds ....................          151            55           206         898           50          948
                                         -------       -------       -------       -----       ------      -------
Total interest-bearing liabilities       $   111       $ 3,097       $ 3,208       $ 730       $  651      $ 1,381
                                         =======       =======       =======       =====       ======      =======
</TABLE>




                                       15
<PAGE>


COMPETITION

         The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The Bank's
most direct competition for deposits has historically come from other commercial
banks and thrift institutions located in its primary market area. However, in
recent years the Bank has had significant competition from money market mutual
funds and other sources which are not subject to federal interest rate
limitations. The Bank's competition for real estate loans comes principally from
other commercial banks, thrift institutions, and mortgage banking companies,
insurance companies and other institutional lenders.

         The Bank competes for loans through the interest rates and loan fees it
charges and the efficiency and quality of the services it provides borrowers,
real estate brokers, and home builders. It competes for deposits by offering a
wide variety of accounts, convenient branch locations, tax-deferred retirement
programs, and other miscellaneous services.

REGULATION, SUPERVISION AND GOVERNMENTAL POLICY

         The following is a brief summary of certain statutes, rules and
regulations affecting the Holding Company and the Bank. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.

         SARBANES-OXLEY ACT of 2002. On July 30, 2002, the President of the
United States signed the Sarbanes-Oxley Act of 2002 (the "SOX Act") into law.
The SOX Act provides for sweeping changes with respect to corporate governance,
accounting policies and disclosure requirements for public companies, and also
for their directors and officers. Section 302 of the SOX Act ("Corporate
Responsibility for Financial Reports") required the Securities and Exchange
Commission ("SEC") to adopt new rules to implement the requirements of the SOX
Act. These requirements include new financial reporting requirements and rules
concerning corporate governance. New SEC rules, effective August 29, 2002,
require a reporting company's chief executive and chief financial officers to
certify certain financial and other information included in the company's
quarterly and annual reports. The rules also require these officers to certify
that they are responsible for establishing, maintaining and regularly evaluating
the effectiveness of the company's disclosure controls and procedures; that they
have made certain disclosures to the auditors and to the audit committee of the
board of directors about the company's controls and procedures; and that they
have included information in their quarterly and annual filings about their
evaluation and whether there have been significant changes to the controls and
procedures or other factors which would significantly impact these controls
subsequent to their evaluation. See "Certifications" for certifications by the
Holding Company's Chief Executive Officer and Chief Financial Officer of the
financial statements and other information included in this Annual Report on
Form 10-KSB. See Item 14.- "Controls and Procedures" hereof for the Holding
Company's evaluation of disclosure controls and procedures. The certifications
required by Section 906 of the SOX Act also accompany this Form 10-KSB.

         USA PATRIOT ACT. The President of the United States signed the USA
Patriot Act into law on October 26, 2001. The USA Patriot Act authorizes new
regulatory powers to combat international terrorism. The provisions that affect
financial institutions most directly are contained in Title III of the Act. In
general, Title III amends current law - primarily the Bank Secrecy Act - to
provide the federal government with enhanced authority to identify, deter, and
punish international money laundering and other crimes. Among other things, the
USA Patriot Act prohibits financial institutions from doing business with
foreign "shell" banks and requires increased due diligence for private banking
transactions and correspondent accounts for foreign banks. In addition,
financial institutions have to follow new minimum verification of identity
standards for all new accounts and are permitted to share information with law
enforcement authorities under circumstances that were not previously permitted.
These and other provisions of the USA Patriot Act became effective at varying
times, and the Treasury Department and various federal banking agencies are
responsible for issuing regulations to implement the new law.

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




                                       16
<PAGE>

regulation or order is (i) financial in nature, (ii) incidental to any such
financial activity, or (iii) complementary to any such financial activity and
does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The GLB Act specifies certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the FRB. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are and continue to be well-capitalized and well-managed and have at least a
satisfactory rating under the Community Reinvestment Act.

         National banks and state banks with the requisite investment authority
are also authorized by the GLB Act to engage, through "financial subsidiaries,"
in any activity that is permissible for a financial holding company (as
described above) and any activity that the Secretary of the Treasury, in
consultation with the FRB, determines is financial in nature or incidental to
any such financial activity, except (i) insurance underwriting, (ii) real estate
development or real estate investment activities (unless otherwise permitted by
law), (iii) insurance company portfolio investments and (iv) merchant banking.
The authority of a bank to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank
must be well-managed and well-capitalized (after deducting from capital the
bank's outstanding investments in financial subsidiaries).

         The GLB Act also adopts a number of consumer protections, including
provisions intended to protect privacy of bank customers' financial information
and provisions requiring disclosure of ATM fees imposed by banks on customers of
other banks.

         At this time, the Holding Company has not determined whether it will
become a financial holding company in order to utilize the expanded powers
offered by the GLB Act. To date, the GLB Act's financial subsidiary provisions
and consumer protections have not had a material impact on its operations.

         BANK HOLDING COMPANY REGULATION. The Holding Company is registered as a
bank holding company under the Holding Company Act and, as such, subject to
supervision and regulation by the FRB. A bank holding company is required to
furnish to the FRB annual and quarterly reports of its operations and to furnish
such additional information as the FRB may require pursuant to the Holding
Company Act. The Holding Company is also subject to regular examination by the
FRB.

         Under the Holding Company Act, a bank holding company must obtain the
prior approval of the FRB before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.

         The Holding Company Act, as amended by the Riegle-Neal Act, generally
permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law. See "Competition".

         Under the Holding Company Act, any company must obtain approval of the
FRB prior to acquiring control of the Holding Company or the Bank. For purposes
of the Holding Company Act, "control" is defined as ownership of more than 25%
of any class of voting securities of the Holding Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Holding Company or
the Bank.

         The Change in Bank Control Act and the regulations of the FRB
thereunder require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the FRB before such person or persons may acquire control of the
Holding Company the Bank. The Change in Bank Control Act defines "control" as
the power, directly or indirectly, to vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.

         The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of a company that is not a bank or a bank



                                       17
<PAGE>

holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The non-bank activities of the Holding Company are subject
to these legal and regulatory limitations under the Holding Company Act and the
FRB's regulations thereunder. Notwithstanding the FRB's prior approval of
specific nonbanking activities, the FRB has the power to order a holding company
or its subsidiaries to terminate any activity, or to terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness or stability of any bank subsidiary of
that holding company.

         The FRB has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "--Capital Requirements."

         The FRB has the power to prohibit dividends by bank holding companies
if their actions constitute unsafe or unsound practices. The FRB has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the FRB's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.

         BANK REGULATION. As an Alabama banking institution, the Bank is subject
to regulation, supervision and regular examination by the Banking Department.
Furthermore, as a state bank that is not a member of the Federal Reserve System
(a "state nonmember bank"), the Bank is subject to regulation, supervision and
regular examination by the FDIC under the applicable provisions of the Federal
Deposit Insurance Act (the "FDI Act") and the FDIC's regulations. The deposits
of the Bank are insured by the FDIC to the maximum extent provided by law (a
maximum of $100,000 for each insured depositor). Alabama and federal banking
laws and regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, and establishment of branches and other aspects of the Bank's
operations.

         The Bank is required to pay assessments, based on a percentage of its
insured deposits, to the FDIC for insurance of its deposits. The FDIC has
established a risk-based deposit insurance assessment system for insured
depository institutions, under which insured institutions are assigned
assessment risk classifications based upon capital levels and supervisory
evaluations.

         The FDIC has adopted a risk-based insurance assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. The FDIC assigns an institution to one of three capital categories
based on the institution's financial information, as of the reporting period
ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds.
Assessment rates for the Bank depend on the capital category and supervisory
category to which they are assigned.

         Under Alabama law, the approval of the Banking Department is required
if the total of all the dividends declared by the Bank in any calendar year
exceeds the Bank's net income as defined for that year combined with its
retained net income for the preceding two calendar years.

         The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies, including the FDIC's capital
adequacy guidelines for state non-member banks. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's and the Company's financial statements. See
"--Capital Requirements."

         The FDI Act requires the federal banking agencies to prescribe for all
insured depository institutions standards relating to, among other things,
internal controls, information systems and audit systems, loan documentation,
credit



                                       18
<PAGE>

underwriting, interest rate risk exposure, asset growth, asset quality and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness standards
pursuant to the statute. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; asset quality; earnings; and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act.

         Supervision, regulation and examination of the Holding Company and the
Bank by the bank regulatory agencies are intended primarily for the protection
of depositors rather than for holders of Holding Company stock or of the Holding
Company as the holder of the stock of the Bank.

         CAPITAL REQUIREMENTS. The FRB has established guidelines with respect
to the maintenance of appropriate levels of capital by bank holding companies,
and the FDIC has promulgated substantially similar capital adequacy regulations
for state nonmember banks. These capital regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.

         The regulations of the FRB and the FDIC require bank holding companies
and state nonmember banks, respectively, to maintain a minimum leverage ratio of
"Tier 1 capital" (as defined in the risk-based capital guidelines discussed in
the following paragraphs) to total assets of 3.0%. Although setting a minimum
3.0% leverage ratio, the regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1 under the rating
system used by the federal bank regulators, would be permitted to operate at or
near such minimum level of capital. All other bank holding companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. In addition, the FRB has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.

         The risk-based capital rules of the FRB and the FDIC require bank
holding companies and state nonmember banks, respectively, to maintain minimum
regulatory capital levels based upon a weighing of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. Core capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less intangible assets, primarily goodwill, with limited
exceptions for mortgage servicing rights and purchased credit card
relationships. Supplementary capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify for Tier 1 and long-term preferred stock with an
original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock. The risk-based capital
regulations assign balance sheet assets and credit equivalent amounts of
off-balance sheet obligations to one of four broad risk categories based
principally on the degree of credit risk associated with the obligor. The assets
and off-balance sheet items in the four risk categories are weighted at 0%, 20%,
50% and 100%. These computations result in the total risk-weighted assets.

         The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.



                                       19
<PAGE>

         The FRB, the FDIC and the other banking agencies have amended the
risk-based capital standards to take account of a bank's concentration of credit
risk, the risk of nontraditional activities, and a bank's exposure to declines
in the economic value of its capital resulting from changes in interest rates.
The revised capital guidelines do not, however, codify a measurement framework
for assessing the level of a bank's interest rate exposure. The FRB, the FDIC
and the other banking agencies have adopted a joint policy statement requiring
that banks adopt comprehensive policies and procedures for managing interest
rate risk and setting forth general standards for such internal policies.

         The FDIC classifies insured depository institutions by capital levels
and provide that the applicable agency will take various prompt corrective
actions to resolve the problems of any institution that fails to satisfy the
capital standards. A "well-capitalized" bank is one that is not subject to any
regulatory order or directive to meet any specific capital level and that has or
exceeds the following capital levels: a total risk-based capital ratio of 10%, a
Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An
"adequately capitalized" bank is one that does not qualify as "well capitalized"
but meets or exceeds the following capital requirements: a total risk-based
capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank not meeting these criteria is treated as "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized" depending on
the extent to which the bank's capital levels are below these standards. A bank
that fails within any of the three "undercapitalized" categories will be subject
to certain severe regulatory sanctions under the FDIC prompt corrective action
regulation. As of December 31, 2002, the Bank was categorized as
"well-capitalized" by the FDIC.

         See Item 6, "Management's Discussion and Analysis or Plan of
Operation," and Notes to Consolidated Financial Statements contained in the
Holding Company's Annual Report to Stockholders for the year ended December 31,
2002 (Exhibit No. 13) which is incorporated herein by reference.

         EFFECTS OF GOVERNMENTAL POLICY. The earnings and business of the
Holding Company and the Bank have been and will be affected by the policies of
various regulatory authorities of the United States, particularly the FRB.
Important functions of the FRB, in addition to those enumerated above, include
the regulation of the supply of money in light of general economic conditions
within the United States. The instruments of monetary policy employed by the FRB
for these purposes influence in various ways the overall level of investments,
loans, other extensions of credit and deposits, and the interest rates paid on
liabilities and received on interest-earning assets.

         Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by the Bank on its deposits
and its other borrowings and the interest received by the Bank on loans extended
to customers and securities held in its investment portfolios comprises the
major portion of the Bank's earnings. The earnings and gross income of the Bank
thus have been and will be subject to the influence of economic conditions
generally, both domestic and foreign, and also to monetary and fiscal policies
of the United States and its agencies, particularly the FRB. The nature and
timing of any future changes in such policies and their impact on the Bank are
not predictable.

..
EMPLOYEES

         As of December 31, 2002, the Holding Company and the Bank had 88
full-time and 15 part-time employees.

         The employees are not represented by a collective bargaining agreement.
The Holding Company and the Bank believe their employee relations are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
Name, Age and Position                          Business Experience
----------------------                          -------------------
<S>                                             <C>
Robert B. Nolen, Jr., 44 -                      Mr. Nolen joined the Bank in 1987 as First Vice
   President of the Holding                     President, Chief Financial Officer and Treasurer.
   Company and the Bank                         Effective July 1, 1994, Mr. Nolen was appointed
                                                President and Chief Executive Officer of the Bank.
                                                As President of the Holding Company and
                                                Bank, Mr. Nolen is responsible for ensuring that
</TABLE>


                                       20

<PAGE>
<TABLE>
<S>                                             <C>
                                                the overall operations of the Holding Company and
                                                the Bank are carried out in accordance with the
                                                policies and procedures of the Board of Directors.

Mary Jo Gunter, 49-                             Ms. Gunter joined the Bank in September 1974 and
   Vice President of the                        has served in various lending related positions within
   Holding Company and Senior                   the Bank. She is responsible for branch operations,
   Vice President - Banking Services            personnel, loan servicing and other customer service
   of the Bank.                                 areas.
</TABLE>

FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-KSB, including all documents incorporated
herein by reference, contains forward-looking statements. Additional written or
oral forward-looking statements may be made by the Holding Company from time to
time in filings with the Securities and Exchange Commission or otherwise. The
words "believe," "expect," "seek," and "intend" and similar expressions identify
forward-looking statements, which speak only as of the date the statement is
made. Such forward-looking statements are within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
are not limited to, projections of income or loss, expenditures, acquisitions,
plans for future operations, financing needs or plans relating to services of
the Holding Company, as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements.

         The Holding Company does not undertake, and specifically disclaims, any
obligation to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Holding Company's principal executive offices and the Bank's main
office are located at 1811 Second Avenue, Jasper, Alabama. At December 31, 2002
the Bank maintained six branches in Jasper, Haleyville, Sumiton, Vestavia and
Trussville, Alabama. The Haleyville branch is leased. The Bank also leases an
administrative office in Jasper, Alabama, which is currently subleased to
another financial institution.

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

         The total net book value of the Bank's investment in premises and
equipment was $5,700,000 at December 31, 2002. See Notes to Consolidated
Financial Statements for further information.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Holding Company
through a solicitation of proxies or otherwise.


                                       21

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The information contained under the section captioned "Market Price and
Dividend Information" in the Holding Company's Annual Report to Stockholders for
the year ended December 31, 2002 (Exhibit No. 13), is incorporated herein by
reference.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report to Stockholders for the year ended
December 31, 2002 (Exhibit No. 13) is incorporated herein by reference.

ITEM 7.  FINANCIAL STATEMENTS

         The financial statements contained in Exhibit No. 13 are incorporated
herein by reference.

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

         The information contained in the section captioned "Management's
Discussion and Analysis -- Change in Independent Accountants" in the Annual
Report to Stockholders for the year ended December 31, 2002 (Exhibit No. 13) is
incorporated herein by reference.

                                    PART III

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

         For information concerning the Board of Directors of the Holding
Company, the information contained under the section captioned "Proposal I --
Election of Directors" in the Holding Company's definitive proxy statement, to
be filed within 120 days after the end of the fiscal year covered by this Form
10-KSB (the "Proxy Statement"), is incorporated herein by reference. For
information concerning the executive officers of the Holding Company, see "Item
1. Business -- Executive Officers of the Registrant," which is incorporated
herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

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







                                       22
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

         (a) Equity Compensation Plan Information

         The following table provides information as of December 31, 2002 with
respect to the shares of the Holding Company's common stock that may be issued
under its existing equity compensation plan.

<TABLE>
<CAPTION>
                                        ------------------------     -------------------------    -------------------------
                                         NUMBER OF SECURITIES            WEIGHTED AVERAGE           NUMBER OF SECURITIES
                                           TO BE ISSUED UPON            EXERCISE PRICE OF          REMAINING AVAILABLE FOR
PLAN CATEGORY                                 EXERCISE OF              OUTSTANDING OPTIONS,         FUTURE ISSUANCE UNDER
                                         OUTSTANDING OPTIONS,              WARRANTS AND              EQUITY COMPENSATION
                                          WARRANTS AND RIGHTS                RIGHTS                         PLANS
------------------------------------    ------------------------     -------------------------    -------------------------
<S>                                     <C>                          <C>                          <C>
Equity Compensation Plans
Approved by Stockholders(1)                     100,060                       $9.41                        54,500

Equity Compensation Plans Not
Approved by Stockholders                             --                          --                            --
                                                -------                       -----                        ------
TOTAL                                           100,060                       $9.41                        54,500
</TABLE>

---------

(1)  Consists of the Option Plan.


         (b)    Security Ownership of Certain Beneficial Owners

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

         (c)    Security Ownership of Management

                Information required by this item is incorporated herein by
                reference to the sections captioned "Voting Securities and
                Principal Holders Thereof" and "Proposal I -- Election of
                Directors" of the Proxy Statement.

         (d)    Changes in Control

                Management of the Registrant knows of no arrangements, including
                any pledge by any person of securities of the Registrant, the
                operation of which may at a subsequent date result in a change
                of control of the Registrant.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (a)      Exhibits



                                       23
<PAGE>

                  3.1      Certificate of Incorporation - Incorporated by
                           reference to Exhibit 3.1 to Registrant's Annual
                           Report on Form 10-KSB for the six months ended
                           December 31, 1996.

                  3.2      Bylaws - Incorporated by reference to Exhibit 3.2 to
                           Registrant's Annual Report on Form 10-KSB for the six
                           months ended December 31, 1996.

                  4        Form of Stock Certificate - Incorporated by reference
                           to Exhibit 4 to Registrant's Annual Report on Form
                           10-KSB for the six months ended December 31, 1996.

                  10.1     Employment Agreement between the Registrant and
                           Robert B. Nolen,  Jr. - Incorporated by reference to
                           Exhibit 10.2 to the Registrant's Registration
                           Statement on Form S-4 (File No. 333-11495)

                  10.2     Pinnacle Bank 1996 Stock Option and Incentive Plan -
                           Incorporated by reference to Exhibit 10.4 to the
                           Registrant's Registration Statement on Form S-4 (File
                           No. 333-11495)

                  13       Annual Report to Stockholders for the year ended
                           December 31, 2002. Except for the portions of the
                           Annual Report to Stockholders which are expressly
                           incorporated herein by reference, such Annual Report
                           to Stockholders is furnished for the information of
                           the SEC and is not to be deemed "filed" as part of
                           this Report.

                  21       Subsidiaries

                  23       Consent of Independent Accountants

(b)      Not applicable.


ITEM 14. CONTROLS AND PROCEDURES

         Within 90 days prior to the date of this report, the Holding Company
carried out an evaluation, under the supervision and with the participation of
the Holding Company's management, including the Company's Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Holding Company's
Principal Executive Officer and Principal Financial Officer concluded that the
Company's disclosure controls and procedures are effective in alerting him in a
timely manner to material information relating to the Holding Company (including
its consolidated subsidiaries) required to be included in the Holding Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date the Holding Company conducted its evaluation.

         Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed by the Holding Company
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to the Holding Company's management,
including the Principal Executive Officer and Principal Financial Officer to
allow timely decisions regarding required disclosures. Disclosure controls
include internal controls that are designed to provide reasonable assurance that
transactions are properly authorized, assets are safeguarded against
unauthorized or improper use and transactions are properly recorded and
reported.

         Any control system, no matter how well conceived and operated, can
provide only reasonable assurance that its objectives are achieved. The design
of a control system inherently has limitations, including the controls' cost
relative to their benefits. Additionally, controls can be circumvented. No
cost-effective control system can provide absolute assurance that all control
issues and instances of fraud, if any, will be detected.




                                       24
<PAGE>


                                   SIGNATURES

       In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

<TABLE>
<S>                                                           <C>
                                                              PINNACLE BANCSHARES, INC.

Date:  March 26, 2003                                         By:    /s/ Robert B. Nolen, Jr.
                                                                     -------------------------------------
                                                                     Robert B. Nolen, Jr., President
                                                                     and Chief Executive Officer
                                                                     (Duly Authorized Representative)
</TABLE>

       In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<S>                                                           <C>
By:    /s/ Robert B. Nolen, Jr.                               By:
       -------------------------------------                         -------------------------------------
       Robert B. Nolen, Jr.                                          James W. Cannon
       President and Chief Executive Officer                         Director
       (Principal Executive Officer and Principal
       Financial Officer)                                     Date:  March ___, 2003

Date:  March 26, 2003                                         By:    /s/ Max W. Perdue
                                                                     -------------------------------------
                                                                     Max W. Perdue
By:    /s/ Marie Guthrie                                             Director
       -------------------------------------
       Marie Guthrie                                          Date:  March 26, 2003
       Treasurer
       (Principal Accounting Officer)                         By:    /s/ Greg Batchelor
                                                                     -------------------------------------
Date:  March 26, 2003                                                Greg Batchelor
                                                                     Director

By:    /s/ Albert H. Simmons                                  Date:  March 26, 2003
       -------------------------------------
       Albert H. Simmons

Date:  March 26, 2003                                         By:    /s/ J. T. Waggoner
                                                                     -------------------------------------
                                                                     J. T. Waggoner
By:    /s/ O. H. Brown                                               Director
       -------------------------------------
       O. H. Brown                                            Date:  March 26, 2003
       Director

Date:  March 26, 2003

By:    /s/ Sam W. Murphy
       -------------------------------------
       Sam W. Murphy
       Director

Date:  March 26, 2003
</TABLE>




<PAGE>

                                 CERTIFICATIONS

I, Robert B. Nolen, Jr., certify that:

        (1)     I have reviewed this annual report on Form 10-KSB of Pinnacle
        Bancshares, Inc.;

        (2)     Based on my knowledge, this annual report does not contain any
        untrue statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this annual report;

        (3)     Based on my knowledge, the financial statements, and other
        financial information included in this annual report, fairly present in
        all material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this annual report;

        (4)     The registrant's other certifying officers and I are responsible
        for establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
        have:

                (a) designed such disclosure controls and procedures to ensure
        that material information relating to the registrant, including its
        consolidated subsidiaries, is made known to us by others within those
        entities, particularly during the period in which this annual report is
        being prepared;

                (b) evaluated the effectiveness of the registrant's disclosure
         controls and procedures as of a date within 90 days prior to the filing
        date of this annual report (the "Evaluation Date"); and

                (c) presented in this annual report our conclusions about the
        effectiveness of the disclosure controls and procedures based on our
        evaluation as of the Evaluation Date;


        (5)     The registrant's other certifying officers and I have disclosed,
        based on our most recent evaluation, to the registrant's auditors and
        the audit committee of registrant's board of directors (or persons
        performing the equivalent functions):

                (a) all significant deficiencies in the design or operation of
        internal controls which could adversely affect the registrant's ability
        to record, process, summarize and report financial data and have
        identified for the registrant's auditors any material weaknesses in
        internal controls; and


<PAGE>


                (b) any fraud, whether or not material, that involves management
        or other employees who have a significant role in the registrant's
        internal controls; and

        (6)     The registrant's other certifying officers and I have indicated
        in this annual report whether there were significant changes in internal
        controls or in other factors that could significantly affect internal
        controls subsequent to the date of our most recent evaluation, including
        any corrective actions with regard to significant deficiencies and
        material weaknesses.


Date: March 31, 2003

                                               /s/ Robert B. Nolen, Jr.
                                               ------------------------------
                                                         Robert B. Nolen, Jr.
                                        President and Chief Executive Officer
                                                 (Chief Executive Officer and
                                                     Chief Financial Officer)



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