##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from  to



Commission File Number: 000-23909



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PINNACLE BANKSHARES CORPORATION

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                       |  | 54-1832714                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



622 Broad Street

Altavista, Virginia 24517

(Address of principal executive offices)



(434) 369-3000

(Issuers telephone number, including area code)



n/a

(Former name, former address and former fiscal year, if changed since last report)



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Check whether the issuer (1) 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 ̈



At October 12, 2004, 1,457,406 shares of Pinnacle Bankshares Corporations common stock,
$3 par value, were outstanding.



Transitional small business disclosure
format:    Yes ̈No  x.



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION

FORM 10-QSB

September 30, 2004



INDEX



|           |  |                                                                                                        |  |                                                           |  |      
|---------- |  | ------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------- |  | -----
|           |  |                                                                                                        |  | Page Number                                              
|Part I.    |  | FINANCIAL INFORMATION                                                                                  |  |                                                          
|           |  |                                                                                                        | 
|           |  | Item 1.                                                                                                |  | Financial Statements (Unaudited)                          |  |      
|           |  |                                                                                                       
|           |  | Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                             |  | 3                                                        
|           |  |                                                                                                       
|           |  | Consolidated Statements of Income for the three months ended September 30, 2004 and 2003               |  | 4                                                        
|           |  |                                                                                                       
|           |  | Consolidated Statements of Income for the nine months ended September 30, 2004 and 2003                |  | 5                                                        
|           |  |                                                                                                       
|           |  | Consolidated Statement of Changes in Stockholders Equity for the nine months ended September 30, 2004 |  | 6                                                        
|           |  |                                                                                                       
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003            |  | 7                                                        
|           |  |                                                                                                       
|           |  | Notes to Consolidated Financial Statements                                                             |  | 8-13                                                     
|           |  |                                                                                                        | 
|           |  | Item 2.                                                                                                |  | Managements Discussion and Analysis or Plan of Operation |  | 14-20
|           |  |                                                                                                        | 
|           |  | Item 3.                                                                                                |  | Controls and Procedures                                   |  | 21   
|           |  |                                                                                                       
|Part II.   |  | OTHER INFORMATION                                                                                      |  |                                                          
|           |  |                                                                                                        | 
|           |  | Item 1.                                                                                                |  | Legal Proceedings                                         |  | 22   
|           |  |                                                                                                        | 
|           |  | Item 6.                                                                                                |  | Exhibits                                                  |  | 22   
|           | 
|SIGNATURES |  | 23                                                                                                    



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars)



|                                                                                                                               |  |                    |         |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | ----------------- | - | -------
|                                                                                                                               |  | September 30, 2004 |         | December 31, 2003
|                                                                                                                               |  | (Unaudited)        |         |                  
|Assets                                                                                                                         |  |                    |         |                   |   |        
|Cash and cash equivalents (note 2):                                                                                            |  |                    |         |                   |   |        
|Cash and due from banks                                                                                                        |  | $                  | 4,737   |                   | $ | 3,967  
|Federal funds sold                                                                                                             |  |                    | 5,711   |                   |   | 9,799  
|                                                                                                                               |  |                    |         |                   |   |        
|Total cash and cash equivalents                                                                                                |  |                    | 10,448  |                   |   | 13,766 
|                                                                                                                               |  |                   
|Securities (note 3):                                                                                                           |  |                    |         |                   |   |        
|Available-for-sale, at fair value                                                                                              |  |                    | 27,415  |                   |   | 27,289 
|Held-to-maturity, at amortized cost                                                                                            |  |                    | 8,539   |                   |   | 9,819  
|Federal Reserve Bank stock, at cost                                                                                            |  |                    | 75      |                   |   | 75     
|Federal Home Loan Bank stock, at cost                                                                                          |  |                    | 571     |                   |   | 598    
|Mortgage loans held for sale (note 8)                                                                                          |  |                    |        |                   |   | 53     
|Loans, net (note 4)                                                                                                            |  |                    | 156,701 |                   |   | 147,883
|Bank premises and equipment, net                                                                                               |  |                    | 5,704   |                   |   | 4,270  
|Accrued income receivable                                                                                                      |  |                    | 974     |                   |   | 908    
|Other assets                                                                                                                   |  |                    | 1,997   |                   |   | 1,683  
|                                                                                                                               |  |                    |         |                   |   |        
|Total assets                                                                                                                   |  |                    | 212,424 |                   | $ | 206,344
|                                                                                                                               |  |                    |         |                   |   |        
|Liabilities and Stockholders Equity                                                                                           |  |                    |         |                   |   |        
|                                                                                                                               |  |                   
|Liabilities:                                                                                                                   |  |                    |         |                   |   |        
|Deposits:                                                                                                                      |  |                    |         |                   |   |        
|Demand                                                                                                                         |  | $                  | 20,073  |                   | $ | 16,688 
|Savings and NOW accounts                                                                                                       |  |                    | 60,331  |                   |   | 62,648 
|Time                                                                                                                           |  |                    | 108,911 |                   |   | 104,529
|                                                                                                                               |  |                    |         |                   |   |        
|Total deposits                                                                                                                 |  |                    | 189,315 |                   |   | 183,865
|                                                                                                                               |  |                   
|Note payable to Federal Home Loan Bank                                                                                         |  |                    | 325     |                   |   | 400    
|Accrued interest payable                                                                                                       |  |                    | 430     |                   |   | 407    
|Other liabilities                                                                                                              |  |                    | 235     |                   |   | 237    
|                                                                                                                               |  |                    |         |                   |   |        
|Total liabilities                                                                                                              |  |                    | 190,305 |                   |   | 184,909
|                                                                                                                               |  |                    |         |                   |   |        
|Stockholders equity:                                                                                                          |  |                    |         |                   |   |        
|Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,457,406 shares in 2004 and 1,455,708 in 2003 |  |                    | 4,372   |                   |   | 4,372  
|Capital surplus                                                                                                                |  |                    | 562     |                   |   | 562    
|Retained earnings                                                                                                              |  |                    | 16,720  |                   |   | 15,807 
|Accumulated other comprehensive income                                                                                         |  |                    | 465     |                   |   | 694    
|                                                                                                                               |  |                    |         |                   |   |        
|Total stockholders equity                                                                                                     |  |                    | 22,119  |                   |   | 21,435 
|                                                                                                                               |  |                    |         |                   |   |        
|Total liabilities and stockholders equity                                                                                     |  | $                  | 212,424 |                   | $ | 206,344
|                                                                                                                               |  |                    |         |                   |   |        



See accompanying notes to unaudited
consolidated financial statements.



3



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars,
except for per share amounts)



|                                                    |  |                                     |       |                                      |   |      
|--------------------------------------------------- |  | ----------------------------------- | ----- | ------------------------------------ | - | -----
|                                                    |  | Three MonthsEndedSeptember 30, 2004 |       | Three MonthsEnded September 30, 2003
|Interest income:                                    |  |                                     |       |                                      |   |      
|Interest and fees on loans                          |  | $                                   | 2,290 |                                      | $ | 2,265
|Interest on securities:                             |  |                                     |       |                                      |   |      
|U.S. Treasury                                       |  |                                     |      |                                      |   |     
|U.S. Government agencies                            |  |                                     | 127   |                                      |   | 123  
|Corporate                                           |  |                                     | 128   |                                      |   | 142  
|States and political subdivisions (taxable)         |  |                                     | 75    |                                      |   | 71   
|States and political subdivisions (tax exempt)      |  |                                     | 112   |                                      |   | 117  
|Other                                               |  |                                     | 5     |                                      |   | 6    
|Interest on federal funds sold                      |  |                                     | 24    |                                      |   | 33   
|                                                    |  |                                     |       |                                      |   |      
|Total interest income                               |  |                                     | 2,761 |                                      |   | 2,757
|                                                    |  |                                     |       |                                      |   |      
|Interest expense:                                   |  |                                     |       |                                      |   |      
|Interest on deposits:                               |  |                                     |       |                                      |   |      
|Savings and NOW accounts                            |  |                                     | 81    |                                      |   | 155  
|Time - under $100,000                               |  |                                     | 593   |                                      |   | 661  
|Time - $100,000 and over                            |  |                                     | 171   |                                      |   | 178  
|Other interest expense                              |  |                                     | 7     |                                      |   | 7    
|                                                    |  |                                     |       |                                      |   |      
|Total interest expense                              |  |                                     | 852   |                                      |   | 1,001
|                                                    |  |                                     |       |                                      |   |      
|Net interest income                                 |  |                                     | 1,909 |                                      |   | 1,756
|                                                    |  |                                    
|Provision for loan losses                           |  |                                     | 40    |                                      |   | 105  
|                                                    |  |                                     |       |                                      |   |      
|Net interest income after provision for loan losses |  |                                     | 1,869 |                                      |   | 1,651
|                                                    |  |                                     |       |                                      |   |      
|Noninterest income:                                 |  |                                     |       |                                      |   |      
|Service charges on deposit accounts                 |  |                                     | 332   |                                      |   | 311  
|Net realized gain on securities                     |  |                                     | 30    |                                      |   |     
|Fees on sales of mortgage loans                     |  |                                     | 66    |                                      |   | 172  
|Commissions and fees                                |  |                                     | 44    |                                      |   | 56   
|Other operating income                              |  |                                     | 120   |                                      |   | 202  
|                                                    |  |                                     |       |                                      |   |      
|Total noninterest income                            |  |                                     | 592   |                                      |   | 741  
|                                                    |  |                                     |       |                                      |   |      
|Noninterest expense:                                |  |                                     |       |                                      |   |      
|Salaries and employee benefits                      |  |                                     | 992   |                                      |   | 990  
|Occupancy expense                                   |  |                                     | 91    |                                      |   | 88   
|Furniture and equipment                             |  |                                     | 163   |                                      |   | 179  
|Office supplies and printing                        |  |                                     | 69    |                                      |   | 51   
|Other operating expenses                            |  |                                     | 502   |                                      |   | 452  
|                                                    |  |                                     |       |                                      |   |      
|Total noninterest expense                           |  |                                     | 1,817 |                                      |   | 1,760
|                                                    |  |                                     |       |                                      |   |      
|Income before income tax expense                    |  |                                     | 644   |                                      |   | 632  
|                                                    |  |                                    
|Income tax expense                                  |  |                                     | 185   |                                      |   | 177  
|                                                    |  |                                     |       |                                      |   |      
|Net income                                          |  | $                                   | 459   |                                      | $ | 455  
|                                                    |  |                                     |       |                                      |   |      
|Net income per share (note 5):                      |  |                                     |       |                                      |   |      
|Basic                                               |  | $                                   | 0.31  |                                      | $ | 0.31 
|Diluted                                             |  | $                                   | 0.31  |                                      | $ | 0.31 



See accompanying notes to unaudited
consolidated financial statements.



4



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars,
except for per share amounts)



|                                                    |  |                                    |       |                                    |   |      
|--------------------------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | -----
|                                                    |  | Nine MonthsEndedSeptember 30, 2004 |       | Nine MonthsEndedSeptember 30, 2003
|Interest income:                                    |  |                                    |       |                                    |   |      
|Interest and fees on loans                          |  | $                                  | 6,622 |                                    | $ | 6,713
|Interest on securities:                             |  |                                    |       |                                    |   |      
|U.S. Treasury                                       |  |                                    |      |                                    |   | 27   
|U.S. Government agencies                            |  |                                    | 376   |                                    |   | 465  
|Corporate                                           |  |                                    | 390   |                                    |   | 412  
|States and political subdivisions (taxable)         |  |                                    | 231   |                                    |   | 235  
|States and political subdivisions (tax exempt)      |  |                                    | 338   |                                    |   | 365  
|Other                                               |  |                                    | 18    |                                    |   | 22   
|Interest on federal funds sold                      |  |                                    | 80    |                                    |   | 117  
|                                                    |  |                                    |       |                                    |   |      
|Total interest income                               |  |                                    | 8,055 |                                    |   | 8,356
|                                                    |  |                                    |       |                                    |   |      
|Interest expense:                                   |  |                                    |       |                                    |   |      
|Interest on deposits:                               |  |                                    |       |                                    |   |      
|Savings and NOW accounts                            |  |                                    | 255   |                                    |   | 437  
|Time - under $100,000                               |  |                                    | 1,764 |                                    |   | 2,030
|Time - $100,000 and over                            |  |                                    | 494   |                                    |   | 550  
|Other interest expense                              |  |                                    | 17    |                                    |   | 21   
|                                                    |  |                                    |       |                                    |   |      
|Total interest expense                              |  |                                    | 2,530 |                                    |   | 3,038
|                                                    |  |                                    |       |                                    |   |      
|Net interest income                                 |  |                                    | 5,525 |                                    |   | 5,318
|                                                    |  |                                   
|Provision for loan losses                           |  |                                    | 203   |                                    |   | 362  
|                                                    |  |                                    |       |                                    |   |      
|Net interest income after provision for loan losses |  |                                    | 5,322 |                                    |   | 4,956
|Noninterest income:                                 |  |                                    |       |                                    |   |      
|Service charges on deposit accounts                 |  |                                    | 959   |                                    |   | 990  
|Net realized gain on securities                     |  |                                    | 30    |                                    |   |     
|Fees on sales of mortgage loans                     |  |                                    | 233   |                                    |   | 431  
|Commissions and fees                                |  |                                    | 137   |                                    |   | 141  
|Other operating income                              |  |                                    | 368   |                                    |   | 418  
|                                                    |  |                                    |       |                                    |   |      
|Total noninterest income                            |  |                                    | 1,727 |                                    |   | 1,980
|                                                    |  |                                    |       |                                    |   |      
|Noninterest expense:                                |  |                                    |       |                                    |   |      
|Salaries and employee benefits                      |  |                                    | 2,884 |                                    |   | 2,824
|Occupancy expense                                   |  |                                    | 259   |                                    |   | 253  
|Furniture and equipment                             |  |                                    | 440   |                                    |   | 468  
|Office supplies and printing                        |  |                                    | 138   |                                    |   | 139  
|Other operating expenses                            |  |                                    | 1,376 |                                    |   | 1,411
|                                                    |  |                                    |       |                                    |   |      
|Total noninterest expense                           |  |                                    | 5,097 |                                    |   | 5,095
|                                                    |  |                                    |       |                                    |   |      
|Income before income tax expense                    |  |                                    | 1,952 |                                    |   | 1,841
|                                                    |  |                                   
|Income tax expense                                  |  |                                    | 558   |                                    |   | 515  
|                                                    |  |                                    |       |                                    |   |      
|Net income                                          |  | $                                  | 1,394 |                                    | $ | 1,326
|                                                    |  |                                    |       |                                    |   |      
|Net income per share (note 5):                      |  |                                    |       |                                    |   |      
|Basic                                               |  | $                                  | 0.96  |                                    | $ | 0.91 
|Diluted                                             |  | $                                  | 0.95  |                                    | $ | 0.90 
|                                                    |  |                                    |       |                                    |   |      



See accompanying notes to unaudited
consolidated financial statements.



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders Equity

Nine Months Ended September 30, 2004

(Unaudited)

(In thousands, except share and per share data)



|                                                                                                            |  |              |  |                 |       |                   |     |  |                                       |   |  |       |   |  |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ |  | --------------- | ----- | ----------------- | --- |  | ------------------------------------- | - |  | ----- | - |  | ------ | -
|                                                                                                            |  | Common Stock |  | Capital Surplus |       | Retained Earnings |     |  | AccumulatedOther Comprehensive Income |   |  | Total |  
|                                                                                                            |  | Shares       |  | Par Value       |       |                   |     | 
|Balances, December 31, 2003                                                                                 |  | 1,457,406    |  | $               | 4,372 |                   | 562 |  | 15,807                                |   |  | 694   |   |  | 21,435 |  
|Net income                                                                                                  |  |             |  |                 |      |                   |    |  | 1,394                                 |   |  |      |   |  | 1,394  |  
|Change in net unrealized gains on available-for-sale securities, net of deferred income tax benefit of $118 |  |             |  |                 |      |                   |    |  |                                      |   |  | (229  | ) |  | (229   | )
|Cash dividends declared by Bankshares ($0.33 per share)                                                     |  |             |  |                 |      |                   |    |  | (481                                  | ) |  |      |   |  | (481   | )
|                                                                                                            |  |              |  |                 |       |                   |     |  |                                       |   |  |       |   |  |        |  
|Balances, September 30, 2004                                                                                |  | 1,457,406    |  | $               | 4,372 |                   | 562 |  | 16,720                                |   |  | 465   |   |  | 22,119 |  
|                                                                                                            |  |              |  |                 |       |                   |     |  |                                       |   |  |       |   |  |        |  



See accompanying notes to unaudited
consolidated financial statements.



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



|                                                                                       |  |                                    |         |   |                                    |   |         |  
|-------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---------------------------------- | - | ------- | -
|                                                                                       |  | Nine MonthsEndedSeptember 30, 2004 |         |   | Nine MonthsEndedSeptember 30, 2003 |  
|Cash flows from operating activities:                                                  |  |                                    |         |   |                                    |   |         |  
|Net income                                                                             |  | $                                  | 1,394   |   |                                    | $ | 1,326   |  
|                                                                                       |  |                                   
|Adjustments to reconcile net income to net cash provided by operating activities:      |  |                                    |         |   |                                    |   |         |  
|Depreciation of bank premises and equipment                                            |  |                                    | 294     |   |                                    |   | 286     |  
|Amortization of intangible assets                                                      |  |                                    | 9       |   |                                    |   | 9       |  
|Accretion (Amortization) of unearned fees, net                                         |  |                                    | 40      |   |                                    |   | (43     | )
|Net amortization of premiums and discounts on securities                               |  |                                    | (11     | ) |                                    |   | 83      |  
|Realized gain on securities                                                            |  |                                    | 30      |   |                                    |   |        |  
|Provision for loan losses                                                              |  |                                    | 203     |   |                                    |   | 362     |  
|Originations of mortgage loans held for sale                                           |  |                                    | (1,604  | ) |                                    |   | (8,523  | )
|Sales of mortgage loans held for sale                                                  |  |                                    | 1,657   |   |                                    |   | 8,470   |  
|Net decrease (increase) in:                                                            |  |                                    |         |   |                                    |   |         |  
|Accrued income receivable                                                              |  |                                    | (66     | ) |                                    |   | 106     |  
|Other assets                                                                           |  |                                    | (192    | ) |                                    |   | 287     |  
|Net increase (decrease) in:                                                            |  |                                    |         |   |                                    |   |         |  
|Accrued interest payable                                                               |  |                                    | 23      |   |                                    |   | 117     |  
|Other liabilities                                                                      |  |                                    | (2      | ) |                                    |   | 195     |  
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Net cash provided by operating activities                                              |  |                                    | 1,775   |   |                                    |   | 2,675   |  
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Cash flows from investing activities:                                                  |  |                                    |         |   |                                    |   |         |  
|Purchases of available-for-sale securities                                             |  |                                    | (3,462  | ) |                                    |   | (4,330  | )
|Purchases of held-to-maturity securities                                               |  |                                    | (301    | ) |                                    |   |        |  
|Proceeds from maturities and calls of held-to-maturity securities                      |  |                                    | 1,578   |   |                                    |   | 4,956   |  
|Proceeds from paydowns and maturities of held-to-maturity mortgage-backed securities   |  |                                    |        |   |                                    |   | 4       |  
|Proceeds from maturities and calls of available-for-sale securities                    |  |                                    | 945     |   |                                    |   | 1,920   |  
|Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities |  |                                    | 2,028   |   |                                    |   | 4,775   |  
|Purchase (sale) of Federal Home Loan Bank stock                                        |  |                                    | 27      |   |                                    |   | (33     | )
|Collections on loan participations                                                     |  |                                    | 1,459   |   |                                    |   | 1,252   |  
|Net increase in loans made to customers                                                |  |                                    | (10,608 | ) |                                    |   | (16,865 | )
|Recoveries on loans charged off                                                        |  |                                    | 75      |   |                                    |   | 118     |  
|Purchases of bank premises and equipment                                               |  |                                    | (1,728  | ) |                                    |   | (563    | )
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Net cash used in investing activities                                                  |  |                                    | (9,987  | ) |                                    |   | (8,766  | )
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Cash flows from financing activities:                                                  |  |                                    |         |   |                                    |   |         |  
|Net increase in demand, savings and NOW deposits                                       |  |                                    | 1,068   |   |                                    |   | 3,251   |  
|Net increase in time deposits                                                          |  |                                    | 4,382   |   |                                    |   | 3,408   |  
|Repayments of note payable to Federal Home Loan Bank                                   |  |                                    | (75     | ) |                                    |   | (75     | )
|Proceeds from issuance of common stock                                                 |  |                                    |        |   |                                    |   | 71      |  
|Cash dividends paid                                                                    |  |                                    | (481    | ) |                                    |   | (479    | )
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Net cash provided by financing activities                                              |  |                                    | 4,894   |   |                                    |   | 6,176   |  
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Net decrease in cash and cash equivalents                                              |  |                                    | (3,318  | ) |                                    |   | 85      |  
|                                                                                       |  |                                   
|Cash and cash equivalents, beginning of period                                         |  |                                    | 13,766  |   |                                    |   | 19,963  |  
|                                                                                       |  |                                    |         |   |                                    |   |         |  
|Cash and cash equivalents, end of period                                               |  | $                                  | 10,448  |   |                                    | $ | 20,048  |  
|                                                                                       |  |                                    |         |   |                                    |   |         |  



See accompanying notes to unaudited
consolidated financial statements.



7



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY



Notes to Consolidated Financial Statements

September 30, 2004 (Unaudited)

(In thousands, except share and per share data)



(1) General



The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation (Bankshares) and its wholly-owned subsidiary,
The First National Bank of Altavista (the Bank), (collectively the Company). All material intercompany accounts and transactions have been eliminated. The consolidated financial statements conform to accounting principles
generally accepted in the United States of America and to general banking industry practices. In the opinion of the Companys management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring
nature, necessary to present fairly the financial position as of September 30, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and
2003.



These interim period consolidated financial statements
and financial information should be read in conjunction with the consolidated financial statements and notes thereto included in Pinnacle Bankshares Corporations 2003 Annual Report to Shareholders and additional information supplied in the
2003 Form 10-KSB.



The results of operations for the interim
period ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.



The Company has a single reportable segment for purposes of segment reporting.



(2) Cash and Cash Equivalents



For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits, and federal funds
sold.



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(3) Securities



The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities at September 30, 2004, are shown in the table below.
As of September 30, 2004, securities with amortized costs of $4,470 and fair values of $4,649 were pledged as collateral for public deposits.



|                                                                                      |  |                |        |                      |     |                        |    |            |       
|------------------------------------------------------------------------------------- |  | -------------- | ------ | -------------------- | --- | ---------------------- | -- | ---------- | ------
|Available-for-Sale:                                                                   |  | AmortizedCosts |        | GrossUnrealizedGains |     | GrossUnrealizedLosses  |    | FairValues
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $              | 3,607  |                      | 56  |                        |   |            | 3,663 
|Obligations of states and political subdivisions                                      |  |                | 7,298  |                      | 285 |                        | 17 |            | 7,566 
|Mortgage-backed securities- Government                                                |  |                | 6,672  |                      | 153 |                        | 17 |            | 6,808 
|Corporate Issues                                                                      |  |                | 9,084  |                      | 244 |                        |   |            | 9,328 
|Other securities                                                                      |  |                | 50     |                      |    |                        |   |            | 50    
|                                                                                      |  |                |        |                      |     |                        |    |            |       
|Totals                                                                                |  | $              | 26,711 |                      | 738 |                        | 34 |            | 27,415
|                                                                                      |  |                |        |                      |     |                        |    |            |       
|                                                                                      |  |                |        |                     
|Held-to-Maturity:                                                                     |  | AmortizedCosts |        | GrossUnrealizedGains |     | Gross UnrealizedLosses |    | FairValues
|Obligations of states and political subdivisions                                      |  |                | 8,539  |                      | 368 |                        | 14 |            | 8,893 
|                                                                                      |  |                |        |                      |     |                        |    |            |       
|Totals                                                                                |  | $              | 8,539  |                      | 368 |                        | 14 |            | 8,893 
|                                                                                      |  |                |        |                      |     |                        |    |            |       



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(4) Allowance for Loan Losses



Changes in the allowance for loan losses for the nine months ended September 30, 2004 and 2003 are as follows:



|                          |  |      |       |   |      |   |       |  
|------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                          |  | 2004 |       |   | 2003 |  
|Balance at January 1,     |  | $    | 1,528 |   |      | $ | 1,298 |  
|Provision for loan losses |  |      | 204   |   |      |   | 362   |  
|Loans charged off         |  |      | (158  | ) |      |   | (300  | )
|Recoveries                |  |      | 75    |   |      |   | 118   |  
|                          |  |      |       |   |      |   |       |  
|Balance at September 30,  |  | $    | 1,649 |   |      | $ | 1,478 |  
|                          |  |      |       |   |      |   |       |  



(5) Net Income Per Share



Basic net income per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.



The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods
indicated:



|                                      |  |                       |     |                     |           |                 |   |     
|------------------------------------- |  | --------------------- | --- | ------------------- | --------- | --------------- | - | ----
|Three Months Ended September 30, 2004 |  | Net Income(Numerator) |     | Shares(Denominator) |           | Per ShareAmount
|Basic net income per share            |  | $                     | 459 |                     | 1,457,406 |                 | $ | 0.31
|                                      |  |                       |     |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                       |    |                     | 15,857    |                 |   |     
|                                      |  |                       |     |                     |           |                 |   |     
|Diluted net income per share          |  | $                     | 459 |                     | 1,473,263 |                 | $ | 0.31
|                                      |  |                       |     |                     |           |                 |   |     
|                                      |  |                       |    
|Three Months Ended September 30, 2003 |  |                       |     |                     |           |                
|Basic net income per share            |  | $                     | 455 |                     | 1,456,760 |                 | $ | 0.31
|                                      |  |                       |     |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                       |    |                     | 14,867    |                 |   |     
|                                      |  |                       |     |                     |           |                 |   |     
|Diluted net income per share          |  | $                     | 455 |                     | 1,471,627 |                 | $ | 0.31
|                                      |  |                       |     |                     |           |                 |   |     



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|                                     |  |                       |       |                     |           |                 |   |     
|------------------------------------ |  | --------------------- | ----- | ------------------- | --------- | --------------- | - | ----
|Nine Months Ended September 30, 2004 |  | Net Income(Numerator) |       | Shares(Denominator) |           | Per ShareAmount
|Basic net income per share           |  | $                     | 1,394 |                     | 1,457,406 |                 | $ | 0.96
|                                     |  |                       |       |                     |           |                 |   |     
|Effect of dilutive stock options     |  |                       |      |                     | 15,767    |                 |   |     
|                                     |  |                       |       |                     |           |                 |   |     
|Diluted net income per share         |  | $                     | 1,394 |                     | 1,473,173 |                 | $ | 0.95
|                                     |  |                       |       |                     |           |                 |   |     
|                                     |  |                       |      
|Nine Months Ended September 30, 2003 |  |                       |       |                     |           |                
|Basic net income per share           |  | $                     | 1,326 |                     | 1,454,897 |                 | $ | 0.91
|                                     |  |                       |       |                     |           |                 |   |     
|Effect of dilutive stock options     |  |                       |      |                     | 13,380    |                 |   |     
|                                     |  |                       |       |                     |           |                 |   |     
|Diluted net income per share         |  | $                     | 1,326 |                     | 1,468,277 |                 | $ | 0.90
|                                     |  |                       |       |                     |           |                 |   |     



(6) Comprehensive Income



The following table presents comprehensive income for the
interim periods indicated below:



|                                                                                                       |  |                    |       |   |                    |   |       |  
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ----- | - | ------------------ | - | ----- | -
|                                                                                                       |  | Three Months Ended |      
|                                                                                                       |  | September 30, 2004 |       |   | September 30, 2003 |  
|Net income                                                                                             |  | $                  | 459   |   |                    | $ | 455   |  
|Change in net unrealized gains (losses) on available-for sale securities, net of deferred income taxes |  |                    | 220   |   |                    |   | (348  | )
|                                                                                                       |  |                    |       |   |                    |   |       |  
|Total comprehensive income                                                                             |  | $                  | 679   |   |                    | $ | 107   |  
|                                                                                                       |  |                    |       |   |                    |   |       |  
|                                                                                                       | 
|                                                                                                       |  | Nine Months Ended  |      
|                                                                                                       |  | September 30, 2004 |       |   | September 30, 2003 |  
|Net income                                                                                             |  | $                  | 1,394 |   |                    | $ | 1,326 |  
|Change in net unrealized gains (losses) on available-for sale securities, net of deferred income taxes |  |                    | (229  | ) |                    |   | (132  | )
|                                                                                                       |  |                    |       |   |                    |   |       |  
|Total comprehensive income                                                                             |  | $                  | 1,165 |   |                    | $ | 1,194 |  
|                                                                                                       |  |                    |       |   |                    |   |       |  



7) Stock Options



The Company has two incentive stock option plans. The 1997 Incentive Stock
Plan (the 1997 Plan), pursuant to which the Companys Board of Directors may grant stock options to officers and key employees, was effective as of May 1, 1997. The 1997 Plan authorizes grants of options to purchase up to 50,000
shares of the Companys authorized, but unissued common stock. Accordingly, 50,000 shares of authorized, but unissued common stock are reserved for use in the 1997 Plan. All stock options are granted with an exercise price equal to the
stocks fair market value at the date of grant. At September 30, 2004, there were 5,000 shares available for grant under the 1997 Plan.



The 2004 Incentive Stock Plan (the 2004 Plan), pursuant to which the Companys Board of Directors may grant stock options to officers and
key employees, was approved by shareholders on April 13, 2004 and



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became effective as of May 1, 2004. The 2004 Plan authorizes grants of options to purchase up to 100,000 shares of the
Companys authorized, but unissued common stock. Accordingly, 100,000 shares of authorized, but unissued common stock are reserved for use in the 2004 Plan. All stock options are granted with an exercise price equal to the stocks fair
market value at the date of grant.



The Company applies the
intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans.
As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123.



No compensation cost has been recognized for the Companys stock options in the accompanying consolidated financial statements. Had the Company
determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Companys net income, basic net income per share and diluted net income per share would have decreased to the pro forma amounts
for the interim periods indicated below:



|                                                                                                                  |  |                    |      |   |                    |   |      |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | - | ------------------ | - | ---- | -
|                                                                                                                  |  | Three Months Ended |     
|                                                                                                                  |  | September 30, 2004 |      |   | September 30, 2003 |  
|Net income, as reported                                                                                           |  | $                  | 459  |   |                    | $ | 455  |  
|Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects |  |                    | (2   | ) |                    |   | (2   | )
|                                                                                                                  |  |                    |      |   |                    |   |      |  
|Pro forma net income                                                                                              |  | $                  | 457  |   |                    | $ | 453  |  
|                                                                                                                  |  |                    |      |   |                    |   |      |  
|Basic net income per share:                                                                                       |  |                    |      |   |                    |   |      |  
|As reported                                                                                                       |  | $                  | 0.31 |   |                    | $ | 0.31 |  
|Pro forma                                                                                                         |  |                    | 0.31 |   |                    |   | 0.31 |  
|Diluted net income per share:                                                                                     |  |                    |      |   |                    |   |      |  
|As reported                                                                                                       |  | $                  | 0.31 |   |                    | $ | 0.31 |  
|Pro forma                                                                                                         |  |                    | 0.31 |   |                    |   | 0.31 |  



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|                                                                                                                  |  |                    |       |   |                    |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | -
|                                                                                                                  |  | Nine Months Ended  |      
|                                                                                                                  |  | September 30, 2004 |       |   | September 30, 2003 |  
|Net income, as reported                                                                                           |  | $                  | 1,394 |   |                    | $ | 1,326 |  
|Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects |  |                    | (6    | ) |                    |   | (6    | )
|                                                                                                                  |  |                    |       |   |                    |   |       |  
|Pro forma net income                                                                                              |  | $                  | 1,388 |   |                    | $ | 1,320 |  
|                                                                                                                  |  |                    |       |   |                    |   |       |  
|Basic net income per share:                                                                                       |  |                    |       |   |                    |   |       |  
|As reported                                                                                                       |  | $                  | 0.96  |   |                    | $ | 0.91  |  
|Pro forma                                                                                                         |  |                    | 0.96  |   |                    |   | 0.91  |  
|                                                                                                                  |  |                   
|Diluted net income per share:                                                                                     |  |                    |       |   |                    |   |       |  
|As reported                                                                                                       |  | $                  | 0.95  |   |                    | $ | 0.90  |  
|Pro forma                                                                                                         |  |                    | 0.95  |   |                    |   | 0.90  |  



(9) Subsequent Declaration of Cash
Dividend



On October 12, 2004 the Board of Directors
declared a quarterly cash dividend in the amount of $0.12 per common share payable to shareholders of record as of October 22, 2004.



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION(Amounts in 000s)



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION



The following discussion is qualified in its entirety by the more detailed information and the unaudited consolidated financial statements and
accompanying notes appearing elsewhere in this Form 10-QSB. In addition to the historical information contained herein, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of the words believe, expect, intend,
anticipate, estimate, project, may, will or similar expressions. Although we believe our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we
can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results, performance or achievements could
differ materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, the legislative/regulatory
climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements contained herein,
and you should not place undue reliance on such statements, which reflect our position as of the date of this report.



THE COMPANY



Pinnacle Bankshares Corporation, a Virginia corporation (Bankshares), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bankshares is
headquartered in Altavista, Virginia, and conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, The First National Bank of Altavista (the Bank). Bankshares exists primarily for the
purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish.



The following discussion supplements and provides information about the major components of the results of operations and financial



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condition, liquidity and capital resources of Bankshares and its subsidiary (collectively the Company). This
discussion and analysis should be read in conjunction with the Companys consolidated financial statements and accompanying notes.



OVERVIEW



Total assets at September 30, 2004 were $212,424, up 2.95% from $206,344 at December 31, 2003. The principal components of the Companys assets at
the end of the period were $35,954 in securities and $156,701 in net loans. During the nine months ended September 30, 2004, net loans increased 5.96% or $8,818 from $147,883 at December 31, 2003. The Companys lending activities are a
principal source of its income. Also during the nine months, securities decreased 3.11% or $1,154 from December 31, 2003.



Total liabilities at September 30, 2004 were $190,305, up 2.92% from $184,909 at December 31, 2003, primarily as a result of an increase in demand
deposits from December 31, 2003 of $3,385 or 20.28% and an increase in time deposits from December 31, 2003 of $4,382 or 4.19%. Savings and NOW accounts decreased by $2,317 or 3.70% from December 31, 2003 to September 30, 2004. The Companys
deposits are provided by individuals and businesses located within the communities the Company serves.



Total stockholders equity at September 30, 2004 was $22,119, including $16,720 in retained earnings and $465 of accumulated other comprehensive
income, which represents net unrealized gains on available-for-sale securities. At December 31, 2003, total stockholders equity was $21,435.



The Company had net income of $1,394 for the nine months ended September 30, 2004, compared with net income of $1,326 for the comparable period in 2003,
an increase of 5.13%. The Company had net income of $459 for the three months ended September 30, 2004, compared with net income of $455 for the comparable period in 2003, an increase of 0.88%. The increase in net income for the nine month period
was primarily attributable to higher other operating expenses incurred in 2003 than in 2004 and a decrease in the provision for loan losses of $159. Net income for the third quarter of 2004 when compared to the third quarter of 2003 was affected by
an 8.71% increase in net interest income, a 61.90% decrease in provision for loan losses, a 20.11% decrease in non-interest income and a 3.24% increase in non-interest expense. The results of operations for the nine months ended September 30, 2004
are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.



Profitability as measured by the Companys return on average assets (ROA) was 0.88% for the nine months ended September 30, 2004,



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compared to 0.87% for the same period of 2003. Another key indicator of performance, the return on average equity (ROE)
for the nine months ended September 30, 2004 was 8.55%, compared to 8.48% for the nine months ended September 30, 2003.



NET INTEREST INCOME



Net interest income represents the principal source of earnings for the Company. Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities and borrowings, as well as their respective rates and yields, have a significant impact on the level of net interest income.



Net interest income was $5,525 for the nine months ended September 30, 2004 and is attributable to interest income from loans and securities exceeding the
cost associated with interest incurred on deposits. Net interest income was $1,909 for the three months ended September 30, 2004. The net interest margin increased to 3.85% for the nine months ended September 30, 2004, from 3.83% for the nine months
ended September 30, 2003. The slight increase in net interest margin is due primarily to the upward repricing of the adjustable rate credits in the banks loan portfolio due to three prime rate increases in the third quarter of 2004 totaling
0.75%. Deposit interest rates in the third quarter were also repriced. However the rate increases in the loan portfolio exceeded the rate increases in the deposit portfolio; hence, the increase in the margin. Should interest rates continue to rise
in the remainder of 2004, management expects the net interest margin to continue to improve due to the level of adjustable rate credits in the banks loan portfolio.



Interest income on loans and securities decreased 3.60% for the nine months ended September 30, 2004 and increased 0.15%
three months ended September 30, 2004 compared to the same periods of 2003 due to the loans repricing and being originated at lower interest rates in the first and second quarter of 2004 and higher yielding securities maturing and being replaced by
lower yielding ones in 2004 as a result of the overall lower interest rate environment. When comparing the third quarter of 2004 with the third quarter of 2003, interest income on loans and securities showed little change.



Interest and fees from loans was $6,622 for the nine months ended September
30, 2004, down from $6,713 at September 30, 2003. Interest and fees from loans was $2,290 for the three months ended September 30, 2004, up from $2,265 at September 30, 2003. Interest from securities and fed funds sold was $1,433 for the nine months
ended September 30, 2004, down from $1,643 at September 30, 2003. Interest from securities was $471 for the three months ended September 30, 2004, down from $492 at September 30,2003.



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Interest expense decreased 16.72% and 14.89% for the nine and three months ended September 30, 2004,
respectively, compared to the same periods of 2003 due to the impact of repricing of deposit liabilities at lower interest rates.



NON-INTEREST INCOME



Non-interest income decreased $253 or 12.78% for the nine months ended September 30, 2004 compared to the same period of 2003. Non-interest income
decreased $149 or 20.11% when comparing the three months ended September 30, 2004 to the same period of 2003. The Companys principal sources of non-interest income are service charges and fees on deposit accounts, particularly transaction
accounts, and fees on sales of mortgage loans. The decreases from 2003 were primarily due to a 45.94% decrease in fees on sales of mortgage loans as a result of a decrease in loan production during the first nine months of 2004. Also contributing to
the decrease was a 3.13% decrease in service charges on deposits. The decline in service charges is largely because overdraft privilege fees, although continuing to perform well, have not remained at the 2003 levels when the overdraft privilege
program was first introduced.



NON-INTEREST
EXPENSE



Non-interest expense increased $2 or 0.04%, for the
nine months ended September 30, 2004 compared to the same period of 2003. Non-interest expense increased $57 or 3.24% for the three months ended September 30, 2004 compared to the same period of 2003. The slight increase in non-interest expense when
comparing the nine month periods is primarily attributable to the conservative $60 increase, or 2.12% growth, in the Companys personnel expenses, a $28 decrease in furniture and equipment expenses due to lower repair costs in 2004 and a $35 or
2.48% decrease in other operating expenses as a result of a consulting expense of $82 related to improving efficiencies within the Company and expenses and loss associated with the sale of land totaling approximately $38 incurred in the second
quarter of 2003. The $57 increase for the three months ended September 30, 2004 when compared with the same period of 2003 was due mainly to a 35.29% increase in office supply expenses and a 11.06% increase in other operating expenses. The supply
and other operating expenses occurred mainly due to the opening of the banks new branch located in Forest, Virginia on August 16, 2004.



ALLOWANCE AND PROVISION FOR LOAN LOSSES



The provision for loan losses expense was $203 in the first nine months of 2004 in recognition of managements estimate of risks inherent with
lending activities. Among other factors, management considers the Companys historical loss experience, the size and



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composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and
current and anticipated economic conditions in making its estimate of risk. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general
economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors
as the methodology used to calculate the allowance. The allowance for loan losses was $1,649 as of September 30, 2004, representing approximately 1.04% of loans receivable. Management believes the allowance was adequate as of September 30, 2004 to
provide for loan losses inherent in the Companys loan portfolio. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision as deemed appropriate.



NON-PERFORMING ASSETS AND IMPAIRED LOANS



Non-performing assets, which consist of nonaccrual loans and foreclosed
properties, were $438 at September 30, 2004 and $260 at December 31, 2003. There were no foreclosed properties as of September 30, 2004 or December 31, 2003. Nonaccrual loans were $438 at September 30, 2004 and $260 at December 31, 2003. Loans are
generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. Impaired loans equaled nonaccrual loans at September 30,
2004 and December 31, 2003.



LIQUIDITY



Liquidity represents an institutions ability to meet
present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. The Companys liquidity is provided by cash and due from banks, federal
funds sold, investments available for sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Companys ability to obtain deposits and purchase funds at favorable rates also
affects it liquidity. As a result of the Companys management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes that the Bank maintains overall liquidity that is sufficient to
satisfy its depositors requirements and to meet customers credit needs. The Companys ratio of liquid assets to deposits and short-term borrowings was 20.24% as of September 30, 2004 compared to 22.33% as of December 31, 2003.
Additional sources of liquidity available to the Company include its capacity to borrow additional funds through correspondent banks. The Company derives cash flows from its operating, investing, and financing activities. Cash flows of the Company
are primarily used to fund loans and securities and are provided by the deposits and borrowings of the Company.



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CAPITAL



The Companys financial position at September 30, 2004 reflects liquidity and capital levels currently adequate to fund
anticipated future business expansion. Capital ratios are well above required regulatory minimums for a well-capitalized institution. The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings
performance, and changing competitive conditions and economic forces. The adequacy of the Companys capital is reviewed by management regularly. Management seeks to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and to absorb potential losses.



Stockholders equity reached $22,119 at September 30, 2004 compared to $21,435 at December 31, 2003. At September 30, 2004, the Companys leverage ratio (Tier I capital divided by quarterly average assets) was 9.94% compared to
9.79% at December 31, 2003. Each of these ratios exceeded the required minimum leverage ratio of 4%.



OFF-BALANCE SHEET ARRANGEMENTS



There were no material changes in the Companys off-balance sheet arrangements and commitments from the information provided in the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2003. The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of September 30, 2004
equaled $187. Other commitments include commitments to extend credit. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of September 30, 2004, the
Company had unused loan commitments of $44,033, including $38,031 in unused commitments with an original maturity exceeding one year.



CRITICAL ACCOUNTING POLICIES



Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
The Companys most critical accounting policy relates to the Companys allowance for loan losses, which reflects the estimated losses resulting from the inability of the Companys borrowers to make required loan payments. If the
financial condition of the Companys borrowers were to deteriorate, resulting in an



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impairment of their ability to make payments, the Companys estimates would be updated, and additional provisions
for loan losses could be required. Further information regarding the estimates used in determining the allowance for loan losses is contained in the discussions on Allowance and Provision for Loan Losses on page 17 herein and Loans
and Allowance for Loan Losses on page 28 of the Companys 2003 Annual Report to Shareholders.



RECENT ACCOUNTING PRONOUNCEMENTS



As of October 12, 2004, there are no new accounting standards that are expected to be applicable to the Companys financial position, operating
results or financial statement disclosures.



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Item 3. CONTROLS AND PROCEDURES



Pursuant to provisions of the Securities Exchange Act of 1934, Robert H. Gilliam, Jr., President and Chief Executive Officer, and Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer, of the Company are responsible for
establishing and maintaining disclosure controls and procedures for the Company. They have designed disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material
information relating to the Company, is made known to them by others within the Company, particularly during the periods when the Companys quarterly and annual reports are being prepared. They have evaluated the effectiveness of the
Companys disclosure controls and procedures, and based on their evaluation, concluded that the Companys disclosure controls and procedures were operating effectively as of the end of the period covered by this report.



Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that the Companys disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be
set forth in the Companys periodic reports.



The
Companys management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of the Companys assets to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There was no change in the Companys internal control over financial reporting or control of assets during
the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting or control over its assets.



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##### Table of Contents

PART II - OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



In the
normal course of business, the Company is involved in various legal proceedings. Management believes that the ultimate resolution of any current proceedings will not have a material adverse effect on the Companys financial position, liquidity
or results of operations.



Item 6. EXHIBITS



|              |  |                                                                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                    
|3.1           |  | Amended and Restated Articles of Incorporation (incorporated by reference to Appendix I to registrants amended registration statement on Form S-4 (File No. 333-20399) filed on January
30, 1997)                             
|              | 
|3.2           |  | Bylaws (incorporated by reference to Exhibit 3(ii) to registrants registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)                                                                          
|              | 
|10.1          |  | 1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrants registration statement on Form S-8 filed September 14, 1998)                                                                               
|              | 
|10.2          |  | Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 12, 1998 (incorported by reference to Exhibit 10.2 to registrants annual report
on Form 10-KSB filed March 25, 2003)
|              | 
|10.3          |  | VBA Directors Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (incorporated by reference to Exhibit 10.3 to registrants annual report on
Form 10-KSB filed March 25, 2003)        
|              | 
|10.4          |  | Pinnacle Bankshares Corporation 2004 Incentive Stock Plan(incorporated by reference to Exhibit 10.4 to registrants quarterly report on Form 10-QSB filed May 10, 2004)                                                        
|              | 
|31.1          |  | CEO Certification Pursuant to Rule 13a-14(a)                                                                                                                                                                                   
|              | 
|31.2          |  | CFO Certification Pursuant to Rule 13a-14(a)                                                                                                                                                                                   
|              | 
|32.1          |  | CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)                                                                                                                                   



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##### Table of Contents

SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                  |  |                                           
|----------------- |  | ------------------------------------------
|                  |  | PINNACLE BANKSHARES CORPORATION           
|                  |  | (Registrant)                              
|                  | 
|NOVEMBER 12, 2004 |  | /s/ Robert H. Gilliam, Jr.                
|Date              |  | Robert H. Gilliam, Jr., President and     
|                  |  | Chief Executive Officer                   
|                  |  | (principal executive officer)             
|                  | 
|NOVEMBER 12, 2004 |  | /s/ Bryan M. Lemley                       
|Date              |  | Bryan M. Lemley, Secretary,               
|                  |  | Treasurer and Chief Financial Officer     
|                  |  | (principal financial & accounting officer)



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