Exhibit 13


                                          PINNACLE BANKSHARES CORPORATION
                                                  AND SUBSIDIARY

                                                   Annual Report

                                            December 31, 1998 and 1997

                                    (With Independent Auditors' Report Thereon)



<PAGE>


                                          PINNACLE BANKSHARES CORPORATION
                                                  AND SUBSIDIARY

                                                 Table of Contents

                                            December 31, 1998 and 1997



                                                                      Page

Selected Historical Consolidated Financial Information                  1

President's Letter                                                      2

Management's Discussion and Analysis of Financial Condition
    and Results of Operations                                           4

Consolidated Balance Sheets                                            22

Consolidated Statements of Income and Comprehensive Income             23

Consolidated Statements of Changes in Stockholders' Equity             24

Consolidated Statements of Cash Flows                                  25

Notes to Consolidated Financial Statements                             27

Independent Auditors' Report                                           51

Directors and Officers                                                 52

Shareholder Information                                                53



<PAGE>


                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
             Selected Historical Consolidated Financial Information
            (In thousands, except ratios, share and per share data)

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                               ----------------------------------------------------------------------
                                                     1998           1997          1996          1995           1994
<S>                                            <C>                  <C>           <C>           <C>            <C>
 Income Statement Data:
     Net interest income                      $     5,210          5,228         4,749         4,388          4,595
      Provision for loan losses                        300            350           205           240            200
      Noninterest income                               513            406           378           192            340
      Noninterest expenses                           3,358          2,905         2,764         2,712          2,581
      Income tax expense                               548            662           573           438            626
      Net income                                     1,517          1,717         1,585         1,190          1,528

Per Share Data (2):
      Basic net income                                2.11           2.39          2.20          1.66           2.13
      Diluted net income                              2.09           2.39          2.20          1.66           2.13
      Cash dividends                                  0.70           0.67          0.59          0.56           0.51
      Book value                                     21.06          19.53         17.60         16.28          14.18

Balance Sheet Data:
      Assets                                       142,458        131,650       124,951       119,380        116,024
      Loans, net of unearned income
        and fees and allowance for
        loan losses                                 90,532         86,816        79,842        75,484         73,063
      Total investment securities                   35,072         32,740        35,766        34,647         34,613
      Deposits                                     125,187        115,533       111,204       106,678        104,952
      Stockholders' equity                          15,142         14,042        12,657        11,709         10,194
      Basic average shares outstanding             719,025        719,025       719,025       719,025        719,025
      Diluted average shares outstanding           724,285        719,578       719,025       719,025        719,025

Performance Ratios:
      Return on average assets                       1.12%          1.35%         1.30%         1.01%          1.29%
      Return on average equity                      10.40%         12.86%        13.01%        10.87%         15.46%
      Dividend payout                               33.18%         28.03%        26.93%        33.80%         24.14%

Asset Quality Ratios:
      Allowance for loan losses to
        total loans, net of unearned
        income and fees                              0.96%          0.85%         0.84%         0.82%          0.76%
      Net chargeoffs to average loans,
        net of unearned income and
        fees                                         0.20%          0.33%         0.20%         0.24%          0.23%

Capital Ratios:
      Leverage                                      10.66%         10.65%        10.14%         9.63%          8.89%
      Risk-based:
        Tier 1 capital                              15.30%         15.40%        15.79%        15.06%         14.45%
        Total capital                               16.20%         16.24%        16.63%        15.88%         15.22%
      Average equity to average assets              10.76%         10.50%        10.01%         9.27%          8.33%
</TABLE>

                                       1
<PAGE>

TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:


The effect of competition on our business was more apparent in 1998 then ever
before. Many more firms are offering financial services today and the public is
constantly bombarded with more and varied forms of solicitation for business.
New banking entrants in our market in 1998 were very aggressive with their
pricing in an attempt to establish themselves through buying business. In order
to maintain our share of the market in 1998, our interest margins were
compressed to the extent that we were not able to increase our net interest
income in 1998 over that in 1997. With higher operating costs in 1998, our net
income for the year of $1,517,000 was 11.65% below net income for 1997. The
return on average assets for 1998 was 1.12% and the return on average equity was
10.40%.

The economy remained sound in 1998 and continued to produce good demand for
loans. While we were pleased with our volume of new loans written in 1998, our
net loans outstanding increased only 4.28% for the year to $90,532,000, as a
larger number of loans than usual were paid out in advance of maturity due to
refinancings. Much of the loan growth we did realize in 1998 occurred late in
the year and the return on this growth did not show in the income statement for
1998.

Deposit growth of $9,654,000, 8.36%, in 1998 was the largest in the last four
years. Year-end deposits were $125,187,000. Total assets as of December 31, 1998
were $142,458,000, a new high for the company. Average assets for 1998 amounted
to $135,687,000.

Stockholders' equity reached $15,142,000 at the end of 1998, an increase of
7.83% over 1997. The growth resulted from retained earnings after payment of
dividends. Your company continues to be a well-capitalized institution by all
regulatory standards. Cash dividends paid in 1998 were $.70 per share. 1998
marked the twenty-second consecutive year of an increase in cash dividend
payments.

Early in 1998, we made a significant commitment to enhancing and expanding our
mortgage lending capabilities. This commitment included an investment in
facilities, personnel and systems and contributed to our increased costs in
1998. In October, First National Mortgage opened a loan production office in the
high growth Forest/Bedford County market. We began seeing positive results from
our mortgage lending operations in the second half of 1998, but even then the
return did not cover our costs for the full year. We have established ourselves
as a player in what is also a highly competitive business and we have confidence
that First National Mortgage will make a positive contribution to the bottom
line of our company in 1999.

Our product line was expanded further in 1998 with the introduction of the First
National Visa Check Key Card. This product looks like a credit card but acts
like a check. The Visa Check Key Card accesses our own ATMs as well as ATMs
world-wide. The card is accepted anywhere Visa is accepted and results in a
debit being made to a First National checking account rather than an extension
of credit. There has been strong demand and broad acceptance of this new
product. The bank has implemented a receivables financing program, "Business
Manager", for small businesses in 1998 and has also established a program to
assist businesses with lease financing. All of these programs are sources of new
fee income for the bank.

                                       2
<PAGE>

Currently, our primary focus is on the successful establishment of our new
Airport Branch located on Wards Road (U.S. Rt. 29) at the intersection of
Russell Woods Drive in northern Campbell County just south of the Lynchburg
Regional Airport. Construction is progressing nicely at this point and we
anticipate opening by June 1, 1999. We are very excited about what we consider
to be a prime site and the opportunities for business this location should
afford us. Knowledge of our branch plans has produced a positive response from
folks located in this new market area and we are looking forward to serving
their banking needs.

It should be recognized that establishment of the branch will generate a new
level of costs in 1999 that will take some period of time to cover through
profitable operation. We are optimistic that we can minimize this time by
attracting a generous volume of business in a short period of time.

Two new members were appointed to the Board of Directors of both Pinnacle
Bankshares and First National Bank in 1998. A. Willard Arthur and James E.
Burton, IV were added to these boards due to their business acumen and the fact
that they represent various constituencies to be served by the new Airport
Branch. Both gentlemen are already making solid contributions to our company and
we are pleased to have them with us in their new capacity. Mr. Arthur's and Mr.
Burton's continued membership on the board of Pinnacle Bankshares Corporation is
subject to election by the shareholders of Pinnacle Bankshares at the 1999
annual meeting.

In February 1999, we announced a Dividend Reinvestment Plan for Pinnacle
Bankshares. The plan will be effective beginning with the April 1999 dividend.
The early response to this plan has been favorable and we are pleased that so
many shareholders have elected to take advantage of this benefit to utilize
dividends to acquire additional shares in the company.

A variety of steps have been taken in 1998 to enhance the business of our
company. Prospects for the future are bright. In spite of the competitive nature
of our business, First National Bank has a niche in the market place as an
established community bank and will continue to produce positive returns for
shareholders. The efforts and contributions of our board, management and staff
to the success of our company are recognized and appreciated. Thanks are also
due to the shareholders of Pinnacle Bankshares for their ongoing support and
referral of business which is so important to us.




                                       Robert H. Gilliam, Jr.
                                       President and Chief Executive Officer

March 1, 1999


                                       3
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


Management's Discussion and Analysis  (Amounts in 000's)

The following is management's discussion and analysis of the financial condition
and results of operations of the Company as of and for the years ended December
31, 1998 and 1997. The discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto.

Overview

Total assets at December 31, 1998 were $142,458, up 8.21% from $131,650 at
December 31, 1997. The principal components of the Company's assets at the end
of the period were $35,072 in securities and $90,532 in net loans. During the
twelve-month period, gross loans increased 4.25% or $3,740. The Company's
lending activities are a principal source of income.

Total liabilities at December 31, 1998 were $127,316, up from $117,608 at
December 31, 1997, with the increase reflective of a rise in total deposits of
$9,654 or 8.36%. Noninterest-bearing demand deposits increased $1,469 or 15.42%
and represented 8.78% of total deposits. The Company's deposits are provided by
individuals and businesses located within the communities served.

Total stockholders' equity at December 31, 1998 was $15,142. At December 31,
1997, total stockholders' equity was $14,042.

The Company had net income of $1,517 for the year ended December 31, 1998,
compared with net income of $1,717 for the year ended December 31, 1997, a
decrease of 11.65%. Higher noninterest expenses due to the main office addition
and increased staffing in mortgage lending contributed substantially to the
decrease in net earnings.

Profitability as measured by the Company's return on average assets (ROA) was
1.12% in 1998, down from 1.35% in 1997. Another key indicator of performance,
the return on average equity (ROE) for 1998 was 10.40%, compared to 12.86% for
1997.

Results of Operations

Net Interest Income. Net interest income represents the principal source of
earnings for the Company. Net interest income is the amount by which interest
and fees generated from loans, securities and other earning assets exceed the
expense associated with funding those assets. Changes in the volume and mix of
earning assets and interest-bearing liabilities, as well as their respective
yields and rates, have a significant impact on the level of net interest income.
Changes in the interest rate environment and the Company's cost of funds also
affected net interest income.

The net interest margin decreased from 4.47% for the year ended December 31,
1997, to 4.20% for the year ending December 31, 1998. Net interest income was
$5,402 for the year ended December 31, 1998 and is attributable to interest
income from loans and securities exceeding the cost associated with interest
paid on deposits. The decrease in the interest rate spread is a result of the
falling interest rate environment and assets repricing at lower rates faster
than corresponding interest-bearing liabilities.

                                       4
<PAGE>
                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


The following table presents the major categories of interest-earning assets,
interest-earning liabilities and stockholders' equity with corresponding average
balances, related interest income or expense and resulting yield and rates for
the period indicated.


<TABLE>
<CAPTION>

                                            ANALYSIS OF NET INTEREST INCOME

                                                                               Years Ended December 31,
                                      ----------------------------------------------------------------------------------
                                                       1998                                      1997
                                      ---------------------------------------   ----------------------------------------
                                                     Interest        Rate                      Interest        Rate
                                       Average       Income/       Earned/        Average       Income/       Earned/
              Assets                   Balance       Expense         Paid         Balance       Expense        Paid
                                      -----------   -----------   -----------   ------------  ------------  ------------
<S>                                <C>                <C>              <C>        <C>            <C>              <C>
Interest-earnings assets:
    Loans(2)(3)                    $   87,057         8,011            9.20%      83,987         7,838            9.33%
Investment securities:
    Taxable                            22,701         1,496            6.59%      24,409         1,632            6.69%
    Tax exempt (4)                     11,476           758            6.61%      10,044           694            6.91%
Interest-earning deposits                  48             3            6.25%          31             2            6.45%
Federal funds sold                      7,425           395            5.32%       2,479           134            5.41%
                                      -----------   -----------                 ------------  ------------
          Total interest-earning
            assets                    128,707        10,663            8.29%     120,950        10,300            8.52%

Other assets:
    Reserve for loan losses              (811)                                      (712)
    Cash and due from banks             2,682                                      2,739
    Other assets, net                   5,109                                      4,153
                                      -----------                               ------------
          Total assets             $  135,687                                 $  127,130
                                      ===========                               ============


Liabilities and
       Stockholders' Equity

Interest-bearing liabilities:
    Savings and NOW                    37,733         1,137            3.01%      37,113         1,123            3.02%
    Time                               71,130         4,065            5.71%      65,970         3,766            5.71%
    Other borrowings                      960            59            6.14%         121             7            5.79%
                                      -----------   -----------                 ------------  ------------
          Total interest-bearing
            liabilities               109,823         5,261            4.79%     103,204         4,896            4.74%

Noninterest-bearing liabilities:
    Demand deposits                    10,160                                      9,485
    Other liabilities                   1,296                                      1,146
                                      -----------                               ------------
          Total liabilities           121,279                                    113,835

Stockholders' equity                   14,408                                     13,295
                                      -----------                               ------------

          Total liabilities and
            stockholders' equity   $  135,687                                    127,130
                                      ===========   -----------                 ============  ------------

Net interest income                               $   5,402                                 $    5,404
                                                    ===========                               ============

Net interest margin(5)                                                 4.20%                                      4.47%
                                                                  ===========                               ============
</TABLE>

                                       5
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


---------------------------

(1)    Averages are daily averages.
(2)    Loan interest income includes late charges and accretion of loan fees of
       $270 and $234 for the years 1998 and 1997, respectively.
(3)    For the purpose of these computations, nonaccrual loans are included in
       average loans.
(4)    Tax-exempt income from investment securities is presented on a
       tax-equivalent basis assuming a 34 percent federal tax rate for 1998 and
       1997.
(5)    The net interest margin is calculated by dividing net interest income by
       average total earning assets.

As discussed above, the Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change," as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and other borrowed
funds, referred to as "rate change." The following table presents, for the
periods indicated, a summary of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities and the amounts of change attributable to variations in volumes and
rates.

<TABLE>
<CAPTION>

                                                 RATE/VOLUME ANALYSIS

                                                                      Years Ended December 31,
                                              --------------------------------------------------------------------------
                                                           1998 compared to 1997                 1997 compared to 1996
                                                            Increase (Decrease)                   Increase (Decrease)
                                              ------------------------------------  ------------------------------------
                                               Volume        Rate         Net        Volume        Rate         Net
                                              ----------  -----------  -----------  ----------   ----------  -----------
<S>                                          <C>                  <C>        <C>         <C>      <C>         <C>
Interest earned on interest-earning assets:
    Loans(1)                               $     280            (107)      173         639           71          710
    Investment securities:
       Taxable                                  (112)            (24)     (136)        (50)          25          (25)
       Tax exempt                                 92             (28)       64         (35)         (17)         (52)
    Interest-earning deposits                      1              --         1          --            2            2
    Federal funds sold                           263              (2)      261         (36)           3          (33)
                                              ----------  -----------  -----------  ----------   ----------  -----------
          Total interest earned on interest-
            earning assets                       524            (161)      363         518           84          602
                                              ----------  -----------  -----------  ----------   ----------  -----------

Interest paid on interest-bearing liabilities:
       Savings and NOW                            18              (4)       14          13           (3)          10
       Time                                      299          --           299         180          (61)         119
       Other borrowings                           52          --            52         --             7            7
                                              ----------  -----------  -----------  ----------   ----------  -----------
          Total interest paid on interest-
            bearing liabilities                  369              (4)      365         193          (57)         136
                                              ==========  ===========  ===========  ==========   ==========  ===========
          Change in net interest income    $     155            (157)       (2)        325          141          466
                                              ==========  ===========  ===========  ==========   ==========  ===========
</TABLE>

---------------------------
(1)    Nonaccrual loans are included in the loan totals used in the calculation
       of this table.

                                       6
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


Provision for Loan Losses. The provision for loan losses is based upon the
Company's evaluation of the quality of the loan portfolio, total outstanding and
committed loans, previous loan losses and current and anticipated economic
conditions. The amount of the provision for loan losses is a charge against
earnings. Actual loan losses are charges against the allowance for loan losses.

The Company's allowance for loan losses is typically maintained at a level
deemed adequate to provide for known and inherent losses in the loan portfolio.
No assurance can be given that unforeseen adverse economic conditions or other
circumstances will not result in increased provisions in the future.
Additionally, regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgment about information available
to them at the time of their examinations.

The provisions for loan losses for the years ended December 31, 1998 and 1997
were $300 and $350, respectively. The decrease in 1998 was a result of a
decrease in the amount of actual net loan losses.

The allowance for loan losses was $877 or .96% of gross loans as of December 31,
1998 as compared to $747 or .85% of total loans, net of unearned income and
fees, as of December 31, 1997. See "Allowance for Loan Losses" for further
discussion.

Noninterest Income. Total noninterest income for the year ended December 31,
1998 increased $107 or 26.35% to $513 from $406 in 1997. The Company's principal
source of noninterest income is service charges and fees on deposit accounts,
particularly transaction accounts, and fees from other bank products. The
majority of the increase in 1998 is attributed to income generated from fees on
various loan and deposit products.

Noninterest Expense. Total noninterest expense for the year ended December 31,
1998 increased $453 or 15.59% to $3,358 from $2,905 for 1997. The increase in
noninterest expense is attributed to the effect of overall growth of the Company
on personnel expenses, fixed asset costs and other operating expenses. One
component of the increase in other operating expenses occurred in advertising
expenses, which increased $31 primarily due to promotions for the new mortgage
production office and a new debit card program.

Income Taxes. Applicable income taxes on 1998 earnings amounted to $548,
resulting in an effective tax rate of 26.09% compared to $662, or 27.8%, in
1997. Effective tax rates are comparable with the overall decline attributable
to an increase in tax exempt income in 1998 as compared to 1997.

Liquidity and Asset/Liability Management

Effective asset/liability management includes maintaining adequate liquidity and
minimizing the impact of future interest rate changes on net interest income.
The responsibility for monitoring the Company's liquidity and the sensitivity of
its interest-earning assets and interest-bearing liabilities lies with the Asset
Liability Committee of the Bank which meets at least quarterly to review
liquidity and the adequacy of funding sources.

Cash Flows. 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.

                                       7
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

The Company's operating activities for the year ended December 31, 1998 resulted
in net cash provided of $1,748 primarily due to net earnings of $1,517 adjusted
for depreciation of $240, a provision for loan losses of $300, and increases in
other liabilities and accrued interest payable of $101 and $53, respectively,
and partially offset by an increase in other assets of $147, an increase in
accrued income receivable of $67, a provision for deferred income taxes of $166,
and amortization of net unearned fees of $133. The Company's operating
activities for the year ended December 31, 1997 resulted in net cash provided of
$2,403 primarily due to net earnings of $1,717 adjusted for depreciation of
$213, a provision for loan losses of $350, a decrease in other assets of $121
and a provision for deferred income taxes of $74 partially offset by
amortization of unearned fees of $102.

The Company's cash flows from investing activities used net cash of $6,809 for
the year ended December 31, 1998 compared to net cash used of $6,303 for the
same period in 1997. In 1998, cash was used primarily to fund loans in the
amount of $4,203 and for purchases of bank premises and equipment of $1,380. In
1997, cash was used primarily to fund loans in the amount of $7,576 and for
investment in bank premises and equipment and development costs associated with
the new branch construction of $2,155. Investing activities representing net
proceeds from investment securities purchases, maturities and calls generated
cash outflows of $2,223 in 1998 and cash inflows of $3,243 in 1997.

Net cash provided by financing activities for the year ended December 31, 1998
was $9,052 as compared to $4,847 for the year ended December 31, 1997. The net
increase in deposits was $9,654 and $4,329 in 1998 and 1997, respectively. The
Company borrowed $1,000 during 1997 under a note payable to the Federal Home
Loan Bank and made repayments of $100 during 1998. Cash dividends paid to
stockholders were $502 and $482 in 1998 and 1997, respectively.

Liquidity. Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations, and to provide for customers' credit needs.
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 ratio of liquid assets to deposits and short-term borrowings was
23.05% as of December 31, 1998 as compared to 23.06% as of December 31, 1997.
The Company sells excess funds as overnight federal funds sold to provide an
immediate source of liquidity. Federal funds sold as of December 31, 1998 was
$7,359 as compared to $3,387 as of December 31, 1997.


The level of deposits may fluctuate significantly due to seasonal business
cycles of depository customers. Similarly, the level of demand for loans may
vary significantly and at any given time may increase or decrease substantially.
However, unlike the level of deposits, management has more direct control over
lending activities and maintains the level of those activities according to the
amounts of available funds.

                                       8
<PAGE>
                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

As a result of the Company's management of liquid assets and the ability to
generate liquidity through alternative funding sources, management believes that
the Company maintains overall liquidity which is sufficient to satisfy its
depositors' requirements and to meet customers' credit needs. Additional sources
of liquidity available to the Company include its capacity to borrow funds
through correspondent banks and the Federal Home Loan Bank.

Interest Rates

While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity is
to measure, over a variety of time periods, the differences in the amounts of
the Company's rate-sensitive assets and rate-sensitive liabilities. These
differences or "gaps" provide an indication of the extent to which net interest
income may be affected by future changes in interest rates. A "positive gap"
exists when rate-sensitive assets exceed rate-sensitive liabilities and
indicates that a greater volume of assets than liabilities will reprice during a
given period. This mismatch may enhance earnings in a rising interest rate
environment and may inhibit earnings in a declining interest rate environment
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets,
referred to as a "negative gap," it indicates that a greater volume of
liabilities than assets will reprice during the period. In this case, a rising
interest rate environment may inhibit earnings and a declining interest rate
environment may enhance earnings. The cumulative one-year gap as of December 31,
1998 was $(30,150), representing 25.37% of total assets. This negative gap falls
within the parameters set by the Company.

The following table illustrates the Company's interest rate sensitivity gap
position at December 31, 1998.

<TABLE>
<CAPTION>
                                                REPRICING GAP POSITION

                                                                       Repricing Period at December 31, 1998
                                                           -------------------------------------------------------------
                                                              1 Year        1-3 Years       3-5 Years       5-15 Years
                                                           -------------   -------------   -------------   -------------
<S>                                                             <C>             <C>             <C>           <C>
ASSET/(LIABILITY):
    Cumulative interest
       rate sensitivity gap                                     (30,150)        (35,947)        (17,266)      13,974
</TABLE>



As of December 31, 1998, the Company was liability-sensitive in periods up to
five years and asset-sensitive beyond five years. The foregoing table does not
necessarily indicate the impact of general interest rate movements on the
Company's net interest yield, because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact price at different times and at different
rate levels. Management attempts to mitigate the impact of changing interest
rates in several ways, one of which is to manage its interest rate-sensitivity
gap. At December 31, 1998, all fluctuations fell within Company policy
limitations. In addition to managing its asset/liability position, the Company
has taken steps to mitigate the impact of changing interest rates by generating
noninterest income through service charges, and offering products which are not
interest rate-sensitive.

Effects of Inflation

                                       9
<PAGE>
                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

The effect of changing prices on financial institutions is typically different
from other industries as the Company's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation, but neither the
timing nor the magnitude of the changes are directly related to price level
indices. Impacts of inflation on interest rates, loan demand and deposits are
reflected in the financial statements.

Investment Portfolio

The Company's investment portfolio is used primarily for investment income and
secondarily for liquidity purposes. The Company invests funds not used for
capital expenditures or lending purposes in securities of the U.S. Government
and its agencies, mortgage-backed securities, and taxable and tax-exempt
municipal bonds or certificates of deposit. Obligations of the U.S. Government
and its agencies include treasury notes and callable or noncallable agency
bonds. Mortgage-backed securities include collateralized mortgage obligations
and mortgage-backed security pools. The collateralized mortgage obligations in
the Company's investment securities portfolio are "low risk" as defined by
applicable bank regulations and are diverse as to collateral and interest rates
of the underlying mortgages. The mortgage-backed securities are diverse as to
interest rates and guarantors. The Company does not invest in derivatives or
other high-risk type securities.

Investment securities available-for-sale as of December 31, 1998 were $20,352, a
decrease of $1,687 or 7.65% from $22,039 as of December 31, 1997. The decrease
was primarily due to maturities and calls of $11,620. Investment securities
held-to-maturity increased to $14,720 as of December 31, 1998 from $10,701 as of
December 31, 1997, an increase of $4,019 or 37.56%.

The table below presents the composition of the Company's investment portfolios
as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                --------------------------------------------------------
                                                                                1998                         1997
                                                                --------------------------   ---------------------------
                                                                 Amortized        Fair        Amortized        Fair
Available-for-Sale                                                 Costs         Values         Costs         Values
---------------------                                           ------------   -----------   ------------   ------------
<S>                                                          <C>                <C>            <C>            <C>
U.S. Treasury securities and
    obligations of U.S. Government
    corporations and agencies                                $    10,996        11,127         10,844         10,880
Obligations of states and political
    subdivisions                                                   4,199         4,343          3,891          4,012
Mortgage-backed securities -
    Government                                                     4,208         4,267          6,223          6,258
Corporate securities                                                 504           508            764            782
Other securities                                                     107           107            107            107
                                                                ------------   -----------   ------------   ------------
          Total available-for-sale                           $    20,014        20,352         21,829         22,039
                                                                ============   ===========   ============   ============
</TABLE>

                                       10
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                --------------------------------------------------------
                                                                                1998                         1997
                                                                --------------------------   ---------------------------
                                                                 Amortized        Fair        Amortized        Fair
Held-to-Maturity                                                   Costs         Values         Costs         Values
                                                                ------------   -----------   ------------   ------------
<S>                                                          <C>                 <C>            <C>            <C>
U.S. Treasury securities and
    obligations of U.S. Government
    corporations and agencies                                $     2,411         2,427          3,142          3,155
Obligations of states and political
    subdivisions                                                  12,302        12,650          7,548          7,732
Mortgage-backed securities -
    Private                                                            7             7             11             11
                                                                ------------   -----------   ------------   ------------
          Total held-to-maturity                             $    14,720        15,084         10,701         10,898
                                                                ============   ===========   ============   ============
</TABLE>

The following table presents the maturity distribution based on fair value and
amortized cost of the investment portfolios as of the dates indicated.

<TABLE>
<CAPTION>
                                     INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION

                                                                                            December 31, 1998
                                                                           ---------------------------------------------
                                                                            Amortized          Fair
Available-for-Sale                                                            Costs           Values          Yield
---------------------                                                      -------------   -------------   -------------
<S>                                                                            <C>             <C>                <C>
U.S. Treasury securities and obligations
    of U.S. Government corporations:
       Within one year                                                  $        --              --              --
       After one but within five years                                         5,493           5,544              5.73%
       After five years through ten years                                      5,503           5,583              6.53%
       After ten years                                                           --              --              --
Obligations of states and subdivisions:
    Within one year                                                              265             267              6.11%
    After one but within five years                                            1,285           1,323              4.93%
    After five years through ten years                                         1,927           1,997              5.03%
    After ten years                                                              722             756              5.02%
Corporate securities:
    Within one year                                                              504             508              6.80%
Mortgage-backed securities -
    Government                                                                 4,208           4,267              6.47%
Other securities(1)                                                              107             107             52.37%
                                                                           -------------   -------------
          Total available-for-sale                                      $     20,014          20,352
                                                                           =============   =============
</TABLE>

                                       11
<PAGE>
                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

<TABLE>
<CAPTION>
                                 INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION (Cont.)

                                                                                            December 31, 1998
                                                                           ---------------------------------------------
                                                                            Amortized          Fair
Held-to-Maturity                                                              Costs           Values          Yield
                                                                           -------------   -------------   -------------
<S>                                                                     <C>                    <C>                <C>
U.S. Treasury securities and obligations
    of U.S. Government corporations:
       Within one year                                                  $      1,698           1,710              6.32%
       After five years through ten years                                        713             717              6.41%
Obligations of states and subdivisions:
    Within one year                                                              500             503              5.72%
    After one but within five years                                            2,730           2,810              5.21%
    After five years through ten years                                         6,719           6,892              5.14%
    After ten years                                                            2,353           2,445              5.25%
Mortgage-backed securities - private                                               7               7              5.73%
                                                                           -------------   -------------
          Total held-to-maturity                                        $     14,720          15,084
                                                                           =============   =============
</TABLE>

---------------------------

(1) Equity securities assume a life greater than ten years.

Loan Portfolio

The Company's net loans were $90,532 as of December 31, 1998, an increase of
$3,716 or 4.28% from $86,816 as of December 31, 1997.

The Company's ratio of net loans to total deposits was 72.32% as of December 31,
1998. Typically, the Company maintains a ratio of loans to deposits of between
70% and 85%. The loan portfolio primarily consists of commercial, real estate
(including real estate term loans, construction loans and other loans secured by
real estate), and loans to individuals for household, family and other consumer
expenditures. However, the Company adjusts its mix of lending and the terms of
its loan programs according to market conditions and other factors. The
Company's loans are typically made to businesses and individuals located within
the Company's market area, most of whom have account relationships with the
Bank. There is no concentration of loans exceeding 10% of total loans which is
not disclosed in the categories presented below. The Company has not made any
loans to any foreign entities including governments, banks, businesses or
individuals. Commercial and construction loans in the Company's portfolio are
primarily variable rate loans and have little interest rate risk.






The table below presents the composition of the Company's loan portfolio as of
the dates indicated.


                                       12
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

<TABLE>
<CAPTION>

                                                    LOAN PORTFOLIO

                                                                                                  December 31,
                                                                                        --------------------------------
                                                                                             1998             1997
                                                                                        ---------------  ---------------
<S>                                                                                   <C>                     <C>
Real estate loans:
    Residential                                                                       $      34,324           37,557
    Other                                                                                    11,307            8,912
Loans to individuals for household, family
    and other consumer expenditures                                                          32,817           31,942
Commercial and industrial loans                                                              12,890            8,714
All other loans                                                                                 367              840
                                                                                        ---------------  ---------------
          Total loans, gross                                                                 91,705           87,965
    Less unearned income and fees                                                              (296)            (402)
                                                                                        ---------------  ---------------
          Loans, net of unearned income and fees                                             91,409           87,563
    Less allowance for loan losses                                                             (877)            (747)
                                                                                        ---------------  ---------------
          Loans, net                                                                  $      90,532           86,816
                                                                                        ===============  ===============
</TABLE>

Commercial Loans. Commercial and industrial loans accounted for 14.06% of the
Company's loan portfolio as of December 31, 1998. Such loans are generally made
to provide operating lines of credit, to finance the purchase of inventory or
equipment, and for other business purposes. Commercial loans are primarily made
at rates that adjust with changes in the prevailing prime interest rate, are
generally made for a maximum term of five years (unless they are term loans),
and generally require interest payments to be made monthly. The creditworthiness
of the borrower is reviewed, analyzed and evaluated on a periodic basis. Most
commercial loans are collateralized with business assets such as accounts
receivable, inventory and equipment. Even with substantial collateralization
such as all the assets of the business and personal guarantees, commercial
lending involves considerable risk of loss in the event of a business downturn
or failure of the business.

Real Estate Loans. Real estate loans accounted for 49.76% of the Company's loan
portfolio as of December 31, 1998. The Company makes commercial and industrial
real estate term loans that are typically secured by a first deed of trust.
73.04% of the real estate loans were secured by 1-4 family residential
properties and .89% of total gross loans were construction loans. Real estate
lending involves risk elements when there is lack of timely payment and/or a
decline in the value of the collateral.

Installment Loans. Installment loans are represented by loans to individuals for
household, family and other consumer expenditures. Installment loans accounted
for 35.78% of the Company's loan portfolio as of December 31, 1998. Vehicle
financing involves the risk that collateral will decline in value faster than
the balance of the loan it secures.

                                       13
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

Loan Maturity and Interest Rate Sensitivity. The following table presents loan
portfolio information related to maturity distribution of commercial and
industrial loans and real estate construction loans based on scheduled
repayments at December 31, 1998.

<TABLE>
<CAPTION>
                                                     LOAN MATURITY

                                                       Due Within       Due One to        Due After
                                                        One Year        Five Years       Five Years          Total
                                                     ---------------   --------------   --------------   ---------------
<S>                                               <C>                       <C>              <C>              <C>
Commercial and industrial loans                   $        4,073            6,896            1,921            12,890
Real estate - construction                                   635              182              --                817
</TABLE>



The following table presents the interest rate sensitivity of commercial and
industrial loans and real estate construction loans maturing after one year as
of December 31, 1998.

<TABLE>
<CAPTION>
                                               INTEREST RATE SENSITIVITY

<S>                                                                                                    <C>
Fixed interest rates                                                                                   $       3,541
Variable interest rates                                                                                        5,458
                                                                                                         ---------------
          Total maturing after one year                                                                $       8,999
                                                                                                         ===============
</TABLE>

Nonperforming Assets. Interest on loans is normally accrued from the date a
disbursement is made and recognized as income as it is accrued. Generally, the
Company reviews any loan on which payment has not been made for 90 days for
potential nonaccrual. The loan is examined and the collateral is reviewed to
determine loss potential. If the loan is placed on nonaccrual, any prior accrued
interest which remains unpaid is reversed. Loans on nonaccrual amounted to $45
and $38 as of December 31, 1998 and 1997, respectively. Interest income that
would have been earned on nonaccrual loans if they had been current in
accordance with their original terms and the recorded interest that was included
in income on these loans was not significant for 1998 and 1997. There were no
commitments to lend additional funds to customers whose loans were on nonaccrual
at December 31, 1998.

The following tables present information with respect to the Company's
nonperforming assets and accruing loans 90 days or more past due by type as of
the dates indicated.

<TABLE>
<CAPTION>
                                                 NONPERFORMING ASSETS
                                                                                                  December 31,
                                                                                        --------------------------------
                                                                                             1998             1997
                                                                                        ---------------  ---------------
<S>                                                                                   <C>                         <C>
Nonperforming loans:
    Loans on nonaccrual - real estate                                                 $          45               38
Other real estate owned (OREO)                                                                   48              151
                                                                                        ---------------  ---------------
          Total nonperforming assets                                                  $          93              189
                                                                                        ===============  ===============
</TABLE>

                                       14
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


Nonperforming assets totaled $93 or .10% of total gross loans and OREO as of
December 31, 1998, as compared to $189 or .21% as of December 31, 1997. The
following table presents the balance of accruing loans 90 days or more past due
by type as of the dates indicated.

<TABLE>
<CAPTION>
                                            ACCRUING LOANS 90 DAYS OR MORE
                                                   PAST DUE BY TYPE

                                                                                                  December 31,
                                                                                        --------------------------------
                                                                                             1998             1997
                                                                                        ---------------  ---------------
<S>                                                                                   <C>                        <C>
Loans 90 days or more past due by type:
       Real estate loans                                                              $         194              202
       Loans to individuals                                                                     232              138
       Commercial loans                                                                          22               32
                                                                                        ---------------  ---------------
                                                                                      $         448              372
                                                                                        ===============  ===============
</TABLE>


Allowance for Loan Losses. The Company maintains an allowance for loan losses
which it considers adequate to cover the risk of losses in the loan portfolio.
The allowance is based upon management's ongoing evaluation of the quality of
the loan portfolio, total outstanding and committed loans, previous charges
against the allowance and current and anticipated economic conditions. 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 Company's management believe that as of December
31, 1998, the allowance is adequate. The amount of the provision for loan losses
is a charge against earnings. Actual loan losses are charged against the
allowance for loan losses.

The provision for loan losses for the years ended December 31, 1998 and 1997 was
$300 and $350, respectively. The decrease in the provision during 1998 was due
to a decrease in the amount of actual net loan losses.

As of December 31, 1998, the allowance for loan losses totaled $877 or .96% of
total gross loans as compared with $747 or .84% of total loans as of December
31, 1997. Net charge-offs for the Company were $170 and $277 for the years ended
December 31, 1998 and 1997, respectively. The ratio of net loan charge-offs
during the period to average loans outstanding for the period was .20% and .33%
for the years ended December 31, 1998 and 1997, respectively. Management
evaluates the reasonableness of the allowance for loan losses on a quarterly
basis and adjusts the provision as deemed necessary.

                                       15
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)




The following table presents charged off loans, provisions for loan losses,
recoveries on loans previously charged off, allowance adjustments and the amount
of the allowance for the dates indicated.

<TABLE>
<CAPTION>
                                         ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

                                                                                                  Years Ended
                                                                                                  December 31,
                                                                                        --------------------------------
                                                                                             1998             1997
                                                                                        ---------------  ---------------
<S>                                                                                   <C>                        <C>
Balance at beginning of year                                                          $            747              674
Loan charge-offs:
    Real estate loans:
       Residential                                                                                 (15)              (1)
    Loans to individuals for household,
       family and other consumer
       expenditures                                                                               (281)            (373)
    Commercial and industrial                                                                       (7)             (83)
                                                                                        ---------------  ---------------
          Total loan charge-offs                                                                  (303)            (457)
                                                                                        ---------------  ---------------

Less recoveries:
    Real estate loans:
       Residential                                                                                   3                1
    Loans to individuals for household,
       family and other consumer
       expenditures                                                                                127              165
    Commercial and industrial                                                                        3               14
                                                                                        --------------  ---------------
          Total loan recoveries                                                                    133              180
                                                                                        ---------------  ---------------
          Net loan charge-offs                                                                    (170)            (277)

Provisions for loan losses                                                                         300              350
                                                                                        ---------------  ---------------
          Balance at end of year                                                      $            877              747
                                                                                        ===============  ===============
</TABLE>

The primary risk element considered by management with respect to each
installment and conventional real estate loan is lack of timely payment and the
value of the collateral. The primary risk elements with respect to real estate
construction loans are fluctuations in real estate values in the Company's
market areas, inaccurate estimates of construction costs, fluctuations in
interest rates, the availability of conventional financing, the demand for
housing in the Company's market area and general economic conditions. The
primary risk elements with respect to commercial loans are the financial
condition of the borrower, general economic conditions in the Company's market
area, the sufficiency of collateral, the timeliness of payment and, with respect
to adjustable rate loans, interest rate fluctuations. Management has a policy of
requesting and reviewing annual financial statements from its commercial loan
customers and periodically reviews the existence of collateral and its value.
Management also has a reporting system that monitors all past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position.

                                       16
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


Loans are charged against the allowance when, in management's opinion, they are
deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the allowance for loan losses is
adequate to absorb losses as they arise, there can be no assurance that (i) the
Company will not sustain losses in any given period which could be substantial
in relation to the size of the allowance for loan losses, (ii), the Company's
level of nonperforming loans will not increase, (iii) the Company will not be
required to make significant additional provisions to its allowance for loan
losses, or (iv) the level of net charge-offs will not increase and possibly
exceed applicable reserves.

The following table presents the allocation of the allowance for loan losses as
of the dates indicated. Notwithstanding these allocations, the entire allowance
for loan losses is available to absorb charge-offs in any category of loans.

<TABLE>
<CAPTION>
                                        ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

                                                          December 31, 1998                  December 31, 1997
                                                ----------------------------------   -----------------------------------
                                                                     Percent of                           Percent of
                                                   Allowance       Loans in Each        Allowance        Loans in Each
                                                   for Loan         Category to         for Loan          Category to
                                                    Losses          Total Loans          Losses           Total Loans
                                                ----------------   ---------------   ----------------   ----------------
<S>                                          <C>                           <C>                                   <C>
Real estate loans:
    Residential                              $             2               37.43%             --                 42.70%
    Other                                                --                12.33%             --                 10.13%
Loans to individuals for households,
    family and other consumer
    expenditures                                         272               35.78%             198                36.31%
Commercial and industrial loans                          169               14.06%              68                 9.91%
All other loans                                          --                  .40%             --                   .95%
Unallocated                                              434               --                 481                --
                                                ================   ===============   ================   ================
                                             $           877              100.00%             747               100.00%
                                                ================   ===============   ================   ================
</TABLE>

Credit Risk Management. The risk of nonpayment of loans is an inherent aspect of
commercial banking. The degree of perceived risk is taken into account in
establishing the structure of, and interest rates and security for, specific
loans and various types of loans. The Company strives to minimize its credit
risk exposure by its credit underwriting standards and loan policies and
procedures. Management continually evaluates the credit risks of such loans and
believes it has provided adequately for the credit risks associated with these
loans. The Company has implemented and expects to continue to implement and
update new policies and procedures to maintain its credit risk management
systems.

Premises and Equipment

The Company's premises and equipment grew 12.32%, basically due to completion of
an addition to the main office facility and land improvements relating to a new
branch to be built in Campbell County.


Deposits

                                       17
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


Average deposits were $119,023 for the year ended December 31, 1998, an increase
of $6,455 or 5.73% from $112,568 of average deposits for the year ended December
31, 1997. As of December 31, 1998, total deposits were $125,187, representing an
increase of $9,654 or 8.36% from $115,533 in total deposits as of December 31,
1997. The increase in deposits during 1998 was primarily due to increases in
previously existing accounts as well as new accounts opened as a result of
relationship changes and new products offered.

For the year ended December 31, 1998, average demand deposits were $10,160 or
8.54% of average deposits. For the year ended December 31, 1997, average demand
deposits were $9,485 or 8.43% of average deposits. Average interest-bearing
deposits were $108,863 for the year ended December 31, 1998, representing an
increase of $5,780 or 5.61% over the $103,083 in average interest-bearing
deposits for the year ended December 31, 1997.

The levels of noninterest-bearing demand deposits (including retail accounts)
are influenced by such factors as customer service, service charges and the
availability of banking services. No assurance can be given that the Company
will be able to maintain its current level of noninterest-bearing deposits.
Competition from other banks and thrift institutions as well as money market
funds, some of which offer interest rates substantially higher than the Company,
makes it difficult for the Company to maintain the current level of
noninterest-bearing deposits. Management continually works to implement pricing
and marketing strategies designed to control the cost of interest-bearing
deposits and to maintain a stable deposit mix.

The following table presents the Company's average deposits and the average rate
paid for each category of deposits for the period indicated.

<TABLE>
<CAPTION>
                                              AVERAGE DEPOSIT INFORMATION

                                                                Year Ended                        Year Ended
                                                             December 31, 1998                 December 31, 1997
                                                     --------------------------------   --------------------------------
                                                        Average           Average          Average          Average
                                                       Amount of           Rate           Amount of           Rate
                                                        Deposits           Paid           Deposits            Paid
                                                     ---------------   --------------   --------------   ---------------
<S>                                                       <C>                  <C>          <C>                   <C>
Noninterest-bearing demand
    deposits                                      $       10,160                 N/A         9,485                  N/A
Interest-bearing demand deposits                          14,802               2.93%        13,408                2.92%
Savings deposits                                          22,931               3.07%        23,705                3.08%
Certificates of deposit:
    Under $100,000                                        59,418               5.72%        55,891                5.70%
    $100,000 or more                                      11,712               5.70%        10,079                5.78%
                                                     ---------------                    --------------
          Total certificates of deposit                   71,130                            65,970
                                                     ---------------                    --------------
          Total average deposits                  $      119,023                           112,568
                                                     ===============                    ==============
</TABLE>

The following table presents the maturity schedule of certificates of deposit of
$100,000 or more as of December 31, 1998.



                                       18
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


                      CERTIFICATES OF DEPOSIT OVER $100,000

Three months or less                                           $       3,264
Over three through six months                                            949
Over six through 12 months                                             5,291
Over 12 months                                                         2,580
                                                               -----------------
          Total                                                $      12,084
                                                               =================

Financial Ratios

The following table presents certain financial ratios for the period indicated.


                           RETURN ON EQUITY AND ASSETS

                                                     Years Ended
                                                     December 31,
                                             --------------------------------
                                                  1998             1997
                                             ---------------  ---------------

Return on average assets                              1.12%            1.35%
Return on average equity                             10.40%           12.86%
Dividend payout ratio                                33.18%           28.03%
Average equity to average assets                     10.76%           10.50%


Capital Resources

The Company's financial position at December 31, 1998 reflects liquidity and
capital levels currently adequate to fund anticipated future business expansion.
Capital ratios are well in excess of 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 on an ongoing basis. 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.

The Company's capital position continues to exceed regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier I capital, total risk-based capital and leverage ratios.
Tier I capital consists of common and qualifying preferred stockholders' equity
less goodwill. Total capital consists of Tier I capital, qualifying subordinated
debt and a portion of the allowance for loan losses. Risk-based capital ratios
are calculated with reference to risk weighted assets. The Company's Tier I
capital ratio was 15.30% at December 31, 1998, compared to 15.40% at December
31, 1997. The total capital ratio was 16.20% at December 31, 1998, compared to
16.24% at December 31, 1997. These ratios are in excess of the mandated minimum
requirements of 4% and 8%, respectively. As of December 31, 1998, the Company
met all regulatory capital ratio requirements and was considered "well
capitalized" in accordance with FDICIA.

Stockholders' equity reached $15,142 at December 31, 1998 compared to $14,042 at
December 31, 1997. The leverage ratio consists of Tier I capital divided by
quarterly average assets. At December 31, 1998, the Company's leverage ratio was
10.66% compared to 10.65% at December 31, 1997. Each of these exceeds the
required minimum leverage ratio of 3%. The dividend payout ratio was 33.18% and
28.03% in 1998 and


                                       19
<PAGE>
                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)


1997, respectively. During 1998, the Company paid dividends
of $0.70 per share, up 4.48% from $0.67 per share paid in 1997.

Year 2000

The Company is cognizant of the risks posed by the Year 2000 (Y2K) issue for
both our operation and our borrowers. The Company continues to place high
priority regarding our Y2K efforts to identify any potential problems and
determine corrective action. Our Y2K committee, which has representation from
all areas of the Bank, including senior management and internal audit, continues
to meet at least monthly to monitor servicers and business partners in their
efforts to be Y2K prepared as well as complete our internal testing and
remediation projects. Inventory and assessment of all Y2K related items was
completed in April 1998.

The Company neither develops nor supports code for any information systems;
therefore, our remediation efforts have been toward soliciting compliance from
our vendors, business partners and servicers and on-site testing. The Company
has identified all core and business critical applications and the hardware
utilized for each. Our environmental systems such as HVAC and security systems
have been noted. Y2K compliance from the vendors for these areas has been
sought, and the Company notes that these applications are currently compliant or
the vendor has submitted an acceptable timeline for compliance. The Company is
monitoring the compliance efforts of such vendors and notes that in all cases,
time lines are being substantially adhered to.

A written testing strategy was developed and internal mission critical testing
is now completed without a single testing failure. Internal testing included,
but was not limited to, the century rollover date on all hardware and software
components followed by a complete update of core financial programs. Six other
critical dates were tested utilizing unit tests, as well as integrated tests,
where appropriate. Testing with third-party servicers has begun and is on target
to be completed by March 1999. The Federal Reserve Bank of Richmond has provided
comprehensive testing opportunities for our on-line connection. The Company has
completed Y2K testing for each of the applications in use with the Federal
Reserve. Third-party testing included data exchange where appropriate. All
testing is documented and reviewed for acceptance by our internal audit
department. In addition, documentation of the acceptance process will be made
available for review by our federal regulators. The Company continues to be
vigilant regarding any new Information Technology (IT) products and applications
and performs appropriate testing.

The Company has identified credit risks associated with borrowers who may not be
Y2K prepared through inquiry and completion of a readiness questionnaire. A
bankwide credit risk assessment was completed and submitted to the Board of
Directors. All new commercial credits continue to be evaluated for Y2K risk. Our
lending area is currently reevaluating any credit risk originally designated
with medium risk or higher to determine their current Y2K status. The Company
expects that virtually all of our borrowers will be low risk by the end of first
quarter 1999. However, methods to reduce risk for the Company, if lack of
compliance threatens to impact the viability of our customers, have been
established. Methods to reduce risk would be to require additional collateral,
require additional cosigners, or call the note.

                                       20
<PAGE>

                 PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                     Years Ended December 31, 1998 and 1997

             (In thousands, except ratios, share and per share data)

With testing substantially completed, the Company is focusing primarily on the
validation of the contingency plans developed to ensure business continuity
throughout potential disruptions possible in the century change. A separate
contingency task force has been established to direct the implementation and
training necessary for a successful plan. This plan would enable the Company to
continue to operate in the event of disruption of service from outside partners.

Although contingency plans address a number of scenarios, the Company does not
believe it is possible for any business to address the potentially unlimited
number of scenarios related to Y2K issues. Management does not believe in the
most likely worse case scenarios, Y2K will have a material effect on the
Company's results of operations, liquidity or financial condition. Although
considered highly unlikely, management realizes that if its Y2K assessment,
remediation or contingency plans prove to be inadequate, it could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition.

The Company notes that the resources to address Y2K issues have been included in
the budget approved by the Board of Directors. As of December 31, 1998, actual
expenditures were $5. The estimated 1999 Y2K budget is $15.

The Company has confidence in our preparedness for the millennium change and in
our ability to continue to successfully operate and handle the transactions of
our customers.


                                       21
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997

                        (In thousands, except share data)

<TABLE>
<CAPTION>



                                    Assets                                               1998                1997
                                                                                   -----------------   -----------------
<S>                                                                             <C>                            <C>
Cash and cash equivalents:
    Cash and due from banks (note 2)                                            $          3,323               3,304
    Federal funds sold                                                                     7,359               3,387
                                                                                   -----------------   -----------------
               Total cash and cash equivalents                                            10,682               6,691

Securities (note 3):
    Available-for-sale, at fair value                                                     20,352              22,039
    Held-to-maturity, at amortized cost (fair value of $15,084 in 1998
       and $10,898 in 1997)                                                               14,720              10,701
Federal Reserve Bank stock, at cost                                                           75                  75
Federal Home Loan Bank Stock, at cost                                                        409                 409
Loans, net (notes 4, 9 and 10)                                                            90,532              86,816
Premises and equipment, net (note 5)                                                       3,547               3,158
Other real estate owned                                                                       48                 151
Accrued income receivable                                                                  1,112               1,045
Other assets (note 8)                                                                        981                 565
                                                                                   -----------------   -----------------
               Total assets                                                     $        142,458             131,650
                                                                                   =================   =================

                     Liabilities and Stockholders' Equity

Liabilities:
    Deposits (note 6):
       Demand                                                                             10,993               9,524
       Savings and NOW accounts                                                           39,575              37,104
       Time                                                                               74,619              68,905
                                                                                   -----------------   -----------------
               Total deposits                                                            125,187             115,533

    Note payable to Federal Home Loan Bank                                                   900               1,000
    Accrued interest payable                                                                 587                 534
    Other liabilities (note 7)                                                               642                 541
                                                                                   -----------------   -----------------
               Total liabilities                                                         127,316             117,608
                                                                                   -----------------   -----------------

Stockholders' equity (notes 1 and 11):
    Common stock, $3 par value.  Authorized 3,000,000 shares, issued
       and outstanding 719,025 shares in 1998 and 1997                                     2,157               2,157
    Capital surplus                                                                          338                 338
    Retained earnings                                                                     12,424              11,409
    Accumulated other comprehensive income                                                   223                 138
                                                                                   -----------------   -----------------
               Total stockholders' equity                                                 15,142              14,042

Commitments, contingencies and other matters (notes 7, 9, 10 and 11)
                                                                                   -----------------   -----------------
               Total liabilities and stockholders' equity                       $        142,458             131,650
                                                                                   =================   =================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

           Consolidated Statements of Income and Comprehensive Income

                     Years Ended December 31, 1998 and 1997

                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                         1998                1997
                                                                                   -----------------   -----------------
<S>                                                                             <C>                            <C>
Interest income:
    Interest and fees on loans                                                  $          8,011               7,838
    Interest on securities:
       U.S. Treasury                                                                         229                 256
       U.S. Government agencies                                                              963               1,140
       Corporate                                                                             214                 165
       States and political subdivisions (tax exempt)                                        566                 518
       Other                                                                                  93                  73
    Interest on federal funds sold                                                           395                 134
                                                                                   -----------------   -----------------
               Total interest income                                                      10,471              10,124
                                                                                   -----------------   -----------------

Interest expense:
    Interest on deposits:
       Savings and NOW accounts                                                            1,137               1,123
       Time - other                                                                        3,398               3,184
       Time - $100,000 and over                                                              667                 582
    Other interest expense                                                                    59                   7
                                                                                   -----------------   -----------------
               Total interest expense                                                      5,261               4,896
                                                                                   -----------------   -----------------
               Net interest income                                                         5,210               5,228

Provision for loan losses (note 4)                                                           300                 350
                                                                                   -----------------   -----------------
               Net interest income after provision for loan losses                         4,910               4,878
                                                                                   -----------------   -----------------

Noninterest income:
    Service charges on deposit accounts                                                      263                 268
    Net gain on calls and sales of securities (note 3)                                        10                   4
    Other operating income                                                                   240                 134
                                                                                   -----------------   -----------------
               Total noninterest income                                                      513                 406
                                                                                   -----------------   -----------------

Noninterest expense:
    Salaries and employee benefits (note 7)                                                1,847               1,650
    Occupancy expense                                                                        167                  98
    Furniture and equipment                                                                  316                 330
    Other operating expenses                                                               1,028                 827
                                                                                   -----------------   -----------------
               Total noninterest expense                                                   3,358               2,905
                                                                                   -----------------   -----------------
               Income before income tax expense                                            2,065               2,379

Income tax expense (note 8)                                                                  548                 662
                                                                                   -----------------   -----------------
               Net income                                                                  1,517               1,717

Other comprehensive income, net of income tax expense:
    Net unrealized gains on securities available for sale                                     85                 150
                                                                                   -----------------   -----------------
               Comprehensive income                                             $          1,602               1,867
                                                                                   =================   =================
Basic net income per share                                                      $           2.11                2.39
                                                                                   =================   =================
Diluted net income per share                                                    $           2.09                2.39
                                                                                   =================   =================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity

                     Years Ended December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                               Common Stock                                          Other
                                    ---------------------------------   Capital     Retained     Comprehensive
                                         Shares           Par Value     Surplus     Earnings         Income          Total
                                    ------------------   ------------  ----------  ------------  ---------------  ------------
<S>                                        <C>         <C>                <C>        <C>         <C>              <C>
Balances, December 31, 1996                719,025     $    2,157         338        10,174              (12)       12,657

Net income                                     --             --          --          1,717              --          1,717
Cash dividends declared
    by Bankshares ($.67 per share)             --             --          --           (482)             --           (482)
Change in net unrealized gains on
    available-for-sale securities,
    net of deferred income tax
    expense of $77                             --             --          --            --               150           150
                                    ------------------   ------------  ----------  ------------  ---------------  ------------
Balances, December 31, 1997                719,025          2,157         338        11,409              138        14,042

Net income                                     --             --          --          1,517              --          1,517
Cash dividends declared by
    Bankshares ($.70 per share)                --             --          --           (502)             --           (502)
Change in net unrealized gains on
    available-for-sale securities,
    net of deferred income tax
    expense of $44                             --             --          --            --                85            85
                                    ==================   ============  ==========  ============  ===============  ============
Balances, December 31, 1998                719,025     $    2,157         338        12,424              223        15,142
                                    ==================   ============  ==========  ============  ===============  ============

</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                     Years Ended December 31, 1998 and 1997

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         1998               1997
                                                                                   -----------------  ------------------
<S>                                                                             <C>                            <C>
Cash flows from operating activities:
    Net income                                                                  $          1,517               1,717
    Adjustments to reconcile net income to net cash provided by
       operating activities:
          Depreciation of bank premises and equipment                                        240                 213
          Amortization of organization costs                                                  28                   4
          Amortization of core deposit premium                                                13                  16
          Amortization of unearned fees, net                                                (133)               (102)
          Net amortization of premiums and discounts on
            securities                                                                        29                   8
          Provision for loan losses                                                          300                 350
          Provision for deferred income taxes                                               (166)                 74
          Net gain on calls and sales of securities                                          (10)                 (4)
          Net gain on sale of premises and equipment                                         (10)                 --
          Net (increase) decrease in:
            Accrued income receivable                                                        (67)                 21
            Other assets                                                                    (147)                121
          Net increase (decrease) in:
            Accrued interest payable                                                          53                  (3)
            Other liabilities                                                                101                 (12)
                                                                                   -----------------  ------------------
               Net cash provided by operating activities                                   1,748               2,403
                                                                                   -----------------  ------------------

Cash flows from investing activities:
    Purchases of held-to-maturity securities                                              (5,598)               (675)
    Purchases of available-for-sale securities                                            (9,817)               (471)
    Proceeds from maturities and calls of held-to-maturity securities                      1,568               1,874
    Proceeds from paydowns and maturities of held-to-maturity
       mortgage-backed securities                                                              4                   5
    Proceeds from maturities and calls of available-for-sale securities                    9,617               1,720
    Proceeds from paydowns and maturities of available-for-sale
       mortgage-backed securities                                                          2,003                 796
    Purchase of Federal Home Loan Bank stock                                                 --                   (6)
    Net increase in loans                                                                 (4,203)             (7,576)
    Recoveries on loans charged off                                                          133                 180
    Purchases of premises and equipment                                                   (1,380)             (2,155)
    Proceeds from sale of bank premises and equipment                                        761                 --
    Proceeds from sale and rental of other real estate owned                                 103                   5
                                                                                   -----------------  ------------------
               Net cash used in investing activities                                      (6,809)             (6,303)
                                                                                   -----------------  ------------------
</TABLE>

                                       25
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                     Years Ended December 31, 1998 and 1997

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                        1998                1997
                                                                                  ------------------  -----------------
<S>                                                                             <C>                             <C>
Cash flows from financing activities:
    Net increase in demand, savings and NOW deposits                            $          3,940                476
    Net increase in time deposits                                                          5,714              3,853
    Proceeds from (repayments of) note payable to Federal
       Home Loan Bank                                                                       (100)             1,000
    Dividends paid                                                                          (502)              (482)
                                                                                  ------------------  -----------------
               Net cash provided by financing activities                                   9,052              4,847
                                                                                  ------------------  -----------------
               Net increase in cash and cash equivalents                                   3,991                947

Cash and cash equivalents, beginning of year                                               6,691              5,744
                                                                                  ------------------  -----------------
Cash and cash equivalents, end of year                                          $         10,682              6,691
                                                                                  ==================  =================


Supplemental disclosure of cash flows information:

Cash paid during the year for:

       Income taxes                                                             $            719                629
                                                                                  ==================  =================

       Interest                                                                 $          5,250              4,899
                                                                                  ==================  =================


Supplemental schedule of noncash investing and financing activities:

       Transfer of loans to repossessed properties                              $            187                174
                                                                                  ==================  =================

       Loans charged against the allowance for loan
          losses                                                                $            303                457
                                                                                  ==================  =================

       Unrealized gains (losses) on available-for-sale
          securities                                                            $            129                227
                                                                                  ==================  =================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


(1)    Summary of Significant Accounting Policies

       The accounting and reporting policies of Pinnacle Bankshares Corporation
       (Bankshares) and its wholly-owned subsidiary, The First National Bank of
       Altavista (the "Bank") (collectively, the "Company"), conform to
       generally accepted accounting principles and general practices within the
       banking industry.

       Bankshares, a Virginia Corporation, was incorporated under the laws of
       the Commonwealth of Virginia on January 22, 1997, primarily to serve as a
       holding company for the Bank. Effective on May 1, 1997, the Bank became a
       wholly-owned subsidiary of Bankshares. Pursuant to this reorganization,
       Bankshares issued 719,025 shares of its common stock, $3.00 par value in
       exchange for 239,675 shares of the Bank's common stock, $2.00 par value.
       The reorganization has been accounted for as a pooling-of-interests and,
       accordingly, the consolidated financial statements for the periods prior
       to May 1, 1997 include the accounts and results of operations of the
       Bank. All shares and per share data have been adjusted to reflect the
       exchange of Bankshares' shares for Bank shares.

       The following is a summary of the more significant accounting policies:

       (a)    Consolidation

              The consolidated financial statements include the accounts of
              Pinnacle Bankshares Corporation and its wholly-owned subsidiary.
              All material intercompany balances and transactions have been
              eliminated.

       (b)    Securities

              The Bank classifies its securities in three categories: (1) debt
              securities that the Bank has the positive intent and ability to
              hold to maturity are classified as "held-to-maturity securities"
              and reported at amortized cost; (2) debt and equity securities
              that are bought and held principally for the purpose of selling
              them in the near term are classified as "trading securities" and
              reported at fair value, with unrealized gains and losses included
              in net income; and (3) debt and equity securities not classified
              as either held-to-maturity securities or trading securities are
              classified as "available-for-sale securities" and reported at fair
              value, with unrealized gains and losses excluded from net income
              and reported in a separate component of stockholders' equity.
              Held-to-maturity securities are stated at cost, adjusted for
              amortization of premiums and accretion of discounts on a basis
              which approximates the level yield method. The Bank does not
              maintain trading account securities. Gains or losses on
              disposition are based on the net proceeds and adjusted carrying
              values of the securities called or sold, using the specific
              identification method. A decline in the market value of any
              available-for-sale or held-to-maturity security below cost that is
              deemed other than temporary is charged to net income, resulting in
              the establishment of a new cost basis for the security.

                                                                     (Continued)

                                       27
<PAGE>
                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


       (c)    Required Investments

              As members of the Federal Reserve and the Federal Home Loan Bank
              (FHLB) of Atlanta, the Bank is required to maintain certain
              minimum investments in the common stock of those entities.
              Required levels of investment are based upon the Bank's capital
              and a percentage of qualifying assets. In addition, the Bank is
              eligible to borrow from the FHLB with borrowings collateralized by
              qualifying assets, primarily residential mortgage loans, and the
              Bank's capital stock investment in the FHLB. At December 31, 1998,
              the Bank's available borrowing limit was approximately $20,500.
              The Bank had $900 and $1,000 in borrowings outstanding at December
              31, 1998 and 1977, respectively. The note payable is due in
              December 2002 and bears interest at a fixed rate of 6.13 percent.

       (d)    Loans and Allowance for Loan Losses

              Loans are stated at the amount of unpaid principal, reduced by
              unearned income and fees on loans, and an allowance for loan
              losses. Income is recognized over the terms of the loans using
              methods which approximate the level yield method. The allowance
              for loan losses is a valuation allowance consisting of the
              cumulative effect of the provision for loan losses, plus any
              amounts recovered on loans previously charged off, minus loans
              charged off. The provision for loan losses charged to operating
              expenses is the amount necessary in management's judgment to
              maintain the allowance for loan losses at a level it believes
              sufficient to cover losses in the collection of its loans.
              Management determines the adequacy of the allowance based upon
              reviews of individual credits, recent loss experience,
              delinquencies, current economic conditions, the risk
              characteristics of the various categories of loans and other
              pertinent factors. Loans are charged against the allowance for
              loan losses when management believes the collectibility of the
              principal is unlikely. While management uses available information
              to recognize losses on loans, future additions to the allowance
              for loan losses may be necessary based on changes in economic
              conditions. In addition, various regulatory agencies, as an
              integral part of their examination process, periodically review
              the Bank's allowance for loan losses. Such agencies may require
              the Bank to recognize additions to the allowance for loan losses
              based on their judgments about information available to them at
              the time of their examinations.

              Interest related to nonaccrual loans is recognized on the cash
              basis. 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 are required to be presented in the financial
              statements at the present value of the expected future cash flows
              or at the fair value of the loan's collateral. Homogeneous loans
              such as real estate mortgage loans, individual consumer loans,
              home equity loans and bankcard loans are evaluated collectively
              for impairment. Management, considering current information and
              events regarding the borrowers ability to repay their obligations,
              considers a loan to be impaired when it is probable that the Bank
              will be unable to collect all amounts due according to the

                                                                     (Continued)

                                       28
<PAGE>
                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

              contractual terms of the loan agreement. Impairment losses are
              included in the allowance for loan losses through a charge to the
              provision for loan losses. Cash receipts on impaired loans
              receivable are applied first to reduce interest on such loans to
              the extent of interest contractually due and any remaining amounts
              are applied to principal.

       (e)    Loan Origination and Commitment Fees and Certain Related Direct
              Costs

              Loan origination and commitment fees and certain direct loan
              origination costs charged by the Bank are deferred and the net
              amount amortized as an adjustment of the related loan's yield. The
              Bank is amortizing these net amounts over the contractual life of
              the related loans or, in the case of demand loans, over the
              estimated life. Net fees related to standby letters of credit are
              recognized over the commitment period.

       (f)    Bank Premises and Equipment

              Bank premises and equipment are stated at cost, net of accumulated
              depreciation. Depreciation on buildings and equipment is computed
              by the straight-line and declining-balance methods over the
              estimated useful lives of the assets. The cost of assets retired
              and sold and the related accumulated depreciation are eliminated
              from the accounts and the resulting gains or losses are included
              in determining net income. Expenditures for maintenance and
              repairs are charged to expense as incurred, and improvements and
              betterments are capitalized.

       (g)    Other Real Estate Owned

              Other real estate owned consists of properties acquired through
              foreclosure or deed in lieu of foreclosure. These properties are
              carried at the lower of cost or fair value less estimated selling
              costs. Losses from the acquisition of property in full or partial
              satisfaction of debt are charged against the allowance for loan
              losses. Subsequent write-downs, if any, are charged to expense.
              Gains and losses on the sales of other real estate owned are
              recorded in net income in the year of the sale.


       (h)    Pension Plan

              On January 1, 1998, the Company adopted Statement of Financial
              Accounting Standards No. 132, Employers' Disclosure about Pension
              and Other Post-retirement Benefits. Statement 132 revises the
              Company's disclosure about pension and other post-retirement
              benefit plans. Statement 132 does not change the method of
              accounting for such plans.

                                                                     (Continued)

                                       29
<PAGE>
                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

              The Bank maintains a noncontributory defined benefit pension plan
              which covers substantially all of its employees. The net periodic
              pension expense includes a service cost component, interest on the
              projected benefit obligation, a component reflecting the actual
              return on plan assets, the effect of deferring and amortizing
              certain actuarial gains and losses, and the amortization of any
              unrecognized net transition obligation on a straight-line basis
              over the average remaining service period of employees expected to
              receive benefits under the plan. The Bank's funding policy is to
              make annual contributions in amounts necessary to satisfy the
              Internal Revenue Service's funding standards and to the extent
              that they are tax deductible.

       (i)    Income Taxes

              Income taxes are accounted for under the asset and liability
              method, whereby deferred tax assets and liabilities are recognized
              for the future tax consequences attributable to differences
              between the financial statement carrying amounts of existing
              assets and liabilities and their respective tax bases and
              operating loss and tax credit carryforwards. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and liabilities of a change in tax rates is
              recognized in net income in the period that includes the enactment
              date.

       (j)    Stock Options

              The Company has adopted Statement of Financial Accounting
              Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
              which permits entities to recognize as expense over the vesting
              period the fair value of all stock-based awards on the date of
              grant. Alternatively, SFAS No. 123 also allows entities to
              continue to apply the provisions of APB Opinion No. 25 and provide
              pro forma net income and pro forma earnings per share disclosures
              for employee stock option grants made in 1995 and future years as
              if the fair-value-based method defined in SFAS No. 123 had been
              applied. The Company has elected to apply the provisions of APB
              Opinion No. 25 and provide the pro forma disclosure provisions of
              SFAS No. 123.


       (k)    Net Income Per Share

              In February 1997, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 128, Earnings per
              Share. Statement 128 established standards for computing and
              presenting earnings per share (EPS) and applies to entities with
              publicly held common stock or potential common stock. It replaces
              the presentation of primary EPS with a presentation of basic EPS.
              It also requires dual presentation of basic and diluted EPS on the
              face of the income statement for all entities with complex capital
              structures and requires a

                                                                     (Continued)

                                       30
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


              reconciliation of the numerator and denominator of the basic EPS
              computation to the numerator and denominator of the diluted EPS
              computation.

              Basic EPS 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 EPS 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 entity.

              The provisions of Statement 128 were adopted by the Company at
              December 31, 1997. The Statement requires restatement of all prior
              years' EPS data previously presented. The following is a
              reconciliation of the numerators and denominators of the basic and
              diluted EPS computations for the periods indicated:

<TABLE>
<CAPTION>

                                                Net Income            Shares                Per Share
Year Ended December 31, 1998                   (Numerator)         (Denominator)              Amount
-----------------------------------          -----------------   ------------------      -----------------
<S>                                       <C>                           <C>            <C>
Basic net income per share                $          1,517              719,025        $             2.11
                                                                                         =================
Effect of dilutive stock options                        --                 5,260
                                             -----------------   ------------------
Diluted net income per share              $          1,517              724,285        $             2.09
                                             =================   ==================      =================

Year Ended December 31, 1997
-----------------------------------

Basic net income per share                           1,717              719,025        $             2.39
                                                                                         =================
Effect of dilutive stock options                        --                   553
                                             -----------------   ------------------
Diluted net income per share              $          1,717              719,578        $             2.39
                                             =================   ==================      =================

</TABLE>

       (l)    Consolidated Statements of Cash Flows

              For purposes of the consolidated statements of cash flows, cash
              and cash equivalents include cash on hand, amounts due from banks
              (with original maturities of three months or less), and federal
              funds sold. Generally, federal funds are purchased and sold for
              one-day periods.

       (m)    Use of Estimates

                                                                     (Continued)

                                       31
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


              In preparing the consolidated financial statements, management is
              required to make estimates and assumptions that affect the
              reported amounts of assets and liabilities as of the dates of the
              consolidated balance sheets and revenues and expenses for the
              years ended December 31, 1998 and 1997. Actual results could
              differ from those estimates.

       (n)    Transfers and Servicing of Financial Assets and Extinguishments of
              Liabilities

              The Company adopted the provisions of Statement No. 125,
              Accounting for Transfers and Servicing of Financial Assets and
              Extinguishments of Liabilities, on January 1, 1997. The Statement
              provides accounting and reporting standards for transfers and
              servicing of financial assets and extinguishments of liabilities
              based on consistent application of a financial-components approach
              that focuses on control. Under that approach, after a transfer of
              financial assets, an entity recognizes the financial and servicing
              assets it controls and the liabilities it has incurred,
              derecognizes financial assets when control has been surrendered,
              and derecognizes liabilities when extinguished. This Statement
              provides consistent standards for distinguishing transfers of
              financial assets that are sales from transfers that are secured
              borrowings. This Statement also provides implementation guidance
              for assessing isolation of transferred assets and for accounting
              for transfers of partial interests, servicing of financial assets,
              securitizations, transfers of sales-type and direct financing
              lease receivables, securities lending transactions, repurchase
              agreements including "dollar rolls," "wash sales," loan
              syndications and participations, risk participations in banker's
              acceptances, factoring arrangements, transfers of receivables with
              recourse, and extinguishments of liabilities. Statement No. 127,
              Deferral of the Effective Date of Certain Provisions of Statement
              No. 125, issued in December 1996, deferred until January 1, 1998,
              the effective date of paragraph 15 of Statement 125 and
              implementation of Statement 125 for repurchase agreement,
              dollar-roll, securities lending and similar transactions as
              defined in Statement 125. Statement 125 was required to be adopted
              on a prospective basis; adoption did not have a material impact on
              the Company's financial position, results of operations or
              liquidity.

       (o)    Comprehensive Income

              On January 1, 1998, the Company adopted Statement of Financial
              Accounting Standards No. 130, Reporting Comprehensive Income.
              Statement 130 establishes standards for reporting and presentation
              of comprehensive income and its components in a full set of
              general purpose financial statements. Statement 130 was issued to
              address concerns over the practice of reporting elements of
              comprehensive income directly in equity.

              The Company is required to classify items of "Other Comprehensive
              Income" (such as net unrealized gains (losses) on securities
              available-for-sale) by their nature in a financial statement

                                                                     (Continued)

                                       32
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

              and present the accumulated balance of other comprehensive income
              separately from retained earnings and additional paid-in capital
              in the equity section of a statement of financial position. It
              does not require per share amounts of comprehensive income to be
              disclosed.

              In accordance with the provisions of the Statement, the Company
              has included Consolidated Statements of Income and Comprehensive
              Income in the accompanying consolidated financial statements.
              Comprehensive income consists of net income and net unrealized
              gains (losses) on securities available-for-sale. Also, accumulated
              other comprehensive income is included as a separate disclosure
              within the Consolidated Statements of Changes in Stockholders'
              Equity in the accompanying consolidated financial statements.
              Comprehensive income for the year ended December 31, 1997 is
              presented for comparative purposes. The adoption of Statement 130
              did not have any effect on the Company's consolidated financial
              position, results of operation or liquidity.

       (p)    Reclassifications

              Certain reclassifications were made to prior year amounts to
              conform with 1998 presentation.


(2)    Restrictions on Cash

       To comply with Federal Reserve regulations, the Bank is required to
       maintain certain average reserve balances. The daily average reserve
       requirements were approximately $661 and $540 for the weeks including
       December 31, 1998 and 1997, respectively.


(3)    Securities

       The amortized costs, gross unrealized gains, gross unrealized losses and
       fair values for securities at December 31, 1998 and 1997 are as follows:

                                                                     (Continued)

                                       33
<PAGE>


                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                  1998
                                                      -----------------------------------------------------------
                                                                         Gross          Gross
                                                       Amortized       Unrealized     Unrealized        Fair
Available-for-Sale                                       Costs           Gains          Losses         Values
                                                      -------------   -------------  -------------  -------------
<S>                                                 <C>                      <C>                <C>     <C>
U.S. Treasury securities and obligations of
    U.S. Government corporations and
    agencies                                       $     10,996             138                (7)     11,127
Obligations of states and political subdivisions          4,199             144            --           4,343
Mortgage-backed securities - Government                   4,208              61                (2)      4,267
Corporate securities                                        504               4            --             508
Other securities                                            107             --             --             107
                                                      -------------   -------------  -------------  -------------
                   Totals                          $     20,014             347                (9)     20,352
                                                      =============   =============  =============  =============



                                                                                 1998
                                                      -----------------------------------------------------------
                                                                         Gross          Gross
                                                       Amortized       Unrealized     Unrealized        Fair
Held-to-Maturity                                         Costs           Gains          Losses         Values
                                                      -------------   -------------  -------------  -------------

U.S. Treasury securities and obligations of
    U.S. Government corporations and
    agencies                                              2,411              16            --           2,427
Obligations of states and political subdivisions         12,302             360               (12)     12,650
Mortgage-backed securities - private                          7             --             --               7
                                                      -------------   -------------  -------------  -------------
                   Totals                          $     14,720             376               (12)     15,084
                                                      =============   =============  =============  =============


                                                                                 1997
                                                      -----------------------------------------------------------
                                                                         Gross          Gross
                                                       Amortized       Unrealized     Unrealized        Fair
Available-for-Sale                                       Costs           Gains          Losses         Values
                                                      -------------   -------------  -------------  -------------

U.S. Treasury securities and obligations of
    U.S. Government corporations and
    agencies                                             10,844              52               (16)     10,880
Obligations of states and political subdivisions          3,891             122                (1)      4,012
Mortgage-backed securities - Government                   6,223              60               (25)      6,258
Corporate securities                                        764              18            --             782
Other securities                                            107             --             --             107
                                                      -------------   -------------  -------------  -------------
                   Totals                          $     21,829             252               (42)     22,039
                                                      =============   =============  =============  =============

</TABLE>
                                                                     (Continued)

                                       34
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                 1997
                                                     -------------------------------------------------------------
                                                                        Gross           Gross
                                                      Amortized       Unrealized      Unrealized         Fair
Held-to-Maturity                                        Costs           Gains           Losses          Values
                                                     -------------   -------------   -------------   -------------
<S>                                               <C>                       <C>                <C>       <C>
U.S. Treasury securities and obligations
    of U.S. Government corporations
    and agencies                                  $      3,142              17                 (4)       3,155
Obligations of states and political
    subdivisions                                         7,548             192                 (8)       7,732
Mortgage-backed securities - private                        11             --              --               11
                                                     =============   =============   =============   =============
                   Totals                         $     10,701             209                (12)      10,898
                                                     =============   =============   =============   =============
</TABLE>




       The amortized costs and fair values of available-for-sale and
       held-to-maturity securities at December 31, 1998, by contractual
       maturity, are shown below. Expected maturities may differ from
       contractual maturities because borrowers may have the right to call or
       prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                                                              1998
                                                    -------------------------------------------------------------
                                                         Available-for-Sale              Held-to-Maturity
                                                    -----------------------------   -----------------------------
                                                     Amortized          Fair         Amortized          Fair
                                                       Costs           Values          Costs           Values
                                                    -------------   -------------   -------------   -------------
<S>                                              <C>                      <C>           <C>             <C>
Due in one year or less                          $        769             775           2,198           2,213
Due after one year through five years                   6,778           6,867           2,730           2,810
Due after five years through ten years                  7,430           7,580           7,432           7,609
Due after ten years                                       829             863           2,353           2,445
                                                    -------------   -------------   -------------   -------------
                                                       15,806          16,085          14,713          15,077
Mortgage-backed securities                               4,208           4,267               7              7
                                                    --------------  --------------  --------------  -------------
                   Totals                         $     20,014          20,352          14,720         15,084
                                                    ==============  ==============  ==============  =============
</TABLE>

       No securities were sold in 1998 or 1997. Gross gains of $10 and $4 were
       realized in 1998 and 1997, respectively, on calls of securities.

       Securities with amortized costs of approximately $2,100 and $3,950 (fair
       values of $2,156 and $3,989, respectively) as of December 31, 1998 and
       1997, respectively, were pledged as collateral for public deposits.


(4)    Loans

                                                                     (Continued)

                                       35
<PAGE>


                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

       A summary of loans at December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------

<S>                                                                      <C>                           <C>
Real estate loans:
    Residential                                                          $         34,324              37,557
    Other                                                                          11,307               8,912
Loans to individuals for household, family and other
    consumer expenditures                                                          32,817              31,942
Commercial and industrial loans                                                    12,890               8,714
All other loans                                                                       367                 840
                                                                            -----------------   -----------------
               Total loans, gross                                                  91,705              87,965

Less unearned income and fees                                                        (296)               (402)
                                                                            -----------------   -----------------
               Loans, net of unearned income and fees                              91,409              87,563

Less allowance for loan losses                                                       (877)               (747)
                                                                            =================   =================
               Loans, net                                                $         90,532              86,816
                                                                            =================   =================
</TABLE>

       Nonaccrual loans amounted to approximately $45 and $38 at December 31,
       1998 and 1997, respectively. Interest income that would have been earned
       on nonaccrual loans if they had been current in accordance with their
       original terms and the recorded interest that was included in income on
       these loans was not significant for 1998 and 1997. There were no
       commitments to lend additional funds to customers whose loans were on
       nonaccrual at December 31, 1998.

       In the normal course of business, the Bank has made loans to executive
       officers and directors. At December 31, 1998, loans to executive officers
       and directors were approximately $785 compared to $1,096 at December 31,
       1997. During 1998, new loans to executive officers and directors amounted
       to approximately $723 and repayments amounted to approximately $1,034.
       Loans to companies in which executive officers and directors have an
       interest amounted to approximately $1,316 and $1,297 at December 31, 1998
       and 1997, respectively. In addition, dealer loans purchased from
       companies owned by certain directors, and against whom the bank has
       recourse, amounted to approximately $174 and $261 at December 31, 1998
       and 1997, respectively.



       Activity in the allowance for loan losses is summarized as follows:

                                                                     (Continued)

                                       36
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------

<S>                                                                      <C>                              <C>
Balances, beginning of year                                              $            747                 674
Provision for loan losses                                                             300                 350
Loans charged off                                                                    (303)               (457)
Loan recoveries                                                                       133                 180
                                                                            -----------------   -----------------
               Balances, end of year                                     $            877                 747
                                                                            =================   =================

</TABLE>

       At December 31, 1998 and 1997, the recorded investment in loans for which
       an impairment has been identified totaled approximately $216 and $96,
       respectively. The entire amounts of impaired loans of $216 and $96
       related to loans with corresponding valuation allowances of approximately
       $91 and $13 at December 31, 1998 and 1997, respectively. The average
       recorded investment in impaired loans receivable during 1998 and 1997 was
       approximately $152 and $120. Interest income recognized on impaired loans
       during 1998 and 1997 was $25 and $5, including approximately $9 and $-0-,
       respectively, recognized on a cash basis.


(5)    Premises and Equipment

       Premises and equipment were comprised of the following as of December 31,
       1998 and 1997:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------

<S>                                                                      <C>                              <C>
Land improvements                                                        $            367                 169
Buildings                                                                           2,528               1,056
Equipment, furniture and fixtures                                                   2,417               1,894
                                                                            -----------------   -----------------
                                                                                    5,312               3,119
    Less accumulated depreciation                                                  (2,643)             (2,417)
                                                                            -----------------   -----------------
                                                                                    2,669                 702

Land                                                                                  832               1,139
Construction-in-progress                                                               46               1,317
                                                                            -----------------   -----------------
                                                                         $          3,547               3,158
                                                                            =================   =================
</TABLE>



(6)    Deposits

       A summary of deposits at December 31, 1998 and 1997 follows:

                                                                     (Continued)

                                       37
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                  1998               1997
                                                                            -----------------  -----------------
<S>                                                                      <C>                           <C>
Noninterest bearing:
    Demand deposits                                                      $         10,993              9,524
Interest bearing:
    Savings                                                                        22,675             23,700
    NOW accounts                                                                   16,900             13,404
    Time deposits                                                                  62,535             57,080
    Time deposits greater than $100,000                                            12,084             11,825
                                                                            -----------------  -----------------
                                                                         $        125,187            115,533
                                                                            =================  =================
</TABLE>


        At December 31, 1998, the scheduled maturity of time deposits are as
        follows: $52,786 in 1999; $13,114 in 2000; $2,395 in 2001; $1,761 in
        2002 and $4,563 in 2003.


(7)    Employee Benefit Plans

       The Bank maintains a noncontributory defined benefit pension plan which
       covers substantially all of its employees. Benefits are computed based on
       employees' average final compensation and years of credited service.
       Pension expense amounted to approximately $108 and $82 in 1998 and 1997,
       respectively.

        The funded status of the pension plan at September 30, 1998 and 1997
        (most recent information available) and pertinent assumptions are as
        follows:

<TABLE>
<CAPTION>
                                                                                      Pension Benefits
                                                                                        December 31,
                                                                            -------------------------------------
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                      <C>                            <C>
Change in Benefit Obligation

Benefit obligation at beginning of year                                  $          1,659               1,259
Service cost                                                                          114                  97
Interest cost                                                                         124                  94
Actuarial gain                                                                         28                 255
Benefits paid                                                                          (5)                (46)
                                                                            -----------------   -----------------
               Benefit obligation at end of year                                    1,920               1,659
                                                                            -----------------   -----------------

</TABLE>
                                                                     (Continued)


                                       38
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                              Pension Benefits
                                                                            -------------------------------------
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                         <C>                 <C>
Change in Plan Assets

Fair value of plan assets at beginning of year                              $          1,456               1,144
Actual return on plan assets                                                              (9)                242
Employer contribution                                                                 --                     116
Benefits paid                                                                             (5)                (46)
                                                                            -----------------   -----------------
               Fair value of plan assets at end of year                                1,442               1,456
                                                                            -----------------   -----------------
               Funded status                                                            (478)               (203)
Unrecognized net actuarial gain                                                         (139)               (315)
Unrecognized prior service cost                                                          107                 116
                                                                            -----------------   -----------------
               Accrued pension benefit cost, included
                   in other liabilities                                     $           (510)               (402)
                                                                            =================   =================

Weighted Average Assumptions as of December 31
                                                                                   1998                1998
                                                                            -----------------   -----------------
Weighted average discount rate                                                          7.50%               7.50%
Expected return on plan assets                                                          9.00%               9.00%
Rate of compensation increase                                                           5.00%               5.00%
</TABLE>

       The components of net periodic pension benefit cost under the plan is
summarized as follows:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                      <C>                               <C>
Service cost                                                             $            114                  97
Interest cost                                                                         124                  94
Expected return on plan assets                                                       (131)               (103)
Net amortization (accretion)                                                            1                  (6)
                                                                            -----------------   -----------------
               Net pension cost                                          $            108                  82
                                                                            =================   =================
</TABLE>


       Plan assets consisted of cash equivalents, U.S. Government securities,
       mortgage-backed securities, corporate bonds and equities securities in a
       pooled pension fund administered by the Virginia Bankers Association. The
       Company also has a 401(k) plan for which the Company does not currently
       match employee contributions to the plan.

                                                                     (Continued)


                                       39
<PAGE>


                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


(8)    Income Taxes

       Total income taxes for the years ended December 31, 1998 and 1997 are
allocated as follows:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                      <C>                              <C>
Income                                                                   $            548                 662
Stockholders' equity for unrealized gains
    (losses) on available-for-sale securities
    recognized for financial reporting purposes                                        44                  77
                                                                            -----------------   -----------------
               Total                                                     $            592                 739
                                                                            =================   =================
</TABLE>

       Income tax expense (benefit) attributable to income before income tax
expense is summarized as follows:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------

<S>                                                                      <C>                              <C>
Current                                                                  $            714                 588
Deferred                                                                             (166)                 74
                                                                            -----------------   -----------------
               Total                                                     $            548                 662
                                                                            =================   =================
</TABLE>


       Included in income tax expense were tax expenses of approximately $3 and
       $1 for the years ended December 31, 1998 and 1997, respectively, related
       to net realized gains and losses on the calls of securities.

       Income tax expense for the years ended December 31, 1998 and 1997
       differed from the amounts computed by applying the U.S. Federal income
       tax rate of 34 percent to income before income tax expense as a result of
       the following:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                      <C>                              <C>
Computed "expected" income tax expense                                   $            702                 809
Increase (reduction) in income tax expense
    resulting from:
       Tax-exempt interest                                                           (195)               (176)
       Disallowance of interest expense                                                31                  26
       Other                                                                           10                   3
                                                                            -----------------   -----------------
               Total                                                     $            548                 662
                                                                            =================   =================
</TABLE>

                                                                     (Continued)

                                       40
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities at
       December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                  1998                1997
                                                                            -----------------   -----------------
<S>                                                                      <C>                              <C>
Deferred tax assets:
    Loans, principally due to allowance for loan losses                  $            202                 158
    Accrued pension, due to accrual for financial
       reporting purposes in excess of actual pension
       contributions                                                                  173                 137
    Loans, due to unearned fees, net                                                   87                 --
    Other                                                                              27                  27
                                                                            -----------------   -----------------
               Total gross deferred tax assets                                        489                 322
    Less valuation allowance                                                           --                   --
                                                                            -----------------   -----------------
               Net deferred tax assets                                                489                 322
                                                                            -----------------   -----------------

Deferred tax liabilities:
    Bank premises and equipment, due to differences
       in depreciation                                                                 41                  40
    Prepaid expenses, due to capitalization for
       financial reporting purposes                                                     2                   2
    Net unrealized gains on available-for-sale securities                             115                  71
                                                                            -----------------   -----------------
               Total gross deferred tax liabilities                                   158                 113
                                                                            -----------------   -----------------
               Net deferred tax asset, included in other
                   assets                                                $            331                 209
                                                                            =================   =================
</TABLE>

       The Bank has determined that a valuation allowance for the gross deferred
       tax assets is not necessary at December 31, 1998 and 1997, since
       realization of the entire gross deferred tax assets can be supported by
       the amounts of taxes paid during the carryback periods available under
       current tax laws.


(9)    Financial Instruments with Off-Balance-Sheet Risk

       The Bank is a party to financial instruments with off-balance-sheet risk
       in the normal course of business to meet the financing needs of its
       customers. These financial instruments include commitments to extend
       credit and standby letters of credit. These instruments may involve, to
       varying degrees, credit risk in excess of the amount recognized in the
       balance sheets. The contract amounts of these instruments reflect the
       extent of involvement the Bank has in particular classes of financial
       instruments.

                                                                     (Continued)

                                       41
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


       Credit risk is defined as the possibility of sustaining a loss because
       the other parties to a financial instrument fail to perform in accordance
       with the terms of the contract. The Bank's maximum exposure to credit
       loss under commitments to extend credit and standby letters of credit is
       represented by the contractual amount of these instruments. The Bank uses
       the same credit policies in making commitments and conditional
       obligations as it does for on-balance-sheet instruments.

       The Bank requires collateral to support financial instruments when it is
       deemed necessary. The Bank evaluates such customers' creditworthiness on
       a case-by-case basis. The amount of collateral obtained upon extension of
       credit is based on management's credit evaluation of the counterparty.
       Collateral may include deposits held in financial institutions, U.S.
       Treasury securities, other marketable securities, real estate, accounts
       receivable, inventory, and property, plant and equipment.

       Financial instruments whose contract amounts represent credit risk:


                                                       Contract Amounts at
                                                           December 31,
                                              ----------------------------------
                                                    1998                1997
                                              -----------------   --------------

Commitments to extend credit               $         11,661               9,015
                                              =================   ==============

Standby letters of credit                  $            703               1,369
                                              =================   ==============

       Commitments to extend credit are agreements to lend to a customer as long
       as there is no violation of any condition established in the contract.
       Commitments generally have fixed expiration dates or other termination
       clauses and may require payment of a fee. Since many of the commitments
       are expected to expire without being drawn upon, the total commitment
       amounts do not necessarily represent future cash requirements.

       Standby letters of credit are conditional commitments issued by the Bank
       to guarantee the performance of a customer to a third party. These
       guarantees are primarily issued to support public and private borrowing
       arrangements, including bond financing and similar transactions. Unless
       renewed, substantially all of the Bank's credit commitments at December
       31, 1998 will expire within one year. Management does not anticipate any
       material losses as a result of these transactions. The credit risk
       involved in issuing letters of credit is essentially the same as that
       involved in extending loans to customers.


(10)   Concentrations of Credit Risk

                                                                     (Continued)

                                       42
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)



       The Bank grants commercial, residential, consumer and agribusiness loans
       to customers in the central Virginia area. The Bank has a diversified
       loan portfolio which is not dependent upon any particular economic
       sector. As a whole, the portfolio could be affected by general economic
       conditions in the central Virginia region.

       The Bank's commercial loan portfolio is diversified, with no significant
       concentrations of credit. The real estate loan portfolio consists
       principally of 1-4 family residential property. The installment loan
       portfolio consists of consumer loans primarily for automobiles and other
       personal property. Overall, the Bank's loan portfolio is not concentrated
       within a single industry or group of industries, the loss of any one or
       more of which would generate a materially adverse impact on the business
       of the Bank.

       The Bank has established operating policies relating to the credit
       process and collateral in loan originations. Loans to purchase real and
       personal property are generally collateralized by the related property.
       Credit approval is principally a function of collateral and the
       evaluation of the creditworthiness of the borrower based on available
       financial information.


(11)   Dividend Restrictions and Capital Requirements

       Bankshares' principal source of funds for dividend payments is dividends
       received from its subsidiary Bank. For the years ended December 31, 1998
       and 1997, dividends from the subsidiary Bank totaled $538 and $522,
       respectively.

       Substantially all of Bankshares' retained earnings consists of
       undistributed earnings of its subsidiary Bank, which are restricted by
       various regulations administered by federal banking regulatory agencies.
       Under applicable federal laws, the Comptroller of the Currency restricts,
       without prior approval, the total dividend payments of the Bank in any
       calendar year to the net profits of that year, as defined, combined with
       the retained net profits for the two preceding years. At December 31,
       1998, retained net profits of the Bank which were free of such
       restriction approximated $2,174.

       Bankshares and the Bank are subject to various regulatory capital
       requirements administered by the federal banking agencies. Failure to
       meet minimum capital requirements can initiate certain mandatory and
       possibly additional discretionary actions by regulators that, if
       undertaken, could have a direct material effect on Bankshares'
       consolidated financial statements. Under capital adequacy guidelines and
       the regulatory framework for prompt corrective action, Bankshares and the
       Bank must meet specific capital guidelines that involve quantitative
       measures of their assets, liabilities and certain off-balance-sheet items
       as calculated under regulatory accounting practices. Bankshares and the
       Bank's capital amounts and classification are also subject to qualitative
       judgments by the regulators about components, risk weightings and other
       factors.

       Quantitative measures established by regulation to ensure capital
       adequacy require Bankshares and the Bank to maintain minimum amounts and
       ratios (set forth in the table below) of total and Tier I capital

                                                                     (Continued)

                                       43
<PAGE>
                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)


       (as defined in the regulations) to risk-weighted assets (as defined), and
       of Tier I capital (as defined) to average assets (as defined). Management
       believes, as of December 31, 1998, that Bankshares and the Bank meets all
       capital adequacy requirements to which it is subject.

       As of December 31, 1998, the most recent notification from Office of the
       Comptroller of the Currency categorized Bankshares and the Bank as well
       capitalized under the regulatory framework for prompt corrective action.
       To be categorized as well capitalized, Bankshares and the Bank must
       maintain minimum total risk-based, Tier I risk-based and Tier I leverage
       ratios as set forth in the table below. There are no conditions or events
       since that notification that management believes have changed Bankshares
       and the Bank's category.

       Bankshares and the Bank's actual capital amounts and ratios are presented
in the table below.

<TABLE>
<CAPTION>
                                                                                                To Be Well
                                                                                             Capitalized Under
                                                                      For Capital            Prompt Corrective
                                              Actual                Adequacy Purposes        Action Provisions
                                       -----------------------   ----------------------   -----------------------
                                         Amount      Ratio        Amount       Ratio       Amount       Ratio
                                       ----------- -----------   ----------  ----------   ----------  -----------
<S>                                  <C>               <C>     <C>                <C>   <C>           <C>
As of December 31, 1998:
    Total Capital
       (to Risk Weighted Assets):
          Bankshares consolidated    $  15,715         16.20%  $  7,761          >8.0%  $    N/A         N/A
          Bank                          15,708         16.19%     7,761          >8.0%     9,701          >10.0%
    Tier I Capital
       (to Risk Weighted Assets):
          Bankshares consolidated       14,838         15.30%     3,880          >4.0%       N/A         N/A
          Bank                          14,831         15.29%     3,880          >4.0%     5,821           >6.0%
    Tier I Capital (Leverage)
       (to Average Assets):
          Bankshares consolidated       14,838         10.66%     5,569          >4.0%       N/A         N/A
          Bank                          14,831         10.65%     5,568          >4.0%     6,960           >5.0%

As of December 31, 1997:
    Total Capital
       (to Risk Weighted Assets):
          Bankshares consolidated    $  14,529         16.24%  $  7,159          >8.0%  $    N/A         N/A
          Bank                          14,535         16.24%     7,159          >8.0%     8,949         >10.0%
    Tier I Capital
       (to Risk Weighted Assets):
          Bankshares consolidated       13,782         15.40%     3,580          >4.0%       N/A         N/A
          Bank                          13,788         15.41%     3,580          >4.0%     5,369          >6.0%
    Tier I Capital (Leverage)
       (to Average Assets):
          Bankshares consolidated       13,782         10.65%     5,174          >4.0%       N/A         N/A
          Bank                          13,788         10.66%     5,174          >4.0%     6,468          >5.0%
</TABLE>


(12)   Disclosures About Fair Value of Financial Instruments

                                                                     (Continued)

                                       44
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

       Statement of Financial Accounting Standards No. 107, Disclosures about
       Fair Value of Financial Instruments, requires the Company to disclose
       estimated fair values of its financial instruments.

       The following methods and assumptions were used to estimate the
       approximate fair value of each class of financial instrument for which it
       is practicable to estimate that value.

       (a)    Cash and Due from Banks and Federal Funds Sold

              The carrying amounts are a reasonable estimate of fair value.

       (b)    Securities

              The fair value of securities, except state and municipal
              securities, is estimated based on bid prices published in
              financial newspapers or bid quotations received from securities
              dealers. The fair value of certain state and municipal securities
              is not readily available through market sources other than dealer
              quotations, so fair value estimates are based on quoted market
              prices of similar instruments, adjusted for differences between
              the quoted instruments and the instruments being valued.


       (c)    Loans

              Fair values are estimated for portfolios of loans with similar
              financial characteristics. Loans are segregated by type such as
              commercial, real estate - residential, real estate - other, loans
              to individuals and other loans. Each loan category is further
              segmented into fixed and adjustable rate interest terms.

              The fair value of loans is calculated by discounting scheduled
              cash flows through the estimated maturity using estimated market
              discount rates that reflect the credit and interest rate risk
              inherent in the loan as well as estimates for prepayments. The
              estimate of maturity is based on the Company's historical
              experience with repayments for each loan classification, modified,
              as required, by an estimate of the effect of current economic and
              lending conditions.

       (d)    Deposits and Note Payable to Federal Home Loan Bank

              The fair value of demand deposits, NOW accounts, savings deposits
              and the note payable to the Federal Home Loan Bank is the amount
              payable on demand. The fair value of fixed maturity time deposits,
              certificates of deposit and the note payable to the Federal Home
              Loan Bank is estimated using the rates currently offered for
              deposits or borrowings of similar remaining maturities.

       (e)    Commitments to Extend Credit and Standby Letters of Credit

                                                                     (Continued)

                                       45
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

              The only amounts recorded for commitments to extend credit and
              standby letters of credit are the deferred fees arising from these
              unrecognized financial instruments. These deferred fees are not
              deemed significant at December 31, 1998 and 1997, and as such, the
              related fair values have not been estimated.

       The carrying amounts and approximate fair values of the Company's
       financial instruments are as follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                December 31,                      December 31,
                                                                     1998                             1997
                                                -------------------------------   -------------------------------
                                                   Carrying       Approximate       Carrying        Approximate
                                                   Amounts        Fair Values        Amounts        Fair Values
                                                ---------------  --------------   --------------   --------------
<S>                                           <C>                     <C>              <C>              <C>
Financial assets:
    Cash and due from banks                   $       3,323           3,323            3,304            3,304
    Federal funds sold                                7,359           7,359            3,387            3,387
    Securities:
       Available-for-sale                            20,352          20,352           22,039           22,039
       Held-to-maturity                              14,720          15,084           10,701           10,898
    Federal Reserve Bank Stock                           75              75               75               75
    Federal Home Loan Bank Stock                        409             409              409              409
    Loans, net of unearned income and fees           91,409          93,000           87,563           87,828
                                                ---------------  --------------   --------------   --------------
               Total financial assets         $     137,647         139,602          127,478          127,940
                                                ===============  ==============   ==============   ==============


Financial liabilities:
    Deposits                                        125,187         126,019          115,533          116,165
    Notes payable to Federal Home Loan
       Bank                                             900             903            1,000            1,000
                                                ---------------  --------------   --------------   --------------
               Total financial liabilities    $     126,087         126,922          116,533          117,165
                                                ===============  ==============   ==============   ==============
</TABLE>

       Fair value estimates are made at a specific point in time, based on
       relevant market information and information about the financial
       instrument. These estimates do not reflect any premium or discount that
       could result from offering for sale at one time the Company's entire
       holdings of a particular financial instrument. Because no market exists
       for a significant portion of the Company's financial instruments, fair
       value estimates are based on judgments regarding future expected loss
       experience, current economic conditions, risk characteristics of various
       financial instruments and other factors. These estimates are subjective
       in nature and involve uncertainties and matters of significant judgment
       and therefore cannot be determined with precision. Changes in assumptions
       could significantly affect the estimates.

       Fair value estimates are based on existing on and off-balance sheet
       financial instruments without attempting to estimate the value of
       anticipated future business and the value of assets and liabilities that
       are not considered financial instruments. Significant assets that are not
       considered financial assets include deferred tax assets and premises and
       equipment and other real estate owned. In addition, the

                                                                     (Continued)


                                       46
<PAGE>

                         PINNACLE BANKSHARES CORPORATION
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands, except share and per share data)

       tax ramifications related to the realization of the unrealized gains and
       losses can have a significant effect on fair value estimates and have not
       been considered in the estimates.


(13)   Parent Company Financial Information

       Condensed financial information of Pinnacle Bankshares Corporation
       (Parent) is presented below:


                                           Condensed Balance Sheets

<TABLE>
<CAPTION>


                                                                                               December 31,
                                                                           -------------------------------------
                                                                                 1998                1997
                                                                           -----------------   -----------------
<S>                                                                      <C>                          <C>
Assets

Investment in subsidiaries, at equity                                    $        15,135              14,020
Other assets                                                                          19                  36
                                                                           -----------------   -----------------
               Total assets                                              $        15,154              14,056
                                                                           =================   =================

Liabilities and Stockholders' Equity

Other liabilities                                                                      12                  14
Stockholders' equity (notes 1 and 11):
    Common stock of $3.00 par value.  Authorized
       3,000,000 shares; issued and outstanding 719,025
       shares                                                                       2,157               2,157
    Capital surplus                                                                   338                 338
    Retained earnings                                                              12,424              11,409
    Accumulated other comprehensive income                                            223                 138
                                                                            -----------------   -----------------
               Total stockholders' equity                                          15,142              14,042

Commitments, contingencies and other matters
    (notes 7, 9, 10 and 11)
                                                                            -----------------   -----------------
               Total liabilities and stockholders' equity                $         15,154              14,056
                                                                            =================   =================
</TABLE>