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**U.S. SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10 - KSB**

**(Mark One)**

| x                                                                             |   | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
|                                                                          |   |                                                                                   |
| **For the fiscal year ended December 31, 2002**                               |
|                                                                          |   |                                                                                   |
| **OR**                                                                        |
|                                                                          |   |                                                                                   |
| o                                                                             |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                          |   |                                                                                   |
| **Commission File Number: 000-23909**                                         |
|                                                                          |   |                                                                                   |
| **PINNACLE BANKSHARES CORPORATION**                                           |
| **(Name of small business issuer in its charter)**                            |
|                                                                          |   |                                                                                   |
| **VIRGINIA**                                                                  |   | **54-1832714**                                                                         |
|                                                                               |   |                                                                                        |
| **(State or other jurisdiction of incorporation or organization)**            |   | **(I.R.S. Employer Identification Number)**                                            |
|                                                                          |   |                                                                                   |
| **P.O. Box 29  Altavista, Virginia 24517**                                    |   | **24517-0029**                                                                         |
|                                                                               |   |                                                                                        |
| **(Address of principal executive offices)**                                  |   | **(ZIP CODE)**                                                                         |
|                                                                          |   |                                                                                   |
| **Issuer’s telephone number (434) 369-3000**                             |
|                                                                          |
| **Securities registered pursuant to Section 12(b) of the Exchange Act: None** |
|                                                                          |
| **Securities registered pursuant to Section 12(g) of the Act:**               |
|                                                                          |
| **Common Stock, par value $3.00**                                             |
|                                                                          |        |                                                                                   |
| **(Title of Class)**                                                          |
|                                                                               |        |                                                                                        |  |  |  |  |

               Check whether the issuer (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

| Yes  x | No  o |
|------------------|-----------------|

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

               The issuer’s revenues for the fiscal year ended December 31, 2002:$13,812,000

               The aggregate market value of the issuer’s Common Stock held by nonaffiliates as ofFebruary 7, 2003:   $23,105,928

               The number of shares outstanding of the issuer’s CommonStock as of March 11, 2003: 1,453,203 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2002 Annual Report toShareholders are incorporated by reference in Part II of this report, which is attached hereto as Exhibit 13.  Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on April 8, 2003 are incorporated byreference in Part III of this report.

Transitional small business disclosure format:

| Yes  o | No  x. |
|------------------|------------------|

**PINNACLE BANKSHARESCORPORATION**

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Table of Contents
**2002 FORM 10-KSB ANNUAL REPORTTABLE OF CONTENTS**

  

  

**Page**

 

  

 

**PART I**

 

 

 

 

Item 1.

Description of Business

3

 

 

General Development of Business

 

 

 

Competition

 

 

 

Regulation and Supervision

 

 

 

Employees

 

Item 2.

Description of Property

9

Item 3.

Legal Proceedings

9

Item 4.

Submission of Matters to a Vote of Security Holders

9

 

  

 

 

**PART II**

 

 

 

 

Item 5.

Market for Common Equity and Related Stockholder Matters

9

Item 6.

Management’s Discussion and Analysis or Plan of Operation

10

Item 7.

Financial Statements

10

Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

10

 

  

 

 

**PART III**

 

 

 

 

Item 9.

Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

10

Item 10.

Executive Compensation

10

Item 11.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

10

Item 12.

Certain Relationships and Related Transactions

11

Item 13.

Exhibits and Reports on Form 8-K

11

Item 14.

Controls and Procedures

12

 

 

 

SIGNATURES

 

13

 

 

 

CERTIFICATIONS

 

14

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**PART I**

**Item 1.****          Description of Business.**

**General Development of Business**

               Pinnacle Bankshares Corporation, a Virginia corporation (the “Company”), was organized in 1997 and is registered as a bankholding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Altavista, Virginia.  The Company conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank,The First National Bank of Altavista (the “Bank”).  The Company exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish. The Company’sadministrative offices are located at 622 Broad Street, Altavista, Virginia.

               The Bank was organized as anational bank in 1908 and commenced its general banking operations in December of that year, providing services to commercial and agricultural businesses and individuals in the Altavista area.  With an emphasis on personal service, the Banktoday offers a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, merchant bankcard processing, residential and commercial mortgages, home equity loans,consumer installment loans, agricultural loans, investment loans, small business loans, commercial lines of credit and letters of credit.  

               The Bank serves a trade area consisting primarily of Campbell County, northern Pittsylvania County, southeastern Bedford County, and thecity of Lynchburg from facilities located in the town of Altavista and the city of Lynchburg, Virginia. In October 1998, the Company opened a mortgage loan production office in Forest, Virginia. In addition, in June 1999 the Company opened TheAirport facility, located just outside the Lynchburg city limits. In August 2000, the Company opened the Old Forest Road facility, located on Old Forest Road in Lynchburg, and the Brookville Plaza facility, located on Timberlake Road inLynchburg.  The Company opened these offices to better serve the Lynchburg and northern Campbell County areas.

               The Bank has two wholly-owned subsidiaries. FNB Property Corp., which is a Virginia Corporation, was formed to hold title to Bankpremises real estate. First Properties, Inc., also a Virginia corporation, was formed to hold title to other real estate owned.

**Competition**

               In general, the bankingbusiness in central Virginia is highly competitive with respect to both loans and deposits and is dominated by a number of major banks that have offices operating throughout the state and in the Company’s market area.  The Company activelycompetes for all types of deposits and loans with other banks and with nonbank financial institutions, including savings and loan associations, finance companies, credit unions, mortgage companies, insurance companies and other lendinginstitutions.

               Institutions such as brokerage firms, credit card companies and even retail establishmentsoffer alternative investment vehicles such as money market funds as well as traditional banking services.  Other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity securities alsorepresent a source of competition for the Company with respect to acquisition of deposits.  Among the advantages that the major banks have over the Company is their ability to finance extensive advertising campaigns and to allocate theirinvestment assets to regions of highest yield and demand, over a more diverse geographic area.  Although major banks have these competitive advantages over small independent banks, the Bank has actively tried to turn the loss of localindependent banks to its competitive advantage by soliciting customers who prefer the personal service offered by a small independent bank.

               The Company does not depend upon a single customer or industry, the loss of which would have a material adverse effect on theCompany’s financial condition.  The Company believes that its prompt response to lending requests is a key factor to the Company’s competitive position in its primary service area.  In addition, the accessibility of seniormanagement to customers and local decision-making also distinguish the Company from other area financial institutions.

               In order to compete with the other financial institutions in its primary service area, the Company relies principally upon localpromotional activities, personal contact 

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by its officers, directors, employees and stockholders and offering specialized services to customers.  The Company’s promotional activities emphasize the advantagesof dealing with a local bank attuned to the particular needs of the community.

**Regulation and Supervision**

               Set forthbelow is a brief description of the material laws and regulations that affect the Company.  The description of these statutes and regulations is only a summary and does not purport to be complete.  This discussion is qualified in itsentirety by reference to the statutes and regulations summarized below.  No assurance can be given that these statutes or regulations will not change in the future.  

*               **General.***  The Company is subject to the periodic reporting requirements of the Securities and Exchange Act of 1934,as amended (the “Exchange Act”), which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission (the “SEC”).  As an Exchange Act reporting company, theCompany is directly affected by the recently enacted Sarbanes-Oxley Act of 2002 (the “SOX”), which is aimed at improving corporate governance and reporting procedures and requires expanded disclosure of the Company’s corporateoperations and internal controls.  The Company is already complying with new SEC and other rules and regulations implemented pursuant to the SOX and intends to comply with any applicable rules and regulations implemented in the future. Although the Company anticipates that it will incur additional expense in complying with the provisions of the SOX and the resulting regulations, management does not expect that such compliance will have a material impact on the Company’sfinancial condition or results of operations.

               The Company is a bank holding company within the meaning ofthe Bank Holding Company Act of 1956, and is registered as such with, and subject to the supervision of, the Federal Reserve Bank of Richmond (the “FRB”).  Generally, a bank holding company is required to obtain the approval of theFRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or controlmore than 5% of the voting shares of such bank.  The FRB’s approval is also required for the merger or consolidation of bank holding companies.

               The Company is required to file periodic reports with the FRB and provide any additional information as the FRB may require.  TheFRB also has the authority to examine the Company and the Bank, as well as any arrangements between the Company and the Bank, with the cost of any such examinations to be borne by the Company.

               Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by Federal law in dealings with theirholding companies and other affiliates.  Subject to certain restrictions set forth in the Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from anaffiliate or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the aggregate amount of such transactions of a bank and its subsidiaries with its affiliates does not exceed 10% of the capital stock and surplus ofthe bank on a per affiliate basis or 20% of the capital stock and surplus of the bank on an aggregate affiliate basis.  In addition, such transactions must be on terms and conditions that are consistent with safe and sound bankingpractices.  In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act.  These restrictions also prevent a bank holding company and its otheraffiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. Additionally, the Company and its subsidiary are prohibited from engaging in certain tie-inarrangements in connection with any extension of credit, sale or lease of property or furnishing of services.

               A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the votingshares of any company engaged in nonbanking activities.  A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the FRB has determined by regulation or order are so closely related tobanking as to be a proper incident to banking. In making these determinations, the FRB considers whether the performance of such activities by a bank holding company would offer advantages to the public that outweigh possible adverseeffects.

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               As a national bank, the Bank is subject to regulation, supervision and regularexamination by the Office of the Comptroller of the Currency (the “Comptroller”).  Each depositor’s account with the Bank is insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amountpermitted by law, which is currently $100,000 for each depositor.  The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted byFederal banking law.

               The regulations of the FDIC, the Comptroller and FRB govern most aspects of theCompany’s business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, deposit interest rate ceilings and numerous other matters.  As aconsequence of the extensive regulation of commercial banking activities in the United States, the Company’s business is particularly susceptible to changes in state and Federal legislation and regulations, which may have the effect ofincreasing the cost of doing business, limiting permissible activities or increasing competition.

               ***Governmental Policies and Legislation.***  Banking is a business that depends primarily on interest ratedifferentials.  In general, the difference between the interest rates paid by the Company on its deposits and its other borrowings and the interest rates received by the Company on loans extended to its customers and securities held in itsportfolio, comprise the major portion of the Company’s earnings.  These rates are highly sensitive to many factors that are beyond the Company’s control.  Accordingly, the Company’s growth and earnings are subject to theinfluence of domestic and foreign economic conditions, including inflation, recession and unemployment.

               Thecommercial banking business is affected not only by general economic conditions, but is also influenced by the monetary and fiscal policies of the Federal government and the policies of its regulatory agencies, particularly the FRB.  The FRBimplements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in U.S. Government securities, by adjusting the required level of reserves for financial institutions subject toits reserve requirements and by varying the discount rates applicable to borrowings by depository institutions.  The actions of the FRB in these areas influence the growth of bank loans, investments and deposits, and also affect interest ratescharged on loans and paid on deposits.  The nature and impact of any future changes in monetary policies cannot be predicted.

               From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expandingpermissible activities or affecting the competitive balance between banks and other financial institutions.  Proposals to change the laws and regulations governing the operations and taxation of bank holding companies, banks and other financialinstitutions are frequently made in Congress, in the Virginia Legislature and brought before various bank holding company and bank regulatory agencies.  The likelihood of any major changes and the impact such changes might have are impossibleto predict.  Certain of the potentially significant changes that have been enacted recently by Congress or various regulatory or professional agencies are discussed below.

               ***Dividends.**** *There are regulatory restrictions on dividend payments by both the Bank and the Company that mayaffect the Company’s ability to pay dividends on its Common Stock. See “Item 5.  Market for Common Equity and Related Stockholder Matters.”

               ***Capital Requirements.***  The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy guidelines forbank holding companies and banks.  These capital adequacy regulations are based upon a risk-based capital determination, whereby a bank holding company’s capital adequacy is determined in light of the risk, both on- and off-balance sheet,contained in the company’s assets.  Different categories of assets are assigned risk weightings and are counted at a percentage of their book value.

               The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital.  For a bank holding company, Tier 1capital consists primarily of common stock, related surplus, noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of qualifying cumulative preferred securities.  Goodwill and certainother intangibles are excluded from Tier 1 capital.  Tier 2 capital consists of an amount equal to the allowance for loan and lease losses up

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to a maximum of 1.25% of risk weighted assets, limited other types of preferred stock not included in Tier 1 capital, hybrid capital instruments and term subordinateddebt.  Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from capital.  The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The guidelines generally require banks to maintain a total qualifying capital to weighted risk assets level of 8% (the “Risk-based Capital Ratio”).  Of the total 8%, at least 4% of the total qualifying capital to weighted risk assets(the “Tier 1 Risk-based Capital Ratio”) must be Tier 1 capital.

               The FRB, the Comptroller and theFDIC have adopted leverage requirements that apply in addition to the risk-based capital requirements.  Banks and bank holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets(the “Leverage Ratio”) of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum Leverage Ratio of at least 4.0% for all other banks.  The FDIC and the FRB define Tier 1 capital forbanks in the same manner for both the Leverage Ratio and the Risk-based Capital Ratio.  However, the FRB defines Tier 1 capital for bank holding companies in a slightly different manner.  An institution may be required to maintain Tier 1capital of at least 4% or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors deemed material by regulatory authorities.  As of December 31, 2002, the Company and Bank both met all applicable capitalrequirements imposed by regulation.  

               ***Federal Deposit Insurance Corporation Improvement Act of1991 (“FDICIA”).***  There are five capital categories applicable to insured institutions, each with specific regulatory consequences.  If the appropriate Federal banking agency determines, after notice and an opportunityfor hearing, that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafeor unsound condition.  The Comptroller has issued regulations to implement these provisions.  Under these regulations, the categories are:

               a.          Well Capitalized -- The institution exceeds the required minimum level foreach relevant capital measure.  A well capitalized institution is one (i) having a Risk-based Capital Ratio of 10% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 6% or greater, (iii) having a Leverage Ratio of 5% or greater and(iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

               b.          Adequately Capitalized -- The institution meets the required minimum levelfor each relevant capital measure.  No capital distribution may be made that would result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) having a Risk-based Capital Ratio of 8% or greater,(ii) having a Tier 1 Risk-based Capital Ratio of 4% or greater and (iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

               c.          Undercapitalized -- The institution fails to meet the required minimumlevel for any relevant capital measure.  An undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 8% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 4% or (iii) having a Leverage Ratio of less than4%, or if the institution is rated a composite 1 under the CAMEL rating system, a Leverage Ratio of less than 3%.

               d.          Significantly Undercapitalized -- The institution is significantly belowthe required minimum level for any relevant capital measure.  A significantly undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 6% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 3% or (iii)having a Leverage Ratio of less than 3%.

               e.          Critically Undercapitalized -- The institution fails to meet a criticalcapital level set by the appropriate federal banking agency.  A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.

               An institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increasedregulatory oversight, and is increasingly restricted in the scope of its permissible activities.  Each company having control over an undercapitalized institution must provide a limited guarantee that the

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institution will comply with its capital restoration plan.  Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalizedinstitution may not grow.  An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to beconsistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action.  The appropriate Federal banking agency may take any action authorized for asignificantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency.  A critically undercapitalizedinstitution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities. 

               An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any otherperson having control of the institution if, after making the payment, the institution, would be undercapitalized.  In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance adistribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized.  Thus, if payment of such a management fee or the making of such would cause the Bank to becomeundercapitalized, it could not pay a management fee or dividend to the Company.

               As of December 31, 2002,both the Company and the Bank were considered “well capitalized.” 

               ***Deposit InsuranceAssessments.***  FDICIA also requires the FDIC to implement a risk-based assessment system in which the insurance premium relates to the probability that the deposit insurance fund will incur a loss and directs the FDIC to set semi-annualassessments in an amount necessary to increase the reserve ratio of the Bank Insurance Fund to at least 1.25% of insured deposits or a higher percentage as determined to be justified by the FDIC.

               The FDIC has promulgated implementing regulations that base an institution’s risk category partly upon whether the institution iswell capitalized (“1”), adequately capitalized (“2”) or less than adequately capitalized (“3”), as defined under the Prompt Corrective Action Regulations described above.  In addition, each insured depositoryinstitution is assigned to one of three “supervisory subgroups.”  Subgroup “A” institutions are financially sound institutions with few minor weaknesses, subgroup “B” institutions demonstrate weaknesses which, ifnot corrected, could result in significant deterioration, and subgroup “C” institutions are those as to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action istaken to correct the areas of weakness.  Based on the current capital levels the Company is categorized as a well-capitalized institution.

               ***Gramm-Leach-Bliley Act of 1999.***  The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) implemented major changesto the statutory framework for providing banking and other financial services in the United States.  The GLBA, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms and otherfinancial service providers.  A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incident or complimentary to financial activities.  The activitiesthat the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.

               To become eligible for these expanded activities, a bank holding company must qualify as a financial holdingcompany.  To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the CRA (discussedbelow).  In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company.  While the Company satisfies these requirements, the Company has not elected forvarious reasons to be treated as a financial holding company under the GLBA.

               We do not believe that theGLBA will have a material adverse impact on the Company’s or the Bank’s operations.  To the extent that it allows banks, securities firms and

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insurance firms to affiliate, the financial services industry may experience further consolidation.  The GLBA may have the result of increasing competition that we facefrom larger institutions and other companies offering financial products and services, many of which may have substantially greater financial resources.

               The GLBA and certain new regulations issued by federal banking agencies also provide new protections against the transfer and use byfinancial institutions of consumer nonpublic personal information.  A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and proceduresregarding the handling of customers’ nonpublic personal financial information.  These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated thirdparties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.  

               ***Community Reinvestment Act.***  The Bank is subject to the requirements of the Community Reinvestment Act (the“CRA”).  The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and soundoperation of those institutions.  A financial institution’s efforts in meeting community credit needs currently is evaluated as part of the examination process pursuant to twelve assessment factors.  These factors also are consideredin evaluating mergers, acquisitions and applications to open a branch or facility.

               ***USA PATRIOTAct.*** The USA PATRIOT Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and moneylaundering.  Among other provisions, the USA PATRIOT Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal governmentconcerning activities that may involve money laundering or terrorists’ activities.  Interim rules implementing the USA PATRIOT Act were issued effective March 4, 2002.  The USA PATRIOT Act is considered a significant banking law interms of information disclosure regarding certain customer transactions.  Although it does create a reporting obligation, the Bank does not expect the USA PATRIOT Act to materially affect its products, services or other businessactivities.

               ***Reporting Terrorist Activities.***** **The Federal Bureau of Investigation(“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC.  The Bank has been requested,and will be requested, to search its records for any relationships or transactions with persons on those lists.  If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

               The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury isresponsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our bankingregulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts.  If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze suchaccount, file a suspicious activity report and notify the FBI.  The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications.  The Bank actively checks high-risk OFAC areassuch as new accounts, wire transfers and customer files.  The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationalsand Blocked Persons.

**Employees**

               As of December 31, 2002, theCompany had 78 full-time employees.  The Company’s Management believes that its employee relations are good.

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**Executive Officers of the Registrant**

**Name (Age)**

  

**Principal Occupation During Past Five Years**

 

Robert H. Gilliam, Jr. (57)

 

President & ChiefExecutive Officer of Pinnacle Bankshares Corporation and The First National Bank of Altavista; Director, Pinnacle Bankshares Corporation

 

 

 

Carroll E. Shelton (52)

 

Senior Vice President of Pinnacle Bankshares Corporation and The First National Bank of Altavista; Director, Pinnacle Bankshares Corporation

 

 

 

Bryan M. Lemley (31)

 

Secretary, Treasurer and Chief Financial Officer of Pinnacle Bankshares Corporation and Vice President, Cashier and Chief Financial Officer of The First National Bank ofAltavista since June 2000; Internal Auditor of The First National Bank of Altavista from March through June 2000; Senior Auditor for One Valley Bancorp. from August 1994 through February 2000

**Item 2.****          Description of Property.**

               The Company’s main office and corporate headquarters, located at 622 Broad Street in downtown Altavista, Virginia, is owned andoccupied principally by the Bank.

               The Vista Office, located at 1301 N. Main Street in Altavista, Virginia,consists of a single-story building owned by the Bank.

               First National Mortgage, located at 17841 ForestRoad in Forest, Virginia, consists of a single-story building leased by the Bank.

               The Airport Office,located at 14580 Wards Road in Campbell County, Virginia, consists of a single-story building owned by the Bank.

               The Old Forest Road Office, located at 3309 Old Forest Road in Lynchburg, Virginia, consists of a single-story building owned by theBank.

               The Brookville Plaza Office, located at 7805 Timberlake Road in Lynchburg, Virginia, consists ofoffice space leased by the Bank in a local supermarket.

               All of these properties are in good operatingcondition and are adequate for the Company’s present and anticipated future needs.  The Company maintains comprehensive general liability and casualty loss insurance covering its properties and activities conducted in or about itsproperties.  The Company believes such insurance provides adequate protection for liabilities or losses that might arise out of the ownership and use of such properties.

**Item 3.****          Legal Proceedings.**

               Neither the Company nor any of its properties is involved in any pending legal proceedings, nor are any such proceedings threatened,other than nonmaterial proceedings arising in the ordinary course of the Company’s business.

**Item 4.****          Submission of Matters to a Vote of Security Holders.**

               No matters were submitted to a vote of security holders during the fourth quarter of the Company’s fiscal year ended December 31,2002.

**PART II**

**Item 5.****          Market for Common Equity and Related Stockholder Matters.**

               The information contained on page 45 of the 2002 Annual Report to Shareholders, under the caption, “Market for Common Equity andRelated Stockholder Matters”, is

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incorporated herein by reference.

**Item 6.****          Management’s Discussion and Analysis or Plan of Operation.**

               The information presented under the caption “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” on pages 6 through 20 of the 2002 Annual Report to Shareholders is incorporated herein by reference.

**Item 7.**          **Financial Statements.**

               The consolidated financial statements of the Company and its subsidiary and independent auditors’ report thereon, contained onpages 21 through 44 of the 2002 Annual Report to Shareholders, are incorporated herein by reference.

**Item 8.**          **Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure.**

                       None.

**PART III**

               Except as otherwiseindicated, information called for by the following items under Part III is contained in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders (“Proxy Statement”) mailed to Shareholders on or about March 7,2003.

**Item 9.****          Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the                      Exchange Act.**

               In response to this item, the Company hereby incorporates by reference the section entitled “Election of Directors,” at pages3 through 6 of the Proxy Statement. The Company hereby incorporates by reference the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” on page 9 of the Proxy Statement.  The information concerning theexecutive officers of the Company required by this item is included in Part I of this Form 10-KSB under the caption “Executive Officers of the Registrant.”

**Item 10.****       Executive Compensation.**

               Information on Executive Compensation is contained on pages 6 through 9 of the Proxy Statement and is incorporated herein byreference.  Information on compensation of directors is contained on page 5 of the Proxy Statement and is incorporated herein by reference.

**Item 11.****       Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.**

               Information on Security Ownership of Certain Beneficial Owners and Management is contained on pages 2 and 3 of theProxy Statement and is incorporated herein by reference.

               The following table sets forth information as ofDecember 31, 2002 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance.

Equity Compensation PlanInformation
**Plan Category**
  

**Number of securities to be issued upon exercise of outstanding options, warrants and rights****(a)**

  

**Weighted-average exercise price of outstanding options, warrants and rights****(b)**

  

**Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflectedin column (a))****(c)**

  

  

  

  

  
Equity compensation plans approved by shareholders 
 

45,000

 

$

11.92

 

 

5,000

(1)
Equity compensation plans not approved by shareholders 
 

0

 

$

0.00

 

 

0

 
 Total
 

 

45,000

 

$

11.92

 

 

5,000

 

 

(1)

Includes 5,000 shares available to be granted in the form of options, restricted stock or stock appreciation rights under the 1997 Incentive Stock Plan.

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Table of Contents
**Item 12.**       **Certain Relationships and Related Transactions.**

               Information on Certain Relationships and Related Transactions is contained on pages 5 and 6 of the Proxy Statement and is incorporatedherein by reference.

**Item 13.**       **Exhibits and Reports on Form 8-K.**

          (a)       Exhibits Index

**Exhibit Number**

  

**Description**

  

 

3.1

 

Amended and Restated Articles of Incorporation (incorporated by reference to Appendix 1 to registrant’s amended registration statement on Form S-4 (File No. 333-20399)filed on January 30, 1997)

 

 

 

 

 

3.2

 

Bylaws (incorporated by reference to Exhibit 3.2 to registrant’s registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)

 

 

 

 

 

10.1

 

1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrant’s registration statement on Form S-8 filed September 14, 1998)

 

 

 

 

 

10.2

 

Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 12, 1998 (filed herewith)

 

 

 

 

 

10.3

 

VBA Director’s Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (filed herewith)

 

 

 

 

 

13

 

2002 Annual Report to Shareholders

 

 

 

 

 

21

 

Subsidiaries

 

 

 

 

 

23

 

Consent of KPMG LLP

 

 

 

 

 

99.1

 

CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

 

 

 

 

 

(b)

 

Reports on Form 8-K

 

 

 

 

 

 

 

No reports on Form 8-K were filed during the fourth quarter of the Company’s fiscal year ended December 31, 2002.

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Table of Contents
**Item 14.       Controls and Procedures.**

               Pursuant to provisions of the Securities Exchange Act of 1934, Robert H. Gilliam, Jr., President and Chief Executive Officer (principalexecutive officer), and Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer (principal financial officer), of the Company are responsible for establishing and maintaining disclosure controls and procedures for the Company.  Theyhave designed such disclosure controls and procedures to ensure that material information relating to the Company, is made known to them by others within the Company, particularly during the periods when the Company’s quarterly and annualreports are being prepared.  They have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date (“Evaluation Date”) of this annual report on Form 10-KSB,and based on their evaluation of these controls and procedures, concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date.

               There were no significant changes in the Company’s internal controls or in other factors that could significantly affect theCompany’s internal controls subsequent to the date of their most recent evaluation.

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**SIGNATURES**

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

  
  
 

 
MARCH 11, 2003 
/s/ ROBERT H. GILLIAM, JR..

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

 
  
 

 
MARCH 11, 2003 
/s/ BRYAN M. LEMLEY

  
 
 
Date 
**Bryan M. Lemley, Secretary,  Treasurer and Chief Financial Officer**

 

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

**Title**

  

**Date**
 
 

/s/ A. WILLARD ARTHUR
 
Director

 

March 11, 2003
 
 

 

 

**A. Willard Arthur**
 
 

 

 

  
 
 

 

 

/s/ JAMES E. BURTON, IV
 
Director

 

March 11, 2003
 
 

 

 

**James E. Burton, IV**
 
 

 

 

  
 
 

 

 

/s/ JOHN P. ERB
 
Director

 

March 11, 2003
 
 

 

 

**John P. Erb**
 
 

 

 

  
 
 

 

 

/s/ ROBERT H. GILLIAM, JR.
 
President, Chief Executive 

 

March 11, 2003
 
Officer and Director

 

 

**Robert H. Gilliam, Jr.**
 
 

 

 

  
 
 

 

 

/s/ R.B. HANCOCK, JR.
 
Director

 

March 11, 2003
 
 

 

 

**R.B. Hancock, Jr.**
 
 

 

 

  
 
 

 

 

/s/ JAMES P. KENT, JR.
 
Director

 

March 11, 2003
 
 

 

 

**James P. Kent, Jr.**
 
 

 

 

  
 
 

 

 

/s/ WARREN G. LOWDER
 
Director

 

March 11, 2003
 
 

 

 

**Warren G. Lowder**
 
 

 

 

  
 
 

 

 

/s/ PERCY O. MOORE
 
Director

 

March 11, 2003
 
 

 

 

**Percy O. Moore**
 
 

 

 

  
 
 

 

 

/s/ WILLIAM F. OVERACRE
 
Director

 

March 11, 2003
 
 

 

 

**William F. Overacre**
 
 

 

 

  
 
 

 

 

/s/ HERMAN P. ROGERS, JR.
 
Director

 

March 11, 2003
 
 

 

 

**Herman P. Rogers, Jr.**
 
 

 

 

  
 
 

 

 

/s/ CARROLL E. SHELTON
 
Vice President and Director

 

March 11, 2003
 
 

 

 

**Carroll E. Shelton**
 
 

 

 

  
 
 

 

 

/s/ JOHN L. WALLER
 
Director

 

March 11, 2003
 
 

 

 

**John L. Waller**
 
 

 

 

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**CERTIFICATIONS**

I,  Robert H. Gilliam, Jr., certify that:

               1.          I have reviewed this annual report on Form 10-KSB of Pinnacle BanksharesCorporation;

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

               3.          Basedon my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

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

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

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

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

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

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

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

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

Date: March 24, 2003

 

 

/s/ ROBERT H. GILLIAM, JR.

 

 

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

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I,  Bryan M. Lemley, certify that:

               1.           I have reviewed this annual report on Form 10-KSB of Pinnacle BanksharesCorporation;

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

               3.          Basedon my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

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

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

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

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

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

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

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

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

Date: March 24, 2003

 

 

 

/s/ BRYAN M. LEMLEY

 

 

 

 

**Bryan M. Lemley, Secretary, Treasurer and Chief Financial Officer**

 

15