Pinnacle Bancshares (PCLB) 10QSB 2005 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark one)

þ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

o Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from                    to                    

Commission file number 1-12707

Pinnacle Bancshares, Inc.

(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware	72-1370314
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1811 Second Avenue, Jasper, Alabama 35502-1388
(Address of Principal Executive Offices)

(205) 221-4111
(Issuer’s Telephone Number, Including Area Code)

     Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ           Noo

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso           Noþ

     The number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2005: 1,543,578 shares of common stock.

     Transitional Small Business Disclosure Format (check one):

Yesþ           Noo

CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004.		3
Unaudited Condensed Consolidated Statements of Operations for the three and nine-months Ended September 30, 2005 and 2004.		4
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months Ended September 30, 2005 and 2004.		5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2005 and 2004.		6
Notes to Unaudited Condensed Consolidated Financial Statements.		7
Item 2. Management’s Discussion and Analysis or Plan of Operation		10
Item 3. Controls and Procedures		15
Part II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 6. Exhibits		16
Signatures		17
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO & CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30,			December 31,
	2005			2004
ASSETS:
Cash and cash equivalents	$	3,934,105		$	3,451,046
Interest-bearing deposits in other banks		1,740,797			484,958
Securities available-for-sale		89,979,368			89,025,401
FHLB stock		507,300			417,000
First National Bankers Bancshares, stock		525,000			0
Loans held for sale		1,737,477			1,206,322
Loans receivable, net of allowances for loan losses of $1,296,700 and $1,167,263 respectively		105,780,135			99,599,999
Real estate owned, net		969,041			598,642
Premises and equipment		5,627,771			5,723,120
Goodwill		306,488			306,488
Bank owned life insurance		5,021,557			4,797,758
Accrued interest receivable		1,274,311			1,254,307
Other assets		1,560,794			967,308
Total assets	$	218,964,144		$	207,832,349
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits	$	191,384,187		$	179,965,635
Subordinated debt		3,093,000			3,093,000
Borrowed funds		2,375,000			2,580,000
Official checks outstanding		1,125,544			1,103,521
Accrued interest payable		678,132			498,656
Other liabilities		858,418			677,107
Total liabilities		199,514,281			187,917,919
STOCKHOLDERS’ EQUITY:
Common stock, par value $.01 per share; 2,400,000 authorized; 1,827,813 and 1,821,780 issued at September 30, 2005 and December 31, 2004, respectively; 1,543,578 and 1,553,778 outstanding at September 30, 2005 and December 31, 2004, respectively		18,278			18,218
Additional paid-in capital		8,479,921			8,418,897
Treasury shares, at cost (284,235 shares and 268,002 shares at September 30, 2005 and December 31, 2004, respectively)		(3,453,228	)		(3,220,730	)
Retained earnings		16,253,441			15,571,155
Accumulated other comprehensive loss, net of tax		(1,848,549	)		(873,110	)
Total stockholders’ equity		19,449,863			19,914,430
Total liabilities and stockholders’ equity	$	218,964,144		$	207,832,349

See accompanying notes to these condensed consolidated financial statements.

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PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months ended					Nine Months Ended
	September 30,					September 30,
	2005		2004			2005			2004
INTEREST REVENUE:
Interest on loans	$	2,019,364	$	1,809,241		$	5,624,679		$	5,512,816
Interest and dividends on securities		936,482		845,160			2,785,810			2,436,099
Other interest		14,665		8,749			64,247			24,188
		2,970,511		2,663,150			8,474,736			7,973,103
INTEREST EXPENSE:
Interest on deposits		1,134,499		801,150			3,068,598			2,357,928
Interest on borrowed funds		51,473		40,078			141,916			104,434
Interest on subordinated debentures		54,293		35,674			126,646			134,822
		1,240,265		876,902			3,337,160			2,597,184
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		1,730,246		1,786,248			5,137,576			5,375,919
PROVISION FOR LOAN LOSSES		137,500		147,000			440,500			441,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,592,746		1,639,248			4,697,076			4,934,919
NONINTEREST INCOME:
Fees and service charges on deposit accounts		234,388		231,363			650,637			720,604
Service fee income, net		36,588		41,370			114,210			123,615
Fees and charges on loans		59,806		41,857			128,219			156,893
Bank owned life insurance		74,600		70,714			223,800			212,142
Net gain (loss) on sale or write-down of:
Loans held for sale		130,605		105,487			337,752			432,350
Real estate owned		24,935		2,703			26,559			(14,703	)
Securities available-for-sale		0		(295,537	)		(3,750	)		(373,841	)
		560,922		197,957			1,477,427			1,257,060
NONINTEREST EXPENSE:
Compensation and benefits		817,305		833,455			2,504,391			2,554,261
Occupancy		274,990		267,185			820,351			781,117
Marketing and professional		117,865		55,661			298,968			173,052
Other		261,227		226,613			805,233			760,474
		1,471,387		1,382,914			4,428,943			4,268,904
INCOME BEFORE INCOME TAXES		682,281		454,291			1,745,560			1,923,075
INCOME TAX EXPENSE		220,773		144,933			551,228			641,917
NET INCOME	$	461,508	$	309,358		$	1,194,332		$	1,281,158
Basic earnings per share	$	0.30	$	0.20		$	0.77		$	0.82
Diluted earnings per share	$	0.29	$	0.20		$	0.76		$	0.80
Cash dividends per share	$	0.11	$	0.11		$	0.33		$	0.32
Weighted average basic shares outstanding		1,551,361		1,549,678			1,549,355			1,560,079
Weighted average diluted shares outstanding		1,579,320		1,585,223			1,579,019			1,599,711

See accompanying notes to these condensed consolidated financial statements.

4

PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

													Accumulated
					Additional								Other			Total
	Common Stock				Paid-in		Treasury			Retained			Comprehensive			Stockholders’
	Shares		Amount		Capital		Stock			Earnings			(Loss) Income			Equity
BALANCE, December 31, 2003		1,800,813	$	18,008	$	8,219,941	$	(2,743,245	)	$	14,508,277		$	(571,785	)	$	19,431,196
Comprehensive income:
Net income		0		0		0		0			1,281,158			0			1,281,158
Change in fair value of securities available- for-sale, net of tax		0		0		0		0			0			112,553			112,553
Comprehensive income																	1,393,711
Exercise of stock options		15,967		160		154,943		0			0			0			155,103
Repurchase of common stock (28,900 shares at cost)		0		0		0		(463,917	)		0			0			(463,917	)
Cash dividends declared ($.32 per share)		0		0		0		0			(498,837	)		0			(498,837	)
BALANCE, September 30, 2004		1,816,780	$	18,168	$	8,374,884	$	(3,207,162	)	$	15,290,598		$	(459,232	)	$	20,017,256
BALANCE, December 31, 2004		1,821,780	$	18,218	$	8,418,897	$	(3,220,730	)	$	15,571,155		$	(873,110	)	$	19,914,430
Comprehensive income:									��
Net income		0		0		0		0			1,194,332			0			1,194,332
Change in fair value of securities available- for-sale, net of tax		0		0		0		0			0			(975,439	)		(975,439	)
Comprehensive income																	218,893
Exercise of stock options		6,033		60		61,024		0			0			0			61,084
Repurchase of common stock (16,233 shares at cost)		0		0		0		(232,498	)		0			0			(232,498	)
Cash dividends declared ($.33 per share)		0 0		0		0		0			(512,046	)		0			(512,046	)
BALANCE, September 30, 2005		1,827,813	$	18,278	$	8,479,921	$	(3,453,228	)	$	16,253,441		$	(1,848,549	)	$	19,449,863

See accompanying notes to these condensed consolidated financial statements.

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PINNACLE BANCSHARES, INC,

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,194,332		$	1,281,158
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		369,339			370,129
Provision for loan losses		440,500			441,000
Accretion, net		(111,302	)		(384,879	)
Increase in cash surrender value of Bank owned life insurance		(223,800	)		(212,142	)
Net (gain) loss on sale or write down of:
Loans held for sale		(337,752	)		(432,350	)
Securities available-for-sale		3,750			373,841
Real estate owned and other assets		(26,559	)		14,703
Proceeds from sale of loans		26,059,646			31,356,725
Loans originated for sale		(26,253,049	)		(30,370,667	)
(Increase) decrease in accrued interest receivable		(20,004	)		183,405
Decrease in other assets		5,868			194,555
Increase in accrued interest payable		179,476			70,709
Increase (decrease) in other liabilities		181,311			(34,907	)
Net cash provided by operating activities		1,461,756			2,851,280
CASH FLOWS FROM INVESTING ACTIVITIES:
Net loan (originations) repayments		(7,117,974	)		2,419,536
Net change in interest bearing deposits in other banks		(1,255,839	)		(1,948,399	)
Purchase of securities available-for-sale		(13,191,025	)		(63,731,524	)
Proceeds from the sale of securities available-for-sale		4,000,000			46,689,977
Proceeds from maturing, called and payments received on securities available-for-sale		6,558,289			14,937,787
Purchase of Federal Home Loan Bank stock		(312,300	)		0
Proceeds from sale of Federal Home Loan Bank stock		222,000			174,900
Purchase of First National Bankers Bancshares, Inc. stock		(525,000	)		0
Purchase of premises and equipment		(273,990	)		(391,595	)
Proceeds from sales of real estate owned		365,027			980,072
Net cash used in investing activities		(11,530,812	)		(869,246	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in passbook, NOW and money market deposit accounts		3,808,066			1,849,002
Proceeds from sales of time deposits		21,978,814			14,279,725
Payments on maturing time deposits		(14,368,328	)		(15,902,192	)
Decrease in borrowed funds		(205,000	)		(885,000	)
Increase (decrease) in official checks outstanding		22,023			(843,015	)
Proceeds from the exercise of stock options		61,084			155,103
Repurchase of common stock		(232,498	)		(463,917	)
Payments of cash dividends		(512,046	)		(498,837	)
Net cash provided by financing activities		10,552,115			2,309,131
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS		483,059			(327,097	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,451,046			3,519,377
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,934,105		$	3,192,280
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits, borrowed funds, and subordinated debentures	$	3,157,684		$	2,526,475
Cash payments for income taxes		580,013			640,000
Real estate acquired through foreclosure		708,867			424,304

See accompanying notes to these condensed consolidated financial statements.

6

PINNACLE BANCSHARES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of Pinnacle Bancshares, Inc. (the “Company”) and Pinnacle Bank (the “Bank”), the Company’s wholly owned subsidiary. All significant intercompany transactions and accounts have been eliminated in consolidation.

In the opinion of management, all adjustments (none of which are other than normal recurring accruals) necessary for a fair presentation of the results of such interim periods have been included. The results of operations for the three and nine-month periods ended September 30, 2005, are not necessarily indicative of the results of operations which may be expected for the entire year.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004. The accounting policies followed by the Company are set forth in the summary of Significant Accounting Policies in the Company’s audited consolidated financial statements.

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2.EARNINGS PER SHARE:

The following table represents the earnings per share calculations for the three and nine-month periods ended September 30, 2005 and 2004:

					Per
					Share
For The Three Months Ended	Net Income		Shares		Amount
September 30, 2005
Basic earnings per share	$	461,508		1,551,361	$	0.30
Dilutive securities				27,959
Diluted earnings per share	$	461,508		1,579,320	$	0.29

					Per
					Share
For The Three Months Ended	Net Income		Shares		Amount
September 30, 2004
Basic earnings per share	$	309,358		1,549,678	$	0.20
Dilutive securities				35,545
Diluted earnings per share	$	309,358		1,585,223	$	0.20

					Per
					Share
For The Nine Months Ended	Net Income		Shares		Amount
September 30, 2005
Basic earnings per share	$	1,194,332		1,549,355	$	0.77
Dilutive securities				29,664
Diluted earnings per share	$	1,194,332		1,579,019	$	0.76

					Per
					Share
For The Nine Months Ended	Net Income		Shares		Amount
September 30, 2004
Basic earnings per share	$	1,281,158		1,560,079	$	0.82
Dilutive securities				39,632
Diluted earnings per share	$	1,281,158		1,599,711	$	0.80

3.STOCK BASED COMPENSATION:

In accordance with the provision of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, the Company has elected to continue to record compensation cost under APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly does not recognize compensation cost due to the fact that all options granted were priced at the fair market value of the underlying stock on the date of grant. Had compensation cost been determined, consistent with SFAS No. 123, the impact on the Company’s net income would not have been material.

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4. RECENT ACCOUNTING PRONOUNCEMENTS:

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

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

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

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

9

Item 2. Management’s Discussion and Analysis or Plan of Operation

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

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

Critical Accounting Policies:The accounting principles followed by the Company and the methods of applying these principles conform with United States generally accepted accounting principles and with general practices within the banking industry. The Company’s critical accounting policies relate to the allowance for loan losses and real estate owned. These policies require the use of estimates, assumptions and judgments and are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. These policies require the use of subjective and complex estimates, assumptions and judgments that are important to the portrayal of the Company’s financial condition and results.

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

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

Changes in the allowance can result from changes in economic events, changes in the creditworthiness of the borrowers, or changes in collateral values. The effect of these changes is reflected when known. Though management believes the allowance for loan losses to be adequate as of September 30, 2005, ultimate losses may vary from estimations.

Real estate owned acquired through foreclosure is carried at the lower of cost or fair value less expected selling costs. Any excess of the recorded investment over fair value, less estimated costs of disposition of the property, is charged to the allowance for loan losses at the time of foreclosure. Subsequent to foreclosure, real estate owned is evaluated on an individual basis for changes in fair value. Declines in fair value of the asset, less costs of disposition below its carrying amount, require an increase in the valuation allowance account. Future increases in fair value of

10

the asset, less cost of disposition, may cause a reduction in the valuation allowance account, but not below zero. Increases or decreases in the valuation allowance account are charged or credited to income. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed.

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

Comparison of Financial Condition as of December 31, 2004 and September 30, 2005:Total assets were $219.0 million at September 30, 2005, compared to $207.8 million at December 31, 2004. Net loans receivable increased $6.2 million, to $105.8 million at September 30, 2005, compared to $99.6 million at December 31, 2004. This increase was due primarily to an increase in real estate loans of approximately $3.8 million and an increase in commercial loans of approximately $2.1 million. Total securities available-for-sale were $90.0 million at September 30, 2005, compared to $89.0 million at December 31, 2004.

At September 30, 2005, the investment portfolio of $90.0 million consisted primarily of U. S. agency securities and mortgage-backed securities. The entire investment portfolio is classified as “available-for-sale,” which is carried at fair value with the unrealized gains/losses reflected directly in stockholders’ equity, net of taxes. During the nine months ended September 30, 2005, the Bank sold $4.0 million in agency securities. Net losses of $3,750 were realized on these sales. The proceeds from these sales of securities available-for-sale, combined with the proceeds from loan principal repayments and proceeds from sales of deposits, were used by the Bank to purchase $13.2 million in agency securities with an average yield of 4.34%.

Total deposits increased $11.4 million, to $191.4 million at September 30, 2005, from $180.0 million at December 31, 2004. This increase was primarily due to an increase in time deposits of $7.6 million and an increase in NOW and money market deposit accounts of $3.8 million. This increase was due to more competitive rates.

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

During the nine-months ended September 30, 2005, the Bank periodically borrowed funds on a short-term basis from the Federal Home Loan Bank of Atlanta (“FHLB”). The proceeds from FHLB borrowings along with proceeds from, loan repayments were used to fund lending activities. The maximum amount outstanding during the nine-months ended September 30, 2005 was $7.3 million and the average balance outstanding was $3.2 million.

Stockholders’ equity decreased from $19.9 million at December 31, 2004, to $19.4 million at September 30, 2005. This decrease was primarily attributable to a $1.0 million decrease in the fair value of the Company’s available-for-sale securities portfolio, which is marked to fair value. The interest rate risk in the Company’s portfolio is monitored closely. The Company is contemplating strategies to increase its net interest margin, including sale of certain available-for-sale securities.

Results of Operations-Comparison of the Three and Nine-Months Ended September 30, 2005 and 2004: For the three-months ended September 30, 2005, net income was $462,000 compared with net income of $309,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005, net income was $1,194,000, compared with net income of $1,281,000 for the nine months ended September 30, 2004. The decrease in net income was attributable in part to a decrease in the Company’s net interest margin due to increases in market interest rates. As market rates increased during the nine months ended September 30, 2005, the Company’s cost of funds increased more rapidly than rates on investments. As a result, the Company’s net interest margin was 3.42% and 3.45% for the three and nine months ended September, 30, 2005, respectively, compared to 3.71% and 3.70%

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for the for the three and nine months ended September 30, 2004, respectively. If market rates continue to increase, the Company expects that the margin will continue to decline.

The yield on interest-earning assets increased from approximately 5.53% and 5.48% in the three and nine month periods ended September 30, 2004, respectively, to approximately 5.87% and 5.69% in the three and nine month periods ended September 30, 2005, respectively. These increases were due to increases in market interest rates. The cost of funds increased from approximately 1.86% at September 30. 2004, to approximately 2.58% at September 30, 2005, due to increases in market rates.

Net interest income before the provision for loan losses for the three months ended September 30, 2005, was $1,730,000, compared with $1,786,000 in the same period last year. Net interest income before the provision for loan losses for the nine months ended September 30, 2005, was $5,138,000 compared with $5,376,000 in the same period last year. The decreases were primarily due to increases in interest expense on deposits of $333,000 and $711,000 for the three and nine months ended September 30, 2005, respectively. These increases were offset by increases in interest revenue of $307,000 and $502,000 for the three and nine months ended September 30, 2005, respectively, compared with the same periods last year.

Provisions for loan losses are made to maintain the allowance for loan losses at adequate levels. The allowance for loan losses reflects management’s estimates, which take into account historical experience, the amount of non-performing loans, collateral values and general economic conditions. The provision for loan losses was $137,500 and $440,000 for the three and nine months ended September 30, 2005, respectively, compared to $147,000 and $441,000 for the three and nine months ended September 30, 2004, respectively. It is management’s opinion that the allowance for loan losses at September 30, 2005 was adequate to absorb losses related to the portfolio of loans. Management will continue to analyze the Bank’s exposure to losses. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the initial determinations.

Net interest income after the provision for loan losses for the three months ended September 30, 2005, was $1,593,000, compared with $1,639,000 in the same period last year. Net interest income after the provision for loan losses for the nine months ended September 30, 2005, was $4,697,000, compared with $4,935,000 in the same period last year.

Non-interest income, which includes fees and service charges, income from real estate operations, the sale of loans, bank owned life insurance and other income, increased $363,000, or 183.4%, in the three-month period ended September 30, 2005, as compared to the three-month period ended September 30, 2004. This increase was due primarily to a decrease in the loss on sale of securities available-for sale of $296,000, an increase in the gain on sale of loans held for sale and real estate owned of $47,000 and an increase in all other non-interest income of $20,000. Non-interest income increased $220,000, or 17.5%, in the nine-month period ended September 30, 2005, as compared to the nine-month period ended September 30, 2004. This increase was due primarily to a decrease in the loss on sale of securities available-for sale of $370,000, an increase in the gain on the sale of real estate owned of $41,000, and increase in all other non-interest income of $3,000. These increases were offset by a decrease in the net gain on sale of loans held for sale of $95,000 due to a decrease in originations of mortgage loans held for sale, as well as a decrease in fees and service charges on loan and deposit accounts of $99,000, due to a decline in insufficient funds fees, and a decrease in fees and service charges on loans.

Non-interest expense increased $88,000 in the three-month period ended September 30, 2005, as compared to the corresponding prior year period. This was primarily a result of an increase in marketing and professional expense of $62,000 and an increase in all other non-interest expense of $26,000. Non-interest expense increased $160,000 in the nine month period ended September 30. 2005, as compared to the corresponding prior year period. This was primarily a result of an increase in marketing and professional expense of $126,000, an increase in occupancy expense of $39,000. These increases were offset by a decrease in all other non-interest expense of $5,000.

Asset/Liability Management: The modeling techniques used by the Company simulate net interest income and impact on fair values under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet. Under a scenario simulating a hypothetical 50, 100 and 200 basis

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point rate increase applied to all interest- earning assets and interest-bearing liabilities, the Company would expect net losses in fair value of the equity in the underlying instruments of approximately ($502,000), ($1,002,000) and ($2,015,000) respectively. Under a scenario simulating a hypothetical 50, 100 and 200 basis point rate decrease, the Company would expect net changes in projected net income for the first year of approximately $818,000, $1,415,000 and $985,000, respectively. This hypothetical is not a precise indicator of future events. Instead, it is a reasonable estimate of the results anticipated if the assumptions used in the modeling techniques were to occur.

The rate environment is a function of the monetary policy of the Federal Reserve Board (“FRB”). The principal tools of the FRB for implementing monetary policy are open market operations, or the purchases and sales of U.S. Treasury and federal agency securities. The FRB’s objective for open market operations has varied over the years, but the focus has gradually shifted toward attaining a specified level of the federal funds rate to achieve the long-run goals of price stability and sustainable economic growth. The federal funds rate is the basis for overnight funding and drives the short end of the yield curve. Longer maturities are influenced by FRB purchases and sales and also expectations of monetary policy going forward. The FRB began to increase the targeted level for the federal funds rate in June 2004 after reaching an all-time low of 1.00% in mid-2003. The targeted fed funds rate increased at each Federal Open Market Committee meeting by 25 basis points and ended the third quarter of 2005 at 3.75%. Each FRB rate increase becomes more challenging to offset. The ability to delay deposit rate increases and less aggressive repricing of the maturing certificate of deposit portfolio has allowed the Company to offset the negative impact of recent FRB rate movements. Although management believes that the Company’s operating results are not significantly affected by changes in interest rates over an extended period of time, the continued flattening of the yield curve is expected to exert downward pressure on the net interest margin and net interest income. The Company is most impacted at this time by the increase in short term interest rates which continues to put upward pressure on transaction deposit rates and short term borrowings from the Federal Home Loan Bank (FHLB”) of Atlanta. Under traditional measures of interest rate gap positions, the Company is moderately liability sensitive in the short-term. Changes in interest rates can affect loans and other interest-earning assets, including the Bank’s investment portfolio. A significant change in interest rates could have a negative impact on the Company’s operating income and portfolio market value.

Stock Repurchases:The following table details purchases under the Company’s stock repurchase programs during the three and nine-months ended September 30, 2005.

					Total Number of		Maximum Number
	Total Number				Shares Purchased		of Shares that May
	of Shares		Average Price		As Part of Publicly		Yet Be Purchased
Period	Purchased		Paid per Share		Announced Programs		Under the Programs
January 1-31, 2005		3,000	$	15.47		3,000		79,569
February 1-28, 2005		0		0		0		0
March 1-31, 2005		1,000	$	15.19		1,000		78,569
April 1-30, 2005		0		0		0		0
May 1-31, 2005		2,400	$	14.27		1,300		76,169
June 1-30, 2005		4,933	$	14.31		100		71,236
July 1-31, 2005		0		0		0		0
August 1-31, 2005		4,900	$	13.60		4,900		66,336
September 1-30, 2005		0		0		0		0
Total		16,233	$	14.32		10,300		66,636

On April 25, 2003, the Company announced a stock repurchase program to acquire up to 80,000 shares of common stock. On May 23, 2005 the Company completed this stock repurchase plan by repurchasing 80,000 shares at an average price of $14.74 per share. On June 10, 2004, the Company announced a supplemental stock repurchase program to acquire an additional 5% of the Company’s outstanding shares outstanding upon completion of its current repurchase program, or 66,336 shares. As of September 30, 2005, the Company had repurchased 10,833 shares at an average price of $13.93 per share under the supplemental stock repurchase program. The repurchase program is dependent upon market conditions and other requirements, and there is no guarantee as to the exact number of shares to be repurchased by the Company.

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Capital Resources:Historically, funds provided by operations, mortgage loan principal repayments, deposits and short-term borrowings have been the Bank’s principal sources of funds. In addition, the Bank has the ability to obtain funds through the sale of mortgage loans, through borrowings from the FHLB of Atlanta and other borrowing sources. At September 30, 2005, the Bank’s total loan commitments, including construction loans in process, unused lines of credit and letter of credits, were approximately $30.5 million. Management believes that the Bank’s liquidity and other sources of funds are sufficient to fund all commitments outstanding and other cash needs. The Company and the Bank are required to maintain certain levels of regulatory capital. At September 30, 2005, the Company and the Bank exceeded all regulatory capital requirements.

Asset Quality Ratios:

	September 30,			December 31,
	2005			2004
Nonperforming loans as a percent of total loans		0.13	%		0.72	%
Nonperforming assets as a percent of total assets		0.51	%		0.64	%
Allowance for loan losses as a percent of total loans		1.21	%		1.16	%
Allowance for loan losses as a percent of nonperforming loans		946.72	%		160.74	%

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Item 3. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2005. Based upon that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in alerting him in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

In addition, the Company reviewed its internal controls under the supervision of the audit committee. There has been no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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

Pursuant to Section 404 of the Sarbanes-Oxley Act, the Company will be required under rules adopted by the SEC to include in its annual reports a report by management on the Company’s internal control over financial reporting and an accompanying auditor’s report. In March 2005, the SEC extended the Section 404 compliance date for the Company and other non-accelerated filers. Under the extension, the Company must begin to comply with these requirements for its fiscal year ending December 31, 2007. The Company expects that Section 404 compliance will significantly increase its regulatory compliance costs.

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PART II – OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information regarding the Company’s purchases of equity securities is described on pages 12 and 13 under Item 2. “Management’s Discussion and Analysis or Plan of Operation.”

ITEM 6. Exhibits

Exhibit 31.1- Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1- Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	PINNACLE BANCSHARES, INC
DATE: November 14, 2005	BY:	/s/ Robert B. Nolen Jr.
		Robert B. Nolen, Jr.
		President and Chief
		Executive Officer
		(Principal Executive Officer and
		Principal Financial Officer)
		/s/ Marie Guthrie
		Marie Guthrie
		Treasurer
		(Principal Accounting Officer)

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