Pinnacle Bancshares (PCLB) 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES
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 June 30, 2007

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	(I.R.S. Employer
Incorporation or Organization)	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.

Yesx      Noo

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

Yeso      Nox

      The number of shares outstanding of each of the issuer’s classes of common equity, as of August 13, 2007: 1,463,259 shares of common stock.

     Transitional Small Business Disclosure Format (check one):

Yeso      Nox

CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition at June 30, 2007 and December 31, 2006.		3
Unaudited Condensed Consolidated Statements of Operations for the three and six-months ended June 30, 2007 and 2006.		4
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six-months ended June 30, 2007 and 2006.		5
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006.		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		14
Part II OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities		15
Item 4. Submission of Matters to a Vote of Security Holders		15
Item 6. Exhibits		15
Signatures		16
Ex-31.1 Section 302 Certification of the CEO and CFO
Ex-32.1 Section 906 Certification of the CEO and CFO(

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30,			December 31,
	2007			2006
ASSETS:
Cash and cash equivalents	$	4,543,129		$	4,206,018
Interest-bearing deposits in other banks		7,933,499			8,599,278
Securities available-for-sale		93,689,967			87,852,495
FHLB stock		509,400			532,100
First National Bankers Bancshares stock		525,000			525,000
Loans held for sale		664,279			975,951
Loans receivable, net of allowances for loan losses of $1,411,310 and $1,382,190 respectively		119,688,171			113,489,632
Real estate owned, net		150,217			208,903
Premises and equipment, net		6,934,227			7,075,617
Goodwill		306,488			306,488
Bank owned life insurance		5,581,813			5,413,237
Accrued interest receivable		1,521,157			1,535,638
Other assets		1,586,812			1,513,250
Total assets	$	243,634,159		$	232,233,607
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits	$	217,573,293		$	206,569,999
Subordinated debt		3,093,000			3,093,000
Official checks outstanding		1,236,683			1,005,512
Accrued interest payable		1,430,460			1,262,887
Other liabilities		759,300			896,672
Total liabilities		224,092,736			212,828,070
STOCKHOLDERS’ EQUITY:
Common stock, par value $.01 per share; 2,400,000 authorized; 1,872,313 issued at June 30, 2007 and December 31, 2006, respectively; 1,464,538 outstanding at June 30, 2007 and December 31, 2006, respectively		18,723			18,723
Additional paid-in capital		8,923,223			8,923,223
Treasury shares, at cost (407,775 at June 30, 2007 and December 31, 2006, respectively)		(5,285,739	)		(5,285,739	)
Retained earnings		17,434,449			17,103,780
Accumulated other comprehensive loss, net of tax		(1,549,233	)		(1,354,450	)
Total stockholders’ equity		19,541,423			19,405,537
Total liabilities and stockholders’ equity	$	243,634,159		$	232,233,607

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					Six Months Ended
	June 30,					June 30,
	2007		2006			2007			2006
INTEREST REVENUE:
Interest on loans	$	2,450,901	$	2,138,658		$	4,852,481		$	4,223,802
Interest and dividends on securities		1,053,029		829,246			2,064,705			1,668,672
Other interest		147,167		264,432			248,754			465,813
		3,651,097		3,232,336			7,165,940			6,358,287
INTEREST EXPENSE:
Interest on deposits		1,976,585		1,565,558			3,849,937			2,972,821
Interest on subordinated debentures		64,655		62,408			130,007			120,515
Interest on borrowed funds		0		0			0			14,694
		2,041,240		1,627,966			3,979,944			3,108,030
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		1,609,857		1,604,370			3,185,997			3,250,257
PROVISION FOR LOAN LOSSES		25,000		112,500			100,000			247,500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,584,857		1,491,870			3,085,996			3,002,757
NONINTEREST INCOME:
Fees and service charges on deposit accounts		228,892		214,392			426,945			421,938
Service fee income, net		29,781		33,391			60,735			67,683
Fees and charges on loans		19,696		32,562			50,124			73,205
Bank owned life insurance		84,288		79,270			168,576			158,540
Net gain (loss) on sale or write-down of:
Loans held for sale		114,637		140,632			167,745			207,061
Real estate owned		0		(11,492	)		(16,888	)		(11,492	)
Securities available-for-sale		0		60			0			60
Premises and equipment		0		14,737			0			14,737
		477,294		503,552			857,237			931,732
NONINTEREST EXPENSE:
Compensation and benefits		842,136		842,037			1,713,616			1,707,660
Occupancy		274,554		271,000			558,261			554,360
Marketing and professional		109,208		90,158			221,303			181,817
Other		240,023		241,314			507,251			521,489
		1,465,921		1,444,509			3,000,431			2,965,326
INCOME BEFORE INCOME TAXES		596,230		550,913			942,802			969,163
INCOME TAX EXPENSE		190,856		175,180			289,935			301,772
NET INCOME	$	405,374	$	375,733		$	652,867		$	667,391
Basic earnings per share	$	0.28	$	0.25		$	0.45		$	0.44
Diluted earnings per share	$	0.28	$	0.25		$	0.44		$	0.43
Cash dividends per share	$	0.11	$	0.11		$	0.22		$	0.22
Weighted average basic shares outstanding		1,464,538		1,497,178			1,464,538			1,519,056
Weighted average diluted shares outstanding		1,470,043		1,525,258			1,470,333			1,547,101

See accompanying notes to these condensed consolidated financial statements.

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PINNACLE BANCSHARES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

													Accumulated
					Additional								Other			Total
	Common Stock				Paid-in		Treasury			Retained			Comprehensive			Stockholders’
	Shares		Amount		Capital		Stock			Earnings			(Loss) Income			Equity
BALANCE, December 31, 2005		1,827,813	$	18,278	$	8,479,921	$	(3,488,724	)	$	16,405,863		$	(2,005,364	)	$	19,409,974
Comprehensive income:
Net income		0		0		0		0			667,391			0			667,391
Change in fair value of securities available- for-sale, net of tax		0		0		0		0			0			(976,346	)		(976,346	)
Comprehensive loss																	(308,955	)
Repurchase of common stock (63,100 shares at cost)		0		0		0		(937,657	)		0			0			(937,657	)
Cash dividends declared ($.22 per share)		0		0		0		0			(332,117	)		0			(332,117	)
BALANCE, June 30, 2006		1,827,813	$	18,278	$	8,479,921	$	(4,426,381	)	$	16,741,137		$	(2,981,710	)	$	17,831,245
BALANCE, December 31, 2006		1,872,313	$	18,723	$	8,923,223	$	(5,285,739	)	$	17,103,780		$	(1,354,450	)	$	19,405,537
Comprehensive loss:
Net income		0		0		0		0			652,867			0			652,867
Change in fair value of securities available- for-sale, net of tax		0		0		0		0			0			(194,783	)		(194,783	)
Comprehensive income																	458,084
Cash dividends declared ($.22 per share)		0		0		0		0			(322,198	)		0			(322,198	)
BALANCE, June 30, 2007		1,872,313	$	18,723	$	8,923,223	$	(5,285,739	)	$	17,434,449		$	(1,549,233	)	$	19,541,423

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 Six Months Ended
	June 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	652,867		$	667,391
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		248,065			249,941
Provision for loan losses		100,000			247,500
Accretion, net		(29,902	)		(104,777	)
Increase in cash surrender value of Bank owned life insurance		(168,576	)		(158,540	)
Net (gain) loss on sale or write-down of:
Loans held for sale		(167,745	)		(207,061	)
Securities available-for-sale		0			(60	)
Real estate owned		16,888			11,492
Premises and equipment		0			(14,737	)
Proceeds from sale of loans		14,269,421			12,254,246
Loans originated for sale		(13,790,004	)		(14,366,681	)
Decrease in accrued interest receivable		14,481			25,991
Decrease in other assets		46,823			55,197
Increase in accrued interest payable		167,573			426,400
Decrease in other liabilities		(137,372	)		(308,185	)
Net cash provided by (used in) operating activities		1,222,519			(1,221,883	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net loan originations		(6,350,562	)		(3,505,818	)
Net change in interest bearing deposits in other banks		665,779			(3,551,014	)
Purchase of securities available-for-sale		(10,164,010	)		0
Proceeds from maturing, called and payments received on securities available-for-sale		3,935,201			4,159,006
Proceeds from sale of Federal Home Loan Bank stock		22,700			0
Purchase of Federal Home Loan Bank stock		0			(24,800	)
Purchase of premises and equipment		(106,675	)		(935,665	)
Proceeds from sale of premises and equipment		0			16,936
Proceeds from sales of real estate owned		199,892			155,716
Net cash used in investing activities		(11,797,675	)		(3,685,639	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in passbook, NOW and money market deposit accounts		5,983,583			2,013,641
Proceeds from sales of time deposits		18,657,958			17,387,534
Payments on maturing time deposits		(13,638,247	)		(11,532,609	)
Decrease in borrowed funds		0			(2,375,000	)
Increase in official checks outstanding		231,171			654,508
Repurchase of common stock		0			(937,657	)
Payments of cash dividends		(322,198	)		(332,117)	)
Net cash provided by financing activities		10,912,267			4,878,300
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		337,111			(29,222	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,206,018			3,784,867
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,543,129		$	3,755,645
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits, borrowed funds, and subordinated debentures	$	3,812,371		$	2,681,680
Cash payments for income taxes		340,000			476,000
Real estate acquired through foreclosure		158,094			30,353

See accompanying notes to these condensed consolidated financial statements.

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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 (all of which are 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 six month periods ended June 30, 2007, 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, 2006. 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 six-month periods ended June 30, 2007 and 2006:

					Per
					Share
For The Three Months Ended	Net Income		Shares		Amount
June 30, 2007
Basic earnings per share	$	405,374		1,464,538	$	0.28
Dilutive securities				5,505
Diluted earnings per share	$	405,374		1,470,043	$	0.28

						Per
						Share
For The Three Months Ended	Net Income		Shares		��	Amount
June 30, 2006
Basic earnings per share	$	375,733		1,497,178		$	0.25
Dilutive securities				28,080
Diluted earnings per share	$	375,733		1,525,258		$	025

					Per
					Share
For The Six Months Ended	Net Income		Shares		Amount
June 30, 2007
Basic earnings per share	$	652,867		1,464,538	$	0.45
Dilutive securities				5,795
Diluted earnings per share	$	652,867		1,470,333	$	0.44

					Per
					Share
For The Six Months Ended	Net Income		Shares		Amount
June 30, 2006
Basic earnings per share	$	667,391		1,519,056	$	0.44
Dilutive securities				28,045
Diluted earnings per share	$	667,391		1,547,101	$	0.43

3.RECENT ACCOUNTING PRONOUNCEMENTS:

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS No. 155”), “Accounting for Certain Hybrid Financial Instruments — an Amendment of SFAS No. 133 and 140”. This Statement permits fair value remeaurements for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the fiscal years beginning after March 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007 with no material effect on its consolidated financial statements.

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets — an amendment of SFAS No. 140”. This Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial

8

asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose either of the Amortization or Fair Value subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; and requires separate presentation of servicing assets and servicing liabilities measures at fair value in the statement of financial position. SFAS No. 156 is effective for fiscal years beginning after March 15, 2006. The Company adopted SFAS No. 156 on January 1, 2007 with no material effect on its consolidated financial statements.

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value instruments. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measure attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, SFAS No. 157 will change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact SFAS No. 157 may have on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS No. 159 may have on its consolidated financial statements.

In June 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 with no material effect on its consolidated financial statements.

In September 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-5, “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” The EITF reached a consensus that a policyholder should consider any additional amounts included in the contractual terms of the policy when determining the amount that could be realized under the insurance contract. The Task Force also reached a consensus that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Furthermore, the Task Force reached a consensus that the cash surrender value should not be discounted when contractual limitations on the ability to surrender a policy exist if the policy continues to operate under its normal terms (continues to earn interest) during the restriction period. The Company adopted EITF No. 06-5 as of January 1, 2007, and the adoption did not have a material impact on the Company’s consolidated financial statements.

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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 continual 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 continual 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 June 30, 2007, 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

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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, 2006 and June 30, 2007:Total assets were $243.6 million at June 30, 2007, compared to $232.2 million at December 31, 2006. Net loans increased $6.2 million, to $119.7 million at June 30, 2007, compared to $113.5 million at December 31, 2006. This increase was due primarily to an increase in loans secured by real estate of $8.1 million. This increase was offset by a decrease in commercial and consumer loans of $1.9 million, primarily due to increased rate competition. The loan portfolio continues to shift away from permanent residential mortgages which represented approximately 24% of the loan portfolio at June 30, 2007, compared to 26% at December 31, 2006. Total securities available-for-sale were $93.7 million at June 30, 2007, compared to $87.9 million at December 31, 2006.

Cash and cash equivalents and interest-bearing deposits in other banks at June 30, 2007 totaled $12.5 million, compared to $12.8 million at December 31, 2006. The Company is maintaining this level of liquidity in order to fund current loan commitments and other loan originations in 2007 and reduce risk from rising interest rates. At June 30, 2007 loan commitments totaled $28.6 million.

At June 30, 2007, the investment portfolio of $93.7 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.

Total deposits increased $11.0 million, to $217.6 million at June 30, 2007, from $206.6 million at December 31, 2006. This increase was primarily due to an increase in time deposits of $5.0 million which was primarily due to an increase in new public deposits, and an increase in passbook, NOW and money market deposit accounts of $6.0 million.

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 June 30, 2007 and the $3,093,000 obligation of the Company is included in subordinated debt. Interest expense on Subordinated Debentures was $64,655 and $130,007 for the three and six months ended June 30, 2007, compared to $62,408 and $120,515 for the three and six months ended June 30, 2006. The increase was due to an increase in the average rate paid from 8.0% for the three and six months ended June 30, 2006 to 8.4% for the three months and six months ended June 30, 2007.

Stockholders’ equity increased from $19.4 million at December 31, 2006 to $19.5 million at June 30, 2007. This increase was primarily attributable to net income of $653,000 for the six months ended June 30, 2007. This increase was offset by a cash dividend of $322,000 at $0.22 per share paid to the stockholders and an increase of $195,000 in unrealized losses in 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.

Results of Operations-Comparison of the Three and Six-Months Ended June 30, 2007 and 2006:For the three months ended June 30, 2007, net income was $405,000, compared with net income of $376,000 for the three months ended June 30, 2006. For the six months ended June 30, 2007, net income was $653,000, compared with net income of $667,000 for the six months ended June 30, 2006. For the six months ended June 30, 2007, the decrease in net income was attributable in part to a decrease in the Company’s net interest margin primarily due to an inverted yield

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curve, which caused the Company’s cost of funds to increase more rapidly than interest earned on investments and loans. The average rate paid on deposits in the three and six months ended June 30, 2007 was 3.63% and 3.59%, compared to 3.10% and 2.96% for the three and six months ended June 30, 2006.As a result, the Company’s net interest margin was 2.92% and 2.90% for the three and six months ended June 30, 2007, respectively, as compared to 3.13% and 3.17% for the three and six months ended June 30, 2006, 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 6.30% and 6.20% in the three and six months period ended June 30, 2006, respectively, to approximately 6.62% and 6.52% in the three and six months period ended June 30, 2007, respectively. The cost of funds increased from approximately 3.19% at June 30, 2006, to approximately 3.62% at June 30, 2007. These increases were due to increases in market interest rates.

Net interest income before the provision for loan losses for the three months ended June 30, 2007, was $1,610,000 compared with $1,604,000 in the same period last year. The increase was primarily due to an increase in interest revenues of $419,000. This increase was offset by an increase in interest expense of $413,000. Net interest income before the provision for loan losses for the six months ended June 30, 2007, was $3,186,000 compared with $3,250,000 in the same period last year. The decrease was primarily due to an increase in interest expense of $872,000 for the six months ended June 30, 2007. This increase was offset in part by increases in interest revenue of $808,000 for the six months ended June 30, 2007, 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 $25,000 and $100,000 for the three and six months ended June 30, 2007, compared to $112,500 and $247,500 for the three and six months ended June 30, 2006. The decrease was primarily due to a decrease in charge-offs. Net charge-offs for the six months ended June 30, 2007 were $71,000 compared with $210,000 in the same periods last year. It is management’s opinion that the allowance for loan losses at June 30, 2007 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 June 30, 2007, was $1,585,000 compared with $1,492,000 in the same period last year. Net interest income after the provision for loan losses for the six months ended June 30, 2007, was $3,086,000, compared with $3,003,000 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, decreased $26,258 in the three-month period ended June 30, 2007, as compared to the three-month period ended June 30, 2006. This decrease was due primarily to a decrease in the gain on sale of loans held for sale of $25,995, a decrease in fees and service charges on loans of $12,866, a decrease in service fee income of $3,610, a decrease in the gain on sale of premises and equipment of $14,737, and a decrease in the gain of securities available-for-sale of $60. These decreases were offset by an increase in BOLI income of $5,018, an increase in fees and service charges on deposit accounts of $14,500 and an increase in the loss on sale of real estate owned of $11,492. Non-interest income decreased $74,495 in the six-month period ended June 30, 2007, as compared to the three-month period ended June 30, 2006.This decrease was due primarily to a decrease in the gain on sale of loans held for sale of $39,316, a decrease in fees and service charges on loans of $23,081, a decrease in service fee income of $6,948, a decrease in the gain on sale of premises and equipment of $14,737, a decrease in the gain of securities available-for-sale of $60 and an increase in the loss on sale of real estate owned of $5,396. These decreases were offset by an increase in fees and service charge on deposit accounts of $5,007 and an increase in BOLI income of $10,036.

Non-interest expense increased $21,412 in the three-month period ended June 30, 2007, as compared to the corresponding prior year period. This increase was primarily due to an increase in marketing and professional expense of $19,050 and an increase in occupancy expense of $3,554. These increases were offset by a decrease in all other non-interest expense of $1,192. Non-interest expense increased $35,105 in the six-month period ended June 30, 2007, as compared to the corresponding prior year period. This increase was primarily due to an increase in compensation and benefits expense of $5,956, an increase in marketing and professional expense of $39,486,

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and an increase in occupancy expense of $3,901. These increases were offset by a decrease in all other non-interest expense of $14,238.

Income tax expense increased $15,676 in the three-month period ended June 30, 2007, as compared to the corresponding prior year period. The effective tax rate was 32.01% and 31.80% for the three months ended June 30, 2007 and 2006. This increase was primarily due to an increase in income before income tax expense of 45,317. Income tax expense decreased $11,837 in the six-month period ended June 30, 2007, as compared to the corresponding prior year period. The effective tax rate was 30.75% and 31.14% for the six months ended June 30, 2007 and 2006. This decrease was primarily due to a decrease in income before income tax expense of $26,361.

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 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 ($240,000), ($711,000) 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 $182,000, $81,000 and ($115,000) 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 June 30, 2007 at 5.25%. 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. The continued flattening of the yield curve has exerted 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 believes that it 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:On June 28, 2006, 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 73,900 shares. The stock repurchase program is intended to improve liquidity in the market for the common stock, to increase per share earnings and book value, and to provide a higher rate of return for the Company’s funds. As of December 31, 2006 the Company had repurchased 58,040 shares at an average price of $14.81 per share under the supplemental stock repurchase program. The maximum number of shares that may yet be purchased under the program is 16,696. The Company may consider additional repurchase programs in the future. The Company did not repurchase any shares during the six months ended June 30, 2007.

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 June 30, 2007, the Bank’s total loan commitments, including construction loans in process, unused lines of credit and letter of credits, were approximately $28.6 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 June 30, 2007, the Company and the Bank exceeded all regulatory capital requirements.

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Asset Quality Ratios:

	June 30,			December 31,
	2007			2006
Nonperforming loans as a percent of total loans		0.39	%		0.37	%
Nonperforming assets as a percent of total assets		0.24	%		0.27	%
Allowance for loan losses as a percent of total loans		1.28	%		1.20	%
Allowance for loan losses as a percent of nonperforming loans		328.14	%		329.05	%

New Branch Office: In recent years, the Company has expanded its operations in the Birmingham, Alabama metropolitan area. A new full-service branch office in Gardendale, Alabama was opened on August 7, 2006. The Company currently intends to expand further in the Birmingham market and other market areas as appropriate opportunities become available.

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 June 30, 2007. 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.

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. Changes in Securities and Small Business Issuer Purchases of Equity Securities

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

ITEM 4. Submission of Matters to a Vote of Security Holders

On May 23, 2007, the Company held its Annual Meeting of Stockholders at which the following matters were considered and voted on.

PROPOSAL I- ELECTION OF DIRECTORS

NOMINEES	FOR		WITHHELD		TERM
Greg Batchelor		1,209,552		80,339		2010
James T. Waggoner		1,202,152		87,739		2010

There were no abstentions or broker non-votes.

PROPOSAL II- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

Ratification of the appointment of KPMG, LLP as independent auditors of the Company for the fiscal year ending December 31, 2007.

FOR	AGAINST		ABSTAIN
1,281,429		4,386		4,076

There were no broker non-votes.

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: August 14, 2007	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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