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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - PIONEER BANKSHARES INC/VAdex32.htm
EX-21 - LIST OF SUBSIDIARIES. - PIONEER BANKSHARES INC/VAdex21.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PIONEER BANKSHARES INC/VAdex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PIONEER BANKSHARES INC/VAdex312.htm
EX-23.1 - CONSENT OF YOUNT, HYDE & BARBOUR, P.C. - PIONEER BANKSHARES INC/VAdex231.htm
Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-30541

 

 

Pioneer Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   54-1278721

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (540) 778-2294

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.50 Par Value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates based on the last reported sales price of $15.00 per share as of June 30, 2009 was $13,337,970. The number of shares outstanding of the registrant’s common stock is 1,029,466 as of March 29, 2010.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 12, 2010 are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

Form 10-K

TABLE OF CONTENTS

 

     Page

PART I

  
        Item 1.   Business.    3
        Item 1A.   Risk Factors.    9
        Item 1B.   Unresolved Staff Comments.    9
        Item 2.   Properties.    9
        Item 3.   Legal Proceedings.    9
        Item 4.   Reserved.    9

PART II

  
        Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.    10
        Item 6.   Selected Financial Data.    11
        Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.    11
        Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.    24
        Item 8.   Financial Statements and Supplementary Data.    25
        Item 9.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.    54
        Item 9A.   Controls and Procedures.    54
        Item 9B.   Other Information.    54

PART III

  
        Item 10.   Directors, Executive Officers, and Corporate Governance.    55
        Item 11.   Executive Compensation.    55
        Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.    55
        Item 13.   Certain Relationships and Related Transactions, and Director Independence.    55
        Item 14.   Principal Accounting Fees and Services.    56

PART IV

  
        Item 15.   Exhibits, Financial Statement Schedules.    56
SIGNATURES    57

 

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Table of Contents

PART I

 

Item 1. Business.

General

Pioneer Bankshares, Inc. (the “Company”), a Virginia one bank holding company headquartered in Stanley, Virginia, was incorporated under the laws of the Commonwealth of Virginia on November 4, 1983. The Company’s wholly-owned subsidiary, Pioneer Bank, Inc. (the “Bank”) was established as a national bank in 1909. The Bank converted from a national bank to a state chartered bank, effective April 1994, and changed its name to Pioneer Bank, effective April 1999.

In October 2000, the Bank acquired Valley Finance Service, Inc. (“VFS”), a small loan company located in Harrisonburg, Virginia. In January 2002, the assets of VFS were merged into the Bank and the subsidiary license for this company was dissolved. VFS now operates as a division and branch of the Bank offering consumer loan services.

Pioneer Bank also owns and operates two subsidiaries, one of which is Pioneer Financial Services, LLC. Income received from insurance services and non-banking investment services is handled through Pioneer Financial Services, LLC. The second subsidiary owned by Pioneer Bank is Pioneer Special Assets, LLC. This subsidiary is generally used in conjunction with certain foreclosed properties, in which there are environmental or other significant liability circumstances, of which none existed as of December 31, 2009 and 2008. Foreclosures of this type are handled directly through Pioneer Special Assets, LLC in an effort to minimize the risk of liability to the Bank.

The primary assets of the Company consist of all of the stock of the Bank, real estate holdings leased to the Bank, a portfolio of equity investment securities, and minimal cash accounts.

The Bank is engaged in the general commercial banking business, primarily serving the counties of Page, Greene, Rockingham, and Albemarle, as well as the Cities of Harrisonburg and Charlottesville, Virginia. In addition, the close proximity and mobile nature of individuals and businesses in adjoining Virginia counties and nearby cities places these markets within the Bank’s targeted trade area. The Bank also anticipates serving some individuals and businesses from other areas, including, but not limited to, the counties surrounding Page County.

The Bank offers a full range of banking and related financial services focused primarily towards serving individual consumers, small to medium size commercial businesses, and the professional community. The Bank strives to serve the banking needs of its customers while developing personal, hometown relationships. The Bank’s Board of Directors and management believe that the marketing of customized banking services will enable the Bank to continue its position in the financial services marketplace.

The Bank provides individual consumers, professionals and small and medium size commercial businesses in its market area with responsive and technologically advanced banking services. These services include competitively priced loans that are based on deposit relationships, easy access to the Bank’s decision-makers, and quick and innovative action necessary to meet a customer’s banking needs. The Bank’s capitalization and lending limit enables it to satisfy the credit needs of a large portion of the targeted market segment. In the event there are customers whose loan requirements exceed the Bank’s lending limit, the Bank will seek to arrange such loans on a participation basis with other financial institutions. The Board of Directors and management believe the Bank’s present capitalization will support substantial growth in deposits and loans.

Location and Market Area

The Bank currently operates full service branches in Stanley, Luray, Shenandoah, Harrisonburg, Stanardsville, and Charlottesville, Virginia. Management will continue to investigate and consider other possible sites that would enable the Bank to profitably serve its chosen market area.

The opening of additional banking offices by the Bank requires prior regulatory approval, which takes into account a number of factors, including, among others, a determination that the Bank has capital in an amount deemed necessary to warrant additional expansion and a finding that the public interest will be served. While the Bank plans to seek regulatory approval at the appropriate time to establish additional banking offices in various parts of the Bank’s market area, there can be no assurance when or if the Bank will be able to undertake such expansion plans.

 

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Banking Services

The Bank accepts deposits, makes consumer and commercial loans, issues drafts, and provides other services customarily offered by a commercial banking institution, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour automated teller machines. The Bank is a member of the Federal Reserve System and deposits are insured under the Federal Deposit Insurance Act to the limits provided thereunder.

The Bank offers a full range of short-to-medium term commercial and consumer loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans generally include secured and unsecured loans for financing automobiles, residential financing, home improvements, education, and personal investments.

The Bank’s lending activities are subject to a variety of lending limits imposed by state law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), in general the Bank is subject to a loan-to-one borrower limit of an amount equal to 15% of the Bank’s capital and surplus in the case of loans which are not fully secured by readily marketable or other permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit. The Bank may establish relationships with correspondent banks to sell interests or participations in loans when loan amounts exceed the Bank’s legal limitations or internal lending policies.

Other bank services include internet banking, ATM/Debit Cards, safe deposit boxes, issuance of cashier’s checks, certain cash management services, traveler’s checks, direct deposit of payroll and social security checks and automatic drafts for various accounts. The Bank’s Visa check cards and ATM debit cards can be used by bank customers throughout the United States. The Bank also offers MasterCard and VISA credit card services. Additionally, the Bank offers a “Bounce Protection” program which provides overdraft privileges on checking accounts up to predetermined amounts, subject to overdraft fees. The Bank is also licensed to sell property/casualty and life/health insurance, and investment securities, and does so through its investment subsidiary, Pioneer Financial Services, LLC.

The Bank does not have trust powers and does not anticipate obtaining trust powers. If the Bank decided to establish a trust department in the future, the Bank could not do so without the prior approval of the Virginia State Corporation Commission. In the interim, the Bank may contract for the provision of trust services to its customers through outside vendors.

Competition

The banking business is highly competitive. The Bank competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the western Virginia market area and elsewhere.

The Bank’s service area is a highly competitive, highly branched banking market. Competition in the market area for loans to small to medium size businesses and individuals, the Bank’s target market, is intense, and pricing is important. Most of the Bank’s competitors have substantially greater resources and lending limits than the Bank and offer certain services, such as extensive and established branch networks, that the Bank does not expect to provide or will not provide in the near future. Moreover, larger institutions operating in the western Virginia market area have access to borrowed funds at a lower cost than are available to the Bank. Also, deposit competition among institutions in the market area is strong.

Employees

As of December 31, 2009, the Company had 49 full-time equivalent employees. None of the employees are represented by any collective bargaining agreements and relations with employees are considered to be good.

 

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Supervision and Regulation

Set forth below is a summary of statutes and regulations affecting the Company and the Bank. Federal and state laws and regulations provide regulatory oversight for virtually all aspects of both of their operations. This summary is qualified in its entirety by reference to these statutes and regulations.

Supervision and Regulation of the Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and is supervised and subject to examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company and the Bank are also subject to Virginia laws that regulate banks and bank holding companies. Virginia’s banking laws are administered by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Commission”). The Company and the Bank are also affected by rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”). The various laws and regulations administered by all of these regulatory agencies affect corporate practices, expansion of business, and provisions of services. Also, monetary and fiscal policies of the United States directly affect bank loans and deposits and may affect our earnings. The future impact of these policies and of continuing regulatory changes in the financial services industry cannot be predicted. The supervision, regulation and examination of the Bank are intended primarily for the protection of depositors rather than our stockholders.

As a bank holding company, the institution is required to file with the Federal Reserve periodic reports and any additional information the Federal Reserve may require. The Company also must provide the Commission with information regarding itself and the Bank. The Federal Reserve examines the Company periodically and may examine its subsidiaries. The Commission also may examine the Company.

A bank holding company is required to obtain prior approval from the Federal Reserve before acquiring control of substantially all the assets of any non-affiliated bank or more than 5% of the voting shares of any bank it does not already own, or before it merges or consolidates with another institution or engages in any business other than banking or managing, controlling or furnishing services to banks and other subsidiaries, and a limited list of activities closely related to or incidental to banking. Similarly, approval of the Virginia Bureau of Financial Institutions is required for certain acquisitions of other banks and bank holding companies.

The Federal Reserve will approve the ownership by a bank holding company of shares in a company engaged in activities determined by order or regulation to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In other words, regulatory involvement, and approval, is required for the Company to engage in non-banking activities.

The Company would be compelled by the Federal Reserve to invest additional capital in the event the Bank experiences either significant loan losses or rapid growth of loans or deposits. The Federal Reserve requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries.

Company Capital Guidelines. The Company operates under the capital adequacy guidelines established by the Federal Reserve. Under the Federal Reserve’s current risk-based capital guidelines for bank holding companies, the minimum required ratio for total capital to risk weighted assets the Company is required to maintain is 8%, with at least 4% consisting of Tier 1 capital. Tier 1 capital consists of common and qualifying preferred stock, certain other qualifying instruments, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets. These risk-based capital guidelines establish minimum standards, and bank holding companies generally are expected to operate well above the minimum standards.

 

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Table of Contents

Financial Modernization Legislation. A bank holding company generally is restricted to activities related or incidental to banking. In the past, bank holding companies were specifically prohibited from engaging in the issue, flotation, underwriting, public sale, or distribution of third party securities. Limits also were placed on underwriting and selling insurance. The permitted activities with respect to bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which became effective in March 2000. This act repealed the banking/securities industry anti-affiliation rules and permits the common ownership of commercial banks, investment banks, and insurance companies under the structure of a financial holding company. Under this law, a bank holding company can elect to be treated as a financial holding company, which may engage in any activity that the Federal Reserve determines is financial in nature. A financial holding company also may engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of the related depository institutions or the financial system generally.

In order for a bank holding company to qualify as a financial holding company, all of its depository subsidiaries (i.e., banks and thrifts) must be well capitalized and well managed, and must meet their Community Reinvestment Act, or CRA, obligations, as explained below. The bank holding company also must declare its intention to become a financial holding company to the Federal Reserve and certify that it meets the requirements. Banks and thrifts acquired by a financial holding company within 12 months prior to the date on which the election is filed may be excluded from this test if they have less than a satisfactory CRA rating, but they must submit a plan to the applicable federal banking agency describing how the CRA rating will be brought into conformance.

The act also establishes a system of functional regulation for financial holding companies and banks providing regulation of securities by the Securities and Exchange Commission and state securities regulators, regulation of futures by the Commodity Futures Trading Commission, and regulation of insurance activities by the state insurance regulators. Banks may sell title insurance only when specifically permitted under applicable state law.

The Company does not currently intend to become a “financial holding company” under the terms of this law, but may consider doing so at some point in the future.

Emergency Economic Stabilization Act of 2008. In accordance with its stated purpose of restoring liquidity and stability to the financial system of the United States, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (“TARP”), under which the U.S. Department of the Treasury (“Treasury”) is authorized to purchase preferred stock from qualified financial institutions. The Company meets the requirements to be considered a qualified financial institution.

Under TARP, for organizations like the Company, the federal government’s purchase limitation is generally defined as 3% of risk-weighted assets. The terms of the preferred stock generally provide that: (i) cumulative dividends will be paid at a rate of 5% for the first five years and 9% thereafter; (ii) any increase in the dividend rate paid on common stock during the first three years will require the consent of the Treasury; (iii) any repurchase of common stock will require the consent of the Treasury; (iv) conditions and limitations will be placed on executive compensation; and (v) the Treasury will receive warrants, with a term of 10 years, to purchase a number of shares of common stock having an aggregate market price equal to 15% of the preferred stock amount on the day of investment.

The Company gave consideration to applying for the Treasury’s capital purchase program during 2008. After performing a detailed capital and cost analysis, the Company decided not to participate in the TARP program at this time.

Securities. The Company must also comply with the requirements of the Securities Exchange Act of 1934, which include the filing of annual, quarterly and other reports with the Securities and Exchange Commission.

 

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Table of Contents

Supervision and Regulation of the Bank

General. The Bank is a state chartered bank and member of the Federal Reserve System. The Federal Reserve and the Commission regulate and monitor all significant aspects of the Bank’s operations. The Federal Reserve requires quarterly reports on the Bank’s financial condition, and both federal and state regulators conduct periodic examinations of the Bank. The cost of complying with these regulations and reporting requirements can be significant. In addition, some of these regulations impact investors directly. For example, the Bank may pay dividends only out of its net undivided profits after deducting expenses, bad debts, losses, interest and taxes accrued, and contribution to capital necessary for the Bank’s original capital to be restored. The Federal Reserve recommends that banks pay dividends only if the net income available to shareholders in the past year fully funds those dividends, and the expected rate of earnings retention is consistent with capital needs, asset quality, and overall financial condition. Regulatory restrictions on the Bank’s ability to pay dividends may adversely impact the Company’s ability to pay dividends to its shareholders.

The Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. The Bank operates under the supervision of, and subject to regulation and examination by, the Commission and the Federal Reserve. The Bank is also subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and the establishment of branch offices. Federal and state bank regulatory agencies also have the general authority to eliminate dividends paid by insured banks if such payment is deemed to constitute an unsafe and unsound practice. As the Bank’s primary federal regulator, the Federal Reserve has the authority to impose penalties, initiate civil and administrative actions and take other steps to prevent the Bank from engaging in unsafe and unsound practices. The amount of dividends payable by the Bank will depend upon its earnings and capital position, and is limited by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. No dividend may be declared or paid that would impair a bank’s paid-in capital. Both the Commission and the Federal Reserve have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.

Under current supervisory practice, prior approval of the Federal Reserve is required if the total of all cash dividends declared in any given year will exceed the total of its net profits for such year, plus its retained net profits for the preceding two years. Also, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting current losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of all loans which are in arrears with respect to interest by six months or more, unless such loans are fully secured and in the process of collection. Federal law further provides that no issued depository institution may make any capital distribution (which would include a cash dividend) if, after making the distribution, the institution would not satisfy one or more of its minimum capital requirements.

In addition, the cost of complying with FDIC rules and regulations may negatively impact the Bank’s profitability. For member banks like the Bank, the Federal Reserve has the authority to prevent the continuance or development of unsound and unsafe banking practices and to approve conversions, mergers and consolidations. Obtaining regulatory approval of these transactions can be expensive, time consuming, and ultimately may not be successful.

Capital Resources

The various federal bank regulatory agencies, including the Federal Reserve, have adopted risk-based capital requirements for assessing bank capital adequacy. Virginia chartered banks must also satisfy the capital requirements adopted by the Commission. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

 

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The minimum standard for the ratio of capital to risk-weighted assets (including certain off-balance sheet obligations, such as standby letters of credit) is 8.0%. At least half of the risk-based capital must consist of common equity, retained earnings and qualifying perpetual preferred stock, less deductions for goodwill and various other tangibles (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”

The Federal Reserve also has adopted regulations which supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to average total consolidated assets (“Leverage ratio”) of 4%. The Federal Reserve has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a “tangible Tier 1 leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total assets. The Bank’s capital ratios significantly exceed all requirements at December 31, 2009.

Deposit Insurance

The Bank’s deposits are generally insured by the FDIC for a maximum of $100,000 per depositor. However, in the fourth quarter of 2008, the FDIC insurance limits were raised to $250,000 per depositor. This increase in FDIC coverage will remain in effect through December 31, 2013. The Bank generally pays a quarterly statutory assessment for this insurance coverage and must comply with the rules and regulations of the FDIC. Each depository institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. The FDIC has recently required all financial institutions to prepay deposit insurance premiums through the December 2012. The total prepaid FDIC premium paid by the bank under this arrangement was approximately $779,000, which included the quarterly assessment for December 2009, and all of 2010, 2011, and 2012.

Effect of Governmental Monetary Policies

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. The operations of the Bank will be affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates money, credit conditions and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future.

SEC Filings

A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, excluding exhibits, as filed with the Securities and Exchange Commission can be obtained without charge by writing to Pioneer Bankshares, Inc., Attn: Thomas R. Rosazza, President and Chief Executive Officer, at 263 East Main Street, P.O. Box 10, Stanley, Virginia 22851. This information may also be accessed, without charge, by visiting the SEC’s Electronic Data Gathering and Retrieval Service EDGAR website at www.sec.gov.

 

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Table of Contents
Item 1A. Risk Factors.

Not Applicable

 

Item 1B. Unresolved Staff Comments.

Not Applicable

 

Item 2. Properties.

The Company’s corporate office is located in Stanley, Virginia and is directly across the street from the Bank’s main branch office. The building was originally built as a residence. It was purchased in 1989 and fully renovated for commercial use. The building contains approximately 3,252 square feet.

The Bank’s main branch office in Stanley, Virginia was constructed in 1984, contains 12,876 square feet on three floors and is situated on approximately two acres. The building contains a full service branch, administration and operations, bookkeeping and credit departments, three drive-through lanes and a drive-up ATM. This office is owned by the Bank.

The branch in Luray, Virginia is a brick building containing approximately 3,797 square feet and situated on a 200 x 150 lot. This office is a full service branch with two drive-through lanes and a walk-up ATM. This branch was built in 1989 and is located next to a shopping center. This branch is owned by the Bank.

The branch in Shenandoah, Virginia is a brick building containing approximately 3,400 square feet and situated on a 300 x 150 lot. This office is a full service branch with two drive-through lanes and a walk-up ATM. This branch was built in 1995 and is owned by the Company.

The branch in Harrisonburg, Virginia is a new brick facility, which was constructed in 2003. The building is situated on a 130 x 190 lot, which was originally purchased in 2002. The branch contains approximately 1,620 square feet. This full-service office is located next to a shopping center and has three drive-through lanes and a drive-up ATM. This branch is owned by the Bank.

The branch in Stanardsville, Virginia is a double-wide modular building containing approximately 1,680 square feet and situated on .644 acre. It is equipped with two drive-through lanes and a drive-up ATM. The branch was established in 2001 and is owned by the Bank.

Valley Finance Service operates as a division/branch of Pioneer Bank and was relocated during the third quarter of 2008 into the Harrisonburg branch facility in an effort to improve operating efficiency and reduce overhead expenses.

The Bank’s data processing center facility is located next to the Bank’s main office in Stanley, Virginia. The data processing center building has approximately 25,760 square feet and was originally purchased on September 8, 1970, with recent renovations being completed in 2005.

The Bank also operates a branch facility in downtown Charlottesville, Virginia. This branch is a leased facility. This office was opened in March 2005 and primarily offers commercial loans and small business accounts. The branch is located at 257 Ridge McIntire Road, Charlottesville, Virginia.

 

Item 3. Legal Proceedings.

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

 

Item 4. Reserved.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Common Stock of the Company trades on the OTC Bulletin Board under the symbol “PNBI.OB” and transactions generally involve a small number of shares. The Bank’s transfer agent is Registrar and Transfer Company, 10 Commerce Drive, Cranford Drive, Cranford, New Jersey, 07016-3572. The following table shows actual trade prices (without commissions) as reported by Scott & Stringfellow, Inc. Other transactions may have occurred which were not included in the table.

COMMON STOCK TRADE PRICES

 

2009

   High    Low

First Quarter

   $ 17.00    $ 13.10

Second Quarter

     15.00      13.75

Third Quarter

     15.50      14.10

Fourth Quarter

     16.05      15.30

2008

   High    Low

First Quarter

   $ 27.00    $ 24.00

Second Quarter

     28.10      19.05

Third Quarter

     24.00      17.50

Fourth Quarter

     20.00      17.75

There were 1,029,466 and 1,017,170 shares of the Company’s Common Stock outstanding at the close of business on December 31, 2009 and 2008, respectively. There were 538 and 522 shareholders of record as of December 31, 2009 and 2008, respectively.

The Company has declared dividends on its Common Stock as follows:

 

Declared Date

   Record
Date
   Payment
Date
   Per Share
Amount

3/12/09

   3/20/09    3/31/09    $ .15

6/11/09

   6/22/09    6/30/09      .14

9/10/09

   9/21/09    9/30/09      .14

12/10/09

   12/21/09    12/30/09      .14
            

Total for 2009

         $ .57
            

3/13/08

   3/21/08    3/31/08    $ .15

6/12/08

   6/20/08    6/30/08      .14

9/08/08

   9/18/08    9/29/08      .14

12/11/08

   12/18/08    12/30/08      .14
            

Total for 2008

         $ .57
            

The Company’s ability to pay dividends is subject to certain restrictions imposed by the Federal Reserve and capital requirements of Federal and Virginia banking statutes and regulations. Additionally, the Company intends to follow a policy of retained earnings sufficient for the purpose of maintaining net worth and reserves of the Bank at adequate levels and to provide for the Company’s growth and ability to compete in its market area.

Stock Repurchases

The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase. There were no repurchase transactions during 2009.

 

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Item 6. Selected Financial Data.

The following is selected financial data for the Company for the years ending December 31, 2009 and 2008. This information has been derived from audited financial information included in Item 8 of this Form 10-K.

FINANCIAL HIGHLIGHTS

(In thousands, except for per share information)

 

     2009     2008  

Results of Operations

    

Interest and dividend income

   $ 9,468      $ 10,399   

Interest expense

     2,800        3,756   
                

Net interest income

     6,668        6,643   

Provision for loan losses

     1,260        548   
                

Net interest income after provision for loan losses

     5,408        6,095   

Noninterest income

     1,241        511   

Noninterest expense

     4,869        4,990   
                

Income before income taxes

     1,780        1,616   

Income tax expense

     552        505   
                

Net Income

   $ 1,228      $ 1,111   
                

Financial Condition

    

Assets

   $ 159,903      $ 156,110   

Deposits

     132,014        128,978   

Loans, Net of allowance

     124,660        119,225   

Stockholders’ Equity

     17,916        16,805   

Per Share Data

    

Net income per share, basic and diluted

   $ 1.20      $ 1.09   

Dividends per share

     .57        .57   

Book value per share

     17.40        16.52   

Performance Ratios

    

Return on average assets 1

     0.78     0.67

Return on average equity 1

     7.05     6.45

Dividend payout ratio

     47.49     52.12

Average equity to average assets 1

     11.13     10.42

 

1

Ratios are based primarily on daily average balances

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is management’s discussion of the financial condition and results of operations on a consolidated basis for the two years ended December 31, 2009 and 2008, respectively, for the Company. The consolidated financial statements of the Company include the accounts of the Company, the Bank, and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC, each of which is a wholly-owned subsidiary of the Bank. This discussion should be read in conjunction with the audited consolidated financial statements and related notes of the Company presented elsewhere herein.

 

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Forward Looking Statements

The report on Form 10-K contains forward-looking statements with respect to the Company’s and the Bank’s financial condition, results of operations and business. These forward-looking statements involve certain risks and uncertainties. When used in this report or future regulatory filings, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive office, the words or phrases “will likely result,” “are expect to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution the readers and users of this information not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors including regional and national economic conditions, changes in the levels of market rates of interest, credit risk and lending activities, and competitive and regulatory factors could affect the financial performance of the Company and the Bank and could cause actual results for future periods to differ materially from those anticipated or projected.

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

Critical Accounting Policies

General

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: 1) Accounting for Contingencies, which requires that losses be accrued when they are probable and can be estimated and 2) Accounting for Impairment of a Loan, which requires that estimated losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the market and the loan balance.

Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance include internally generated loan review reports, past due reports, historical loan loss experience and the financial condition of individual borrowers.

This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates the risk elements involved in loans relative to their collateral value and maintains the allowance for loan losses at a level which is adequate to absorb credit losses inherent in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting policy, which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

 

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Goodwill

Goodwill is included in other assets and totaled $360,000 for the reporting periods ending December 31, 2009 and 2008. Goodwill is no longer amortized, but instead is evaluated for impairment at least annually. No impairment charges were recognized for the 2009 and 2008 reporting periods.

Financial Overview

The Company had total asset growth during 2009 of approximately $3.8 million. This asset growth is primarily attributed to moderate loan growth throughout the year. The loan portfolio increased by $5.4 million or 4.56% during 2009. The increase in the loan portfolio was mainly in the residential and commercial real estate. Interest bearing deposits in other banks decreased by $5.2 million or 43.48%, as these funds were used as a source of funds for loan growth. Other assets increased by $1.8 million or 90.56%, with the FDIC prepayment requirement being the largest contributor to this change.

The deposit portfolio grew by $3.0 million or 2.35% during 2009, with the majority of this growth being in demand deposits. Outstanding borrowings decreased by $900,000 or 9.57% during 2009. The Company’s capital position at December 31, 2009 was $17.9 million, or 11.20% as a percentage of total assets.

The Company’s net earnings were $1.2 million for the year ended December 31, 2009, compared to $1.1 million for 2008. This represents an increase of approximately $117,000 or 10.53%. The increase in net income is primarily attributed to gains on the sale of investment securities, as compared to losses in the prior year. Additionally, salary expense decreased as a result of reduced staffing during the year. Earnings per share were $1.20 for the year ended December 31, 2009, compared to $1.09 for 2008.

The Company’s book value as of December 31, 2009 was $17.40 per share, as compared to a book value of $16.52 per share as of December 31, 2008. This represents an increase of 5.33%. Additionally, dividend payments per share for 2009 remained the same as the prior year.

Results of Operations

Net Interest Income

Net interest income increased $25,000 or 0.38% in 2009. The increase in net interest income for 2009 is primarily attributed to the decline in market interest rates, which have reduced the interest expense on deposits and borrowings during the year. Interest expense on deposits and borrowings decreased by $956,000 or 25.45%, while total interest income on loans and investments decreased by $931,000 or 8.95%.

Interest income on securities available for sale decreased by $134,000 or 21.65% in 2009 compared to an increase in the prior year of $166,000 or 36.64%. The average yields on securities decreased from 4.77% in 2008 to 4.51% in 2009. The decrease in average yield on securities is attributed to reinvestment activities during the year at lower market rates. Management makes every effort to maintain a diversified investment strategy as a means of safeguarding the investment portfolio and maintaining adequate cash flow to support future lending activities.

Interest income on federal funds sold and other deposits was $187,000 in 2009, compared to $418,000 in 2008. This decrease is primarily attributed to the decline in market interest rates.

The net interest margin on earning assets on a tax equivalent basis increased from 4.41% in 2008 to 4.54% in 2009, as a result of the reduced deposit expense related to lower market rates.

Interest expense on borrowings decreased by $213,000 or 48.85%, with the average rates paid on borrowings being 3.25% in 2009, compared to 3.42% in 2008.

Yields on total loans decreased from 7.57% in 2008 to 7.04% in 2009. The yield on commercial and agricultural loans decreased from 7.96% in 2008 to 6.48% in 2009. Commercial and residential real estate loan yields have decreased from 6.97% in 2008 to 6.53% in 2009. Installment loan yields have decreased from 10.57% in 2008 to 10.12% in 2009.

 

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Table I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(ON A FULLY TAXABLE EQUIVALENT BASIS)

(In Thousands )

 

     2009     2008  
     Average     Income/
Expense
   Average
Rates
Earned/
Paid
    Average     Income/
Expense
   Average
Rates
Earned/
Paid
 

ASSETS

              

Loans: 1

              

Commercial

   $ 7,050      $ 457    6.48   $ 7,630      $ 607    7.96

Real estate

     100,616        6,567    6.53     98,087        6,834    6.97

Installment

     15,774        1,597    10.12     16,246        1,717    10.57

Credit card

     619        117    18.90     557        118    21.18
                                          

Total Loans

     124,059        8,738    7.04     122,520        9,276    7.57

Federal funds sold

     2,507        6    0.24     3,535        66    1.87

Interest bearing deposits

     8,225        181    2.20     9,925        352    3.55

Securities

              

Taxable

     8,519        374    4.39     12,352        651    5.27

Nontaxable2

     5,335        251    4.70     2,972        80    2.69
                                          

Total Earning Assets

     148,645        9,550    6.42     151,304        10,425    6.89
                              

Allowance for loan losses

     (1,860          (1,582     

Nonearning assets

     9,813             10,594        
                          

Total Assets

   $ 156,598           $ 160,316        
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits:

              

Interest bearing demand deposits

   $ 15,494      $ 158    1.02   $ 11,122      $ 83    0.75

Savings

     16,070        116    0.72     15,689        180    1.15

Time deposits

     74,305        2,303    3.10     73,079        3,057    4.18
                                          

Total Interest Bearing Deposits

     105,869        2,577    2.43     99,890        3,320    3.32

Borrowings

     6,870        223    3.25     12,763        436    3.42
                                          

Total Interest Bearing Liabilities

     112,739        2,800    2.48     112,653        3,756    3.33
                              

Noninterest bearing deposits

     25,776             29,471        

Other liabilities

     657             966        
                          

Total Liabilities

     139,172             143,090        

Stockholders’ equity

     17,426             17,226        
                          

Total Liabilities and Stockholders’ Equity

   $ 156,598           $ 160,316        
                          

Net Interest Earnings

     $ 6,750        $ 6,669   
                      

Net Yield on Interest Earning Assets

        4.54        4.41

 

1

Nonaccrual loans are included in computing the average balance.

2

An incremental tax rate of 34% and a 70% dividend exclusion was used to calculate the tax equivalent income. The total tax equivalent adjustment was approximately $82,000 for 2009 and $25,000 for 2008.

 

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Table II

PIONEER BANKSHARES, INC.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

(On a fully tax equivalent basis)

(Dollars in thousands)

 

     2009 Compared to 2008
Increase (Decrease)
    2008 Compared to 2007
Increase (Decrease)
 
     Volume     Rate     Total     Volume     Rate     Total  

Interest Income

            

Loans

            

Commercial

   $ (46 )   $ (104 )   $ (150   $ (80 )   $ (70 )   $ (150 )

Real estate

     176        (443 )     (267     (155 )     (136 )     (291 )

Installment

     (50     (70     (120     58        (117     (59 )

Credit Card

     13        (14     (1     —          (1     (1
                                                

Total Loans

     93        (631 )     (538     (177 )     (324 )     (501 )
                                                

Federal funds sold

     (19 )     (41     (60     3        (107     (104
                                                

Interest bearing deposits in banks

     (60     (111 )     (171     274        (147 )     127   
                                                

Investments

            

Taxable

     (202     (75 )     (277 )     153        (29 )     124   

Nontaxable

     64        107        171        12        (26     (14
                                                

Total Securities

     (138 )     32        (106 )     165        (55 )     110   
                                                

Total Earning Assets

   $ (124 )   $ (751 )   $ (875   $ 265      $ (633 )   $ (368 )
                                                

Interest Expense

            

Demand deposits

   $ 33      $ 42      $ 75      $ —        $ 30      $ 30   

Savings

     4        (68 )     (64 )     26        20        46   

Time deposits

     51        (805     (754     (15 )     (293     (308 )
                                                

Total Deposits

     88        (831     (743 )     11        (243     (232 )
                                                

Borrowings

     (201 )     (12     (213     118        (38     80   
                                                

Total Liabilities

     (113 )     (843     (956     129        (281     (152 )
                                                

Net Interest Earnings

   $ (11 )   $ 92      $ 81      $ 136      $ (352   $ (216 )
                                                

Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change.

Non-interest Income and Expense

Non-interest income increased from $511,000 in 2008 to $1.2 million in 2009. This represents an increase of $730,000 and is primarily attributed gains on the sale of investment securities in 2009 of $95,000, as compared to losses on the sale of investment securities in 2008 of $553,000.

Service charge income increased by $57,000 or 6.22%. when compared to the prior year, and was the result of scheduled fee increases relating to minimum deposit requirements, overdraft fees, paper statement fees and other services.

Non-interest expense decreased by $121,000 or 2.42% from 2008 to 2009. Salaries and benefits decreased by $316,000 or 13.04% in 2009 compared to 2008. The decrease in salaries and benefits is the result of management’s efforts to control expense through staff reductions and decreased hourly schedules. Equipment expenses decreased by $94,000 or 14.33% in 2009 compared to 2008 as a result of normal depreciation fluctuations. Other expenses increased by $311,000 from 2008 to 2009, which is the net result of increases and decreases in various operating costs.

 

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Financial Condition

General Uncertainties and Trends

Management is of the opinion that loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not (i) represent or result from trends or uncertainties which are reasonably expected to materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits which any available information causes serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Management recognizes that prevailing economic conditions have the potential to adversely impact the Company’s operational results, including future earnings, liquidity, and capital resources. The continued deterioration in the credit and housing markets, increasing unemployment within our service area, and other economic and market factors are monitored closely by management in an effort to promptly identify specific trends that could have a direct material effect on the Company.

Management is not aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on the Company.

Securities

Securities as of December 31, 2009 totaled $13.8 million, which is a 13.87% decrease compared to the December 31, 2008 balance of $16.0 million. This decrease is the result of calls and maturities that occurred within the portfolio and management’s utilization of available funding to support loan growth and operational cash flow.

The Company maintains an adequate level of securities to provide for liquidity and as security for public indebtedness. A schedule of securities including the carrying amount and estimated market value of securities by contractual maturity is shown in a note to the consolidated financial statements. Management’s philosophy is to keep the maturities of investments relatively short which allows the Company to better match deposit maturities with investment maturities and thus react more quickly to interest rate changes.

At December 31, 2009, the Company had investments in equity securities consisting primarily of common and preferred stocks and corporate bonds with a cost of $2.8 million and an estimated market value of $2.6 million. The equity securities generally include common stocks and corporate bonds, which are purchased with the objective of generating additional interest or dividend income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

The Bank’s total investment portfolio at December 31, 2009 has a cost of $12.9 million and an estimated fair market value of $13.0 million. These investments include U.S. government and agency securities, state and municipal securities, and fixed mortgaged-backed securities.

The schedule below summarizes the book value of the portfolio by maturity classification and shows the weighted average yield in each group on a tax equivalent basis as of December 31, 2009 and December 31, 2008:

 

(In Thousands)    2009
Book Value
   Weighted
Average
Yield
    2008
Book Value
   Weighted
Average
Yield
 

Securities available for sale

          

Maturing within one year

   $ 2,000    0.01   $ 997    5.23

Maturing after one year But within five years

     1,398    4.36     1,714    5.81

Maturing after five years But within ten years

     1,760    4.58     900    4.63

Maturing after 10 years

     4,914    5.24     9,194    5.24

Equity Securities

     2,786        2,693   
                  

Total securities available for sale

   $ 12,858    3.97   $ 15,498    5.27
                  

 

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Equity securities have been excluded from the weighted average yield calculations in the previous table. All tax exempt obligations included above have been stated on a tax equivalent basis using a 34% tax rate.

The Company accounts for investments under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This statement requires all securities to be classified at the point of purchase as trading securities, available for sale or held to maturity. See the notes to the financial statements for a discussion of the accounting policies for investments. The Company values its debt securities based on information supplied by its correspondent banks for actively traded obligations and by market comparison with similar obligations for non-rated investments. Investments in common stocks are based on the last trade prices as provided by the Company’s investment broker.

Loan Portfolio

Total net loans increased during 2009 from $119.2 million at December 31, 2008 to $124.7 million at December 31, 2009. This is an increase of $5.4 million or 4.56%. The increase in the loan portfolio was mainly in the categories of residential mortgages, commercial real estate and small business loans, as well as personal installment loans.

Loans are stated at their face amount, net of unearned discount, and are shown in the following schedule:

 

     December 31,
2009
    December 31,
2008
 
     (In Thousands)  

Mortgage loans on real estate:

    

Construction loans

   $ 7,826      $ 9,447   

Agricultural

     3,806        4,267   

Equity lines of credit

     1,788        1,927   

Residential 1-4 family

     47,400        41,618   

Second mortgages 1 - 4 family

     3,998        3,788   

Multifamily

     3,571        4,144   

Commercial

     35,641        34,022   
                

Total real estate loans

     104,030        99,213   

Commercial and agricultural loans

     6,426        5,701   

Consumer installment loans:

    

Personal

     15,669        15,665   

Credit cards

     681        645   
                

Total consumer installment loans

     16,350        16,310   

All other loans

     253        362   
                

Gross Loans

     127,059        121,586   

Less unearned discount on loans

     (454     (710
                

Loans, less unearned discount

     126,605        120,876   

Less allowance for loan losses

     (1,945     (1,651
                

Net Loans Receivable

   $ 124,660      $ 119,225   
                

The Bank’s policy has been to make collectible loans that are held for future interest income. Collateral required by the Bank is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower.

The Bank’s residential real estate loans, including equity lines of credit and second mortgages totaled $53.2 million as of December 31, 2009. This represents an increase of approximately $5.8 million in the residential loan portfolio over the previous year. Residential real estate loans are generally made for a period not to exceed 30 years and are secured by first deed of trust, which do not exceed 80% of the appraised value. If the loan to value ratio exceeds 80%, the Company requires additional collateral or guarantees. For a majority of the real estate loans, interest is adjustable after each three or five year period. Fixed rate loans are generally made for a fifteen-year period. In addition, the Bank makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 80% of the appraised value. Home equity loans are made on a 10-year revolving line of credit basis.

 

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The Bank’s commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $50.8 million as of December 31, 2009. This represents a decrease of approximately $1.0 million in the commercial real estate portfolio when compared to the prior year. The decrease in commercial real estate loans is related to refinancing activities in the current economic downturn. Management has established specific lending criteria relating to commercial loans and considers the risk of loss in this loan category to moderate.

A schedule of remaining maturities of selected loan categories as of December 31, 2009 is as follows:

 

     At December 31, 2009
     (In Thousands)
     Less than
One Year
   One to Five
Years
   Greater than
Five Years
   Total

Commercial and Agricultural

   $ 2,808    $ 2,864    $ 754    $ 6,426

Real estate construction

     3,345      3,310      1,171      7,826
                           

Total Maturities of Selected Loans

   $ 6,153    $ 6,174    $ 1,925    $ 14.252
                           

 

For maturities over one year:

  

Fixed rates

   $ 7,740

Variable rates

     359
      
   $ 8,099
      

At December 31, 2009 construction loans were 6.28% percent of total net loans and commercial and agricultural loans were 5.15% of total net loans.

Risk Elements in the Loan Portfolio

The following schedule outlines the non-accrual, restructured, and other non-performing risk elements in the loan portfolio as of December 31, 2009 and December 31, 2008:

 

     2009     2008  
     (In Thousands)  

Non-accrual Loans

   $ 1,373      $ 1,466   

Loans Past Due 90 days or more

     253        539   
                

Total non-performing assets

   $ 1,626      $ 2,005   
                

Allowance for loan losses to total loans

     1.54     1.37

Non-performing Assets to total loans

     1.30     1.68

Non-accrual loans are loans on which the interest accruals have been suspended or discontinued as a result of the borrower’s financial difficulties and delinquency status. Interest accruals are continued on past due, secured loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the financial condition of the creditor deteriorates to the point that any further accrued interest would be determined to be uncollectible. The impact on interest income with these accounts being in nonaccrual status was minimal for both reporting periods presented.

Restructured loans are those on which the original interest rate or repayment terms have been modified specifically due to the borrower’s financial hardship. The total amount of loans classified as restructured as of December 31, 2009 was approximately $777,000 and consist primarily of residential mortgage loans. The reduced interest rates on these accounts, although modified, remain at or above current market pricing.

Impaired loans are those loans which have been identified by management as problem credits due to various circumstances concerning the borrower’s financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Bank’s allowance for loan loss is made for an impaired loan. Impaired loans not included in the non-accrual totals with specific allocations as of December 31, 2009 totaled approximately $1.3 million compared to $697,000 for the prior year. Impaired loans and other potential problem loans are monitored closely on an on-going basis and allocations are made in accordance with the Company’s allowance for loan loss calculations. Management monitors all past due accounts carefully for any anticipated losses and makes appropriate allocations of funds for potential losses as they are identified.

 

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Loan Losses and Allowance For Loan Losses

The following schedule outlines the activity in the allowance for loan loss account as of December 31, 2009 and December 31, 2008:

 

     2009     2008  
     (In Thousands)  

Beginning balance

   $ 1,651      $ 1,573   

Provision charged to expense

     1,260        548   

Loan losses:

    

Commercial

     131        98   

Installment

     377        319   

Real estate

     641        354   

Credit card

     11        10   
                

Total Loan Losses

     1,160        781   
                

Recoveries:

    

Commercial

     40        6   

Installment

     154        138   

Real estate

     —          167   

Credit card

     —          —     

Total Loan Recoveries

     194        311   
                

Net Loan Losses

     966        470   
                

Balance at End of Period

   $ 1,945      $ 1,651   
                

Net Loan Losses as a Percent of Average loans

     0.78     0.38

A breakdown of the allowance allocations by loan type are presented below for December 31, 2009 and December 31, 2008:

 

     December 31, 2009     December 31, 2008  
     Amount    Percent of
Allowance
    Percent of
Average
Loans
    Amount    Percent of
Allowance
    Percent of
Average
Loans
 
     (In Thousands)  

Analysis of Ending Balance

              

Commercial

   $ 452    23.24   5.68   $ 324    19.63   6.23

Real estate

     804    41.34   81.10     598    36.22   80.06

Installment

     662    34.03   12.72     704    42.64   13.26

Credit card

     27    1.39   0.50     25    1.51   0.45
                                      

Total

   $ 1,945    100.00   100.00   $ 1,651    100.00   100.00
                                      

Allowance for loan losses as a percent of year end loans

      1.54        1.37  

Management’s analysis process for evaluating the adequacy of the allowance for loan loss is a continual process, which is monitored at least quarterly, or more frequently, as needed. The evaluation process consists of regular periodic reviews of the loans outstanding by loan type. Specific reviews and allocations are made for loans that have been identified as potential loss, in which the borrower’s financial condition has substantially weakened or habitual past due payment activity has occurred. Specific reviews and allocations are also made for various sectors of the loan portfolio that have been identified as higher risk categories. Historical loss ratios are applied to the remaining loan portfolio by loan type, based on the most recent loss trends. Management takes into consideration expected recoveries from prior charge offs as part of its allowance and funding calculation.

 

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Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Allocation factors relating to identified loan concentrations and loan growth trends are included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss and funding provision considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a level which is adequate to absorb credit losses considered to be inherent in the loan portfolio. Management engages the services of an outside loan review firm periodically to evaluate the loan portfolio, provide an independent analysis of significant borrowers, and to assist in identifying potential problem credits. The independent loan review report is used by management as an additional tool for monitoring and minimizing risks that may be inherent in the loan portfolio. Management has also implemented an internal loan review process for the purpose of identifying and monitoring possible loan losses in the portfolio. Other factors considered in management’s evaluation process are changes in lending policies, procedures and underwriting criteria; changes in the nature and volume of the loan portfolio; the experience, ability, and depth of lending management or other lending personnel; the volume and severity of past dues, non-accruals, and classified loans; and other external or regulatory requirements. Regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting principle which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

The provision for loan losses and changes in the allowance for loan losses are shown in note 7 of the financial statements included in this report.

The allowance for loan loss balance of $1.945 million at December 31, 2009, increased by approximately $294,000 from its level at December 31, 2008. The increase in the allowance balance is primarily attributed to specific allocations related to impaired loans and an increased percentage of non-performing assets, including nonaccruals, past dues, and classified loans. The increase in non-performing assets is partially attributed to a declining economic environment. Management has made additional allocations based on the declining economic trends and increases in non-performing assets, as a means of providing sufficient funding for possible losses. The cumulative balance in the allowance for loan loss account was equal to 1.54% and 1.37% of total loans at December 31, 2009 and December 31, 2008, respectively. The increase in the percentage of allowance to total loans is considered to be directionally consistent with trends in the portfolio.

The allowance is deemed to be within an acceptable range based on management’s evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account as of December 31, 2009 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Management’s practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

Loan charge offs for 2009 increased by $379,000 compared to the prior year, and loan loss recoveries decreased by $117,000. This resulted in an overall increase of $496,000 in net loan charge offs for the period ending December 31, 2009 as compared to December 31, 2008. The increase in charge offs is primarily related to losses incurred on specific commercial and residential real estate loans, in which the borrower’s financial condition has been impacted by the downturn in economic factors. Additionally, the values of these properties were impacted by the downturn in the housing market.

The provision expense related to the allowance for loan loss for 2009 increased by $712,000 as compared to 2008. This increase is directly related to the increased charge offs and additional allocation made for non-performing and impaired loans.

Management’s evaluation of the allowance for loan losses as of December 31, 2009 and December 31, 2008 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

 

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Premises, Equipment, and Software

The Bank had purchases and investments related to premises improvements, new equipment and software upgrades during 2009 totaling $182,000. These included the upgrades related to item and image processing replacement of data processing servers, equipment and software upgrades, and miscellaneous computer purchases.

The Company continually monitors technological upgrades in the banking industry, and may, from time to time, in order to achieve higher levels of internal operational efficiency, purchase new or additional equipment relating to such technologies. The Company’s management sets specific budget allowances on an annual basis, which are deemed to be adequate to cover expenditures that may arise throughout the year relating to technological upgrades or enhancements.

Deposits

The Company’s total deposits as of December 31, 2009 were $132.0 million compared to $129.0 million at December 31, 2008. This increase of $3.0 million or 2.35% was primarily in the category of demand deposits. Demand deposits consist of checking accounts including standard consumer accounts, NOW accounts, and money market (MMDA) accounts. The Company’s demand deposits have historically remained relatively stable; however, these balances fluctuate with normal daily activity. Total interest bearing demand deposits totaled $17.3 million as of December 31, 2009 compared to $12.4 million at December 31, 2008. Total non-interest bearing demand deposits were $27.3 million as of December 31, 2009 compared to $25.1 million at December 31, 2008.

Total savings deposits as of December 31, 2009 were $15.8 million compared to $15.9 million as of December 31, 2008. This represents a decrease of approximately $64,000 or 0.40%. These accounts consist of passbook savings accounts and statement savings accounts. Management does not expect any major changes in the savings deposit portfolio in the near future.

Time accounts in the form of certificates of deposit instruments represent approximately 54.17% of the Bank’s total deposits. Total time deposits were $71.5 million as of December 31, 2009 compared to $75.7 million at December 31, 2008. Time deposits with a balance greater than $100,000 represent 30.67% of the Bank’s total time deposit portfolio.

The maturity schedule as of December 31, 2009 for certificates of deposit over $100,000 are shown below:

 

Maturity: (in thousands)     

Less than 3 months

   $ 6,505

3 to 12 months

     9,596

1 to 3 years

     5,732

Over 3 years

     101

Total

   $ 21,934
      

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $62.6 million and $61.2 million as of December 31, 2009 and 2008, respectively. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by first lien 1-4 family residential mortgages totaling $47.4 million at December 31, 2009. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

 

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At December 31, 2009, the fixed-rate borrowings with FHLB totaled $5.0 million and mature through January, 2010. The interest rate on the fixed-rate note payable was 3.14%. At December 31, 2009, the total outstanding borrowings with FHLB were $8.5 million, with $5.0 million being in fixed rate advances and $3.5 million being at a variable rate of 0.36%.

The contractual maturities of outstanding FHLB advances as of December 31, 2009 are as follows:

 

(In thousands)     

Due in 2010

   $ 8,500
      

Total

   $ 8,500
      

Analysis of Capital

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to its size, composition, quality of assets and liability levels, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

The Federal Reserve, Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.00%, of which at least 4.00% must be Tier 1 capital, composed of common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain goodwill items.

The Company’s capital ratios exceed regulatory requirements and are considered to be in the well capitalized category under the regulatory framework. Total consolidated capital as a percentage of risk-weighted assets was 15.9% at December 31, 2009 compared to 15.5% at December 31, 2008. The ratio of Consolidated Tier 1 Capital to risk-weighted assets was 14.6% as of December 31 2009 compared to 14.3% at December 31, 2008.

The following schedule shows a comparative breakdown of the Company’s capital as of December 31, 2009 and December 31, 2008:

 

     2009     2008  
     (In Thousands)  

Tier 1 capital

    

Consolidated Risk-weighted assets

   $ 119,356      $ 116,402   
                

Consolidated Tier 1 capital

    

Common stock

   $ 515      $ 509   

Retained Earnings

     17,300        16,460   

Goodwill excluded

     (360     (360
                

Total Tier 1 capital

     17,455        16,609   

Consolidated Tier 2 capital

    

Allowance for loan losses (1)

     1,492        1,455   
                

Total risk-based capital

   $ 18,947      $ 18,064   
                

Consolidated total risk-based capital ratio

     15.9     15.5

Consolidated Tier 1 risk-based capital ratio

     14.6     14.3

Consolidated Leverage ratio

     11.1     10.1

 

(1) Limited to 1.25% of gross risk-weighted assets

 

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Interest Sensitivity and Liquidity

At December 31, 2009, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 43.69% for the one-year re-pricing period compared with a negative Gap Sensitivity Ratio of 33.89% at December 31, 2008. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. Management constantly monitors the Company’s interest rate risk and believes that the current position is an acceptable risk for a growing community bank, which operates primarily in a rural environment.

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash and due from banks, interest-bearing deposits in financial institutions, securities purchased under agreements to resell, federal funds sold, securities available for sale, and loans and investments maturing within one year.

Liquidity as of December 31, 2009 remains adequate. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Bank was a seller of federal funds for most of 2009 and 2008. The Bank’s membership in the Federal Home Loan Bank System also provides liquidity, as the Bank can borrow money that is repaid over a ten-year period and can use the money to make fixed rate loans. The matching of the long-term loans and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Bank reviews its interest rate gap periodically and makes adjustments as needed.

There are no off-balance-sheet items that should impair future liquidity.

The following table reflects the Company’s interest sensitivity and interest rate risk position as of December 31, 2009:

 

(In Thousands)                                   
     1 - 90
Days
    91 - 365
Days
    1 to 5
Years
    Over 5
Years
    Not
Classified
    Total

Uses of Funds:

            

Loans

   $ 9,773      $ 8,336      $ 62,028      $ 46,468      —        $ 126,605

Interest Bearing Bank deposits

     4,224        1,085        1,415        —        —          6,724

Investment Securities

     2,000        —          1,459        6,961      2,579        12,999

Restricted Stock

     —          —          —          —        788        788

Federal Funds Sold

     1,500        —          —          —        —          1,500
                                            

Total

     17,497        9,421        64,902        53,429      3,367        148,616
                                            

Sources of Funds:

            

Demand Deposits

            

Interest bearing

     17,381        —          —          —        —          17,381

Savings accounts

     15,802        —          —          —        —          15,802

Time Deposits:

            

Over $ 100,000

     6,505        9,596        5,833        —        —          21,934

Other certificates

     14,702        19,362        15,517        —        —          49,581
                                            

Total deposits

     54,390        28,958        21,350        —        —          104,698
                                            

Borrowings

     5,000        3,500        —          —        —          8,500
                                            

Total

     59,390        32,458        21,350        —        —          113,198
                                            

Discrete Gap

     (41,893     (23,037     43,552        53,429      3,367        35,418

Cumulative Gap

     (41,893     (64,930     (21,378     32,051      35,418     

Ratio of Cumulative Gap to Total Earning Assets

     -28.19     -43.69     -14.38     21.57   23.83  
                                        

 

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Off-Balance Sheet Commitments

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The notes to the Consolidated Financial Statements contain further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements. The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

New Accounting Standards

New accounting standards and pronouncements are established by various accountancy governing bodies to provide guidance in the principles and practices used for maintaining accurate and consistent accounting records. The Company has established monitoring procedures for the review of new accounting pronouncements relating to the banking industry, in order to ensure that all transactions are in compliance with GAAP. New accounting standards and pronouncements not yet in effect that are considered to be applicable to the Company are included in Note 1 of the Consolidated Financial Statements within this report.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable

 

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Table of Contents
Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   26

Consolidated Balance Sheets as of December 31, 2009 and 2008

   27

Consolidated Statements of Income for the years ended
December 31, 2009, 2008, and 2007

   28

Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December  31, 2009, 2008 and 2007

   29

Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007

   30

Notes to Consolidated Financial Statements

   31

 

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Pioneer Bankshares, Inc.

Stanley, Virginia

We have audited the accompanying consolidated balance sheets of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2009, 2008 and 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assessment of the effectiveness of Pioneer Bankshares, Inc. and subsidiary’s internal control over financial reporting as of December 31, 2009, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

LOGO

Winchester, Virginia

March 29, 2010

 

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PIONEER BANKSHARES, INC. AND SUBSIDARY

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2009 AND 2008

(In Thousands, except share and per share data)

 

     2009    2008  

ASSETS

     

Cash and due from banks

   $ 5,252    $ 2,401   

Interest-bearing deposits in other banks

     6,724      11,896   

Federal funds sold

     1,500      100   

Securities available for sale, at fair value

     12,999      15,216   

Restricted securities, at cost

     788      792   

Loans receivable, net of allowance of $1,945 in 2009 and $1,651 in 2008

     124,660      119,225   

Bank premises and equipment, net

     3,582      3,790   

Accrued interest receivable

     644      720   

Other real estate owned

     352      21   

Other assets

     3,402      1,949   
               

Total Assets

   $ 159,903    $ 156,110   
               

LIABILITIES

     

Deposits

     

Noninterest bearing

   $ 27,316    $ 25,079   

Interest bearing

     

Demand

     17,381      12,377   

Savings

     15,802      15,866   

Time deposits over $100,000

     21,934      16,921   

Other time deposits

     49,581      58,735   
               

Total Deposits

     132,014      128,978   

Accrued expenses and other liabilities

     1,473      927   

Borrowings

     8,500      9,400   
               

Total Liabilities

     141,987      139,305   
               

STOCKHOLDERS’ EQUITY

     

Common stock; $.50 par value, authorized 5,000,000 shares; outstanding – 1,029,466 and 1,017,170 shares in 2009 and 2008, respectively

     515      509   

Retained earnings

     17,300      16,460   

Accumulated other comprehensive income (loss), net

     101      (164
               

Total Stockholders’ Equity

     17,916      16,805   
               

Total Liabilities and Stockholders’ Equity

   $ 159,903    $ 156,110   
               

See Notes to Consolidated Financial Statements.

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(In Thousands, except per share data)

 

     2009    2008     2007

INTEREST AND DIVIDEND INCOME:

       

Loans including fees

   $ 8,738    $ 9,276      $ 9,777

Interest on securities – taxable

     379      597        443

Interest on securities – nontaxable

     106      22        10

Deposits and federal funds sold

     187      418        395

Dividends

     58      86        139
                     

Total Interest and Dividend Income

     9,468      10,399        10,764
                     

INTEREST EXPENSE:

       

Deposits

     2,577      3,320        3,552

Borrowings

     223      436        356
                     

Total Interest Expense

     2,800      3,756        3,908
                     

NET INTEREST INCOME

     6,668      6,643        6,856

PROVISION FOR LOAN LOSSES

     1,260      548        309
                     

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,408      6,095        6,547
                     

NONINTEREST INCOME:

       

Service charges on deposit accounts

     974      917        805

Commission income

     57      73        69

Other income

     115      74        89

Gains (losses) on security transactions

     95      (553     315
                     

Total Noninterest Income

     1,241      511        1,278
                     

NONINTEREST EXPENSES:

       

Salaries and employee benefits

     2,107      2,423        2,545

Occupancy expenses

     332      358        382

Equipment expenses

     562      656        743

ATM expenses

     116      109        92

FDIC assessment

     330      25        14

Sales and Franchise Tax

     135      87        75

Supplies and Printing

     153      131        125

Director Compensation and Committee fees

     165      170        172

Legal fees

     60      100        123

Professional and Audit fees

     221      173        193

Telephone

     110      149        109

Other expenses

     578      609        607
                     

Total Noninterest Expenses

     4,869      4,990        5,180
                     

INCOME BEFORE INCOME TAXES

     1,780      1,616        2,645

INCOME TAX EXPENSE

     552      505        893
                     

NET INCOME

   $ 1,228    $ 1,111      $ 1,752
                     

PER SHARE DATA:

       

Net income, basic and diluted

   $ 1.20    $ 1.09      $ 1.73
                     

Dividends

   $ 0.57    $ 0.57      $ 0.56
                     

See Notes to Consolidated Financial Statements.

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(In Thousands)

 

     Common
Stock
   Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

BALANCE DECEMBER 31, 2006

   $ 506    $ 14,615      $ 97      $ 15,218   

Comprehensive Income

         

Net Income

        1,752          1,752   

Changes in unrealized gains on securities, net of taxes

         

Unrealized holding gains arising during the period (net of tax effect of $29)

          62     

Reclassification adjustment for gains included in net income (net of tax effect of $120)

          (195     (133
               

Total Comprehensive Income

            1,619   

Cash Dividends

        (566       (566

Stock Based Compensation

        4          4   
                               

BALANCE DECEMBER 31, 2007

   $ 506    $ 15,805      $ (36 )   $ 16,275   

Comprehensive Income

         

Net Income

        1,111          1,111   

Changes in unrealized losses on securities, net of taxes

         

Unrealized holding losses arising during the period (net of tax effect of $296)

          (471 )  

Reclassification adjustment for losses included in net income (net of tax effect of $210)

          343        (128
               

Total Comprehensive Income

            983   

Cash Dividends

        (579       (579

Stock issued for compensation

     3      123          126   
                               

BALANCE DECEMBER 31, 2008

   $ 509    $ 16,460      $ (164 )   $ 16,805   

Comprehensive Income

         

Net Income

        1,228          1,228   

Changes in unrealized gains on securities, net of taxes

         

Unrealized holding gains arising during the period (net of tax effect of $190)

          328     

Reclassification adjustment for gains included in net income (net of tax effect of $32)

          (63     265   
               

Total Comprehensive Income

            1,493   

Cash Dividends

        (583       (583

Stock issued for compensation

     6      195          201   
                               

BALANCE DECEMBER 31, 2009

   $ 515    $ 17,300      $ 101      $ 17,916   
                               

See Notes to Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

 

     (In Thousands)  
     2009     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 1,228      $ 1,111      $ 1,752   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Provision for loan losses

     1,260        548        309   

(Gain) loss on security transactions

     (95     553        (315

Net amortization (accretion) on securities

     19        —          (9 )

Deferred income tax (benefit)

     (152     (49     (76

Depreciation

     390        481        546   

Stock based compensation

     201        126        4   

(Gain) loss of sale on other real estate

     (29     33        —     

Net change in:

      

Accrued interest receivable

     76        38        (52

Other assets

     (2,425 )     (168     97   

Accrued expenses and other liabilities

     546        (368 )     360   
                        

Net Cash Provided by Operating Activities

     1,019        2,305        2,616   
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Net change in interest-bearing deposits in other banks

     5,172        (10,296     3,782   

Net change in federal funds sold

     (1,400 )     200        400   

Net change in restricted securities

     4        (112 )     184   

Proceeds from maturities, sales, and principal payments of securities available for sale

     19,428        17,764        14,964   

Proceeds from principal payments of securities held to maturity

     —          —          1   

Purchase of securities available for sale

     (16,712     (22,679     (12,027

Net decrease (increase) in loans

     (6,656     5,449        (7,098

Proceeds on sale of other real estate

     625        335        —     

Purchase of bank premises and equipment

     (182     (215     (124
                        

Net Cash Provided By (Used in) Investing Activities

     279        (9,554     82   
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Net change in:

      

Demand and savings deposits

     7,177        (3,706     2,538   

Time deposits

     (4,141 )     5,329        39   

Proceeds from borrowings

     10,000        21,501        2,000   

Curtailments of borrowings

     (10,900     (19,001     (5,800

Dividends paid

     (583     (579     (566
                        

Net Cash Provided By (Used in) Financing Activities

     1,553        3,544        (1,789 )
                        

CASH AND CASH EQUIVALENTS

      

Net increase (decrease) in cash and cash equivalents

     2,851        (3,705     909   

Cash and cash equivalents, beginning of year

     2,401        6,106        5,197   
                        

Cash and cash equivalents, end of year

   $ 5,252      $ 2,401      $ 6,106   
                        

Supplemental Disclosure of Cash Paid During the Year for:

      

Interest

   $ 3,007      $ 3,903      $ 3,682   

Income taxes

     837        788        811   

Supplemental Disclosure of non-cash activity:

      

Unrealized gain (loss) on securities available for sale

     423        (214     (224

Other real estate acquired in settlement of loans

     927        389        —     

See Notes to Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of Pioneer Bankshares, Inc. (“Company”), and its subsidiary Pioneer Bank (“Bank”), conform to accounting principles generally accepted in the United States of America and to accepted practice within the banking industry. A summary of significant accounting policies is as follows:

Consolidation Policy – The consolidated financial statements of the Company include the Bank and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC which are wholly-owned subsidiaries of the Bank. All significant inter-company balances and transactions have been eliminated.

Use of Estimates – In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, deferred tax assets, and fair value.

Subsequent Events – In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no material subsequent events to be disclosed at this time.

Securities – Investment securities which the Company intends to hold until maturity or until called are classified as held to maturity. These investment securities are carried at cost. Restricted securities include the Bank’s investments in Federal Reserve Bank stock and FHLB stock and are carried at cost.

Securities which the Company intends to hold for indefinite periods of time, including securities used as part of the Company’s asset/liability management strategy, are classified as available for sale. These securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of stockholders’ equity until realized. At December 31, 2009 and 2008, the Company classified all securities as available for sale.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that the Company will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. The Company regularly reviews each security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Loans Receivable – Loans receivable are intended to be held until maturity and are shown on the consolidated balance sheets net of unearned interest, the allowance for loan losses, and deferred loan fees and costs. Interest is computed by methods which generally result in level rates of return on principal. Interest income is generally not recognized on non-accrual loans and payments received on such loans are applied as a reduction of the loan principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 120 days past due unless the loan is well secured and in the process of collection. In most cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses – The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectability of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on the evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either substandard or doubtful. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not generally separately identify individual consumer installment loans for impairment disclosures.

Foreclosed Assets – Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Bank Premises and Equipment – Land values are carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over estimated useful lives ranging from 3 to 40 years, on a straight-line method.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Income Taxes – Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.

Financial Instruments – In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for other loans. Commitments to extend credit are generally made for a period of one year or less and interest rates are determined when funds are disbursed. Collateral and other security for the loans are determined on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily represent future cash requirements.

Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.

Advertising Costs – The Company follows the policy of charging the production costs of advertising to expense as incurred. Advertising expense amounted to $40,542, $36,462, and $53,918 for the years ended December 31, 2009, 2008, and 2007, respectively.

Earnings Per Share – Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Stock Compensation Plans – Accounting guidance requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. Additional information related to the Company’s stock option plan can be found in Note 15 of this financial report.

Adoption of New Accounting Standards – In June 2009, FASB issued new accounting guidance related to U.S. GAAP (FASB ASC 105, Generally Accepted Accounting Principles). This guidance establishes FASB ASC as the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in FASB ASC has become nonauthoritative. FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs), which will serve to update FASB ASC, provide background information about the guidance and provide the basis for conclusions on the changes to FASB ASC. FASB ASC is not intended to change U.S. GAAP or any requirements of the SEC.

The Company adopted new guidance impacting Financial Accounting Standards Board (FASB) Topic 805: Business Combinations (Topic 805) on January 1, 2009. This guidance requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued new guidance impacting Topic 805. This guidance addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for business combinations entered into on or after January 1, 2009. This guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued new guidance impacting FASB Topic 820: Fair Value Measurements and Disclosures (Topic 820). This interpretation provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types that are required to be disclosed. This guidance was effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued new guidance impacting FASB Topic 320-10: Investments – Debt and Equity Securities. This guidance amends GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance was effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company did not have any cumulative effect adjustment related to the adoption of this guidance.

In May 2009, the FASB issued new guidance impacting FASB Topic 855: Subsequent Events. This update provides guidance on management’s assessment of subsequent events that occur after the balance sheet date through the date that the financial statements are issued. This guidance is generally consistent with current accounting practice. In addition, it requires certain additional disclosures. This guidance was effective for periods ending after June 15, 2009 and had no impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued new guidance impacting Topic 820. This guidance is intended to reduce ambiguity in financial reporting when measuring the fair value of liabilities. This guidance was effective for the first reporting period (including interim periods) after issuance and had no impact on the Company’s consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Adoption of New Accounting Standards (continued)-

 

In September 2009, the FASB issued new guidance impacting Topic 820. This creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance was effective for interim and annual periods ending after December 15, 2009. The adoption of the new guidance did not have a material impact on the consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers. Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The Company does not expect the adoption of ASU 2010-01 to have a material impact on its consolidated financial statements.

Accounting Standards Not Yet Effective – In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (ASU) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have, if any, on its consolidated financial statements.

In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The Company does not expect the adoption of the new guidance to have a material impact on its (consolidated) financial statements.

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-02 amends Subtopic 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is effective beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively to the first period Statement 160 was adopted. The Company does not expect the adoption of ASU 2010-02 to have a material impact on its consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Accounting Standards Not Yet Effective (continued)

 

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The Company does not expect the adoption of ASU 2010-04 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. The Company does not expect the adoption of ASU 2010-05 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The Company does not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.

NOTE 2        NATURE OF OPERATIONS:

The Company operates under a charter issued by the Commonwealth of Virginia and provides commercial banking services to its customers through its subsidiary bank. As a state chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Board of Governors of the Federal Reserve Banking System. The Bank provides services at six physical locations to customers in the counties of Page, Greene, Rockingham, Albemarle, and the cities of Harrisonburg and Charlottesville, Virginia. The Bank also operates two separate subsidiaries, one being known as Pioneer Financial Services, LLC, which offers a variety of consumer investment and insurance services. The second subsidiary owned by Pioneer Bank is Pioneer Special Assets, LLC, which is generally used in conjunction with certain foreclosed properties.

NOTE 3        CASH AND DUE FROM BANKS:

The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $1.1 million at December 31, 2009 and December 31, 2008.

NOTE 4        DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:

The Bank had cash deposited in and federal funds sold to other banks, most of which exceed federally insured limits, totaling approximately $2.2 million and $728 thousand at December 31, 2009 and 2008, respectively. Management has established acceptable risk tolerances relating to uninsured deposits in other banks and diversifies these funds in accordance with policy guidelines.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5        INVESTMENT SECURITIES:

The amortized cost and fair value of investment securities are as follows:

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value
     (In Thousands)
December 31, 2009           

Available for Sale

          

U.S. government and agency securities

   $ 2,000    $ —      $ —        $ 2,000

Mortgage-backed securities

     3,778      203      —          3,981

State and municipals

     4,294      152      (7 )     4,439

Equity securities

     2,786      98      (305     2,579
                            
   $ 12,858    $ 453    $ (312   $ 12,999
                            
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value
     (In Thousands)
December 31, 2008           

Available for Sale

          

U.S. government and agency securities

   $ 2,496    $ 42    $ —        $ 2,538

Mortgage-backed securities

     9,194      239      —          9,433

State and municipals

     1,115      —        (15 )     1,100

Equity securities

     2,693      53      (601     2,145
                            
   $ 15,498    $ 334    $ (616   $ 15,216
                            

Realized gains and losses on available for sale securities are summarized below:

 

     2009     2008     2007  
     (In Thousands)  

Gains

   $ 137      $ 175      $ 459   

Losses

     (42     (728     (144
                        

Net Gains (Losses)

   $ 95      $ (553 )   $ 315   
                        

The amortized cost and fair value of investment securities at December 31, 2009, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Securities Available for Sale
     Amortized
Cost
   Fair
Value
     (In Thousands)

Due within one year

   $ 2,000    $ 2,000

Due after one year through five years

     1,398      1,459

Due five years through ten years

     1,760      1,812

Due after ten years

     4,914      5,149
             
     10,072      10,420

Equity securities

     2,786      2,579
             
   $ 12,858    $ 12,999
             

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5        INVESTMENT SECURITIES (Continued):

 

Investment securities with a book value of $670 thousand at December 31, 2009 and $1.2 million at December 31, 2008 were pledged to secure public deposits and for other purposes required by law.

Management recognizes that current economic conditions and market trends may result in other than temporary impairment classifications for certain securities or equity investments. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As of December 31, 2009, management has determined that the unrealized losses in the investment portfolio are temporary. Management does not expect to be required to sell these securities before such time that they recover in value. Management will continue to monitor the securities in a loss position for future impairment. Securities in an unrealized loss position at December 31, 2009 and 2008, by duration of the unrealized loss are shown below.

As of December 31, 2009, there were 7 securities in the portfolio that have unrealized losses, which are considered to be temporary. The schedule of unrealized losses on these securities is as follows:

 

          Municipal
Securities
    Equity
Securities
    Total  

Less than 12 Months

  

Fair Value

   $ 409      $ —        $ 409   
  

Unrealized Losses

     (7     —          (7

More than 12 Months

  

Fair Value

     —          952        952   
  

Unrealized Losses

     —          (305     (305

Total

  

Fair Value

     409        952        1,361   
  

Unrealized Losses

     (7     (305     (312

As of December 31, 2008, there were 10 securities in the portfolio that have unrealized losses, which are considered to be temporary. The schedule of unrealized losses on these securities is as follows:

 

          Municipal
Securities
    Equity
Securities
    Total  

Less than 12 Months

  

Fair Value

   $ 884      $ 398      $ 1,282   
  

Unrealized Losses

     (15     (284     (299

More than 12 Months

  

Fair Value

     —          366        366   
  

Unrealized Losses

     —          (317     (317

Total

  

Fair Value

     884        764        1,648   
  

Unrealized Losses

     (15     (601     (616

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5        INVESTMENT SECURITIES (Continued):

 

The Bank also holds additional investments in Federal Home Loan Bank of Atlanta (“FHLB”) in the form of FHLB stock, which is a membership requirement. Loan advances from FHLB are also subject to additional stock purchase requirements, which are generally redeemed as outstanding loan balances are repaid, subject to FHLB’s quarterly excess capital evaluation process. During the third quarter of 2009, FHLB announced that it will not repurchase activity-based excess capital stock outstanding, but will continue to evaluate excess capital stock repurchases on a quarterly basis going forward. FHLB stock is generally viewed as a long term investment and is considered to be a restricted security, which is carried at cost, because there is no market for the stock other than FHLB or other member institutions. As of December 31, 2009, the Bank’s investment in FHLB stock totaled $712,000. Management’s evaluation of FHLB stock for impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Although FHLB’s stock dividends were temporarily suspended for the fourth quarter of 2008 and the first quarter of 2009, dividend payments were declared for the period ending June 30, 2009 and September 30, 2009. Management’s evaluation of FHLB stock as of December 31, 2009 did not consider this investment to be other than temporarily impaired, and therefore, no impairment has been recognized.

NOTE 6        LOANS:

Loans are stated at their face amount, net of unearned discount, and are classified as follows:

 

     December 31,
2009
    December 31,
2008
 
     (In Thousands)  

Mortgage loans on real estate:

    

Construction loans

   $ 7,826      $ 9,447   

Agricultural

     3,806        4,267   

Equity lines of credit

     1,788        1,927   

Residential 1- 4 family

     47,400        41,618   

Second mortgages 1 - 4 family

     3,998        3,788   

Multifamily

     3,571        4,144   

Commercial

     35,641        34,022   
                

Total real estate loans

     104,030        99,213   

Commercial and agricultural loans

     6,426        5,701   

Consumer installment loans:

    

Personal

     15,669        15,665   

Credit cards

     681        645   
                

Total consumer installment loans

     16,350        16,310   

All other loans

     253        362   
                

Gross Loans

     127,059        121,586   

Less unearned discount on loans

     (454     (710
                

Loans, less unearned discount

     126,605        120,876   

Less allowance for loan losses

     (1,945     (1,651
                

Net Loans Receivable

   $ 124,660      $ 119,225   
                

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6        LOANS: (continued)

 

The Bank grants commercial, real estate and consumer installment loans to its customers. Collateral requirements for loans are determined on a case by case basis depending upon the purpose of the loan and the financial condition of the borrower. The ultimate collectability of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of its market service area.

The Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. The residential real estate loans, including equity lines of credit and second mortgages totaled $53.2 million as of December 31, 2009 as compared to $47.3 million at December 31, 2008. The small business commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $50.8 million as of December 31, 2009 as compared to $51.9 million at December 31, 2008. Management has established specific lending criteria relating to real estate lending and considers the risk of loss in these loan categories to be moderate.

Deposit account overdrafts are also classified as loans and totaled $113,000 and $176,000 as of December 31, 2009 and 2008, respectively.

The following is a summary of information pertaining to impaired loans for the years ended December 31, 2009 and 2008:

 

     2009    2008
     (In Thousands)

Impaired loans with a valuation allowance

   $ 2,237    $ 2,122

Impaired loans without a valuation allowance

     —        —  
             

Total impaired loans

   $ 2,237      2,122
             

Valuation allowance related to impaired loans

   $ 624      362
             

Average investment in impaired loans

   $ 2,112      2,098
             

Interest income recognized on impaired loans

   $ 93    $ 134
             

No additional funds are committed to be advanced in connection with impaired loans.

Loans past due greater than 90 days and still accruing interest at December 31, 2009 and 2008 totaled $253,000 and $539,000, respectively. Management continually monitors past due accounts and places these accounts in nonaccrual status if the payment plans are not adhered to. Nonaccrual loans excluded from impaired loan disclosure above amounted to $421,000 and $41,000, at December 31, 2009 and 2008, respectively. The nonaccrual loans excluded from impaired loan disclosure at December 31, 2009 consisted of one residential real estate account and one commercial real estate loan. A collateral evaluation has been performed on both of these accounts and management has concluded that a specific allocation was not warranted at this time. Management continues to monitor these accounts on a regular basis.

 

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NOTE 7        ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses is as follows:

 

     (In Thousands)  
     2009     2008     2007  

Balance at beginning of year

   $ 1,651      $ 1,573      $ 1,476   

Provision charged to operating expense

     1,260        548        309   

Recoveries of loans charged off

     194        311        262   

Loan charge-offs

     (1,160     (781     (474
                        

Balance at end of year

   $ 1,945      $ 1,651      $ 1,573   
                        

NOTE 8        BANK PREMISES and EQUIPMENT:

Bank premises, equipment and computer software included in the financial statements at December 31, 2009 and 2008 are as follows:

 

     2009    2008
     (In Thousands)

Land

   $ 691    $ 691

Land improvements and buildings

     4,457      4,449

Furniture and equipment

     4,602      4,514

Computer software

     1,276      1,197
             
     11,026      10,851

Less accumulated depreciation

     7,444      7,061
             

Net

   $ 3,582    $ 3,790
             

Depreciation and amortization related to bank premises, equipment and software included in operating expense for 2009 was $390,000. Depreciation and amortization expenses for 2008 and 2007 were $481,000 and $546,000, respectively.

NOTE 9        LEASE COMMITMENTS:

The Company has an annual lease commitment relating to its Charlottesville branch location. The lease agreement term for this office expires November 30, 2012 and provides the Company an option of extending the renewal thereafter. The following is a schedule of future estimated minimum lease requirements under the agreements:

 

     (In Thousands)

2010

   $ 22

2011

     23

2012

     23
      

Total

   $ 68
      

Lease expense, included in occupancy expense, was $21,840, $38,430, and $52,439 for the years ended December 31, 2009, 2008, and 2007, respectively. The decrease in lease expense is attributed to the relocation of the Valley Finance operations.

 

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NOTE 10        DEPOSITS:

The Bank’s total deposit portfolio consists primarily of demand checking accounts, savings accounts and time deposit accounts. Total deposits were $132.0 million and $129.0 million as of December 31, 2009 and 2008, respectively.

The Bank has one business customer with deposit balances exceeding 5% of total deposits as of December 31, 2009. The total deposit balances for this large depositor as of December 31, 2009 were $8.5 million or 6.43% of total deposits.

At December 31, 2009, time deposit scheduled maturities (in thousands) are as follows:

 

2010

   $ 50,164

2011

     6,864

2012

     12,629

2013

     751

2014

     1,107
      

Total

   $ 71,515
      

NOTE 11        BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $62.6 million and $61.2 million as of December 31, 2009 and 2008, respectively. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by first lien 1-4 family residential mortgages totaling $47.4 million at December 31, 2009. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

At December 31, 2009, the fixed-rate borrowings with FHLB totaled $5.0 million and mature through January, 2010. The interest rate on the fixed-rate note payable was 3.14%. At December 31, 2009, the total outstanding borrowings with FHLB were $8.5 million, with $5.0 million being in fixed rate advances and $3.5 million being at a variable rate of 0.36%.

The contractual maturities of outstanding FHLB advances as of December 31, 2009 are as follows:

 

(In thousands)     

Due in 2010

   $ 8,500
      

Total

   $ 8,500
      

NOTE 12        DIVIDEND LIMITATION ON SUBSIDIARY BANK:

A principal source of funds of the Company is dividends paid by the Bank. The amount of dividends the Bank may pay is regulated by the Federal Reserve. As of December 31, 2009, the maximum amount of dividends the Bank can pay to the Company is $2.3 million or 12.65% of the consolidated net assets, without requesting permission from the Federal Reserve Bank.

 

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NOTE 13        INCOME TAXES:

The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2006.

 

     2009     2008     2007  
     (In Thousands)  

Current income tax expense

   $ 704      $ 554      $ 969   

Deferred income tax (benefit)

     (152     (49     (76
                        

Income Tax Expense

   $ 552      $ 505      $ 893   
                        

The components of income tax expense are as follows:

The reasons for the differences between income tax expense and the amount computed by applying the statutory federal income tax rate are as follows:

 

     2009     2008     2007  
     (In Thousands)  

Income taxes computed at the applicable federal income tax rate

   $ 605      $ 549      $ 900   

Increase (decrease) resulting from:

      

Tax-exempt income and dividends

     (49     (16     (18

State income taxes

     3        (32 )     14   

Other

     (7     4        (3
                        

Income Tax Expense

   $ 552      $ 505      $ 893   
                        

At December 31, the net deferred tax asset was made up of the following:

 

     2009    2008
     (In Thousands)

Deferred Tax Assets:

     

Provision for loan losses

   $ 519    $ 416

Deferred compensation

     37      43

Prepayment penalties (FHLB)

     —        13

Securities available for sale

     —        118

Other real estate owned

     77      —  

Other

     33      19
             

Total

   $ 666      609
             

Deferred Tax Liabilities:

     

Depreciation

     15      11

Cash surrender value of life insurance

     39      35

Securities available for sale

     40      —  

Other

     81      66
             

Total

     175      112
             

Net Deferred Tax Asset

   $ 491    $ 497
             

 

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NOTE 14        REGULATORY MATTERS:

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to the bank holding company.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2009 and 2008, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2009, the most recent notification from the bank’s primary federal regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Company’s and the Bank’s actual capital amounts and ratios are also presented below:

 

     Actual     For Capital
Adequacy Purposes
    Minimum
To Be Well
Capitalized
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  
     (in thousands)  
               

As of December 31, 2009:

               

Total Capital to Risk Weighted Assets:

               

Consolidated

   $ 18,846    15.9   $ 9,548    ³8.0     N/A    N/A   

Pioneer Bank

   $ 15,249    13.2   $ 9,275    ³8.0   $ 11,593    ³10.0

Tier I Capital to Risk Weighted Assets:

               

Consolidated

   $ 17,354    14.6   $ 4,774    ³4.0     N/A    N/A   

Pioneer Bank

   $ 13,794    11.9   $ 4,637    ³4.0   $ 6,956    ³6.0

Tier I Capital to Average Assets:

               

Consolidated

   $ 17,354    11.1   $ 6,273    ³4.0     N/A    N/A   

Pioneer Bank

   $ 13,794    9.0   $ 6,132    ³4.0   $ 7,665    ³5.0

As of December 31, 2008:

               

Total Capital to Risk Weighted Assets:

               

Consolidated

   $ 18,064    15.5   $ 9,312    ³8.0     N/A    N/A   

Pioneer Bank

   $ 14,296    12.7   $ 9,043    ³8.0   $ 11,304    ³10.0

Tier I Capital to Risk Weighted Assets:

               

Consolidated

   $ 16,609    14.3   $ 4,656    ³4.0     N/A    N/A   

Pioneer Bank

   $ 12,880    11.4   $ 4,522    ³4.0   $ 6,782    ³6.0

Tier I Capital to Average Assets:

               

Consolidated

   $ 16,609    10.1   $ 6,611    ³4.0     N/A    N/A   

Pioneer Bank

   $ 12,880    8.3   $ 6,202    ³4.0   $ 7,753    ³5.0

 

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NOTE 15        STOCK OPTION PLAN:

The Company’s 1998 Stock Incentive Plan (the “Plan”) was adopted by the Board of Directors on June 11, 1998 and approved by the shareholders on June 11, 1999. This ten year Plan expired in June of 2008 with respect to the issuance of new option grants. However, grants previously issued under this Plan may still be exercised within the original terms.

Generally, the Plan provided for the grants of incentive stock options and non-qualified stock options. The exercise price of an Option could not be less than 100% of the fair market value of the common stock (or if greater, the book value) on the date of the grant. The option terms applicable to each grant were determined at the grant date, but no Option could be exercisable in any event, after ten years from its grant date.

A summary of the activity in the Company’s stock option plan is as follows:

 

     Shares    Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual Term

(In Years)
   Intrinsic Value
of Unexercised
In-the-Money
Options

(In Thousands)

Options outstanding, 12/31/08

   7,200    $ 16.16    4.5    $ 11

Options Granted

   —        —        

Options Exercised

   800      12.75      

Options Forfeited

   —        —        
             

Options outstanding, 12/31/09

   6,400    $ 16.58    4.00   
             

Options exercisable, 12/31/09

   6,400    $ 16.58    4.00    $ —  
             

The intrinsic value of stock options exercised in 2009 and 2008 was $2,600 and $4,000, respectively.

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. This amount changes based on market value of the Company’s stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Back-Scholes option pricing model.

 

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NOTE 16        EARNINGS PER SHARE:

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

 

     2009    2008    2007
     Shares    Per
Share
Amount
   Shares    Per
Share
Amount
   Shares    Per
Share
Amount

Basic earnings per share

   1,022,931    $ 1.20    1,015,243    $ 1.09    1,011,481    $ 1.73
                             

Effect of dilutive securities:

                 

Stock Options

   —         286       644   
                       

Diluted earnings per share

   1,022,931    $ 1.20    1,015,529    $ 1.09    1,012,125    $ 1.73
                                   

For 2009 and 2008, stock options representing 6,400 and 7,200 average shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.

NOTE 17        OFF-BALANCE SHEET COMMITMENTS:

The contract or notional amount of financial instruments at December 31, with off-balance sheet risk are as follows:

 

     2009    2008
     (In Thousands)

Unfunded lines of credit (commercial and personal)

   $ 4,766    $ 6,036

Loan commitments and letters of credit (commercial and personal)

     4,894      6,480

Credit card unused credit limits

     1,279      1,323

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the counter-party.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit generally are un-collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments for which collateral is deemed necessary.

 

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NOTE 18        TRANSACTIONS WITH RELATED PARTIES:

During the year, executive officers and directors (and companies controlled by them) were customers of and had transactions with the Company in the normal course of business. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Deposit account balances of executive officers and directors totaled $1.6 million and $1.5 million as of December 31, 2009 and 2008, respectively. Loan transactions to such related parties are shown in the following schedule:

 

     2009     2008  
     (In Thousands)  

Total loans, beginning of year

   $ 793      $ 598   

New loans

     435        384   

Payments

     (570     (189
                

Total loans, end of year

   $ 658      $ 793   
                

NOTE 19        FAIR VALUE MEASUREMENTS:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.

 

Level 1     Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2     Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3     Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

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NOTE 19        FAIR VALUE MEASUREMENTS (continued):

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table presents the balances of financial assets measured at fair value on a recurring basis as of December 31, 2009 and December 31, 2008:

 

          Fair Value Measurements Using:

Description

   Balances
Outstanding
(In Thousands)
   Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)

Assets

           

As of December 31, 2009

           

Available-for-sale securities

   $ 12,999    $ —      $ 12,999    $ —  
                           

As of December 31, 2008

           

Available-for-sale securities

   $ 15,216    $ —      $ 15,216    $ —  
                           

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: The Fair Value Measurement accounting standard also applies to loans measured for impairment including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business financial statement if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19        FAIR VALUE MEASUREMENTS (continued):

 

Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at the lower of loan balance or fair value less cost to sell.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis during the period.

 

          Carrying values

Description

   Balances
Outstanding
(In Thousands)
   Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)

Assets:

           

As of December 31, 2009

           

Impaired Loans, net of allowance

   $ 1,613    $ —      $ 936    $ 677
                           

Other Real Estate Owned

   $ 352    $ —      $ 140    $ 212
                           

As of December 31, 2008

           

Impaired Loans, net of allowance

   $ 1,760    $ —      $ 873    $ 887
                           

Other Real Estate Owned

   $ 21    $ —      $ —      $ 21
                           

Accounting guidance defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Company’s financial instruments lack an available trading market; significant estimates, assumptions and present value calculations are required to determine estimated fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due From Banks and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Interest Bearing Deposits in Other Banks – Fair values are based on quoted reinvestment market rates available at for similar deposits accounts as of the date of this report.

Securities – Fair values, excluding restricted stock, are based on quoted market prices or dealer quotes.

Loans Receivable – For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits and Borrowings – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of all other deposits and borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19        FAIR VALUE MEASUREMENTS (continued):

 

Accrued Interest – The carrying amounts of accrued interest approximate fair value.

Off-Balance-Sheet Financial Instruments – The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter party. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

At December 31, 2009 and 2008, the fair value of loan commitments and stand-by letters of credit were immaterial. Therefore, they have not been included in the following table.

Estimated fair value and the carrying value of financial instruments at December 31, 2009 and 2008 are as follows (in thousands):

 

     2009    2008
     Carrying
Value
   Estimated
Fair Value
   Carrying
Value
   Estimated
Fair Value
     (In Thousands)

Financial Assets

           

Cash and due from banks

   $ 5,252    $ 5,252    $ 2,401    $ 2,401

Interest bearing deposits in other banks

     6,724      6,769      11,896      12,045

Federal funds sold

     1,500      1,500      100      100

Securities available for sale

     12,999      12,999      15,216      15,216

Loans, net

     124,660      126,297      119,225      118,272

Accrued interest receivable

     644      644      720      720

Financial Liabilities

           

Demand Deposits:

           

Non-interest bearing

     27,316      27,316      25,079      25,079

Interest bearing

     17,381      17,381      12,377      12,377

Savings deposits

     15,802      15,802      15,866      15,866

Time deposits

     71,515      73,098      75,656      76,848

Borrowings

     8,500      8,497      9,400      9,408

Accrued interest payable

     412      412      619      619

The Company, through its bank subsidiary, assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of their financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment and more likely to repay in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 20        BENEFIT PLANS:

The Bank has a 401(k) Profit Sharing Plan covering full-time employees who have completed 180 days of service and are at least 21 years of age. Employees may contribute compensation subject to certain limits based on federal tax laws. The Bank makes discretionary matching contributions of up to 3 percent of an employee’s annual compensation contributed to the Profit Sharing Plan. Additional amounts may be contributed, at the option of the Bank’s Board of Directors. Employer contributions vest to the employee over a six-year period, and employees become 100% vested in his/her seventh year of full-time employment. For the years ended December 31, 2009, 2008 and 2007, total expense attributable to this 401(k) plan amounted to approximately $35,000, $36,000 and $30,000, respectively.

The Bank also provides a cafeteria insurance plan including medical, life, and long-term disability coverage for eligible employees. The net expense attributable to this insurance plan was approximately $179,000, $180,000, and $182,000 for the years ending December 31, 2009, 2008, and 2007, respectively.

NOTE 21        PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

BALANCE SHEETS

 

     December 31,  
     2009    2008  
     (In Thousands)  

ASSETS

     

Cash and cash equivalents

   $ 112    $ 257   

Investment in subsidiary

     14,384      13,416   

Securities available for sale

     2,579      2,144   

Bank premises and equipment, net

     621      645   

Other assets

     220      439   
               

Total Assets

   $ 17,916    $ 16,901   
               

LIABILITIES

     

Accrued expenses

   $ —      $ 16   

Other liabilities

     —        80   
               

Total Liabilities

     —        96   
               

STOCKHOLDERS’ EQUITY

     

Common stock

     515      509   

Retained earnings

     17,300      16,460   

Accumulated other comprehensive income (loss), net

     101      (164
               

Total Stockholders’ Equity

     17,916      16,805   
               

Total Liabilities and Stockholders’ Equity

   $ 17,916    $ 16,901   
               

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21        PARENT CORPORATION ONLY FINANCIAL STATEMENTS: (continued)

 

STATEMENTS OF INCOME

Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007
     (In Thousands)

INCOME

      

Dividends from subsidiary

   $ 322      $ 576      $ 1,258

Interest income

     23        21        29

Dividend income

     63        32        55

Security gains (losses)

     (38 )     (694 )     315

Rent income

     83        83        83

Other income

     3        7        8
                      

Total Income

     456        25        1,748
                      

EXPENSES

      

Compensation expense

     65        82        39

Occupancy expenses

     35        35        35

Equipment expense

     —          1        1

Other operating expenses

     78        195        153
                      

Total Expenses

     178        313        228
                      

Net income (loss) before income tax expense (benefit) and undistributed income of subsidiary

     278        (288 )     1,520

INCOME TAX EXPENSE (BENEFIT)

     (35 )     (333 )     84
                      

Net income before undistributed income of subsidiary

     313        45        1,436

Undistributed income of subsidiary

     915        1,066        316
                      

NET INCOME

   $ 1,228      $ 1,111      $ 1,752
                      

 

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PIONEER BANKSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21        PARENT CORPORATION ONLY FINANCIAL STATEMENTS: (continued)

 

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007  
     (In Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 1,228      $ 1,111      $ 1,752   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Undistributed subsidiary income

     (915     (1,066     (316

Deferred income tax (benefit)

     —          —          (4 )

Net amortization and accretion on securities

     6        —          —     

(Gain) loss on security sales

     38        694        (315

Depreciation

     24        26        26   

Stock based compensation

     201        126        4   

Net change in:

      

Other assets

     89        (211     (11

Accrued expenses and other liabilities

     (96