PIONEER BANKSHARES INC/VA - FORM 10-K

PIONEER BANKSHARES INC/VA - FORM 10-K - March 28, 2011

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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - PIONEER BANKSHARES INC/VA	dex32.htm
EX-21 - LIST OF SUBSIDIARIES - PIONEER BANKSHARES INC/VA	dex21.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PIONEER BANKSHARES INC/VA	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PIONEER BANKSHARES INC/VA	dex312.htm

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, 2010

¨	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.

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 $14.55 per share as of June 30, 2010 was $12,953,836. The number of shares outstanding of the registrant’s common stock is 1,035,274 as of March 28, 2011.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2011 are incorporated by reference into Part III of this Form 10-K.

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.		10

Item 3.	Legal Proceedings.		10

Item 4.	Reserved.		10

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.		11

Item 6.	Selected Financial Data.		12

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		13

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.		26

Item 8.	Financial Statements and Supplementary Data.		26

Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.		61

Item 9A.	Controls and Procedures.		61

Item 9B.	Other Information.		61

PART III

Item 10.	Directors, Executive Officers, and Corporate Governance.		62

Item 11.	Executive Compensation.		62

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.		62

Item 13.	Certain Relationships and Related Transactions, and Director Independence.		63

Item 14.	Principal Accounting Fees and Services.		63

PART IV

Item 15.	Exhibits, Financial Statement Schedules.		63

SIGNATURES			64

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, 2010 and 2009. 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.

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 its 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, 2010, the Company had 50 full-time equivalent employees. None of the employees are represented by any collective bargaining agreements and relations with employees are considered to be good.

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.

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 met 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.

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.

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 quarter will exceed the total of its net profits for that reporting period. 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.

Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Company’s activities that could have an adverse effect on operations and profitability.

Additionally, the Dodd-Frank Act was signed into law during 2010 and represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies.

The Company cannot predict whether any of these changes or potential regulatory actions may have an adverse or material impact on future operational results.

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.

The current 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, 2010.

The Dodd-Frank Act also requires federal banking agencies to establish more stringent risk-based capital requirements and leverage limits applicable to banks and bank holding companies. Under the legislation, federal banking agencies are required to develop capital requirements that will address banking activities that could potentially have a substantial economic impact.

Deposit Insurance

Federal Deposit Insurance Coverage limits were permanently increased to $250,000 per depositor during 2010. 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. In December 2009, federally insured banking institutions were required to prepay deposit insurance premiums through December 2012. Future FDIC assessments will be based on the Company’s assigned risk category and any growth in deposits, as well as potential regulatory changes related to the insurance coverage and assessment process.

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, 2010, 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.

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

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


2010	High		Low
First Quarter	$	16.00	$	13.50
Second Quarter		17.50		14.50
Third Quarter		16.00		14.50
Fourth Quarter		18.25		14.71

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

There were 1,035,274 and 1,029,466 shares of the Company’s Common Stock outstanding at the close of business on December 31, 2010 and 2009, respectively. There were 570 and 538 shareholders of record as of December 31, 2010 and 2009, respectively.

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


Declared Date	Record Date	Payment Date	Per Share Amount

3/11/10	3/19/10	3/31/10	$	.15
6/10/10	6/22/10	6/30/10		.15
9/09/10	9/22/10	9/30/10		.14
12/9/10	12/21/10	12/30/10		.14


Total for 2010			$	.58


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

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 2010.

Item 6.

Selected Financial Data.

The following is selected financial data for the Company for the years ending December 31, 2010 and 2009. 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)


	2010			2009
Results of Operations
Interest and dividend income	$	9,377		$	9,468
Interest expense		1,764			2,800

Net interest income		7,613			6,668
Provision for loan losses		806			1,260

Net interest income after provision for loan losses		6,807			5,408
Noninterest income		1,151			1,241
Noninterest expense		5,215			4,869

Income before income taxes		2,743			1,780
Income tax expense		884			552

Net Income	$	1,859		$	1,228


Financial Condition, At Year End
Assets	$	168,158		$	159,903
Deposits		135,959			132,014
Loans, net of allowance		130,786			124,660
Stockholders’ Equity		19,395			17,916

Per Share Data
Net income per share, basic and diluted	$	1.80		$	1.20
Dividends per share		.58			.57
Book value per share		18.73			17.40

Performance Ratios
Return on average assets ¹		1.13	%		0.78	%
Return on average equity ¹		9.99	%		7.05	%
Dividend payout ratio		32.17	%		47.49	%
Average equity to average assets ¹		11.33	%		11.13	%

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, 2010 and 2009, 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.

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.

Goodwill

Goodwill is included in other assets and totaled $360,000 for the reporting periods ending December 31, 2010 and 2009. Goodwill is no longer amortized, but instead is evaluated for impairment at least annually. No impairment charges were recognized for the 2010 and 2009 reporting periods.

Financial Overview

The Company reported net earnings of $1.9 million for the year ending December 31, 2010, as compared to $1.2 million for 2009. This represents an increase of approximately 51%. Total earnings per share as of December 31, 2010 were $1.80 compared to $1.20 for the prior year.

According to Company records, net income for 2010 is the highest in the history of the institution. The increase in earnings of approximately $631,000 during 2010 is primarily the result of management’s proactive approach related to deposit and loan pricing in the current economic environment and assertive actions relating to problem loan identification and oversight.

The Company had asset growth of approximately $8.3 million during 2010, with approximately $6.1 million being attributed to increased loan volume. Investments in securities available for decreased by approximately $1.8 million for the period ending December 31, 2010, as compared to total securities available for sale at December 31, 2009. Investments in interest bearing deposits increased by $3.9 million for the period ending December 31, 2010, while investments in Federal Funds Sold increased by approximately $1.1 million for the same period compared to balances as of December 31, 2009. The Company’s deposit portfolio increased by approximately $3.9 million during 2010 as compared to total deposits as of December 31, 2009. The Company’s total capital was $19.4 million as of December 31, 2010 and remains above the established regulatory guidelines to be considered a well capitalized institution. The capital to asset ratio as of December 31, 2010 was 11.53% as compared to 11.20% as of December 31, 2009.

The Company’s book value as of December 31, 2010 was $18.73 per share, as compared to a book value of $17.40 per share as of December 31, 2009. This represents an increase of 7.64%. Shareholder dividend payments for 2010 totaled $0.58 per share compared to $0.57 per share for the prior year. This represents a 1.75% increase for the company’s shareholders.

Results of Operations

Net Interest Income

Net interest income increased $945,000 or 14.17% in 2010. The increase in net interest income for 2010 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 $1.0 million or 37.00%, while total interest income on loans and investments decreased by $91,000 or 0.96%.

Interest income on securities available for sale decreased by $160,000 or 32.99% in 2010 compared to an decrease in the prior year of $134,000 or 21.65%. The average yields on securities decreased from 4.51% in 2009 to 3.96% in 2010. 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 $150,000 in 2010, compared to $187,000 in 2009. This decrease is primarily attributed to the low rate environment.

The net interest margin on earning assets on a tax equivalent basis increased from 4.54% in 2009 to 4.95% in 2010, as a result of the reduced deposit expense related to lower market rates. Interest expense on borrowings decreased by $115,000 or 51.57%, with the average rates paid on borrowings being 1.04% in 2010, compared to 3.25% in 2009. Yields on total loans decreased from 7.04% in 2009 to 6.78% in 2010. The yield on commercial and agricultural loans increased from 6.48% in 2009 to 6.77% in 2010. Commercial and residential real estate loan yields have decreased from 6.53% in 2009 to 6.29% in 2010. Installment loan yields have decreased from 10.12% in 2009 to 9.67% in 2010.

Table I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(ON A FULLY TAXABLE EQUIVALENT BASIS)

(In Thousands )


	2010								2009
	Average			Income/ Expense		Average Rates Earned/ Paid			Average			Income/ Expense		Average Rates Earned/ Paid
ASSETS
Loans: ¹
Commercial	$	6,481		$	439		6.77	%	$	7,050		$	457		6.48	%
Real estate		107,393			6,754		6.29	%		100,616			6,567		6.53	%
Installment		16,002			1,548		9.67	%		15,774			1,597		10.12	%
Credit card		616			105		17.05	%		619			117		18.90	%

Total Loans		130,492			8,846		6.78	%		124,059			8,738		7.04	%
Federal funds sold		2,449			6		0.24	%		2,507			6		0.24	%
Interest bearing deposits		10,606			144		1.36	%		8,225			181		2.20	%
Securities
Taxable		5,439			195		3.59	%		8,519			374		4.39	%
Nontaxable²		6,515			278		4.27	%		5,335			251		4.70	%

Total Earning Assets		155,501			9,469		6.09	%		148,645			9,550		6.42	%

Allowance for loan losses		(2,250	)							(1,860	)
Nonearning assets		11,103								9,813

Total Assets	$	164,354							$	156,598


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Interest bearing demand deposits	$	20,238		$	129		0.64	%	$	15,494		$	158		1.02	%
Savings		16,091			55		0.34	%		16,070			116		0.72	%
Time deposits		71,231			1,472		2.07	%		74,305			2,303		3.10	%

Total Interest Bearing Deposits		107,560			1,656		1.54	%		105,869			2,577		2.43	%
Borrowings		10,426			108		1.04	%		6,870			223		3.25	%

Total Interest Bearing Liabilities		117,986			1,764		1.50	%		112,739			2,800		2.48	%

Noninterest bearing deposits		26,518								25,776
Other liabilities		1,236								657

Total Liabilities		145,740								139,172
Stockholders’ equity		18,614								17,426

Total Liabilities and Stockholders’ Equity	$	164,354							$	156,598

Net Interest Earnings				$	7,705							$	6,750

Net Yield on Interest Earning Assets							4.95	%							4.54	%

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 $92,000 for 2010 and $82,000 for 2009.

Table II

PIONEER BANKSHARES, INC.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

(On a fully tax equivalent basis)

(Dollars in thousands)


	2010 Compared to 2009									2009 Compared to 2008
	Increase (Decrease)									Increase (Decrease)
	Volume			Rate			Total			Volume			Rate			Total
Interest Income
Loans
Commercial	$	(37	)	$	19		$	(18	)	$	(46	)	$	(104	)	$	(150	)
Real estate		443			(256	)		187			176			(443	)		(267	)
Installment		23			(72	)		(49	)		(50	)		(70	)		(120	)
Credit Card		(1	)		(11	)		(12	)		13			(14	)		(1	)

Total Loans		428			(320	)		108			93			(631	)		(538	)

Federal funds sold		—			—			—			(19	)		(41	)		(60	)

Interest bearing deposits in banks		52			(89	)		(37	)		(60	)		(111	)		(171	)

Investments
Taxable		(135	)		(44	)		(179	)		(202	)		(75	)		(277	)
Nontaxable		55			(28	)		27			64			107			171

Total Securities		(80	)		(72	)		(152	)		(138	)		32			(106	)

Total Earning Assets	$	400		$	(481	)	$	(81	)	$	(124	)	$	(751	)	$	(875	)

Interest Expense
Demand deposits	$	48		$	(77	)	$	(29	)	$	33		$	42		$	75
Savings		—			(61	)		(61	)		4			(68	)		(64	)
Time deposits		(95	)		(736	)		(831	)		51			(805	)		(754	)

Total Deposits		(47	)		(874	)		(921	)		88			(831	)		(743	)

Borrowings		115			(230	)		(115	)		(201	)		(12	)		(213	)

Total Liabilities		68			(1,104	)		(1,036	)		(113	)		(843	)		(956	)

Net Interest Earnings	$	332		$	623		$	955		$	(11	)	$	92		$	81

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 decreased from $1.2 million in 2009 to approximately $1.1 million in 2010. This represents a decrease of $90,000 and is primarily attributed to reduced service charge income related to checking accounts and debit card activities, as well as losses incurred on the sale of certain investment securities in 2010 as compared to gains on the sale of investment securities in 2009. Service charge income decreased by $102,000 or 10.47%, while losses on securities transactions were $43,000 in 2010 compared to gains of $95,000 in 2009.

Non-interest expense increased by $346,000 or 7.11% from 2009 to 2010. Salaries and benefits increased by $410,000 or 19.46% in 2010 compared to a decrease of $316,000 or 13.04% in 2009. The increase in salaries and benefit expense during 2010 is the result of wage increases given to bank employees, as well as the addition of new salary expenses relating to staff positions that have remained vacant for an extended period of time. Management’s decisions in recent years regarding salary increases and hiring activities were of a conservative nature in an effort to control costs in the uncertain economic environment.

Equipment expenses decreased by $131,000 or 23.31% in 2010 compared to 2009 as a result of normal depreciation fluctuations. Other expenses increased by $77,000 from 2009 to 2010, which is the net result of increases and decreases in various operating costs.

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.

The Company cannot predict whether any pending recommendations by the regulatory authorities, if implemented, may have an adverse or material impact on future operational results.

Securities

Securities as of December 31, 2010 totaled $12.1 million, which is a 12.13% decrease compared to the December 31, 2009 balance of $13.8 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, 2010, the Company had investments in equity securities consisting primarily of common stocks and corporate bonds with a cost of $1.5 million and an estimated market value of $1.6 million. The equity securities are generally 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 total available for sale investment portfolio at December 31, 2010 has a cost of $10.8 million and an estimated fair market value of $11.2 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, 2010 and December 31, 2009:


	2010 Book Value		Weighted Average Yield			2009 Book Value		Weighted Average Yield
(In Thousands)
Securities available for sale
Maturing within one year	$	3,500		0.01	%	$	2,000		0.01	%
Maturing after one year & within five years		3,033		3.55	%		1,398		4.36	%
Maturing after five years & within ten years		1,727		5.02	%		1,760		4.58	%
Maturing after 10 years		1,040		5.50	%		4,914		5.24	%
Equity Securities		1,515					2,786

Total securities available for sale	$	10,815		2.71	%	$	12,858		3.97	%

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 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 2010 from $124.7 million at December 31, 2009 to $130.8 million at December 31, 2010. This is an increase of $6.1 million or 4.91%. The increase in the loan portfolio was mainly in the categories of commercial real estate, residential mortgages, 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, 2010			December 31, 2009
	(In Thousands)
Real Estate Loans
Construction & land loans	$	6,283		$	7,826
Residential Equity lines of credit		1,534			1,788
Residential 1-4 family		48,573			47,400
Residential second mortgages 1 - 4 family		4,161			3,998
Residential Multifamily		5,439			3,571
Commercial Agricultural loans		4,125			3,806
Commercial Municipal loans		164			78
Commercial Owner & Non-owner occupied		40,911			35,641

Total real estate loans		111,190			104,108

Commercial Non Real Estate loans		4,891			6,475

Consumer Non Real Estate loans
Personal Installments		16,688			15,669
Credit Cards		659			681
Overdrafts/Other		73			126

Total consumer installment loans		17,420			16,463


Gross Loans		133,501			127,059
Less unearned discount on loans		(373	)		(454	)

Loans, less unearned discount		133,128			126,605
Less allowance for loan losses		(2,342	)		(1,945	)

Net Loans Receivable	$	130,786		$	124,660

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 residential real estate loans, including equity lines of credit, residential 1–4 family first and second mortgages, and multifamily loans totaled $59.7 million as of December 31, 2010 as compared to $56.8 million at December 31, 2009. 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.

The small business commercial real estate loans, including construction and land loans, agricultural/farm loans, and other business properties totaled $51.3 million as of December 31, 2010 as compared to $47.3 million at December 31, 2009. The increase in commercial real estate loans is primarily related to increased loan volume in the Harrisonburg and Charlottesville service area. Management has established specific lending criteria relating to commercial loans and considers the risk of loss in this loan category to be moderate.

A schedule of remaining maturities of selected loan categories as of December 31, 2010 is as follows:


	At December 31, 2010
	(In Thousands)
	Less than One Year		One to Five Years		Greater than Five Years		Total
Commercial and Agricultural	$	1,725	$	2,679	$	452	$	4,856
Real estate construction		5,365		664		254		6,283

Total Maturities of Selected Loans	$	7,090	$	3,343	$	706	$	11,139


For maturities over one year:
Fixed rates	$	3,843
Variable rates		206

	$	4,049

At December 31, 2010 construction loans were 4.80% percent of total net loans and commercial and agricultural loans were 3.71% 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, 2010 and December 31, 2009:


	2010			2009
	(In Thousands)
Non-accrual Loans	$	2,589		$	1,373
Loans Past Due 90 days or more		76			253

Total non-performing assets	$	2,665		$	1,626

Allowance for loan losses to total loans		1.76	%		1.54	%

Non-performing Assets to total loans		2.00	%		1.30	%

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 generally defined as those loans on which the original interest rate or repayment terms have been modified specifically due to the borrower’s financial hardship. Restructured loans totaled $875,000 as of December 31, 2010, which included $432,000 in loans that are classified as performing and in compliance with their modified terms. Approximately $443,000 in restructured loans were classified as nonperforming based on their past due or nonaccrual status as of December 31, 2010. Restructured loans as of December 31, 2009 totaled $777,000, with approximately $558,000 classified as performing and approximately $219,000 classified as nonperforming.

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, 2010 totaled approximately $448,000 compared to $1.3 million 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 the probable and inherent risk of loss within the portfolio.

Loan Losses and Allowance For Loan Losses

The following schedule outlines the activity in the allowance for loan loss account as of December 31, 2010 and December 31, 2009:


	2010			2009
	(In Thousands)
Beginning balance	$	1,945		$	1,651
Provision charged to expense		806			1,260

Loan losses:
Commercial		—			131
Installment		334			377
Real estate		205			641
Credit card		19			11

Total Loan Losses		558			1,160

Recoveries:
Commercial		8			40
Installment		140			154
Real estate		1			—
Credit card		—			—
Total Loan Recoveries		149			194

Net Loan Losses		409			966

Balance at End of Period	$	2,342		$	1,945

Net Loan Losses as a Percent of Average loans		0.31	%		0.78	%

A breakdown of the allowance allocations by loan type are presented below for December 31, 2010 and December 31, 2009:


	December 31, 2010								December 31, 2009
	Amount		Percent of Allowance			Percent of Average Loans			Amount		Percent of Allowance			Percent of Average Loans
	(In Thousands)
Analysis of Ending Balance
Commercial	$	222		9.48	%		4.97	%	$	452		23.24	%		5.68	%
Real estate		1,702		72.67	%		82.30	%		804		41.34	%		81.10	%
Installment		406		17.34	%		12.26	%		662		34.03	%		12.72	%
Credit card		12		0.51	%		0.47	%		27		1.39	%		0.50	%

Total	$	2,342		100.00	%		100.00	%	$	1,945		100.00	%		100.00	%

Allowance for loan losses as a percent of year end loans				1.76	%							1.54	%

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.

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 $2,342 million at December 31, 2010, increased by approximately $397,000 from its level at December 31, 2009. 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 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 1.76% and 1.54% of total loans at December 31, 2010 and December 31, 2009, 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, 2010 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 2010 decreased by $602,000 compared to the prior year, and loan loss recoveries decreased by $45,000. This resulted in an overall decrease of $557,000 in net loan charge offs for the period

ending December 31, 2010 as compared to December 31, 2009. The decrease in charge offs is primarily related to a reduced amount of losses incurred on commercial and residential real estate loans as compared to the prior year.

The provision expense related to the allowance for loan loss for 2010 decreased by $454,000 as compared to 2009. This decrease is directly related to the reduced amount of charge offs noted above.

Management’s evaluation of the allowance for loan losses as of December 31, 2010 and December 31, 2009 concluded that the reserved amount was adequate to cover estimated losses inherent in the portfolio. 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.

Premises, Equipment, and Software

The Bank had purchases relating to premises, equipment and other fixed assets of approximately $132,000 during 2010. These purchases were primarily related to in-house software and equipment upgrades. The Bank continually monitors technological upgrades in the banking industry, and periodically, in order to achieve higher levels of internal operational efficiency, purchases new or additional equipment relating to such technologies. 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.

The Bank executed new contracts with its core data processing vendor during 2010 for various system enhancements relating to certain daily processing functions and operational software upgrades. One major element of these new contracts was the change from an in-house daily processing system to an outsourced environment, in which the core vendor now performs selected back-office operational support functions for the bank. The implementation of these new system functions are expected to provide cost savings and increased internal efficiencies to the Bank in future reporting periods.

Deposits

The Company’s total deposits as of December 31, 2010 were $135.9 million compared to $132.0 million at December 31, 2009. This increase of $3.9 million or 2.99% was primarily in the category of interest bearing 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 $23.1 million as of December 31, 2010 compared to $17.4 million at December 31, 2009. Total non-interest bearing demand deposits were $25.7 million as of December 31, 2010 compared to $27.3 million at December 31, 2009.

Total savings deposits as of December 31, 2010 were $15.7 million compared to $15.8 million as of December 31, 2009. This represents a decrease of approximately $56,000 or 0.35%. 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 52.49% of the Bank’s total deposits. Total time deposits were $71.4 million as of December 31, 2010 compared to $71.5 million at December 31, 2009. Time deposits with a balance greater than $100,000 represent 38.59% of the Bank’s total time deposit portfolio.

The maturity schedule as of December 31, 2010 for certificates of deposit over $100,000 are shown below:


Maturity: (in thousands)

Less than 3 months	$	11,262
3 to 12 months		8,593
1 to 3 years		7,484
Over 3 years		206

Total	$	27,545

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 Bank assets, subject to certain eligibility requirements. This represents a total credit line of approximately $65.9 million and $62.6 million as of December 31, 2010 and 2009, 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 $48.6 million at December 31, 2010. 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, 2010, total outstanding borrowings with FHLB were $11.0 million. Of this total, approximately $9.0 million was in fixed rate principal reducing advances with a maturity date of March 1, 2013 and $2.0 million was a variable rate note with a maturity of August 30, 2011. The contractual maturities of the outstanding FHLB advances as of December 31, 2010 are shown below:


(In thousands)
Due in 2011	$	2,000
Due in 2012		—
Due in 2013		9,000

Total	$	11,000

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 16.4% at December 31, 2010 compared to 15.9% at December 31, 2009. The ratio of Consolidated Tier 1 Capital to risk-weighted assets was 15.1% as of December 31 2010 compared to 14.6% at December 31, 2009.

The following schedule shows a comparative breakdown of the Company’s capital as of December 31, 2010 and December 31, 2009:


	2010			2009
	(In Thousands)
Tier 1 capital
Consolidated Risk-weighted assets	$	124,487		$	119,356


Consolidated Tier 1 capital
Common stock	$	518		$	515
Retained Earnings		18,649			17,300
Goodwill excluded		(360	)		(360	)

Total Tier 1 capital		18,807			17,455

Consolidated Tier 2 capital
Allowance for loan losses (1)		1,556			1,492

Total risk-based capital	$	20,363		$	18,947


Consolidated total risk-based capital ratio		16.4	%
15.9%
Consolidated Tier 1 risk-based capital ratio		15.1	%
14.6%
Consolidated Leverage ratio		11.4	%
11.1%

(1)

Limited to 1.25% of gross risk-weighted assets

Interest Sensitivity and Liquidity

At December 31, 2010, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 34.19% for the one-year re-pricing period compared with a negative Gap Sensitivity Ratio of 43.69% at December 31, 2009. 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, 2010 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 2010 and 2009. The Bank’s membership in the Federal Home Loan Bank System also provides liquidity, as the Bank can borrow funds at various terms and then match such maturities to specific repayment terms of loans. The matching of the assets 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, 2010:

(In Thousands)


	1 - 90 Days			91 - 365 Days			1 to 5 Years			Over 5 Years			Not Classified			Total
Uses of Funds:
Loans	$	8,412		$	11,578		$	65,694		$	47,444			—		$	133,128
Interest Bearing Bank deposits		5,384			—			5,250			—			—			10,634
Investment Securities		3,500			—			3,131			2,904			1,633			11,168
Restricted Stock		—			—			—			—			947			947
Federal Funds Sold		2,550			—			—			—			—			2,550

Total		19,846			11,578			74,075			50,348			2,580			158,427

Sources of Funds:
Demand Deposits
Interest bearing		23,104			—			—			—			—			23,104
Savings accounts		15,746			—			—			—			—			15,746
Time Deposits:
Over $ 100,000		11,262			8,593			7,690			—			—			27,545
Other certificates		8,322			16,563			18,940			—			—			43,825

Total deposits		58,434			25,156			26,630			—			—			110,220


Borrowings		2,000			—			9,000			—			—			11,000

Total		60,434			25,156			35,630			—			—			121,220

Discrete Gap		(40,588	)		(13,578	)		38,445			50,348			2,580			37,207

Cumulative Gap		(40,588	)		(54,166	)		(15,721	)		34,627			37,207

Ratio of Cumulative Gap to Total Earning Assets		-25.62	%		-34.19	%		-9.92	%		21.86	%		23.49	%

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

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Report of Independent Registered Public Accounting Firm		27

Consolidated Balance Sheets as of December 31, 2010 and 2009		28

Consolidated Statements of Income for the years ended December 31, 2010, 2009, and 2008		29

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008		30

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		31

Notes to Consolidated Financial Statements		32

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Pioneer Bankshares, Inc.

Stanley, Virginia

We have audited the accompanying consolidated balance sheets of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008. 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An also 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, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010, 2009 and 2008, in conformity with U.S. generally accepted accounting principles.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 28, 2011

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2010 AND 2009

(In Thousands, except share and per share data)


	2010		2009
ASSETS
Cash and due from banks	$	4,373	$	5,252
Interest-bearing deposits in other banks		10,634		6,724
Federal funds sold		2,550		1,500
Securities available for sale, at fair value		11,168		12,999
Restricted securities, at cost		947		788
Loans receivable, net of allowance of $2,342 in 2010 and $1,945 in 2009		130,786		124,660
Bank premises and equipment, net		3,359		3,582
Accrued interest receivable		681		644
Other real estate owned		244		352
Other assets		3,416		3,402

Total Assets	$	168,158	$	159,903

LIABILITIES

Deposits
Noninterest bearing	$	25,739	$	27,316
Interest bearing
Demand		23,104		17,381
Savings		15,746		15,802
Time deposits over $100,000		27,545		21,934
Other time deposits		43,825		49,581

Total Deposits		135,959		132,014

Accrued expenses and other liabilities		1,804		1,473
Borrowings		11,000		8,500

Total Liabilities		148,763		141,987

STOCKHOLDERS’ EQUITY

Common stock; $.50 par value, authorized 5,000,000 shares; outstanding – 1,035,274 and 1,029,466 shares in 2010 and 2009, respectively		518		515
Retained earnings		18,649		17,300
Accumulated other comprehensive income, net		228		101

Total Stockholders’ Equity		19,395		17,916

Total Liabilities and Stockholders’ Equity	$	168,158	$	159,903

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In Thousands, except per share data)


	2010			2009		2008
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	8,846		$	8,738	$	9,276
Interest on securities – taxable		187			379		597
Interest on securities – nontaxable		138			106		22
Deposits and federal funds sold		150			187		418
Dividends		56			58		86

Total Interest and Dividend Income		9,377			9,468		10,399

INTEREST EXPENSE:
Deposits		1.656			2,577		3,320
Borrowings		108			223		436

Total Interest Expense		1,764			2,800		3,756

NET INTEREST INCOME		7,613			6,668		6,643
PROVISION FOR LOAN LOSSES		806			1,260		548

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,807			5,408		6,095

NONINTEREST INCOME:
Service charges on deposit accounts		872			974		917
Commission income		250			57		73
Gain (losses) on other real estate owned		(20	)		29		(33	)
Other income		92			86		107
Gains (losses) on security transactions		(43	)		95		(553	)

Total Noninterest Income		1,151			1,241		511

NONINTEREST EXPENSES:
Salaries and employee benefits		2,517			2,107		2,423
Occupancy expenses		350			332		358
Equipment expenses		431			562		656
ATM expenses		101			116		109
FDIC assessment		221			330		25
Sales and franchise tax		156			135		87
Supplies and printing		145			153		131
Director compensation and fees		158			165		170
Legal fees		125			60		100
Professional and audit fees		239			221		173
Telephone		117			110		149
Other expenses		655			578		609

Total Noninterest Expenses		5,215			4,869		4,990

INCOME BEFORE INCOME TAXES		2,743			1,780		1,616
INCOME TAX EXPENSE		884			552		505

NET INCOME	$	1,859		$	1,228	$	1,111

PER SHARE DATA:
Net income, basic and diluted	$	1.80		$	1.20	$	1.09

Dividends	$	0.58		$	0.57	$	0.57

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In Thousands)


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

Comprehensive Income
Net Income				1,859						1,859
Changes in unrealized gains on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $70)							99
Reclassification adjustment for losses included in net income (net of tax effect of $15)							28			127

Total Comprehensive Income										1,986
Cash Dividends				(598	)					(598	)
Stock issued for compensation		3		88						91


BALANCE DECEMBER 31, 2010	$	518	$	18,649		$	228		$	19,395

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008


	(In Thousands)
	2010			2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,859		$	1,228		$	1,111
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		806			1,260			548
(Gain) loss on security transactions		43			(95	)		553
Net amortization (accretion) on securities		27			19			—
Deferred income tax (benefit)		(126	)		(152	)		(49	)
Depreciation		355			390			481
Stock based compensation		91			201			126
(Gain) loss of sale on other real estate		20			(29	)		33
Net change in:
Accrued interest receivable		(37	)		76			38
Other assets		29			(2,425	)		(168	)
Accrued expenses and other liabilities		331			546			(368	)

Net Cash Provided by Operating Activities		3,398			1,019			2,305

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits in other banks		(3,910	)		5,172			(10,296	)
Net change in federal funds sold		(1,050	)		(1,400	)		200
Net change in restricted securities		(159	)		4			(112	)
Proceeds from maturities, sales, and principal payments of securities available for sale		15,923			19,428			17,764
Purchase of securities available for sale		(13,951	)		(16,712	)		(22,679	)
Net decrease (increase) in loans		(7,189	)		(6,656	)		5,449
Proceeds on sale of other real estate		344			625			335
Purchase of bank premises and equipment		(132	)		(182	)		(215	)

Net Cash Provided By (Used in) Investing Activities		(10,124	)		279			(9,554	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand and savings deposits		4,090			7,177			(3,706	)
Time deposits		(145	)		(4,141	)		5,329
Proceeds from borrowings		22,060			10,000			21,501
Curtailments of borrowings		(19,560	)		(10,900	)		(19,001	)
Dividends paid		(598	)		(583	)		(579	)

Net Cash Provided By Financing Activities		5,847			1,553			3,544

CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents		(879	)		2,851			(3,705	)
Cash and cash equivalents, beginning of year		5,252			2,401			6,106

Cash and cash equivalents, end of year	$	4,373		$	5,252		$	2,401


Supplemental Disclosure of Cash Paid During the Year for:
Interest	$	1,931		$	3,007		$	3,903
Income taxes		892			837			788

Supplemental Disclosure of non-cash activity:
Unrealized gain (loss) on securities available for sale		212			423			(214	)
Other real estate acquired in settlement of loans		257			927			389

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

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 and deferred tax assets, other-than-temporary impairment of securities, and fair value of financial instruments.

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.

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, 2010 and 2009, 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Loans Receivable - Loans receivable are intended to be held until maturity and are reported at their outstanding principal balance less any adjustments for charge offs, 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.

The Company classifies all loans past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent.

The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection for all loan classes. Commercial non-real estate classes are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or generally when principal or interest becomes 90 days past due, whichever occurs first. Real estate loans, which includes the residential, commercial, and construction land categories, are generally placed on nonaccrual status when principal and interest becomes 90 days past due. Consumer non-real estate loans, including personal automobile loans and all other individual loans are placed on nonaccrual status at varying intervals, based on the type of product, generally when principal and interest becomes between 90 days and 120 days past due. Revolving consumer credit card loans are not placed on nonaccrual but are generally charged-off if they reach 120 days past due, with unpaid fees and finance charges reversed against interest income. Consumer non-real estate loans are typically charged off between 90 and 120 days past due unless the loan is well secured and in the process of collection and are subject to mandatory charge-off at a specified delinquency date consistent with regulatory guidelines. 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 other loan classes are generally charged off within the range of 90 to 180 days, unless there are specific or extenuating circumstances that warrant further collection or legal actions.

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. Payments received on nonaccrual loans are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are generally removed from nonaccrual status when the concern no longer exists as to the collectability of principal and interest and the borrower has been able to demonstrate a specific period of payment performance.

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, concentrations of credit within the portfolio, loan growth trends, levels of adversely classified loans, past due trends, as well as other factors related to the knowledge and experience of lending personnel and legal, regulatory, or compliance issues related to lending practices. 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

The allowance consists of specific and various general 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.

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 commercial real estate loans and construction land loans are reviewed and evaluated on an annual basis or as they become deliquent so as to determine any possible impairment. Residential real estate loans are specifically evaluated for possible impairment on a case by case basis as they become delinquent or are identified as a potential problem credit. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not generally separately identify individual consumer loans for impairment disclosures.

Troubled Debt Restructurings - In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.

Restructured loans totaled $875,000 as of December 31, 2010, which included $432,000 in loans that are classified as performing and in compliance with their modified terms. Approximately $443,000 in restructured loans were classified as nonperforming based on their past due or nonaccrual status as of December 31, 2010. Restructured loans as of December 31, 2009 totaled $777,000, with approximately $558,000 classified as performing and approximately $219,000 classified as nonperforming.

Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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.

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 $36,481, $40,542, and $36,462 for the years ended December 31, 2010, 2009, and 2008, 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

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, the Financial Accounting Standards Board (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 the Accounting Standards Codification (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. ASU 2009-16 was effective for transfers on or after January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance relating to variable interest entities. The new guidance, which was issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” was adopted into the 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 was effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 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 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective immediately. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

On September 15, 2010, the SEC issued Release No. 33-9142, “Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.” This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

On September 17, 2010, the SEC issued Release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.” This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosures,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2011, the FASB issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” The amendments in this ASU temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.

The SEC has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting,” which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $1.2 million at December 31, 2010 and $1.1 million at December 31, 2009.

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 $3.8 million and $2.2 million at December 31, 2010 and 2009, respectively. Management has established acceptable risk tolerances relating to uninsured deposits in other banks and diversifies these funds in accordance with policy guidelines.

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, 2010
Available for Sale
U.S. government and agency securities	$	4,500	$	4	$	—		$	4,504
Mortgage-backed securities		1,040		75		—			1,115
State and municipals		3,760		156		—			3,916
Equity securities		1,515		118		—			1,633

	$	10,815	$	353	$	—		$	11,168


	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

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5

INVESTMENT SECURITIES (Continued):

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


	2010			2009			2008
	(In Thousands)

Gains	$	169		$	137		$	175
Losses		(212	)		(42	)		(728	)

Net Gains (Losses)	$	(43	)	$	95		$	(553	)

The amortized cost and fair value of investment securities at December 31, 2010, 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	$	3,500	$	3,500
Due after one year through five years		3,034		3,130
Due five years through ten years		1,726		1,790
Due after ten years		1,040		1,115

		9,300		9,535
Equity securities		1,515		1,633

	$	10,815	$	11,168

Investment securities with a book value of $773 thousand at December 31, 2010 and $670 thousand at December 31, 2009 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. Management’s evaluation of the individual stocks and securities within the investment portfolios is performed on a quarterly basis and assesses the unrealized loss positions that exist to determine whether there is potential other than temporary impairment. The key factors considered during this evaluation process are the amount of unrealized loss, percentage decline in value, length of time in loss position, near-term prospects of the issuer, current market trading activity, financial strength ratings from industry reports, credit quality, credit ratings, continued dividend payments of the issuer, diversification or multiple holdings within particular funds, as well as management’s intent and ability to hold stocks until such time that they can recover in value and further assessment and determination that the institution will not be required to sell such investments to meet operational cash flow needs in the near future. In analyzing an issuer’s financial condition, management also 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5

INVESTMENT SECURITIES (Continued):

As of December 31, 2010, there were no securities in an unrealized loss position. Should unrealized losses exist within the securities portfolio, management’s practice is to perform a quarterly evaluation and assess numerous factors in determining if any such losses are considered to be other-than-temporarily impaired as previously discussed.

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 (in thousands):


		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	)

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 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.

FHLB evaluates the excess capital stock of its members on a quarterly basis to determine stock repurchase activities. Additionally, FHLB generally pays quarterly dividends on the outstanding stock investment of each of its members.

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, 2010, the Bank’s investment in FHLB stock totaled approximately $871,000.

Management’s evaluation of FHLB stock for possible impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Management’s evaluation of FHLB stock as of December 31, 2010 and 2009 did not consider this investment to be other than temporarily impaired, and therefore, no impairment has been recognized.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS:

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


	December 31, 2010			December 31, 2009
	(In Thousands)
Real Estate Loans
Construction & land loans	$	6,283		$	7,826
Residential Equity lines of credit		1,534			1,788
Residential 1-4 family		48,573			47,400
Residential second mortgages 1 - 4 family		4,161			3,998
Residential Multifamily		5,439			3,571
Commercial Agricultural loans		4,125			3,806
Commercial Municipal loans		164			78
Commercial Owner & Non-owner occupied		40,911			35,641

Total real estate loans		111,190			104,108

Commercial Non Real Estate loans		4,891			6,475

Consumer Non Real Estate loans
Personal Installments		16,688			15,669
Credit Cards		659			681

Overdrafts/Other		73			126

Total consumer installment loans		17,420			16,463


Gross Loans		133,501			127,059
Less unearned discount on loans		(373	)		(454	)

Loans, less unearned discount		133,128			126,605
Less allowance for loan losses		(2,342	)		(1,945	)

Net Loans Receivable	$	130,786		$	124,660

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, residential 1 – 4 family first and second mortgages, and multifamily loans totaled $59.7 million as of December 31, 2010 as compared to $56.8 million at December 31, 2009. The small business commercial real estate loans, including construction and land loans, agricultural/farm loans, and other business properties totaled $51.3 million as of December 31, 2010 as compared to $47.3 million at December 31, 2009. Management has established specific lending criteria relating to real estate loans as a means of assessing the risk inherent in the portfolio.

Deposit account overdrafts are also classified as loans and totaled $74,000 and $113,000 as of December 31, 2010 and 2009, respectively.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS: (continued)

The following table reflects the detailed breakdown of impaired loans with a recorded allowance by loan class for the year ended December 31, 2010 (in thousands):


Impaired Loans with a Recorded Allowance	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized

Construction & Land Loans
Commercial properties	$	1,378	$	1,378	$	540	$	1,416	$	4

Residential Real Estate
1-4 Family Residences	$	982	$	982	$	180	$	651	$	35

Commercial Real Estate
Non-owner occupied	$	220	$	662	$	175	$	220	$	—

Commercial – Non Real Estate
Industrial loans	$	241	$	241	$	120	$	202	$	16


Totals	$	2,821	$	3,263	$	1,015	$	2,489	$	55

There were no impaired loans without a recorded allowance as of December 31, 2010.

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


	2009
	(In Thousands)
Impaired loans with a valuation allowance	$	2,237
Impaired loans without a valuation allowance		—

Total impaired loans		2,237

Valuation allowance related to impaired loans		624

Average investment in impaired loans		2,112


Interest income recognized on impaired loans	$	93

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS: (continued)

The following table reflects the amounts of outstanding delinquencies by loan class as of December 31, 2010 (in thousands):


Past Due Loans by Class	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Total Current		Total Loans

Construction & Land Loans
Residential	$	—	$	—	$	—	$	—	$	708	$	708

Commercial		—		—		589		589		3,878		4,467
Other – Land only		118		88		—		206		902		1,108

Residential Real Estate
Equity Lines of Credit		27		—		—		27		1,507		1,534
1-4 Family Residences		2,894		1,011		—		3,905		48,829		52,734
Multifamily Dwellings		—		—		—		—		5,439		5,439

Commercial Real Estate
Owner occupied		69		402		—		471		24,763		25,234
Non-owner occupied		182		—		—		182		15,495		15,677
Agricultural / Farm loans		—		—		5		5		4,120		4,125
Municipals		—		—		—		—		164		164

Commercial – Non Real Estate
Agricultural	$	—	$	5	$	—	$	5	$	159	$	164
Industrial		517		47		46		610		4,082		4,692
Municipals		—		—		—		—		35		35

Consumer – Non Real Estate
Credit Cards		26		5		—		31		628		659
Automobile loans		368		144		42		554		11,957		12,511
Other personal loans		108		28		7		143		4,107		4,250


Totals Gross Loans	$	4,309	$	1,730	$	689	$	6,728	$	126,773	$	133,501

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS: (continued)

The following table represents loans 90 days delinquent and still accruing interest and loans in a nonaccrual status as of December 31, 2010 by loan class (in thousands):


	90 days past due & still accruing interest		Nonaccrual Loans

Construction & Land Loans
Commercial	$	—	$	1,378

Residential Real Estate
1-4 Family Residences		—		652

Commercial Real Estate
Non-owner occupied		—		412
Agricultural / Farm loans		5		—

Commercial Non-Real Estate
Industrial	$	46	$	123

Commercial Real Estate
Non-owner occupied		—		412
Agricultural / Farm loans		5		—

Consumer – Non Real Estate
Automobile loans		18		24
Other personal loans		7		—


Totals Gross Loans	$	76	$	2,589

Loans past due greater than 90 days and still accruing interest at December 31, 2010 and 2009 totaled $76,000 and $253,000, 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 amounted to $216,000 and $421,000, at December 31, 2010 and 2009, respectively. The nonaccrual loans excluded from impaired loan disclosure at December 31, 2010 consisted of one small business real estate loan and one consumer installment loan. A collateral evaluation has been performed on these accounts and management has concluded that a specific allocation was not warranted at this time.

Management has developed an internal loan risk rating system as part of its credit analysis process. Loans are assigned an appropriate risk grade at the time of origination based on specific assessment factors relating to the borrower’s ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers’ financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loan grade assessments also include consideration of business cash flow and debt obligations. Risk grades are generally reviewed on an annual basis for credit relationships with total credit exposure of $500,000 or more, or at any point management becomes aware of information affecting the borrower’s ability to fulfill their obligations. Management utilizes both internal and external loan review processes as a means of monitoring the appropriateness of risk ratings across the loan portfolio.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS: (continued)

The specific loan risk rating categories included in the Bank’s internal rating system include pass credits, pass-watch, special mention, substandard, doubtful, and loss. Pass credits generally consist of loans secured by cash or cash equivalents and loans to borrowers with a strong cash flow ratio, stable financial net worth and above average sources of liquidity to meet financial obligations. Pass-watch credits generally consist of loans to borrowers that may have minor, yet manageable, weaknesses related to the stability of cash flow and repayment sources and may require periodic monitoring. Special mention credits are loans that have identified weaknesses or adverse trends in the borrower’s financial position that could potentially impact the bank’s credit position at some future date if not monitored closely. Substandard credits are those loans that have been identified as having a well-defined, specific, or major weakness in the primary cash flow sources or upon which significant reliance is being placed on secondary sources of repayment due to the borrower’s financial difficulties. Potential for losses related to substandard credits is evaluated on a regular basis with specific allocations being made as needed, as well as other corrective actions necessary to protect the institution. Loans categorized as doubtful also have well defined weaknesses with the added characteristic of the likelihood that collection of payment in full is highly questionable or perhaps improbable. Loans classified as loss are considered to be totally uncollectible or of such little value that their continuance on the bank’s books as an asset is not warranted.

The following table represents a summary of the Bank’s loan portfolio by class and internal risk rating as of December 31, 2010 (in thousands):


	Pass		Pass- Watch		Special Mention		Substandard		Doubtful		Loss		Total Loans

Construction & Land Loans
Residential	$	699	$	9	$	—	$	—	$	—	$	—	$	708

Commercial		778		2,117		—		1,572		—		—		4,467
Other – Land only		898		183		27		—		—		—		1,108

Residential Real Estate
Equity Lines of Credit		1,514		20		—		—		—		—		1,534
1-4 Family Residences		44,943		5,094		2,490		207		—		—		52,734
Multifamily Dwellings		2,813		772		1,180		674		—		—		5,439

Commercial Real Estate
Owner occupied		10,268		12,862		1,703		401		—		—		25,234
Non-owner occupied		2,339		11,336		—		1,782		220		—		15,677
Agricultural / Farm loans		963		2,564		598		—		—		—		4,125
Municipals		138		26		—		—		—		—		164

Commercial – Non Real Estate
Agricultural		11		153		—		—		—		—		164
Industrial		1,688		2,753		128		—		123		—		4,692
Municipals		35		—		—		—		—		—		35

Consumer – Non Real Estate
Credit Cards		628		31		—		—		—		—		659
Automobile loans		12,470		6		35		—		—		—		12,511
Other personal loans		3,842		74		332		2		—		—		4,250


Totals Gross Loans	$	84,027	$	38,000	$	6,493	$	4,638	$	343		—	$	133,501

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7

ALLOWANCE FOR LOAN LOSSES:

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


	(In Thousands)
	2010			2009			2008
Balance at beginning of year	$	1,945		$	1,651		$	1,573
Provision charged to operating expense		806			1,260			548
Recoveries of loans charged off		149			194			311
Loan charge-offs		(558	)		(1,160	)		(781	)

Balance at end of year	$	2,342		$	1,945		$	1,651

The summary table below includes the allowance allocations and total loans evaluated both individually and collectively for impairment by loan segment as of December 31,2010 (in thousands):


	Construction & Land Loans		Residential Real Estate		Commercial Real Estate		Commercial Non-Real Estate		Consumer Non-Real Estate		Total
ALL Lending balance 12/31/2010	$	575	$	587	$	540	$	222	$	418	$	2,342


Evaluated individually for impairment		540		180		175		120		—		1,015

Evaluated collectively for impairment		35		407		365		102		418		1,327

Total Gross Loans 12/31/2010	$	6,283	$	59,707	$	45,200	$	4,891	$	17,420	$	133,501


Evaluated individually for impairment		1,378		982		220		241		—		2,821

Evaluated collectively for impairment		4,905		58,725		44,980		4,650		17,420		130,680

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8

BANK PREMISES and EQUIPMENT:

Bank premises, equipment and computer software included in the financial statements at December 31, 2010 and 2009 are as follows:


	2010		2009
	(In Thousands)
Land	$	691	$	691
Land improvements and buildings		4,463		4,457
Furniture and equipment		4,664		4,602
Computer software		1,341		1,276

		11,159		11,026
Less accumulated depreciation		7,800		7,444

Net	$	3,359	$	3,582

Depreciation and amortization related to bank premises, equipment and software included in operating expense for 2010 was $355,000. Depreciation and amortization expenses for 2009 and 2008 were $390,000 and $481,000, 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)
2011	$	25
2012		25

Total	$	50

Lease expense, included in occupancy expense, was $22,000 for December 31, 2010 and December 31, 2009, and was $38,000 for the year ended December 31, 2008.

NOTE 10

DEPOSITS:

The Bank’s total deposit portfolio consists primarily of demand checking accounts, savings accounts and time deposit accounts. Total deposits were $135.9 million and $132.0 million as of December 31, 2010 and 2009, respectively.

The Bank has two customers with large deposit balances exceeding 5% of total deposits as of December 31, 2010. The total deposit balances for these customers as of December 31, 2010 were $16.6 million or 12.23% of total deposits.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10

DEPOSITS (Continued):

At December 31, 2010, time deposit scheduled maturities (in thousands) are as follows:


2011	$	44,740
2012		19,893
2013		3,404
2014		1,280
2015		2,053

Total	$	71,370

NOTE 11

BORROWINGS:


(In thousands)
Due in 2011	$	2,000
Due in 2012		—
Due in 2013		9,000

Total	$	11,000

NOTE 12

DIVIDEND LIMITATION ON SUBSIDIARY BANK:

A principal source of funds of the Company is dividends transfers paid by the Bank. The amount of dividends the Bank may pay to the Company is regulated by the Federal Reserve. As of December 31, 2010, the maximum amount of dividends the Bank can pay to the Company is $3.7 million or 19.15% of the consolidated net assets, without requesting permission from the Federal Reserve Bank.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2007.

The components of income tax expense are as follows:


	2010			2009			2008
	(In Thousands)

Current income tax expense	$	1,010		$	704		$	554
Deferred income tax (benefit)		(126	)		(152	)		(49	)

Income Tax Expense	$	884		$	552		$	505

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


	2010			2009			2008
	(In Thousands)

Income taxes computed at the applicable federal income tax rate	$	933		$	605		$	549
Increase (decrease) resulting from:
Tax-exempt income and dividends		(58	)		(49	)		(16	)
State income taxes		(5	)		3			(32	)
Other		14			(7	)		4

Income Tax Expense	$	884		$	552		$	505

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


	2010		2009
	(In Thousands)

Deferred Tax Assets:
Provision for loan losses	$	639	$	519
Deferred compensation		32		37
Other real estate owned		42		77
Other		74		33

Total	$	787		666

Deferred Tax Liabilities:
Depreciation		8		15
Cash surrender value of life insurance		43		39
Securities available for sale		124		40
Other		79		81

Total		254		175

Net Deferred Tax Asset	$	533	$	491

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2010 and 2009, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2010, 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:


											Minimum
						For Capital					To Be Well
	Actual					Adequacy Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
As of December 31, 2010:
Total Capital to Risk Weighted Assets:
Consolidated	$	20,363		16.4	%	$	9,959	³	8.0	%		N/A		N/A
Pioneer Bank	$	17,065		14.0	%	$	9,774	³	8.0	%	$	12,217	³	10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	18,807		15.1	%	$	4,979	³	4.0	%		N/A		N/A
Pioneer Bank	$	15,528		12.7	%	$	4,887	³	4.0	%	$	7,330	³	6.0	%
Tier I Capital to Average Assets:
Consolidated	$	18,807		11.4	%	$	6,616	³	4.0	%		N/A		N/A
Pioneer Bank	$	15,528		9.6	%	$	6,493	³	4.0	%	$	8,116	³	5.0	%

As of December 31, 2009:
Total Capital to Risk Weighted Assets:
Consolidated	$	18,947		15.9	%	$	9,548	³	8.0	%		N/A		N/A
Pioneer Bank	$	15,249		13.2	%	$	9,275	³	8.0	%	$	11,593	³	10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	17,455		14.6	%	$	4,774	³	4.0	%		N/A		N/A
Pioneer Bank	$	13,794		11.9	%	$	4,637	³	4.0	%	$	6,956	³	6.0	%
Tier I Capital to Average Assets:
Consolidated	$	17,455		11.1	%	$	6,273	³	4.0	%		N/A		N/A
Pioneer Bank	$	13,794		9.0	%	$	6,132	³	4.0	%	$	7,665	³	5.0	%

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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) ⁽¹⁾
Options outstanding, 12/31/09		6,400	$	16.58		4.00	$	—
Options Granted		—		—
Options Exercised		800		12.75
Options Forfeited		—		—

Options outstanding, 12/31/10		5,600	$	17.13		3.50

Options exercisable, 12/31/10		5,600	$	17.13		3.50	$	5

The intrinsic value of stock options exercised in 2010 and 2009 was $1,800 and $2,600, 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, 2010. 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.


	2010				2009				2008
	Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount

Basic earnings per share		1,031,160	$	1.80		1,022,931	$	1.20		1,015,243	$	1.09

Effect of dilutive securities:

Stock Options										286

Diluted earnings per share		1,031,160	$	1.80		1,022,931	$	1.20		1,015,529	$	1.09

For 2010 and 2009, stock options representing 5,600 and 6,400 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 with off-balance sheet risks are as follows:


	December 31,
	2010		2009
	(In Thousands)
Unfunded lines of credit (commercial and personal)	$	5,110	$	4,766
Loan commitments and letters of credit (commercial and personal)		4,110		4,894
Credit card unused credit limits		1,355		1,279

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $1.8 million and $1.6 million as of December 31, 2010 and 2009, respectively. Loan transactions to such related parties are shown in the following schedule:


	2010			2009
	(In Thousands)
Total loans, beginning of year	$	658		$	793
New loans		—			435
Payments		(419	)		(570	)

Total loans, end of year	$	239		$	658

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2010 and December 31, 2009:


			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)

As of December 31, 2010
U.S. Government & Agency Securities	$	4,504	$	—	$	4,504	$	—
Mortgage-backed Securities		1,115		—		1,115		—
State & Municipals		3,916		—		3,916		—
Equity Securities		1,633		—		1,633		—


Total Available –for-sale securities	$	11,168	$	—	$	11,168	$	—


As of December 31, 2009
U.S. Government & Agency Securities	$	2,000	$	—	$	2,000	$	—
Mortgage-backed Securities		3,981		—		3,981		—
State & Municipals		4,439		—		4,439		—
Equity Securities		2,579		—		2,579		—


Total Available-for-sale securities	$	12,999	$	—	$	12,999	$	—

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

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. Internal collateral evaluations relating to commercial loans secured by business assets such as inventory and equipment are generally performed on an annual basis. However, since this is not a formalized or certified valuation, these evaluations are considered to be level 3 for fair value disclosure and reporting purposes. 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.

For residential and commercial real estate loans considered to be collateral dependent, appraisals or updated collateral evaluations are generally obtained in conjunction with specific allowance allocations and/or anticipated foreclosure proceedings, on a case by case basis, depending upon the strength of additional mitigating arrangements with individual borrowers. .

The amount outstanding principal balance of impaired loans considered to be collateral dependent in the level 3 category as of December 31, 2010 totaled approximately $680,000 and primarily consisted of residential real estate properties with appraisal valuations that were in the process of being updated. As a general rule, management utilizes a significant discount factor for outdated appraisals when calculating its allowance allocation estimates and making specific reserves. Local professional realtors are also contacted regarding potential fair market values in an effort to ensure that the discounted values are within reasonable ranges on individual properties. Additionally, updated tax assessed values are also considered in this evaluation process on a case by case basis.

Oher 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, 2010
Impaired Loans, net of allowance	$	1,806	$	—	$	1,111	$	695

Other Real Estate Owned	$	244	$	—	$	244	$	—


As of December 31, 2009
Impaired Loans, net of allowance	$	1,613	$	—	$	936	$	677

Other Real Estate Owned	$	352	$	—	$	140	$	212

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

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 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.

Accrued Interest – The carrying amounts of accrued interest approximates 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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

At December 31, 2010 and 2009, 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, 2010 and 2009 are as follows (in thousands):


	2010				2009
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(In Thousands)

Financial Assets
Cash and due from banks	$	4,373	$	4,373	$	5,252	$	5,252
Interest bearing deposits in other banks		10,634		10,632		6,724		6,769
Federal funds sold		2,550		2,550		1,500		1,500
Securities available for sale		11,168		11,168		12,999		12,999
Loans, net		130,786		133,269		124,660		126,297
Accrued interest receivable		681		681		644		644
Financial Liabilities
Demand Deposits:
Non-interest bearing		25,739		25,739		27,316		27,316
Interest bearing		23,104		23,104		17,381		17,381
Savings deposits		15,746		15,746		15,802		15,802
Time deposits		71,370		72,313		71,515		73,098
Borrowings		11,000		11,073		8,500		8,497
Accrued interest payable		246		246		412		412

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.

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 matching contributions 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 at 100% after six years of service. A year of vesting service is a Plan year during which an employee is credited with at least 1,000 hours of service. For the years ended December 31, 2010, 2009 and 2008, total expense attributable to this 401(k) plan amounted to approximately $44,000, $35,000 and $36,000, 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 $195,000, $179,000, and $180,000 for the years ending December 31, 2010, 2009, and 2008, respectively.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21

PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

BALANCE SHEETS


	December 31,
	2010		2009
	(In Thousands)
ASSETS
Cash and cash equivalents	$	1,051	$	112
Investment in subsidiary		16,043		14,384
Securities available for sale		1,633		2,579
Bank premises and equipment, net		595		621
Other assets		118		220

Total Assets	$	19,440	$	17,916


LIABILITIES
Accrued expenses	$	45	$	—

Total Liabilities		45		—


STOCKHOLDERS’ EQUITY
Common stock		518		515
Retained earnings		18,649		17,300
Accumulated other comprehensive income, net		228		101

Total Stockholders’ Equity		19,395		17,916


Total Liabilities and Stockholders’ Equity	$	19,440	$	17,916

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21

PARENT CORPORATION ONLY FINANCIAL STATEMENTS: (continued)

STATEMENTS OF INCOME


	December 31,
	2010			2009			2008
	(In Thousands)
INCOME
Dividends from subsidiary	$	260		$	322		$	576
Interest income		23			23			21
Dividend income		48			63			32
Security gains (losses)		(167	)		(38	)		(694	)
Rent income		84			83			83
Other income		5			3			7

Total Income		253			456			25


EXPENSES
Compensation expense		75			65			82
Occupancy expenses		35			35			35
Equipment expense		—			—			1
Other operating expenses		75			78			195

Total Expenses		185			178			313

Net income (loss) before income tax expense (benefit) and undistributed income of subsidiary		68			278			(288	)


INCOME TAX (BENEFIT) EXPENSE		(57	)		(35	)		333

Net income before undistributed income of subsidiary		125			313			45
Undistributed income of subsidiary		1,734			915			1,066


NET INCOME	$	1,859		$	1,228		$	1,111

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21

PARENT CORPORATION ONLY FINANCIAL STATEMENTS: (continued)

STATEMENTS OF CASH FLOWS


	December 31,
	2010			2009			2008
	*(In Thousands)*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,859		$	1,228		$	1,111
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed subsidiary income		(1,734	)		(915	)		(1,066	)
Net amortization and accretion on securities		7			6			—
Loss on security sales		167			38			694
Depreciation		26			24			26
Stock based compensation		91			201			126
Net change in:
Other assets		(21	)		89			(211	)
Accrued expenses and other liabilities		45			(96	)		45

Net Cash Provided by Operating Activities		440			575			725


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		1.548			162			2,217
Purchase of securities available for sale		(451	)		(299	)		(2,652	)

Net Cash Provided by (Used In) Investing Activities		1.097			(137	)		(435	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(598	)		(583	)		(579	)

Net Cash Used in Financing Activities		(598	)		(583	)		(579	)


Net Increase (Decrease) in Cash and Cash Equivalents		939			(145	)		(289	)
Cash and Cash Equivalents, Beginning of Year		112			257			546

Cash and Cash Equivalents, End of Year	$	1,051		$	112		$	257

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

Not Applicable

Item 9A.

Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934), as amended (the “Exchange Act”) as of December 31, 2010. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the year ended December 31, 2010 that have materially affected or are reasonable likely to materially affect the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal controls over financial reporting, and actions are taken to correct deficiencies as they are identified.

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010, as such term is defined in the Exchange Act Rules 13a-15(f).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ THOMAS R. ROSAZZA

Thomas R. Rosazza

President and Chief Executive Officer

/s/ LORI G. HASSETT

Lori G. Hassett

Vice President and Chief Financial Officer

Item 9B.

Other Information.

Not Applicable

Part III

Item 10.

Directors, Executive Officers, and Corporate Governance.

Other than as provided below, all required information on (i) the directors and executive officers of the Company, (ii) compliance by Company directors and executive officers with Section 16(a) of the Securities Exchange Act of 1934, (iii) the Company’s Code of Ethics and (iv) the Company’s Audit Company is detailed in the Company’s 2011 definitive proxy statement for the annual meeting of shareholders (“Definitive Proxy Statement”), which is expected to be filed with the Securities and Exchange Commission within the required time period, and is incorporated herein by reference. The following provides information on executive officers who are not directors of the Company and are not included in the Definitive Proxy Statement:


Executive Officer	Age	Principal Occupation During Past Five Years

Lori G. Hassett	44	Vice President/Chief Financial Officer, Pioneer Bankshares, Inc. and Pioneer Bank

Item 11.

Executive Compensation.

Information on executive compensation is provided in the Definitive Proxy Statement and is incorporated herein by reference.

Item 12.

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

Information on security ownership of certain beneficial owners and management is provided in the Definitive Proxy Statement, and is incorporated herein by reference.

Equity Compensations Plan Information

The following table sets forth information as of December 31, 2010 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance:


	Number of Securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted- average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) ) (c)
Equity Compensation plans approved by security holders		5,600 shares	$	17.13		0
Equity Compensation plans not approved by security holders		—		—		—

Total		5,600 shares	$	17.13		0

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Information on certain relationships and related transactions, and director independence is detailed in the Definitive Proxy Statement, and is incorporated herein by reference.

Item 14.

Principal Accounting Fees and Services.

Information on principal accounting fees and services is provided in the Definitive Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a)

(1)

The response to this portion of Item 15 is included in Item 8 of this report.

(2)

The response to this portion of Item 15 is included in Item 8 of this report.

(3)

The following exhibits are attached hereto or incorporated by reference as part of this Form 10-K and this list includes the Exhibit Index


Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation of Pioneer Bankshares, Inc. (incorporated by reference to Exhibit 3.1 of Pioneer Bankshares, Inc.’s Form 10-K filed May 2, 2000, as amended).

3.2		Bylaws of Pioneer Bankshares, Inc. (incorporated by reference to Exhibit 3.2 of Pioneer Bankshares, Inc.’s Form 10-SB filed May 2, 2000, as amended).

10.1		Pioneer Bankshares, Inc. (Formerly Page Bankshares, Inc.), 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10 of Pioneer Bankshares, Inc.’s Form 10-QSB filed August 12, 2002).

21		List of subsidiaries.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).

32		Certifications of Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(b)

Exhibits

See Item 15(a)(3)above

(c)

Financial Statement Schedules

See Item 15(a)(2)above

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Pioneer Bankshares, Inc.

		By: /s/ THOMAS R. ROSAZZA
Date:	3/28/2011	Thomas R. Rosazza
		President and Chief Executive Officer

Date:	3/28/2011	By: /s/ LORI G. HASSETT
		Lori G. Hassett
		Vice President and Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ ROBERT E. LONG	Director	3/24/2011
Robert E. Long

/s/ KYLE MILLER	Director	3/25/2011
Kyle Miller

/s/ PATRICIA G. BAKER	Director	3/23/2011
Patricia G. Baker

/s/ DAVID N. SLYE	Director	3/25/2011
David N. Slye

/s/ HARRY F. LOUDERBACK	Director	3/23/2011
Harry F. Louderback

/s/ JAMES F. PRINTZ	Director	3/28/2011
James F. Printz

/s/ MARK N. REED	Director	3/25/2011
Mark N. Reed

/s/ E. POWELL MARKOWITZ	Director	3/23/2011
E. Powell Markowitz

/s/ THOMAS R. ROSAZZA	President, Chief Executive Officer	3/28/2011
	and Director

/s/ LORI G. HASSETT	Vice President,	3/28/2011
Lori G. Hassett	Chief Financial Officer

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