Pioneer Bankshares Inc/Va - Annual Report (Small Business Issuers) (10KSB)

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number: 0-30541

Pioneer Bankshares, Inc.

(Name of small business issuer 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)

Issuer’s telephone number: (540) 778-2294

Securities registered under Section 12(b) of the Act:

None

Securities registered under Section 12(g) of the Act:

Common Stock - $.50 Par Value

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. Yes ¨ No x

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

Issuer’s revenues for its most recent fiscal year were $12,043,860.

The aggregate market value of the voting stock held by non-affiliates based on the last reported sales price of $25.50 per share as of March 26, 2008 was $22,651,472.

The number of shares outstanding of the registrant’s common stock is 1,013,758 as of March 26, 2008.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 14, 2008 are incorporated by reference into Part III of this Form 10-KSB.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES ¨ NO x

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-KSB

TABLE OF CONTENTS


		Page
PART I

Item 1.	Description of Business.	3

Item 2.	Description of Property.	8

Item 3.	Legal Proceedings.	9

Item 4.	Submission of Matters to a Vote of Security Holders.	9

PART II

Item 5.	Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.	9

Item 6.	Management’s Discussion and Analysis or Plan of Operation.	10

Item 7.	Financial Statements.	27

Item 8.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.	56

Item 8A.	Controls and Procedures.	56

Item 8B.	Other Information.	56

PART III

Item 9.	Directors, Executive Officers, Promoters, Control Persons, and Corporate Governance; Compliance With Section 16(a) of the Exchange Act.	57

Item 10.	Executive Compensation.	57

Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	57

Item 12.	Certain Relationships and Related Transactions, and Director Independence.	58

Item 13.	Exhibits.	58

Item 14.	Principal Accountant Fees and Services.	58

SIGNATURES		59

PART I

Item 1.

Description of Business.

Overview

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, 2007 and 2006. 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 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, 2007, the Company had 65 employees, with 62 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.

General

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.

Supervision and Regulation of the Company

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. It is impossible to predict the impact of this new law on our competition or our operations at this time.

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

Supervision and Regulation of the Bank

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

The Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. The Bank operates under the supervision of, and subject to regulation and examination by, the Commission and the Federal Reserve. The Bank is also subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and the establishment of branch offices. Federal and state bank regulatory agencies also have the general authority to eliminate dividends paid by insured banks if such payment is deemed to constitute an unsafe and unsound practice. As the Bank’s primary federal regulator, the Federal Reserve has the authority to impose penalties, initiate civil and administrative actions and take other steps to prevent the Bank from engaging in unsafe and unsound practices. The amount of

dividends payable by the Bank will depend upon its earnings and capital position, and is limited by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. No dividend may be declared or paid that would impair a bank’s paid-in capital. Both the Commission and the Federal Reserve have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.

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

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

Capital Resources

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

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

The Federal Reserve also has adopted regulations which supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to average total consolidated assets (“Leverage ratio”) of 4%. The Federal Reserve has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a “tangible Tier 1 leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total assets. The Bank’s capital ratios significantly exceed all requirements at December 31, 2007.

Deposit Insurance

The Bank’s deposits are insured by the FDIC for a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly statutory assessment and must comply with the rules and regulations of the FDIC.

In November 2006, the FDIC issued final regulations, as required by the Federal Deposit Insurance Reform Act of 2005, by which the FDIC established a new base rate schedule for the assessment of deposit insurance premiums and set new assessment rates which became effective in January 2007. Under these regulations, 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. Some depository institutions are entitled to apply against these premiums a credit that is designed to give effect to premium payments, if any, that the depository institution may have made in certain prior years. The new assessment schedule will not have a material adverse effect on the earnings or financial condition of the Company or the Bank.

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.

Item 2.

Description of Property.

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

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

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

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

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

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

Valley Finance Service operates as a division/branch of Pioneer Bank and was relocated in September 2003 from its former location of 120 S. Main Street, Harrisonburg, Virginia. This finance company and loan production office now operates out of the former branch location at 932 West Market Street, Harrisonburg, Virginia. This facility is leased on a short-term basis. The facility is equipped with two drive-through lanes for customer convenience.

The Bank has recently renovated the Jenkins Building located next to the Bank’s main office in Stanley, Virginia for the purpose of housing its data processing, technology operations, and bookkeeping departments. The renovations to this facility were completed in October 2005. The data processing center building has approximately 25,760 square feet and was originally purchased on September 8, 1970.

The Bank’s newest branch office is located 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.

Submission of Matters to a Vote of Security Holders.

Not Applicable

PART II

Item 5.

Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.

The Common Stock of the Company is not currently traded on any established market. The Common Stock 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) reported to Scott & Stringfellow, Inc. Other transactions may have occurred which were not included in the table.

COMMON STOCK TRADE PRICES


2006	High		Low
First Quarter	$	18.50	$	17.50
Second Quarter		25.00		19.15
Third Quarter		30.00		22.10
Fourth Quarter		22.50		21.50

2007	High		Low
First Quarter	$	23.05	$	21.40
Second Quarter		24.25		21.50
Third Quarter		27.50		24.25
Fourth Quarter		28.10		26.00

There were 1,011,481 shares of the Company’s Common Stock outstanding at the close of business on December 31, 2007, which were held by 500 shareholders of record.

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


Declared Date	Record Date	Payment Date	Per Share Amount
3/09/06	3/20/06	3/30/06	$	.12
6/08/06	6/19/06	6/30/06		.13
9/14/06	9/20/06	9/29/06		.13
12/07/06	12/18/06	12/29/06		.13

Total for 2006			$	.51


3/08/07	3/19/07	3/30/07	$	.14
5/30/07	6/14/07	6/29/07		.14
9/13/07	9/20/07	9/28/07		.14
12/13/07	12/21/07	12/31/07		.14

Total for 2007			$	.56

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.

Item 6.

Management’s Discussion and Analysis or Plan of Operation.

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, 2007 and 2006, 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-KSB 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) Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable and can be estimated and 2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that 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 evaluated on an annual basis for impairments in value and adjusted accordingly. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

Goodwill is included in other assets and totaled $360,000 for the reporting periods ending December 31, 2007 and 2006. Goodwill is no longer amortized, but instead is evaluated for impairment at least annually. There were no impairment charges recognized for the 2007 and 2006 reporting periods.

OPERATIONS ANALYSIS - 2007 - Compared to 2006

Table I

PIONEER BANKSHARES, INC.

FINANCIAL HIGHLIGHTS

(In thousands, except for per share information)


	2007			2006
Condensed Statement of Income
Interest and dividend income	$	10,764		$	9,834
Interest expense		3,908			3,287

Net interest income		6,856			6,547
Provision for loan losses		309			233

Net interest income after provision for loan losses		6,547			6,314
Noninterest income		1,278			1,187
Noninterest expense		5,180			4,994

Income before income taxes		2,645			2,507
Income tax expense		893			845

Net Income	$	1,752		$	1,662


At Year End
Assets	$	151,825		$	151,631
Deposits		127,355			124,778
Loans, Net		125,611			118,822
Stockholders’ Equity		16,275			15,218

Per Share Information
Net income per share, basic	$	1.73		$	1.64
Net income per share, diluted		1.73			1.64
Dividends per share		.56			.51
Book value per share		16.09			15.05

Financial Statement Ratios
Return on average assets ¹		1.12	%		1.11	%
Return on average equity ¹		10.97	%		11.31	%
Dividend payout ratio		32.31	%		31.05	%
Average equity to average assets ¹		10.24	%		9.85	%

¹	Ratios are based primarily on daily average balances

Overview

The Company’s net earnings were $1.752 million for the year ended December 31, 2007, compared to $1.662 million for 2006. According to Company records, net income for 2007 is the highest in the history of the institution. Earnings per share were $1.73 for the year ended December 31, 2007, compared to $1.64 for 2006.

The overall increase in earnings of $90,000 is generally attributed to additional interest income on loans and investment securities at the bank level, as well as, gains on securities transactions at the holding company level. The increase in loan and investment interest is primarily the result of the Company’s continued efforts to expand its loan portfolio, as well as, increased market yields on the bank’s investment portfolio as compared to the prior year. The increased income on the securities portfolio at the holding company level is largely attributed to market conditions and management’s oversight.

The Company’s loan portfolio grew by $6.8 million or 5.71% during 2007, and was primarily in the category of commercial real estate loans. The deposit portfolio grew by $2.6 million or 2.07% during the same period, with the majority of this growth being in demand deposit and savings accounts. Interest bearing deposits in other banks decreased by $3.8 million or 70.27%, and total investment securities available for sale were reduced by $2.8 million or 20.40%. These reductions in assets were used as a source of funding to support the Company’s loan growth and to reduce outstanding borrowings in accordance with original repayment schedules. Total outstanding borrowings were reduced by $3.8 million or 35.51% during 2007. The changes in assets and liabilities provided net asset growth for the Company during 2007 of $194,000. This represents a 0.13% increase. The Company’s capital position at December 31, 2007 was $16.3 million, or 10.72% as a percentage of total assets.

The Company’s book value as of December 31, 2007 was $16.09 per share, as compared to a book value of $15.05 per share as of December 31, 2006. This represents an increase of 6.91%. Additionally, shareholder dividend payments for 2007 were increased by 9.80%, as compared to the prior year.

In summary, the financial and operational results for 2007 were both positive and productive for Pioneer Bankshares, Inc.

Table II

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(ON A FULLY TAXABLE EQUIVALENT BASIS)

(In thousands)


	2007							2006
	Average			Income/ Expense		Average Rates Earned/ Paid		Average			Income/ Expense		Average Rates Earned/ Paid
ASSETS
Loans: ¹
Commercial	$	8,529		$	757	8.88	%	$	6,247		$	539	8.63	%
Real estate		100,274			7,125	7.11	%		94,978			6,579	6.93	%
Installment		15,732			1,776	11.29	%		14,517			1,664	11.46	%
Credit card		555			119	21.44	%		594			128	21.55	%

Total Loans		125,090			9,777	7.82	%		116,336			8,910	7.66	%
Federal funds sold		3,476			170	4.89	%		4,438			227	5.11	%
Interest bearing deposits		4,475			225	5.03	%		5,723			259	4.53	%
Securities
Taxable		9,570			527	5.51	%		9,397			373	3.97	%
Nontaxable ²		2,639			94	3.56	%		2,227			94	4.22	%

Total Earning Assets		145,250			10,793	7.43	%		138,121			9,863	7.14	%

Allowance for loan losses		(1,483	)						(1,477	)
Nonearning assets		12,184							12,548

Total Assets	$	155,951						$	149,192


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Interest bearing demand deposits	$	11,019		$	53	0.48	%	$	12,408		$	55	0.44	%
Savings		13,157			134	1.02	%		13,390			82	0.61	%
Time deposits		73,407			3,365	4.58	%		61,631			2,490	4.04	%

Total Deposits		97,583			3,552	3.64	%		87,429			2,627	3.00	%
Borrowings		9,595			356	3.71	%		16,380			660	4.03	%

Total Interest Bearing Liabilities		107,178			3,908	3.65	%		103,809			3,287	3.17	%

Noninterest bearing deposits		31,613							29,746
Other liabilities		1,189							936

Total Liabilities		139,980							134,491

Stockholders’ equity		15,971							14,701

Total Liabilities and Stockholders’ Equity	$	155,951						$	149,192

Net Interest Earnings				$	6,885						$	6,576

Net Yield on Interest Earning Assets						4.74	%						4.76	%

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 $29,000 for 2007 and 2006.

Table III

PIONEER BANKSHARES, INC.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

(On a fully tax equivalent basis)

(In thousands of dollars)


	2007 Compared to 2006									2006 Compared to 2005
	Increase (Decrease)									Increase (Decrease)
	Volume			Rate			Total			Volume			Rate			Total
Interest Income
Loans
Commercial	$	197		$	21		$	218		$	181		$	45		$	226
Real estate		367			179			546			839			123			962
Installment		139			(27	)		112			81			(148	)		(67	)
Credit Card		(8	)		(1	)		(9	)		(9	)		2			(7	)

Total Loans		695			172			867			1,092			22			1,114

Federal funds sold		(49	)		(8	)		(57	)		53			82			135

Interest bearing deposits in banks		(57	)		23			(34	)		(21	)		72			51

Investments
Taxable		7			147			154			(157	)		92			(65	)
Nontaxable		17			(17	)		—			12			24			36

Total Securities		24			130			154			(145	)		116			(29	)

Total Earning Assets	$	613		$	317		$	930		$	979		$	292		$	1,271

Interest Expense
Demand deposits	$	(6	)	$	4		$	(2	)	$	(10	)	$	3		$	(7	)
Savings		(1	)		53			52			(4	)		7			3
Time deposits		476			399			875			363			621			984

Total Deposits		469			456			925			349			631			980
Borrowings		(273	)		(31	)		(304	)		(38	)		81			43

Total Liabilities		196			425			621			311			712			1,023

Net Interest Earnings	$	417		$	(108	)	$	309		$	668		$	(420	)	$	248

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.

Net Interest Income

Net interest income increased $309,000 or 4.72% in 2007. The increase in net interest income for 2007 is primarily attributed to interest income on loans and decreased interest expense on borrowings. Interest income on loans increased by $867,000 or 9.73% and interest expense on borrowings decreased by $304,000 or 46.06% when compared to 2006. The increase in loan interest is related to the volume of loan growth during 2007. As the volume of lending activity continues to grow, the Company expects that income from earning assets will continue to increase, subject to market rates and economic conditions.

Interest income on securities held to maturity and securities available for sale increased by $157,000 or 54.90% in 2007 compared to a decrease of $89,000 in 2006. The average yields on securities increased from 4.02% in 2006 to 5.09% in 2007. The increase in average yield on securities is primarily related to reinvestment activities during the year at higher market rates. Management maintains 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 $395,000 in 2007, compared to $486,000 in 2006. This decrease of $91,000 is attributed to management’s efforts to maximize earnings in loans and securities, while maintaining lower average balances in fed funds during the year.

The net interest margin on earning assets on a tax equivalent basis decreased from 4.76% in 2006 to 4.74% in 2007. This can be attributed to slightly lower yields on installment loans and credit card accounts, as well as increased interest expense on the Bank’s deposit portfolio.

Total interest expense increased $621,000 or 18.89% in 2007. The increase in interest expense on deposits accounts of $925,000 was offset by a decrease in borrowing interest expense of $304,000. The increase in deposit interest is primarily the result of increased market rates and the Bank’s efforts to remain competitive in the current economic environment. The decrease in interest expense on borrowings is related to the reduction of outstanding balances, which were paid in accordance with the original repayment schedules. The average interest rate paid on total deposits increased from 3.00% in 2006 to 3.64% in 2007. The average interest rate paid on borrowings decreased from 4.03% in 2006 to 3.71% in 2007.

Yields on total loans increased from 7.66% in 2006 to 7.82% in 2007. The yield on commercial and agricultural loans increased from 8.63% in 2006 to 8.88% in 2007. Commercial and residential real estate loan yields have increased from 6.93% in 2006 to 7.11% in 2007. Installment loan yields have decreased from 11.46% in 2006 to 11.29% in 2007 primarily due to management’s implementation of a dealer loan program for auto financing, which offers lower interest rates to well qualified buyers.

The yield on taxable investments increased from 3.97% in 2006 to 5.51% in 2007. The tax equivalent yield on nontaxable investments decreased from 4.22% in 2006 to 3.56% in 2007. The changes in these yields are attributed to market fluctuations and management’s efforts to maximize earnings through reinvestment activities.

Non-interest Income and Expense

Non-interest income increased from $1.2 million in 2006 to $1.3 million in 2007. This represents a 7.67% increase. The primary factors affecting this change were increases in service charges and fees, commission income, gains on security transactions, and other income. Service charge income increased by $21,000 or 2.68%. Commission income increased by $29,000 or 72.50% and is primarily the result of management’s increased efforts relating to the Bank’s subsidiary, Pioneer Financial Services, LLC, which offers non-bank investment and insurance products. Gains on securities increased by $20,000 or 28.57% compared to the prior year. Other income increased by $21,000 or 7.17% during 2007.

Non-interest expense increased by $186,000 or 3.72% from 2006 to 2007. Salaries and benefits increased by $179,000 or 7.57% in 2007 compared to 2006. The increase in salaries and benefits is attributed to regular salary increases. Equipment expenses decreased by $49,000 or 6.19% in 2007 compared to 2006 as a result of normal depreciation fluctuations. Total other expenses increased by $49,000 from 2006 to 2007, which is the net result of increases and decreases in various operating costs. The largest increase in operating expenses was in the category of legal fees, with an increase of approximately $92,000. The increase in legal fees is primarily attributed to litigation costs incurred for shareholder and related proxy matters.

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, significant price increases in crude oil, increasing unemployment within our service area, and other local market factors are monitored closely by management in an effort to promptly identify specific trends that could have a direct material effect on the Company.

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

Securities

Securities as of December 31, 2007 totaled $11.7 million, which is a 20.46% decrease over the December 31, 2006 balance of $14.8 million. This decrease is attributed to funding needs in support of the increased loan volume.

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, 2007, the Company had investments in equity securities consisting primarily of common and preferred stocks with a cost of $3.0 million and an estimated market value of $2.8 million. The investments generally include common stocks purchased with the objective of realizing capital gains. The market value of these investments is sensitive to general trends in the stock market.

The Bank’s total investment portfolio at December 31, 2007 has a cost of $8.2 million and an estimated fair market value of $8.3 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:


	2007 Book Value		Weighted Average Yield		2006 Book Value		Weighted Average Yield
(In Thousands)
Securities available for sale
Maturing within one year	$	1,781	4.77	%	$	6,491	4.32	%
Maturing after one year But within five years		4,284	5.40	%		3,365	5.07	%
Maturing after five years But within ten years		514	6.00	%		729	6.20	%
Maturing after 10 years		1,734	5.51	%		992	5.44	%
Equity Securities		2,756				2,329

Total securities available for sale	$	11,069	5.32	%	$	13,906	4.75	%

Securities held to maturity
Maturing within one year	$	—	—		$	—	—
Maturing after one year		—	—			—	—
But within five years		—	—			—	—
Maturing after five but Within ten years		—	—			1	10.93	%

Total securities held to maturity	$	—	—		$	1	10.93	%

Total Securities	$	11,069	5.32	%	$	13,907	4.75	%

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

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

Loan Portfolio

Total net loans increased during 2007 from $118.8 million at December 31, 2006 to $125.6 million at December 31, 2007. This is an increase of $6.8 million or 5.71%. The increase in the loan portfolio was mainly in the areas of construction loans, commercial residential real estate loans, and personal installment loans. In addition to these noted categories, the Bank also continues to make other general consumer loans, residential mortgage loans, and offer credit card accounts for its customers.

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


	(In Thousands)
	December 31, 2007			December 31, 2006
Mortgage loans on real estate
Construction loans	$	12,979		$	9,933
Agricultural		4,573			4,940
Equity lines of credit		2,431			1,777
Residential 1-4 family		41,579			45,624
Second mortgages 1-4 family		5,055			4,894
Multifamily		3,946			3,796
Commercial		32,332			26,998

Total real estate loans		102,895			97,962

Commercial and agricultural loans		7,204			7,174
Consumer installment loans
Personal		17,165			15,314
Credit cards		587			661

Total consumer installment loans		17,752			15,975
All other loans		323			331

Gross Loans		128,174			121,442
Less unearned income on loans		(990	)		(1,144	)

Loans, less unearned discount		127,184			120,298
Less allowance for loan losses		(1,573	)		(1,476	)

Net Loans Receivable	$	125,611		$	118,822

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

The Bank’s residential real estate loans, including equity lines of credit and second mortgages totaled $49.1 million as of December 31, 2007. This represents a decrease of approximately $3.2 million in the residential loan portfolio over the previous year. Residential real estate loans are generally made for a period not to exceed 30 years and are secured by first deed of trust, which do not exceed 80% of the appraised value. If the loan to value ratio exceeds 80%, the Company requires additional collateral or guarantees. For a majority of the real estate loans, interest is adjustable after each three or five year period. Fixed rate loans are generally made for a fifteen-year period. In addition, the Bank makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 80% of the appraised value. Home equity loans are made on a 10-year revolving line of credit basis.

The Bank’s commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $53.8 million as of December 31, 2007. This represents an increase of approximately $8.2 million in the commercial real estate portfolio when compared to the prior year. The increase in commercial real estate loans is a direct result of management’s focus on this lending category in an effort to diversify the overall lending portfolio. Management has established specific lending criteria relating to commercial loans and considers the risk of loss in this loan category to be relatively low.

The Bank’s consumer loan portfolio increased $1.8 million or 11.12% to a total of $17.8 million at December 31, 2007. This increase is attributed to the Bank’s continued efforts to serve consumer loan needs throughout its service area and offering a dealer loan program for auto financing.

A schedule of remaining maturities of selected loan categories as of December 31, 2007 is as follows:


	Construction Loans		Commercial and Agricultural Loans
	(In thousands)
Loans maturing within one year	$	9,693	$	900
Variable rate		2,429		2,039
Fixed rate, over one year through five years		789		3,514
Fixed rate, over five years		68		751

Total Maturities of Selected Loans	$	12,979	$	7,204

At December 31, 2007, construction loans were 10.33% percent of total net loans and commercial and agricultural loans were 5.74% 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, 2007 and December 31, 2006:


	2007			2006
	(In Thousands)
Non-accrual Loans	$	297		$	21
Loans Past Due 90 days or more		89			46

Total non-performing assets	$	386		$	67

Allowance for loan losses to total loans		1.24	%		1.23	%

Non-performing Assets to total loans		0.30	%		0.06	%

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. Interest on non-accrual loans did not have a significant impact on income for 2007 or 2006.

Restructured loans are loans on which the original interest rate or repayment terms have been substantially changed due to the borrower’s financial hardship. There were no restructured loans on which interest was accruing at a reduced rate or on which payments had been extended.

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, 2007 totaled approximately $489,000, and were primarily related to one borrower. Management has also identified other credits that may present potential problems of approximately $2.2 million as of December 31, 2007. The potential problem loans are monitored closely on an on-going basis and a general allocation has been made in accordance with the Company’s allowance for loan loss calculations.

Management monitors all past due accounts carefully for any anticipated losses and makes appropriate allocations of funds for potential losses as they are identified.

Loan Losses and Allowance For Loan Losses

The following schedule outlines the activity in the allowance for loan loss account as of December 31, 2007 and December 31, 2006:


	2007			2006
	(in thousands)
Beginning balance	$	1,476		$	1,332
Provision charged to expense		309			233

Loan losses:
Commercial		181			—
Installment		283			382
Real estate		—			23
Credit card		10			19

Total Loan Losses		474			424

Recoveries:
Commercial		63			1
Installment		199			287
Real estate		—			42
Credit card		—			5

Total Loan Recoveries		262			335

Net Loan Losses		212			89

Balance at End of Period	$	1,573		$	1,476

Net Loan Losses as a Percent of Average loans		0.17	%		0.08	%

A breakdown of the allowance allocations by loan type are presented below for December 31, 2007 and December 31, 2006:


	December 31, 2007						December 31, 2006
	Amount		Percent of Allowance		Percent of Average Loans		Amount		Percent of Allowance		Percent of Average Loans
Analysis of Ending Balance
Commercial	$	256	16.27	%	6.82	%	$	172	11.65	%	5.37	%
Real estate		433	27.53	%	80.16	%		455	30.83	%	81.64	%
Installment		853	54.23	%	12.58	%		816	55.28	%	12.48	%
Credit card		31	1.97	%	0.44	%		33	2.24	%	0.51	%

Total	$	1,573	100.00	%	100.00	%	$	1,476	100.00	%	100.00	%

Allowance for loan losses as a percent of year end loans			1.24	%					1.23	%

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 4 of the financial statements included in this report.

The allowance for loan loss balance of $1.573 million at December 31, 2007, increased by approximately $97,000 from its level at December 31, 2006. The increase in the allowance balance is primarily attributed to specific allocations related to impaired loans, growth in the consumer auto financing category, as well as, an increased percentage of non-performing assets, including nonaccruals, past dues, and classified loans. The increase in non-performing assets is partially attributed to a declining economic environment. Management has made additional allocations based on the declining economic trends and increases in non-performing assets, as a means of providing sufficient funding for possible losses. While the funding requirement for impaired and non-performing loans has increased, the majority of loan portfolio growth has been in commercial real estate accounts, which are considered to be a lower risk category. Management also noted a positive trend in consumer installment charge offs during 2007. The charge offs for consumer loans declined by approximately $99,000 or 25.92% as compared to the prior year. The lower risk growth funding factors related to commercial real estate loans and the reduced charge offs in consumer loans have contributed to a minimal overall increase in the cumulative funding as a percentage of total loans. The cumulative balance in the allowance for loan loss account was equal to 1.24% and 1.23% of total loans at December 31, 2007 and December 31, 2006, respectively.

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, 2007 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 2007 increased by $50,000 compared to the prior year, and loan loss recoveries decreased by $73,000. This resulted in an overall increase of $123,000 in net loan charge offs for the period ending December 31, 2007 as compared to December 31, 2006. The increase in charge offs is primarily related to losses incurred on specific commercial loan accounts, which

had collateral that was not readily marketable due to the downturn in the housing market and other economic factors. The decrease in recoveries for 2007 is primarily attributed to the limited recoveries on the commercial charge offs previously discussed, as well as non-recurring activities on previously foreclosed accounts that were collected in 2006. There were no foreclosed assets subject to recovery in 2007.

The provision expense related to the allowance for loan loss for 2007 increased by $76,000 as compared to 2006. This increase is directly related to the increased charge offs and reduced recoveries during the year.

Management’s evaluation of the allowance for loan losses as of December 31, 2007 and December 31, 2006 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

Premises, Equipment, and Software

The Bank had purchases and investments related to premises improvements, new equipment and software upgrades during 2007 totaling $124,000. These included the replacement of drive-thru equipment at 2 branch locations, additional telephone equipment and operating upgrades, and miscellaneous computer purchases. Additionally, there were purchases relating to the implementation of merchant remote capture software, which is expected to be fully operational in early 2008.

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

Deposits

The Company’s total deposits as of December 31, 2007 were $127.4 million compared to $124.8 million at December 31, 2006. This increase of $2.6 million or 2.07% was primarily in the categories of non-interest bearing demand deposits and savings accounts. Total demand deposits totaled $43.7 million as of December 31, 2007 compared to $42.2 million at December 31, 2006. This represents an increase of $1.5 million or 3.56%. 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 savings deposits as of December 31, 2007 were $13.4 million compared to $12.3 million as of December 31, 2006. This represents an increase of approximately $1.0 million or 8.41%. These accounts consist of passbook savings accounts, statement savings accounts, and Christmas club 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 55.22% of the Bank’s total deposits. Total time deposits as of December 31, 2007 and December 31, 2006 were $70.3 million. Time deposits are classified in two major categories for FDIC Insurance purposes, as well as other accounting and regulatory purposes: 1) those time deposits with a balance greater than $100,000, and 2) those time deposits with a balance of $100,000 or less. The Company’s total time deposits greater than $100,000 increased during 2007 by approximately $4.4 million compared to the prior year as a result of management’s efforts to attract additional deposits by offering limited time promotional rates. Total time deposits with balances of $100,000 or less were $54.5 million at December 31, 2007 compared to $58.8 million at December 31, 2006. Time deposits with a balance greater than $100,000 represent 22.50% of the Bank’s total time deposit portfolio.

The maturity schedule as of December 31, 2007 for certificates of deposit over $100,000 are shown below:


Maturity
Less than 3 months	$	1,070
3 to 12 months		13,014
1 to 3 years		1,516
Over 3 years		222

Total	$	15,822

Long-term Debt

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $60.7 million as of December 31, 2007 and 2006. 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 1-4 family residential mortgages. On some 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 pay back all or part of the advance without a prepayment penalty.

At December 31, 2007, the total fixed-rate long-term debt with FHLB totaled $6.9 million and matures through December 30, 2009. The interest rates on the fixed-rate notes payable ranges from 2.92% to 3.92%. At December 31, 2006, the total fixed-rate long-term debt with FHLB was $10.7 million.

The contractual maturities of FHLB advances as of December 31, 2007 are as follows:


	(In Thousands)
	Fixed Rate
Due in 2008	$	3,800
Due in 2009		3,100

	$	6,900

Subsequent to the end of 2007, the Company received additional loan advances from the FHLB totaling $8.5 million. These borrowings were initiated primarily for investment purposes with funds generally being placed in matching term instruments ranging from 6 months to 3 years. These additional borrowings were fixed rate credits with terms not exceeding 3 years and had average borrowing rates of 3.21%. The average earning rate on the investments was 4.24%.

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 is considered to be well capitalized under the regulatory framework. Total consolidated capital as a percentage of risk-weighted assets was 14.7% at December 31, 2007. The ratio of Consolidated Tier 1 Capital to risk-weighted assets was 13.4% as of December 31 2007 compared to 13.5% at December 31, 2006. Both of these ratios exceed regulatory capital requirements.

The following schedule shows a comparative breakdown of the Company’s capital as of December 31, 2007 and December 31, 2006:


	2007			2006
	(in thousands)
Tier 1 capital
Consolidated Risk-weighted assets	$	119,023		$	109,068

Consolidated Tier 1 capital
Common stock	$	506		$	506
Surplus		—			—
Retained Earnings		15,805			14,615
Goodwill excluded		(360	)		(360	)

Total Tier 1 capital		15,951			14,761

Consolidated Tier 2 capital
Allowance for loan losses (1)		1,488			1,363

Total risk-based capital	$	17,439		$	16,124

Consolidated total risk-based capital ratio		14.7	%		14.8	%
Consolidated Tier 1 risk-based capital ratio		13.4	%		13.5	%
Consolidated Leverage ratio		10.2	%		9.9	%

(1)

Limited to 1.25% of gross risk-weighted assets

Interest Sensitivity and Liquidity

At December 31, 2007, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 39.65% for the one-year re-pricing period compared with a negative Gap Sensitivity Ratio of 39.46% at December 31, 2006. 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, 2007 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 2007 and 2006. The Bank’s membership in the

Federal Home Loan Bank System also provides liquidity, as the Bank can borrow money that is repaid over a ten-year period and can use the money to make fixed rate loans. The matching of the long-term loans and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Bank reviews its interest rate gap periodically and makes adjustments as needed.

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

The following table reflects the Company’s interest sensitivity and interest rate risk position as of December 31, 2007:


(In Thousands)
	1 - 90 Days			91 - 365 Days			1 to 5 Years			Over 5 Years			Not Classified		Total
Uses of Funds:
Loans	$	15,418		$	10,934		$	55,495		$	45,337		—		$	127,184
Interest bearing
Bank deposits		1,600			—			—			—		—			1,600
Investment Securities		—			1,781			4,284			2,248		2,756			11,069
Restricted Stock		—			—			—			—		680			680
Federal Funds Sold		300			—			—			—		—			300

Total		17,318			12,715			59,779			47,585		3,436			140,833

Sources of Funds:
Demand Deposits
Interest bearing		10,238			—			—			—		—			10,238
Savings accounts		13,367			—			—			—		—			13,367
Time Deposits:
Over $ 100,000		1,070			13,014			1,738			—		—			15,822
Other certificates		9,812			34,579			10,114			—		—			54,505

Total deposits		34,487			47,593			11,852			—		—			93,932

Borrowings		1,300			2,500			3,100			—		—			6,900

Total		35,787			50,093			14,952			—		—			100,832

Discrete Gap		(18,469	)		(37,378	)		44,827			47,585		3,436			40,001

Cumulative Gap		(18,469	)		(55,847	)		(11,020	)		36,565		40,001

Ratio of Cumulative Gap to Total Earning Assets		-13.11	%		-39.65	%		-7.82	%		25.96	%	28.40	%

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.

Recent Accounting Pronouncements

Accounting 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. Recent accounting pronouncements considered to be applicable to the Company are included in Note 1 of the Consolidated Financial Statements within this report.

Item 7.

Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Report of Independent Registered Public Accounting Firm		28

Consolidated Balance Sheets as of December 31, 2007 and 2006		29

Consolidated Statements of Income for the years ended December 31, 2007 and 2006		30

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007 and 2006		31

Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006		32

Notes to Consolidated Financial Statements		33

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Pioneer Bankshares, Inc.

Stanley, Virginia

We have audited the consolidated balance sheets of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the year in the two-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of Pioneer Bankshares, Inc. and subsidiary internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

LOGO

Winchester, Virginia

March 25, 2008

PIONEER BANKSHARES, INC. AND SUBSIDARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(In Thousands, except share and per share data)


	2007			2006
ASSETS
Cash and due from banks	$	6,106		$	5,197
Interest-bearing deposits in banks		1,600			5,382
Federal funds sold		300			700
Securities available for sale, at fair value		11,069			13,906
Securities held to maturity (fair value was $— and $ 1 in 2007 and 2006, respectively)		—			1
Restricted securities		680			864
Loans receivable, net of allowance for loan losses of $1,573 in 2007 and $1,476 in 2006		125,611			118,822
Bank premises and equipment, net		4,056			4,478
Accrued interest receivable		758			706
Other assets		1,645			1,575

Total Assets	$	151,825		$	151,631

LIABILITIES

Deposits
Noninterest bearing	$	33,423		$	30,104
Interest bearing
Demand		10,238			12,056
Savings		13,367			12,330
Time deposits over $100,000		15,822			11,443
Other time deposits		54,505			58,845

Total Deposits		127,355			124,778

Accrued expenses and other liabilities		1,295			935
Long term debt		6,900			10,700

Total Liabilities		135,550			136,413

STOCKHOLDERS’ EQUITY

Common stock; $.50 par value, authorized 5,000,000 shares; outstanding – 1,011,481 shares in 2007 and 2006		506			506
Retained earnings		15,805			14,615
Accumulated other comprehensive income (loss), net		(36	)		97

Total Stockholders’ Equity		16,275			15,218

Total Liabilities and Stockholders’ Equity	$	151,825		$	151,631

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2007 AND 2006

(In Thousands, except per share data)


	2007		2006
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	9,777	$	8,910
Interest on securities – taxable		443		286
Interest on securities – nontaxable		10		10
Deposits and federal funds sold		395		486
Dividends		139		142

Total Interest and Dividend Income		10,764		9,834

INTEREST EXPENSE:
Deposits		3,552		2,627
Long term debt		356		660

Total Interest Expense		3,908		3,287

NET INTEREST INCOME		6,856		6,547
PROVISION FOR LOAN LOSSES		309		233

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,547		6,314

NONINTEREST INCOME:
Service charges on deposit accounts		805		784
Commission income		69		40
Other income		89		70
Gain on security transactions		315		293

Total Noninterest Income		1,278		1,187

NONINTEREST EXPENSES:
Salaries and employee benefits		2,545		2,366
Occupancy expenses		382		375
Equipment expenses		743		792
Other expenses		1,510		1,461

Total Noninterest Expenses		5,180		4,994

INCOME BEFORE INCOME TAXES		2,645		2,507
INCOME TAX EXPENSE		893		845

NET INCOME	$	1,752	$	1,662

PER SHARE DATA
Net income, basic	$	1.73	$	1.64

Net income, diluted	$	1.73	$	1.64

Dividends	$	0.56	$	0.51

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007 AND 2006

(In Thousands)


	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE DECEMBER 31, 2005	$	506	$	13,468		$	(29	)	$	13,945
Comprehensive Income
Net Income				1,662						1,662
Changes in unrealized gains on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $179)							308
Reclassification adjustment for gains included in net income (net of tax effect of $111)							(182	)		126

Total Comprehensive Income										1,788
Cash Dividends				(517	)					(517	)
Stock Based Compensation (net of tax $1)				2						2

BALANCE DECEMBER 31, 2006	$	506	$	14,615		$	97		$	15,218
Comprehensive Income
Net Income				1,752						1,752
Changes in unrealized gains on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $29)							62
Reclassification adjustment for gains included in net income (net of tax effect of $120)							(195	)		(133	)

Total Comprehensive Income										1619
Cash Dividends				(566	)					(566	)
Stock Based Compensation (net of tax $2)				4						4

BALANCE DECEMBER 31, 2007	$	506	$	15,805		$	(36	)	$	16,275

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007 AND 2006

(In Thousands)


	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,752		$	1,662
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		309			233
(Gain) on security sales		(315	)		(293	)
Net amortization on securities		(9	)		23
Deferred income tax (benefit)		(76	)		(80	)
Depreciation		546			546
Stock Based Compensation		4			2
Net change in:
Accrued interest receivable		(52	)		(139	)
Other assets		97			(225	)
Accrued expense and other liabilities		360			195

Net Cash Provided by Operating Activities		2,616			1,924

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits in other banks		3,782			(436	)
Net change in federal funds sold		400			2,550
Net change in restricted securities		184			152
Proceeds from maturities, sales, and principal payments of securities available for sale		14,964			18,111
Proceeds from principal payments of securities held to maturity		1			4
Purchase of securities available for sale		(12,027	)		(20,423	)
Net (increase) in loans		(7,098	)		(10,363	)
Purchase of bank premises and equipment		(124	)		(443	)

Net Cash Provided By (Used in) Investing Activities		82			(10,848	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand and savings deposits		2,538			(4,003	)
Time deposits		39			15,068
Proceeds from borrowings		2,000			5,000
Curtailments of borrowings		(5,800	)		(8,800	)
Dividends paid		(566	)		(517	)

Net Cash Provided By (Used in) Financing Activities		(1,789	)		6,748

CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents		909			(2,176	)
Cash and cash equivalents, beginning of year		5,197			7,373

Cash and Cash Equivalents, End of Year	$	6,106		$	5,197

Supplemental Disclosure of Cash Paid During the Year for:
Interest	$	3,682			3,182
Income taxes		811			925
Supplemental Disclosure of non-cash activity:
Unrealized gain (loss) on securities available for sale		(224	)		194

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.

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.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than cost, 2) the financial condition and near term prospects of the issuer, and 3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Receivable - Loans receivable are intended to be held until maturity and are shown on the consolidated balance sheets net of unearned interest and the allowance for loan losses. 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.

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

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

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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

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

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

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

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, generally on a straight-line method.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Income Taxes - Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

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 sheet 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 statement 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 $53,918 and $59,501 for the years ended December 31, 2007 and 2006, 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 - The Company previously accounted for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2006, the Financial Accounting Standards Board (FASB) Statement No. 123R (Revised 2004), Share-Based Payment (SFAS No. 123R), replaces and supersedes APB Opinion No. 25. This revised accounting principle now 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. The Company has adopted SFAS No. 123R and does not expect this change in accounting principle to have a material impact on its financial condition or future results of operations. Additional information related to the Company’s stock option plan can be found in Note 15 of this financial report.

The fair value of each grant was estimated at the grant date using the Black-Scholes option-pricing model. The estimates were calculated using the following weighted-average assumptions for stock options granted in 2007 and 2006 respectively: Dividend rate of 2.99% and 3.07%, price volatility of 21.41% and 14.58%, risk-free interest rate of 5.23% and 5.13%, and expected lives of 10 years.

The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend paid assumption is based on the Company’s history and expectation of dividend payments.

Additional stock options were granted to non-employee directors under this plan on June 14, 2007. The expense relating to all outstanding stock options, as of December 31, 2007, is approximately $4,000, net of tax. There have been no stock options exercised under this plan as of the date of this report.

Recent Accounting Pronouncements - In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company does not expect the implementation of SFAS 157 to have a material impact on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Company does not expect the implementation of SFAS 159 to have a material impact on its consolidated financial statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Recent Accounting Pronouncements – (continued)

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS 160). The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008, with early adoption prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements, at this time.

In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” This consensus concludes that for a split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007, with early application permitted. The Company does not expect the implementation of EITF 06-4 to have a material impact on its consolidated financial statements.

In November 2006, the EITF issued “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). In this Issue, a consensus was reached that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee. A consensus also was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The consensuses are effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years, with early application permitted. The Company does not expect the implementation of EITF 06-10 to have a material impact on its consolidated financial statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Recent Accounting Pronouncements – (continued)

In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the implementation of SAB 109 to have a material impact on its consolidated financial statements.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (SAB 110). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not expect the implementation of SAB 110 to have a material impact on its consolidated financial statements.

NOTE 2 NATURE OF OPERATIONS:

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

NOTE 3 CASH AND DUE FROM BANKS:

The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $1.2 million at December 31, 2007 and $1.1 million at December 31, 2006.

NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:

The Bank has cash deposited in and federal funds sold to other banks, most of which exceed federally insured limits, totaling $1.2 million and $3.8 million at December 31, 2007 and 2006, respectively.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 INVESTMENT SECURITIES:

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
December 31, 2007
Available for Sale
U.S. government and agency securities	$	5,962	$	126	$	—		$	6,088
Mortgage-backed securities		1,999		13		(5	)		2,007
State and municipals		215		3		—			218
Equity securities		2,961		—		(205	)		2,756

	$	11,137	$	142	$	(210	)	$	11,069

There were no securities classified as held-to-maturity as of December 31, 2007.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
December 31, 2006
Available for Sale
U.S. government and agency securities	$	9,984	$	29	$	(8	)	$	10,005
Mortgage-backed securities		1,366		—		(12	)		1,354
State and municipals		214		4		—			218
Equity securities		2,184		157		(12	)		2,329

	$	13,748	$	190	$	(32	)	$	13,906

Held to Maturity
Mortgage-backed securities	$	1	$	—	$	—		$	1

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 INVESTMENT SECURITIES (Continued):

The amortized cost and fair value of investment securities at December 31, 2007, 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	$	1,500	$	1,508
Due after one year through five years		4,177		4,284
Due five years through ten years		500		514

		6,177		6,306

Mortgage-backed		1,999		2,007
Equity securities		2,961		2,756

	$	11,137	$	11,069

There were no securities classified as held-to-maturity as of December 31, 2007.

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


	2007			2006
	(In Thousands)
Gains	$	459		$	407
Losses		(144	)		(114	)

Net Gains	$	315		$	293

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 INVESTMENT SECURITIES (Continued):

Investment securities with a book value of $713,000 at December 31, 2007 and 2006, were pledged to secure public deposits and for other purposes required by law.

Securities in an unrealized loss position at December 31, 2007 and 2006, by duration of the unrealized loss are shown below. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment has been recognized on any of the securities in a loss position because of management’s intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value.

As of December 31, 2007, there are 21 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:


LOSSES		Mortgage-Backed Securities			Equity Securities			Total
		(In Thousands)
Less than 12 Months	Fair Value	$	—		$	2,756		$	2,756
	Unrealized Losses		—			(205	)		(205	)
More than 12 Months	Fair Value		273			—			273
	Unrealized Losses		(5	)		—			(5	)

Total	Fair Value		273			2,756			3,029
	Unrealized Losses		(5	)		(205	)		(210	)

As of December 31, 2006, there are 13 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:


LOSSES		US Government Agency Securities			Mortgage-Backed Securities			Equity Securities			Total
					(In Thousands)
Less than 12 Months	Fair Value	$	—		$	—		$	456		$	456
	Unrealized Losses		—			—			(12	)		(12	)
More than 12 Months	Fair Value		1,494			363			—			1,857
	Unrealized Losses		(8	)		(12	)		—			(20	)

Total	Fair Value		1,494			363			456			2,313
	Unrealized Losses		(8	)		(12	)		(12	)		(32	)

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, 2007			December 31, 2006
	(In Thousands)
Mortgage loans on real estate:
Construction loans	$	12,979		$	9,933
Agricultural		4,573			4,940
Equity lines of credit		2,431			1,777
Residential 1-4 family		41,579			45,624
Second mortgages 1 - 4 family		5,055			4,894
Multifamily		3,946			3,796
Commercial		32,332			26,998

Total real estate loans		102,895			97,962
Commercial and agricultural loans		7,204			7,174
Consumer installment loans:
Personal		17,165			15,314
Credit cards		587			661

Total consumer installment loans		17,752			15,975
All other loans		323			331

Gross Loans		128,174			121,442
Less unearned income on loans		(990	)		(1,144	)

Loans, less unearned discount		127,184			120,298
Less allowance for loan losses		(1,573	)		(1,476	)

Net Loans Receivable	$	125,611		$	118,822

Deposit accounts reclassified as loans totaled $162,000 and $150,000 as of December 31, 2007 and 2006, respectively.

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 collectibility of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of its market service area.

The Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. The residential real estate loans, including equity lines of credit and second mortgages totaled $49.1 million as of December 31, 2007 as compared to $52.3 million at December 31, 2006. The small business commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $53.8 million as of December 31, 2007 as compared to $45.7 million at December 31, 2006. Management has established specific lending criteria relating to real estate lending and considers the risk of loss in these loan categories to be relatively low.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 LOANS (Continued):

The following is a summary of information pertaining to impaired loans for the years ended December 31, 2007 and 2006:


	2007		2006
	(In Thousands)
Impaired loans with a valuation allowance	$	786	$	213
Impaired loans without a valuation allowance		—		—

Total impaired loans	$	786		213

Valuation allowance related to impaired loans	$	111		43

Average investment in impaired loans	$	348		309

Interest income recognized on impaired loans	$	48	$	18

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

There were no nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 as of December 31, 2007. Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 as of December 31, 2006 amounted to $21,000. The impact on interest income with these accounts being in nonaccrual status was minimal for both reporting periods presented.

Loans past due greater than 90 days and still accruing interest at December 31, 2007 and 2006 totaled $87,000 and $46,000, respectively.

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

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


	2007			2006
	(In Thousands)
Balance, beginning of year	$	1,476		$	1,332
Provision charged to operating expenses		309			233
Recoveries of loans charged off		262			335
Loans charged off		(474	)		(424	)

Balance, end of year	$	1,573		$	1,476

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 BANK PREMISES, EQUIPMENT and SOFTWARE:

Bank premises, equipment and computer software included in the financial statements at December 31, 2007 and 2006 are as follows:


	2007		2006
	(In Thousands)
Land	$	691	$	691
Land improvements and buildings		4,454		4,433
Furniture and equipment		4,418		4,385
Computer software		1,179		1,154

		10,742		10,663
Less accumulated depreciation		6,686		6,185

Net	$	4,056	$	4,478

Depreciation and amortization related to bank premises, equipment and software included in operating expense for 2007 and 2006 was $546,000.

The Company has annual lease commitments relating to its Charlottesville and Valley Finance branch locations. The lease agreement term for the Charlottesville office expires November 30, 2012 and provides the Company an option of extending the renewal thereafter. The lease agreement for Valley Finance is renewable on an annual basis. These lease agreements may be subject to annual rental increases. The following is a schedule of future estimated minimum lease requirements under long-term agreements:


	(In thousands)
2008	$	47
2009		49
2010		50
2011		52
2012		53

Total	$	251

NOTE 9 DEPOSITS:

The Bank’s total deposit portfolio consists primarily of demand checking accounts, savings accounts and time deposit accounts. Total deposits as of December 31, 2007 were $127.4 million.

The Bank has one business customer with deposit balances exceeding 5% of total deposits as of December 31, 2007. The total deposit balances related to this customer as of December 31, 2007 were $10.5 million or 8.26% of total deposits.

At December 31, 2007, time deposit scheduled maturities (in thousands) are as follows:


2008	$	58,475
2009		4,899
2010		3,634
2011		1,913
2012		1,406

Total	$	70,327

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 LONG-TERM DEBT:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $60.7 million as of December 31, 2007 and 2006. 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 $41.6 million at December 31, 2007. On some 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 pay back all or part of the advance without a prepayment penalty.

The contractual maturities of FHLB advances as of December 31, 2007 are as follows:


	(In Thousands) Fixed Rate
Due in 2008	$	3,800
Due in 2009		3,100

	$	6,900

Subsequent to December 31, 2007, the Company received additional loan advances from the FHLB totaling $8.5 million. These borrowings were initiated primarily for investment purposes with funds generally being placed in matching term instruments ranging from 6 months to 3 years. The average borrowing rates on these fixed rate advances was 3.21% with terms not exceeding 3 years. The average earning rate on the investments was 4.24%.

NOTE 11 OTHER EXPENSES:

Other expenses in the consolidated statements of income include the following components:


	2007		2006
	(In Thousands)
Supplies and printing	$	125	$	137
Directors fees		172		184
Legal fees		123		31
Professional fees		193		170
Telephone		109		159
Other		788		780

Total	$	1,510	$	1,461

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 DIVIDEND LIMITATION ON SUBSIDIARY BANK:

The principal source of funds of the Company is dividends paid by the Bank. The amount of dividends the Bank may pay is regulated by the Federal Reserve. As of January 1, 2008, the maximum amount of dividends the Bank can pay to the Company is $1.7 million or 10.73% of the consolidated net assets, without requesting permission from the Federal Reserve Bank.

NOTE 13 INCOME TAXES:

The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2004. The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no impact on the financial statements.

The components of income tax expense are as follows:


	2007			2006
	(In Thousands)
Current income tax expense	$	969		$	925
Deferred income tax (benefit)		(76	)		(80	)

Income Tax Expense	$	893		$	845

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


	2007			2006
	(In Thousands)
Income taxes computed at the applicable federal income tax rate	$	900		$	852
Increase (decrease) resulting from:
Tax-exempt income and dividends		(18	)		(18	)
State income taxes		14			18
Other		(3	)		(7	)

Income Tax Expense	$	893		$	845

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


	2007		2006
	(In Thousands)
Deferred Tax Assets:
Provision for loan losses	$	325	$	261
Deferred compensation		50		56
Prepayment penalties (FHLB)		26		39
Securities available for sale		31		—
Other		28		20

Total	$	460		376

Deferred Tax Liabilities
Depreciation		13		51
Cash surrender value of life insurance		31		27
Securities available for sale		—		59
Other		55		44

Total		99		181

Net Deferred Tax Asset	$	361	$	195

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, 2007 and 2006, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2007, the most recent notification from the institution’s primary federal regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

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


	Actual				For Capital Adequacy Purposes				Minimum To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
					(in thousands)
As of December 31, 2007:
Total Capital to Risk Weighted Assets:
Consolidated	$	17,439	14.7	%	$	9,522	> 8.0	%		N/A	N/A
Pioneer Bank	$	13,256	11.5	%	$	9,224	> 8.0	%	$	11,530	> 10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	15,951	13.4	%	$	4,761	> 4.0	%		N/A	N/A
Pioneer Bank	$	11,813	10.3	%	$	4,612	> 4.0	%	$	6,918	> 6.0	%
Tier I Capital to Average Assets:
Consolidated	$	15,951	10.3	%	$	6,238	> 4.0	%		N/A	N/A
Pioneer Bank	$	11,813	7.8	%	$	6,094	> 4.0	%	$	7,617	> 5.0	%
As of December 31, 2006:
Total Capital to Risk Weighted Assets:
Consolidated	$	16,124	14.8	%	$	8,725	> 8.0	%		N/A	N/A
Pioneer Bank	$	12,825	12.1	%	$	8,487	> 8.0	%	$	10,609	> 10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	14,761	13.5	%	$	4,363	> 4.0	%		N/A	N/A
Pioneer Bank	$	11,497	10.8	%	$	4,244	> 4.0	%	$	6,365	> 6.0	%
Tier I Capital to Average Assets:
Consolidated	$	14,761	9.9	%	$	5,968	> 4.0	%		N/A	N/A
Pioneer Bank	$	11,497	7.9	%	$	5,825	> 4.0	%	$	7,281	> 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. The Plan makes available up to 14,000 shares of common stock for awards to employees and to non-employee directors of the Company and its subsidiaries in the form of stock options.

Generally, the Plan provides for the grants of incentive stock options and non-qualified stock options. The exercise price of an Option cannot 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 are determined at the grant date, but no Option can be exercisable in any event, after ten years from its grant date. On June 14, 2007, the Board of Directors granted Options to current non-employee directors for 2007. The effective date of the grant is June 14, 2007 and the Options may be exercised on or after June 14, 2008.

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


	2007 Shares		Weighted Average Exercise Price		Average Intrinsic Value (1)
					(In Thousands)
Options outstanding at beginning of year		7,100	$	14.62
Options Granted		800	$	23.80
Options Exercised		—		—
Options Forfeited		—		—

Options outstanding at end of year		7,900	$	16.32

Options exercisable		7,100	$	15.48	$	75

Weighted-average fair value of options granted during the year	$	6.17

(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, 2007. 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 15 STOCK OPTION PLAN: (continued)

Information pertaining to options outstanding at December 31, 2007 is as follows:


	Options Outstanding			Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life		Number Exercisable	Weighted Average Remaining Contractual Life
$ 18.00	700	0.5	years	700	0.5	years
12.75	3,200	3.0		3,200	3.0
12.50	800	5.5		800	5.5
18.40	800	6.5		800	6.5
17.50	800	7.5		800	7.5
22.20	800	8.5		800	8.5
23.80	800	9.5		—	—

Outstanding at end of year	7,900	5.1		7,100	4.6

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.


	2007			2006
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	1,011,481	$	1.73	1,011,481	$	1.64

Effect of dilutive securities:
Stock Options	644			1,902

Diluted earnings per share	1,012,125	$	1.73	1,013,383	$	1.64

As of December 31, 2007 and 2006, stock options representing 3,900 and 775 average shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 OFF-BALANCE SHEET COMMITMENTS:

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


	2007		2006
	(In Thousands)
Unfunded lines of credit (commercial and personal)	$	4,127	$	6,526
Loan commitments and letters of credit (commercial and personal)		6,741		7,023
Credit card unused credit limits		1,378		1,424

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.

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 $1.9 and $2.2 million as of December 31, 2007 and 2006, respectively. Loan transactions to such related parties are shown in the following schedule:


	2007			2006
	(In Thousands)
Total loans, beginning of year	$	797		$	798
New loans		—			179
Payments		(199	)		(180	)

Total Loans, End of Year	$	598		$	797

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards No. 107 (SFAS 107) “Disclosures About the Fair Value of Financial Statements” 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 Fed Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

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

Securities - Fair values, excluding restricted stock, are based on quoted market prices or dealer quotes. The carrying value of restricted stock approximates fair value based on each issuer’s redemption provision.

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 approximate fair value.

Off-Balance-Sheet Financial Instruments - The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter party. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

At December 31, 2007 and 2006, the fair value of loan commitments and stand-by letters of credit were immaterial. Therefore, they have not been included in the following table.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: (continued)

Estimated fair value and the carrying value of financial instruments at December 31, 2007 and 2006 are as follows (in thousands):


	2007				2006
	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
	(In Thousands)
Financial Assets
Cash	$	6,106	$	6,106	$	5,197	$	5,197
Interest bearing deposits		1,603		1,600		5,373		5,382
Federal funds sold		300		300		700		700
Securities available for sale		11,069		11,069		13,906		13,906
Securities held to maturity		—		—		1		1
Restricted Securities		680		680		864		864
Loans, net		128,854		125,611		121,778		118,822
Accrued interest receivable		758		758		706		706
Financial Liabilities
Demand Deposits:
Non-interest bearing		33,423		33,423		30,104		30,104
Interest bearing		10,238		10,238		12,056		12,056
Savings deposits		13,367		13,367		12,330		12,330
Time deposits		71,278		70,367		70,746		70,288
Long-term debt		6,814		6,900		10,626		10,700
Accrued interest payable		767		767		540		540

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.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 BENEFIT PLANS

The Bank has a 401(k) Profit Sharing Plan covering full-time employees who have completed 180 days of service and are at least 21 years of age. Employees may contribute compensation subject to certain limits based on federal tax laws. The Bank makes discretionary matching contributions equal to 100 percent of an employee’s compensation contributed to the Plan up to 3 percent of the employee’s compensation. Additional amounts may be contributed, at the option of the Bank’s Board of Directors. Employer contributions vest to the employee over a six-year period, and employees become 100% vested in his/her seventh year of full-time employment. For the years ended December 31, 2007 and 2006, total expense attributable to this plan amounted to $29,884 and $36,569, 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 $182,000 for the year ending December 31, 2007 compared to $160,000 for the year ending December 31, 2006. The increase in this expense category is directly related to rising health care costs and the number of active participants in the plan.

NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

BALANCE SHEET


	December 31,
	2007			2006
	(In Thousands)
ASSETS
Cash and cash equivalents	$	546		$	546
Investment in subsidiary		12,265			11,865
Securities available for sale		2,756			2,329
Bank premises and equipment, net		671			697
Other assets		88			—

Total Assets	$	16,326		$	15,437

LIABILITIES
Deferred income taxes	$	—		$	58
Income tax payable		—			146
Accrued expenses		16			15
Other liabilities		35			—

Total Liabilities		51			219

STOCKHOLDERS’ EQUITY
Common stock		506			506
Retained earnings		15,805			14,615
Accumulated other comprehensive income (loss), net		(36	)		97

Total Stockholders’ Equity		16,275			15,218

Total Liabilities and Stockholders’ Equity	$	16,326		$	15,437

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (Continued):

STATEMENTS OF INCOME

Years Ended December 31, 2007 and 2006


	2007		2006
	(In Thousands)
INCOME
Dividends from subsidiary	$	1,258	$	544
Interest income		29		21
Dividend income		55		55
Security gains		315		293
Rent income		83		83
Other income		8		3

Total Income		1,748		999

EXPENSES
Compensation expense		39		3
Occupancy expenses		35		37
Equipment expense		1		1
Other operating expenses		153		74

Total Expenses		228		115

Net income before income tax expense and increase in undistributed equity of affiliates		1,520		884
INCOME TAX EXPENSE		84		113

Net income before increase in undistributed income of affiliates		1,436		771
Undistributed income of subsidiary		316		891

NET INCOME	$	1,752	$	1,662

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (Continued):

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2007 and 2006


	2007			2006
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,752		$	1,662
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed subsidiary income		(316	)		(891	)
Deferred income tax (benefit)		(4	)		—
(Gain) on security sales		(315	)		(293	)
Depreciation		26			26
Stock based compensation		4			2
Net change in:
Other assets		(11	)
Accrued expenses and other liabilities		(109	)		100

Net Cash Provided by Operating Activities		1,027			606

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		4,583			2,463
Purchase of securities available for sale		(5,044	)		(2,460	)

Net Cash Provided by (Used in) Investing Activities		(461	)		3

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(566	)		(517	)

Net Cash Used in Financing Activities		(566	)		(517	)

Net Increase in Cash and Cash Equivalents		—			92
Cash and Cash Equivalents, Beginning of Year		546			454

Cash and Cash Equivalents, End of Year	$	546		$	546

Item 8.

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

Not Applicable

Item 8A.

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, 2007. 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, 2007 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, 2007, 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 temporary 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 8B.

Other Information.

Not Applicable

Part III

Item 9.

Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act.

All required information on (i) the directors 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 2008 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
Betty J. Purdham	59	Senior Vice President/Lending Officer, Pioneer Bank.

Judy L. Painter	58	Senior Vice President/Administration Officer, Pioneer Bank.

Eugene G. Colligan	65	Vice President/Chief Lending Officer, Pioneer Bank.

Lori G. Hassett	41	Vice President/Chief Financial Officer, Pioneer Bank.

Item 10.

Executive Compensation.

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

Item 11.

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

Information on security ownership of certain beneficial owners and management is 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, 2007 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	7,900 shares	$	15.48	6,100 shares
Equity Compensation plans not approved by security holders
Total	7,900 shares	$	15.48	6,100 shares

Item 12.

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 13.

Exhibits.

The following exhibits are filed as part of this Form 10-KSB 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-SB 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.

23.1		Consent of Yount, Hyde & Barbour, P.C.

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).

Item 14.

Principal Accountant Fees and Services.

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Pioneer Bankshares, Inc.

	By:	/s/ THOMAS R. ROSAZZA
Date: 3/27/08		Thomas R. Rosazza
		President and Chief Executive Officer

Date: 3/27/08	By:	/s/ LORI G. HASSETT
		Lori G. Hassett
		Vice President and Chief Financial Officer

SIGNATURE

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


Signature	Title	Date

/s/ ROBERT E. LONG		3/25/2008
Robert E. Long	Director

/s/ KYLE MILLER		3/26/2008
Kyle Miller	Director

/s/ PATRICIA G. BAKER		3/19/2008
Patricia G. Baker	Director

/s/ DAVID N. SLYE		3/26/2008
David N. Slye	Director

/s/ HARRY F. LOUDERBACK		3/25/2008
Harry F. Louderback	Director

/s/ LOUIS L. BOSLEY		3/25/2008
Louis L. Bosley	Director

/s/ MARK N. REED
Mark N. Reed	Director	3/25/2008

/s/ E. POWELL MARKOWITZ
E. Powell Markowitz	Director	3/25/2008

/s/ THOMAS R. ROSAZZA	President, Chief	3/26/2008
Thomas R. Rosazza	Executive Officer and Director

/s/ LORI G. HASSETT	Vice President,	3/26/2008
Lori G. Hassett	Chief Financial Officer