- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2009

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

Commission File Number: 0-30541

PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

54-1278721

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

(540) 778-2294

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common shares outstanding as of August 13, 2009 were 1,025,098.

PIONEER BANKSHARES, INC.

INDEX


		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets – June 30, 2009 and December 31, 2008	3

	Consolidated Statements of Income – Three Months Ended June 30, 2009 and 2008	4

	Consolidated Statements of Income – Six Months Ended June 30, 2009 and 2008	5

	Consolidated Statements of Changes in Stockholders’ Equity – Six Months Ended June 30, 2009 and 2008	6

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2009 and 2008	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	28

Item 4.	Controls and Procedures.	28

PART II	OTHER INFORMATION	28

Item 1.	Legal Proceedings.	28

Item 1A.	Risk Factors.	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	28

Item 3.	Defaults Upon Senior Securities.	28

Item 4.	Submission of Matters to a Vote of Security Holders.	28

Item 5.	Other Information.	28

Item 6.	Exhibits.	29

	SIGNATURES	30

Part I – Financial Information.

Item 1.

Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)


	June 30, 2009			December 31 2008
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	2,811		$	2,401
Interest bearing deposits in banks		8,933			11,896
Federal funds sold		2,900			100
Securities available for sale, at fair value		15,755			15,216
Restricted securities		788			792
Loans receivable, net of allowance for loan losses of $1,835 and $1,651 respectively		124,195			119,225
Premises and equipment, net		3,720			3,790
Accrued interest receivable		691			720
Other assets		2,079			1,970


Total Assets	$	161,872		$	156,110


LIABILITIES

Deposits
Noninterest bearing demand	$	24,574		$	25,079
Interest bearing
Demand		15,377			12,377
Savings		16,343			15,866
Time deposits over $100,000		24,313			16,921
Other time deposits		53,476			58,735


Total Deposits		134,083			128,978

Accrued expenses and other liabilities		819			927
Borrowings		9,700			9,400


Total Liabilities		144,602			139,305


STOCKHOLDERS’ EQUITY
Common stock; $.50 par value, authorized 5,000,000, outstanding 1,021,714 and 1,017,170 respectively		511			509
Retained earnings		16,963			16,460
Accumulated other comprehensive loss, net		(204	)		(164	)


Total Stockholders’ Equity		17,270			16,805


Total Liabilities and Stockholders’ Equity	$	161,872		$	156,110

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)


	Three Months Ended June 30,
	2009		2008

Interest and Dividend Income:
Loans including fees	$	2,161	$	2,342
Interest on securities - taxable		96		158
Interest on securities - nontaxable		27		3
Interest on deposits and federal funds sold		48		117
Dividends		12		20

Total Interest and Dividend Income		2,344		2,640


Interest Expense:
Deposits		656		874
Long term debt		59		121

Total Interest Expense		715		995


Net Interest Income		1,629		1,645
Provision for loan losses		250		91


Net interest income after provision for loan losses		1,379		1,554


Noninterest Income:
Service charges and fees		246		213
Other income		56		47
Gain (loss) on securities transactions		—		(6	)

Total Noninterest Income		302		254


Noninterest Expense:
Salaries and benefits		548		666
Occupancy expenses		82		87
Equipment expenses		148		166
Other expenses		461		434

Total Noninterest Expenses		1,239		1,353


Income before Income Taxes		442		455
Income Tax Expense		137		151


Net Income	$	305	$	304


Per Share Data
Net income, basic and diluted	$	0.30	$	0.30

Dividends	$	0.14	$	0.14


Weighted Average Shares Outstanding, Basic		1,021,644		1,013,285

Weighted Average Shares Outstanding, Diluted		1,021,644		1,013,666

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except Per Share Data)

(UNAUDITED)


	Six Months Ended June 30,
	2009		2008

Interest and Dividend Income:
Loans including fees	$	4,320	$	4,753
Interest on securities - taxable		243		273
Interest on securities - nontaxable		36		5
Interest on deposits and federal funds sold		103		225
Dividends		12		37

Total Interest and Dividend Income		4,714		5,293


Interest Expense:
Deposits		1,404		1,755
Long term debt		122		235

Total Interest Expense		1,526		1,990


Net Interest Income		3,188		3,303
Provision for loan losses		425		196


Net interest income after provision for loan losses		2,763		3,107


Noninterest Income:
Service charges and fees		469		414
Other income		109		116
Gain on security transactions		133		145

Total Noninterest Income		711		675


Noninterest Expense:
Salaries and benefits		1,102		1,305
Occupancy expenses		177		179
Equipment expenses		293		341
Other expenses		837		854

Total Noninterest Expenses		2,409		2,679


Income before Income Taxes		1,065		1,103
Income Tax Expense		343		367


Net Income	$	722	$	736


Per Share Data
Net income, basic and diluted	$	0.71	$	0.73

Dividends	$	0.29	$	0.29


Weighted Average Shares Outstanding, Basic		1,021,115		1,013,285

Weighted Average Shares Outstanding, Diluted		1,021,115		1,013,858

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands)

(UNAUDITED)


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

BALANCE DECEMBER 31, 2007	$	506	$	15,805		$	(36	)	$	16,275
Comprehensive Income
Net Income				736						736
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding losses arising during the period (net of tax effect of $111)							(187	)
Reclassification adjustment for gains included in net income (net of tax effect of $49)							(96	)		(283	)

Total Comprehensive Income
Stock issued for compensation		1		69						70
Cash Dividends		—		(294	)		—			(294	)


BALANCE JUNE 30, 2008	$	507	$	16,316		$	(319	)	$	16,504


BALANCE DECEMBER 31, 2008	$	509	$	16,460		$	(164	)	$	16,805
Comprehensive Income
Net Income				722						722
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $28)							48
Reclassification adjustment for gains included in net income (net of tax effect of $45)							(88	)		(40	)

Total Comprehensive Income										682
Stock issued for compensation		2		77			—			79
Cash Dividends		—		(296	)		—			(296	)


BALANCE JUNE 30, 2009	$	511	$	16,963		$	(204	)	$	17,270

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)


	Six Months Ended June 30,
	2009			2008
Cash Flows from Operating Activities:
Net income	$	722		$	736
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		425			196
Depreciation and amortization		207			253
Gain on sale of securities		(133	)		(145	)
Net amortization on securities		5			5
Stock issued for compensation		79			70
Net change in:
Accrued interest receivable		29			(2	)
Other assets		(91	)		(404	)
Accrued expense and other liabilities		(108	)		(153	)


Net Cash Provided by Operating Activities		1,135			556


Cash Flows from Investing Activities:
Net change in federal funds sold		(2,800	)		(2,900	)
Net change in interest bearing deposits		2,963			(9,456	)
Net change in restricted securities		4			(454	)
Proceeds from maturities and sales of securities available for sale		10,944			8,891
Purchase of securities available for sale		(11,413	)		(17,373	)
Net decrease (increase) in loans		(5,395	)		4,880
Purchase of bank premises and equipment		(137	)		(164	)


Net Cash Used in Investing Activities		(5,834	)		(16,576	)


Cash Flows from Financing Activities:
Net change in:
Demand and savings deposits		2,972			(426	)
Time deposits		2,133			4,542
Proceeds from borrowings		3,500			12,000
Curtailments of borrowings		(3,200	)		(1,900	)
Dividends paid		(296	)		(294	)


Net Cash Provided by Financing Activities		5,109			13,922


Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents		410			(2,098	)
Cash and Cash Equivalents, beginning of year		2,401			6,106


Cash and Cash Equivalents, End of Period	$	2,811		$	4,008


Supplemental Disclosure of Cash Paid
During the Period for:
Interest	$	1,684		$	2,013
Income taxes	$	447		$	499
Supplemental Disclosure of non-cash activity:
Unrealized gain (loss) on securities available for sale		(58	)		(443	)
Loan balances transferred to OREO		—			254

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

ACCOUNTING PRINCIPLES:

The consolidated financial statements conform to generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2009 and the results of operations for the six-month period ended June 30, 2009 and June 30, 2008. The notes included herein should be read in conjunction with the notes to financial statements included in the 2008 annual report to stockholders of Pioneer Bankshares, Inc. (the “Company”) and its Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission. The results for the six month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year.

Reclassifications – Certain reclassifications have been made to prior period balances to conform to the current year presentation.

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

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

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement 123R (Revised 2004), Share-Based Payment (“SFAS 123R”). This revised accounting principle 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 fair value of each previously issued stock option grant was estimated at the grant date using the Black-Scholes option-pricing model. The expected volatility was based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards were 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 assumptions were based on the Company’s history and expectation of dividend payments.

The following summarizes the stock options outstanding as of June 30, 2009:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Intrinsic Value of Unexercised In-the-Money Options (In Thousands)
Options outstanding, 12/31/08	7,200	$	16.16	4.50
Options Granted	—		—
Options Exercised	800		12.75
Options Forfeited	—		—
Options outstanding, 6/30/09	6,400	$	16.58	4.50
Options exercisable, 6/30/09	6,400	$	16.58	4.50	$	—

NOTE 2

INVESTMENT SECURITIES:

The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at June 30, 2009 and December 31, 2008 follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
June 30, 2009

Available for Sale

U.S. government and agency securities	$	4,499	$	15	$	—		$	4,514

Mortgage-backed securities		4,600		159		—			4,759

State and municipals		4,305		—		(16	)		4,289

Equity securities		2,690		37		(534	)		2,193

	$	16,094	$	211	$	(550	)	$	15,755


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
December 31, 2008

Available for Sale

U.S. government and agency securities	$	2,496	$	42	$	—		$	2,538

Mortgage-backed securities		9,194		239		—			9,433

State and municipals		1,115		—		(15	)		1,100

Equity securities		2,693		53		(601	)		2,145

	$	15,498	$	334	$	(616	)	$	15,216

Management recognizes that current economic conditions and market trends may result in other than temporary impairment classifications for certain securities or equity investments. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As of June 30, 2009, management has determined that the unrealized losses in the investment portfolio are temporary. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value. Management will continue to monitor the securities in a loss position for future impairment. Securities in an unrealized loss position at June 30, 2009 and December 31, 2008, by duration of the unrealized loss are shown in the following table.

NOTE 2

INVESTMENT SECURITIES (continued):

As of June 30, 2009, there were 13 securities in the portfolio with unrealized losses, which were considered to be temporary. The schedule of losses on theses securities is as follows:

LOSSES


	(In Thousands)	Municipal Securities			Mortgage-Backed Securities		Equity Securities			Total
Less than 12 Months	Fair Value	$	2,924		$	—	$	78		$	3,002
	Unrealized Losses		(16	)		—		(11	)		(27	)

More than 12 Months	Fair Value		—			—		765			765
	Unrealized Losses		—			—		(523	)		(523	)


Total	Fair Value	$	2,924		$	—	$	843		$	3,767
	Unrealized Losses		(16	)		—		(534	)		(550	)

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

LOSSES


		Municipal Securities			Mortgage-Backed Securities		Equity Securities			Total
					(In Thousands)
Less than 12 Months	Fair Value	$	884		$	—	$	398		$	1,282
	Unrealized Losses		(15	)		—		(284	)		(299	)

More than 12 Months	Fair Value		—			—		366			366
	Unrealized Losses		—			—		(317	)		(317	)


Total	Fair Value		884			—		764			1,648
	Unrealized Losses	$	(15	)	$	—	$	(601	)	$	(616	)

The Bank also holds additional investments in Federal Home Loan Bank of Atlanta (“FHLB”) in the form of FHLB stock, which is a membership requirement. Loan advances from FHLB are also subject to additional stock purchase requirements, which are generally redeemed as outstanding loan balances are repaid, subject to FHLB’s quarterly excess capital evaluation process. For the second quarter of 2009, FHLB announced that it will not repurchase activity-based excess capital stock outstanding. FHLB will continue to evaluate excess capital stock repurchases on a quarterly basis going forward. FHLB stock is generally viewed as a long term investment and is considered to be a restricted security, which is carried at cost, because there is no market for the stock other than FHLB or other member institutions. As of June 30, 2009, the Bank’s investment in FHLB stock totaled $788,000. Management’s evaluation of FHLB stock for impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Although FHLB’s stock dividends were temporarily suspended for the fourth quarter of 2008 and the first quarter of 2009, dividend payments have been declared for the period ending June 30, 2009. Management’s evaluation of FHLB stock as of June 30, 2009 did not consider this investment to be other than temporarily impaired, and therefore, no impairment has been recognized.

NOTE 3

LOANS:

Loans outstanding are summarized as follows:


	(In Thousands)
	June 30, 2009			December 31, 2008
Mortgage loans on real estate
Construction loans	$	8,492		$	9,447
Agricultural		3,699			4,267
Equity lines of credit		2,012			1,927
Residential 1-4 family		44,770			41,618
Second Mortgages		4,151			3,788
Multifamily		3,626			4,144
Commercial		36,947			34,022

Total real estate loans		103,697			99,213

Commercial and industrial loans		5,833			5,701
Consumer installment loans
Personal		16,221			15,665
Credit cards		628			645

Total consumer installment loans		16,849			16,310
All other loans		224			362

Gross Loans		126,603			121,586

Less unearned income on loans		(573	)		(710	)

Loans, less unearned discount		126,030			120,876

Less allowance for loan losses		(1,835	)		(1,651	)

Net Loans Receivable	$	124,195		$	119,225

Pioneer Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. Management has established specific lending criteria relating to real estate lending and considers the risk of loss in these loan categories to be moderate.

NOTE 4

ALLOWANCE FOR LOAN LOSSES:

A summary of transactions in the allowance for loan losses for the three months ended June 30, 2009 and the year ending December 31, 2008 is as follows:


	June 30, 2009			December 31, 2008
	(Unaudited)			(Audited)
	(In Thousands)
Balance, beginning of period	$	1,651		$	1,573
Provision charged to operating expenses		425			548
Recoveries of loans charged off		91			311
Loans charged off		(332	)		(781	)

Balance, end of period	$	1,835		$	1,651

The total amount of impaired loans as of June 30, 2009 were $2.2 million compared to a total of $2.1 million as of December 31, 2008. Specific valuation allowances of approximately $540,000 have been made to cover potential losses associated with these loans.

NOTE 5

EARNINGS PER SHARE:

The following shows the weighted average number of shares for the six month period ending June 30, 2009 and 2008, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.


	Six Months Ended June 30, 2009			Six Months Ended June 30, 2008
	Shares	Per Share Amount		Shares	Per Share Amount

Basic earnings per share	1,021,115	$	0.71	1,013,285	$	0.73

Effect of dilutive securities:
Stock Options	—			573


Diluted earnings per share	1,021,115	$	0.71	1,013,858	$	0.73

The weighted average number of shares for the three month period ending June 30, 2009 and 2008, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock are shown below.


	Three Months Ended June 30, 2009			Three Month Ended June 30, 2008
	Shares	Per Share Amount		Shares	Per Share Amount

Basic earnings per share	1,021,644	$	0.30	1,013,285	$	0.30

Effect of dilutive securities:
Stock Options	—			381


Diluted earnings per share	1,021,644	$	0.30	1,013,666	$	0.30

As of June 30, 2009 and 2008 there were stock options representing 6,400 and 3,200 shares respectively that were excluded from the computation of diluted earnings per share because their effects were anti-dilutive.

NOTE 6

BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta (the “FHLB”) upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. 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.

As of June 30, 2009, the total outstanding borrowings with FHLB were $9.7 million, which mature through June 30, 2010. The interest rates on these fixed-rate notes payable range from 0.41% to 3.92%. The maturities of FHLB advances as of June 30, 2009 are shown in TABLE II of this report.

NOTE 7

OTHER EXPENSES:

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


	June 30,
	2009		2008
	(In Thousands)
ATM Service Fees	$	60	$	49
Director Fees		60		66
FDIC Assessment		104		7
Legal Fees		50		80
Professional Fees		56		110
Supplies and Printing		78		82
Telephone Expense		47		65
Other		382		451

Total	$	837	$	910

NOTE 8

FAIR VALUE MEASUREMENT:

The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

In October of 2008, the FASB issued Staff Position No. 157-3 (“FSP 157-3”) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financials statements were not issued.

SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:

•

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009:


Description			Fair Value Measurements Using
Description	Balance as of June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities	$	15,755	$	—	$	15,755	$	—

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

Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan , including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

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

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at the lower of loan balance or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157. The outstanding balance of OREO was $21,000 as of June 30, 2009 and December 31, 2008.

The following table summarizes the Company’s financial assets that were measured at fair value as of June 30, 2009:


Description	Balance as of June 30, 2009		Carrying value at June 30, 2009
Description	Balance as of June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of allowance	$	1,649	$	—	$	893	$	756
Other Real Estate Owned	$	21					$	21

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

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

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

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

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

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 June 30, 2009 and December 31, 2008, the fair value of loan commitments and stand-by letters of credit were immaterial. Therefore, they have not been included in the following table.

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.

Estimated fair value and the carrying value of financial instruments at June 30, 2009 and December 31, 2008 are as follows (in thousands):


	June 30, 2009				December 31, 2008
	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
	(In Thousands)

Financial Assets

Cash and due from banks	$	2,811	$	2,811	$	2,401	$	2,401

Interest bearing deposits in other banks		9,008		8,933		12,045		11,896

Federal funds sold		2,900		2,900		100		100

Securities available for sale		15,755		15,755		15,216		15,216

Loans, net		121,193		124,195		118,272		119,225

Accrued interest receivable		691		691		720		720

Financial Liabilities

Demand Deposits:

Non-interest bearing		24,574		24,574		25,079		25,079

Interest bearing		15,377		15,377		12,377		12,377

Savings deposits		16,343		16,343		15,866		15,866

Time deposits		79,546		77,789		76,848		75,656

Borrowings		9,686		9,700		9,408		9,400

Accrued interest payable		460		460		619		619

Item 2.

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

The discussion covers the consolidated financial condition and operations of Pioneer Bankshares, Inc. (“Company”) and its subsidiary Pioneer Bank (“Bank”).

Forward-Looking Statements

This quarterly report on Form 10-Q 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 quarterly 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 officer, the words or phrases “will likely result,” “are expected 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.

Overview

The Company reported net earnings of $722,000 as of June 30, 2009, as compared to $736,000 for the same period last year. Earnings per share as of June 30, 2009 were $0.71 compared to $0.73 for the first six months of 2008.

The Company had asset growth of approximately $5.8 million during the first six months of 2009. Investments in securities available for sale increased by $539,000 for the period ending June 30, 2009, as compared to total securities available for sale at December 31, 2008. Investments in interest bearing deposits decreased by $3.0 million for the first six months of 2009 and investments in Federal Funds Sold increased by approximately $2.8 million for the same period, as compared to balances as of December 31, 2008. The Company’s loan portfolio increased by approximately $5.0 million or 4.17% during the first six months of 2009, with the majority of this growth being in small to medium sized commercial and residential real estate loans. The deposit portfolio increased by $5.1 million or 3.96% during the same period, with the majority of this growth being in the category of interest bearing demand deposit accounts. The Company’s capital position as of June 30, 2009 was approximately $17.3 million, or 10.67% as a percentage of total assets.

The Company’s book value as of June 30, 2009 was $16.90 per share, as compared to a book value of $16.52 per share as of December 31, 2008. This represents an increase of 2.30%. Shareholder dividend payments for the first six months of 2009 totaled $0.29 per share, and were the same as the dividend amount paid for the first half of 2008.

Management recognizes that prevailing economic conditions may have the potential to adversely impact the Company’s operational results, including future earnings, liquidity, and capital resources. Management continually monitors economic factors in an effort to promptly identify specific trends that could have a direct material effect on the Company.

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.

The Company uses 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 of occurring and estimatable, 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 individual borrower’s financial condition. This review also considers concentrations of loans in terms of geography, business type or 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 principle, 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 (“FASB”) 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 is 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 will be subject to at least 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 at June 30, 2009 and December 31, 2008. Goodwill is no longer amortized, but instead is tested for impairment at least annually.

Results of Operations

Net Interest Income

Total interest income decreased $579,000 or 10.94% during the first six months of 2009, as compared to the same period for 2008. Total interest expense decreased $464,000 or 23.32% in the first six months of 2009 compared to the same period of 2008. The decreases in interest income and interest expense resulted in a net interest income decrease of $115,000 or 3.48% for the period ending June 30, 2009 compared to the period ending June 30, 2008. This net decrease is primarily attributed to reduced interest income on loans of approximately $433,000 as compared to the same period last year. The reduced interest income on loans is attributed to the lower volume of loans outstanding, which resulted from loan refinancing activities during 2008. The average outstanding loan balances as of June 30, 2009 totaled $121.1 million, as compared to $125.5 million as of June 30, 2008. The average yield on loan balances outstanding has decreased from 7.57% as of June 30, 2008 to 7.13% as of June 30, 2009. This decrease in interest yield on loans has been largely impacted by lower market interest rates and scheduled loan re-pricing activities. The overall average yield on earning assets decreased from 6.94% as of June 30, 2008 to 6.36% as of June 30, 2009, and is attributed to the previously mentioned factors.

The Company’s cost of liabilities decreased from 3.53% as of June 30, 2008 to 2.72% as of June 30, 2009. This is attributed to management’s proactive re-pricing efforts to reduce interest expense on deposit products in conjunction with lower market rates.

The Company’s overall net interest margin remained relatively stable at 4.31% as of June 30, 2009 compared to 4.33% as of June 30, 2008.

Noninterest Income

During the first six months 2009, non-interest income increased by $36,000 when compared to the same period last year. This increase is primarily attributed to increased service charges and fees on deposit products and services. Securities gains during the first six months 2009 decreased by $12,000 or 8.28% as compared to the prior year. Income from Securities gains is generally considered to be non-recurring and may fluctuate with market conditions. Other income for the first six months of 2009 totaled $109,000 and was 6.03% less than the prior year.

Noninterest Expense

During the first six months of 2009, non-interest expense decreased by $270,000 or 10.08% in comparison to the first six months of 2008. The primary factor contributing to this overall decrease is reduced salary and benefit expense of approximately $203,000. The decrease in salaries and benefits is the result of management’s continuing efforts to control expense through staff reductions and decreased hourly schedules.

The Bank is subject to a quarterly statutory FDIC assessment for deposit insurance coverage and must comply with the rules, regulations, and fees established by the FDIC. Each depository institution is assigned a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. The FDIC has temporarily raised the insurance limits to $250,000 per depositor and has also established a temporary liquidity guarantee program for additional insurance coverage on non-interest bearing transaction accounts. The changes in FDIC insurance coverage are subject to additional assessment fees, which have resulted in a considerable increase in this expense category. As of June 30, 2009, the FDIC insurance assessment expense totaled $104,000 compared to $7,000 for the period ending June 30, 2008.

Financial Condition

Securities

The Company’s securities portfolio is held to assist the Company in liquidity and asset liability management as well as capital appreciation. The securities portfolio generally consists of securities held to maturity and securities available for sale. Securities are classified as held to maturity when management has the intent and ability to hold the securities to maturity. These securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, general liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses of available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders’ equity.

As of June 30, 2009, the net amortized cost of securities available for sale was approximately $339,000 more than the stated market value as shown in Note 2 of the financial statements included in this report. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value. Management continually monitors the securities in a loss position for possible impairment. At this time, management does not expect the fluctuation in the value of these securities to have a material impact on earnings.

Investments in securities, including those which were restricted, increased by approximately $535,000 during the first six months of 2009. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 13.92% (based on market value) are invested in equities, some of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The equity securities generally include common stocks and corporate bonds, which are purchased with the objective of generating additional interest or dividend income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

Loan Portfolio

The Company operates in a service area in the western portion of Virginia in the counties of Page, Greene, Rockingham, and the City of Harrisonburg, and has expanded its service area to include Albemarle County and the City of Charlottesville, Virginia. The Company does not make a significant number of loans to borrowers outside its primary service area. The Company is active in local residential construction mortgages and consumer lending. Commercial lending includes loans to small and medium sized businesses within its service area.

An inherent risk in the lending of money is that the borrower will not be able to repay the loan under the terms of the original agreement. The allowance for loan losses (see subsequent section) provides for this risk and is reviewed periodically for adequacy. The risk associated with real estate and installment loans to individuals is based upon employment, the local and national economies, and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies in addition to the financial strength of the borrower.

While lending is geographically diversified within the service area, the Company does have loan concentrations in commercial and residential real estate loans, as well as, consumer auto loans. A significant percentage of these loans are made to borrowers who are employed by businesses outside the service area.

During the first six months of 2009, net loans increased by approximately $5.0 million or 4.17%. The increase in loans was primarily in the categories of residential real estate, small business and commercial real estate loans, and other consumer installment loans. A schedule of loans by type is shown in a note to the consolidated financial statements included in this report.

The risk elements in lending activities include non-accrual loans, loans 90 days or more past due and restructured loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently. Restructured loans are loans on which the original interest rate or repayment terms have changed due to financial hardship. Non-accrual loans and loans 90 days or more past due were approximately $2.9 million at June 30, 2009 compared to $2.0 million at December 31, 2008. This represents an increase of $900,000 and is mainly attributed to certain real estate accounts in which the borrowers are experiencing financial difficulties. Management has evaluated the value of collateral related to these accounts and has made appropriate specific allocations to the allowance for loan loss account for potential loan losses.

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. The total amount of impaired loans as of June 30, 2009, were $2.2 million, and have increased by approximately $67,000 from the total of impaired loans at December 31, 2008. Management has placed approximately $2.0 million of the Bank’s impaired loans in a nonaccrual status as of June 30, 2009. This amount is also included in the nonaccrual loan totals discussed above. Impaired loans not in nonaccrual status as of June 30, 2009 were approximately $187,000. Specific allocations have been made to the allowance for loan loss account of approximately $540,000, as of June 30, 2009, to cover potential losses that may occur relating to impaired loans.

Management continually monitors past due, non-accrual, and impaired loans and takes necessary collection actions on a consistent basis to minimize losses in the portfolio. Management monitors all non-performing assets in order to promptly identify any loss allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well secured and continues to actively work with these customers to effect payment.

Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans at June 30, 2009 that are not included in the past due or non-accrual loans referred to above.

Allowance for Loan Losses

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 $1.8 million, at June 30, 2009, increased by approximately $184,000 from its level at December 31, 2008. The increase in the allowance balance is primarily attributed to specific allocations related to impaired loans, 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. The increased allowance allocations noted above has contributed to an 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 1.46% and 1.37% of total loans at June 30, 2009 and December 31, 2008, respectively. The increase in the allowance for loan loss as a percentage of total loans is directionally consistent with the changes and trends that have been identified within the loan portfolio as of June 30, 2009.

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 June 30, 2009 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Management’s practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

The provision expense related to the allowance for loan loss as of June 30, 2009 was $425,000 as compared to $196,000 for the first six months of 2008. This increase of $229,000 is directly related to the increased loan portfolio allocations previously discussed.

Management’s evaluation of the allowance for loan losses as of June 30, 2009 and December 31, 2008 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

Premises, Equipment and Software

During the first six months of 2009, the Company had purchases relating to premises, equipment or other fixed assets of approximately $137,000. These purchases were primarily related to in-house software and equipment upgrades for image processing.

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

Deposits

The Company’s main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Company’s total deposit portfolio has historically remained relatively stable; however, these balances fluctuate with normal daily activity.

During the first six months of 2009, total deposits increased by approximately $5.1 million or 3.96% with the increase being distributed among interest bearing deposits, savings accounts, and certificates of deposit accounts. The Company monitors its deposits carefully on an on-going basis in order to provide for investment activities and loan funding opportunities.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank (the “FHLB”) of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. As of June 30, 2009, total borrowings were $9.7 million compared to $9.4 million at December 31, 2008. This represents an increase of approximately $300,000, which resulted from short-term borrowings during the second quarter of 2009. Additional information relating to the Bank’s borrowing activities is included in Note 6 of the financial statements included in this report.

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 to support anticipated asset growth, future expansion, shareholder dividends, and ongoing operational needs.

As of June 30, 2009 and December 31, 2008, the Company’s total capital-to-asset ratios were 10.67% and 10.76%, respectively. The Company’s Tier 1 risk-based capital ratio was 14.11% and the total risk-based capital ratio was 15.36% as of June 30, 2009. The Bank’s Tier 1 risk-based capital ratio was 11.53% and total risk-based capital ratio was 12.78% as of June 30, 2009. The capital ratios for both the Company and the Bank exceed the well-capitalized regulatory guidelines as of June 30, 2009 and earnings have historically been sufficient to allow for consistent dividends to be declared on a quarterly basis.

Liquidity

Liquidity is the 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, interest bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company’s management of liquid assets and the ability to generate liquidity through borrowings, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, deposits obtained through the adjustment of interest rates, purchases of federal funds and borrowings. To further meet its liquidity needs, the Company also maintains lines of credit with the FHLB and certain correspondent banks.

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

Liquidity as of June 30, 2009 remains adequate.

Interest Rate Sensitivity

The Company 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 Company also uses loan repayments and maturing investments to meet its liquidity needs. The Bank’s membership in the Federal Home Loan Bank System provides additionally liquidity. The matching of long-term receivables and liabilities helps the Company reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed.

As of June 30, 2009, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 36.44% for the one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 33.89% at December 31, 2008. This negative gap position 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. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of June 30, 2009.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.” SAB 111 maintains the SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events.” SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS 168 establishes the FASB Accounting Standards Codification, which will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

Securities and Exchange Commission Web Site

The Securities and Exchange Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including Pioneer Bankshares, Inc.

TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)


	Six Months Ended June 30, 2009						Six Months Ended June 30, 2008
	Average Balance		Income/ Expense		Rates		Average Balance		Income/ Expense		Rates
Interest Income
Loans ¹
Commercial	$	6,832	$	231	6.76	%	$	8,008	$	324	8.09	%
Real estate		97,925		3,228	6.59	%		99,777		3,487	6.99	%
Installment		15,747		803	10.20	%		17,224		884	10.26	%
Credit Card		613		58	18.92	%		539		58	21.52	%
Federal funds sold		2,306		3	0.26	%		3,238		41	2.53	%
Interest Bearing Deposits		9,217		100	2.17	%		9,631		184	3.82	%
Investments
Taxable		10,284		233	4.53	%		11,411		303	5.31	%
Nontaxable ²		6,259		85	2.72	%		2,899		18	1.24	%


Total earning assets		149,183		4,741	6.36	%		152,727		5,299	6.94	%


Interest Expense
Demand deposits		14,101		71	1.01	%		10,407		28	0.54	%
Savings		16,126		74	0.92	%		14,826		78	1.05	%
Time deposits		74549		1,259	3.38	%		73,537		1,649	4.48	%
Borrowings		7,354		122	3.32	%		13,862		235	3.39	%


Total Interest Bearing Liabilities	$	112,130	$	1,526	2.72	%	$	112,632	$	1,990	3.53	%

Net Interest Income				3,215						3,309

Net Interest Margin					4.31	%					4.33	%

¹	Nonaccrual loans are included in computing the average balances.

²	An incremental tax rate of 34% and a 70% dividend exclusion was used to calculate the tax equivalent income.

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)


	Three Months Ended June 30, 2009						Three Months Ended June 30, 2008
	Average Balance		Income/ Expense		Rates		Average Balance		Income/ Expense		Rates
Interest Income
Loans ¹
Commercial	$	6,883	$	112	6.51	%	$	7,684	$	152	7.91	%
Real estate		98,337		1,619	6.59	%		99,330		1,728	6.96	%
Installment		15,926		402	10.10	%		15,600		432	11.08	%
Credit card		614		28	18.24	%		543		30	22.10	%
Federal funds sold		1,746		1	0.23	%		3,085		15	1.94	%
Interest Bearing Deposits		9,882		47	1.90	%		11,382		102	3.58	%
Securities
Taxable		8,356		96	4.60	%		13,969		175	5.01	%
Nontaxable ²		5,206		57	4.38	%		2,642		9	1.36	%


Total earning assets		146,950		2,362	6.43	%		154,235		2,643	6.85	%


Interest Expense

Demand deposits		15,200		38	1.00	%		10,521		15	0.57	%
Savings		16,333		30	0.73	%		16,116		43	1.07	%
Time deposits		73,309		588	3.21	%		75,033		816	4.35	%
Borrowings		6,832		59	3.45	%		14,363		121	3.37	%


Total Interest Bearing Liabilities	$	111,674	$	715	2.56	%	$	116,033	$	995	3.43	%


Net Interest Income			$	1,647					$	1,648


Net Interest Margin					4.48	%					4.27	%

¹	Nonaccrual loans are included in computing the average balances.

²	An incremental tax rate of 34% and a 70% dividend exclusion was used to calculate the tax equivalent income.

TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

JUNE 30, 2009

(Dollar Amounts in Thousands)


	0-3 Months			4-12 Months			1-5 Years			Over 5 Years			Not Classified			Total
Uses of Funds:

Loans ¹	$	12,315		$	8,890		$	59,545		$	45,280		$	—		$	126,030
Interest bearing bank deposits		3,683			3,750			1,500			—			—			8,933
Investment securities ²		3,502			510			977			8,573			2,193			15,755
Restricted stock		—			—			—			—			788			788
Federal funds sold		2,900			—			—			—			—			2,900


Total		22,400			13,150			62,022			53,853			2,981			154,406


Sources of Funds:

Interest bearing demand deposits		15,377															15,377
Regular savings		16,343															16,343
Certificates of deposit $100,000 and over		8,319			7,979			8,015									24,313
Other certificates of deposit		5,857			28,240			19,379									53,476
Borrowings		600			9,100			—									9,700


Total	$	46,496		$	36,219		$	27,394		$	—		$	—		$	119,209


Discrete Gap	$	(24,096	)	$	(32,169	)	$	34,628		$	53,853		$	2,981		$	35,197

Cumulative Gap	$	(24,096	)	$	(56,265	)	$	(21,637	)	$	32,216		$	35,197

Ratio of Cumulative
Gap To Total
Earning Assets at June 30, 2009		-15.61	%		-36.44	%		-14.01	%		20.86	%		22.08	%


Ratio of Cumulative
Gap To Total
Earning Assets at
December 31, 2008		-18.46	%		-33.89	%		-13.56	%		21.93	%		23.90	%

¹	Nonaccrual loans are included in the loan totals.

²	Investment securities are reflected at fair value.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

Item 4.

Controls and Procedures

As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as Pioneer Bankshares, Inc. that file periodic reports under the Securities Exchange Act of 1934 (the “Act”) are required to include in those reports certain information concerning the issuer’s controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company has established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive officers, and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, the Company evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are adequate and effective. There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

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 1A.

Risk Factors.

Not Applicable

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

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

Item 3.

Defaults Upon Senior Securities.

Not Applicable

Item 4.

Submission of Matters to a Vote of Security Holders.

Not Applicable

Item 5.

Other Information.

Not Applicable

Item 6.

Exhibits.

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).

Certifications of Chief Executive 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).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PIONEER BANKSHARES, INC.

		By:	/s/ THOMAS R. ROSAZZA
Date:	August 13, 2009		Thomas R. Rosazza
			President and Chief Executive Officer

Date:	August 13, 2009	By:	/s/ LORI G. HASSETT
			Lori G. Hassett
			Vice President and Chief Financial Officer