- 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 March 31, 2010

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

Commission File Number: 0-30541

PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

54-1278721

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

(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 May 14, 2010 were 1,030,266.

PIONEER BANKSHARES, INC.

INDEX


		Page

PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets – March 31, 2010 and December 31, 2009	3

	Consolidated Statements of Income - Three Months Ended March 31, 2010 and 2009	4

	Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2010 and 2009	5

	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2010 and 2009	6

	Notes to Consolidated Financial Statements	7

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	27

Item 4.	Controls and Procedures.	27

PART II	OTHER INFORMATION	27

Item 1.	Legal Proceedings.	27

Item 1A.	Risk Factors.	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27

Item 3.	Defaults Upon Senior Securities.	27

Item 4.	Reserved.	27

Item 5.	Other Information.	27

Item 6.	Exhibits.	28

	SIGNATURES	29

Part I - Financial Information.

Item 1.

Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)


	March 31, 2010		December 31, 2009
	(Unaudited)		(Audited)
ASSETS

Cash and due from banks	$	2,087	$	5,252
Interest bearing deposits in banks		16,575		6,724
Federal funds sold		900		1,500
Securities available for sale, at fair value		14,057		12,999
Restricted securities		891		788
Loans receivable, net of allowance for loan losses of $2,266 and $1,945 respectively		126,270		124,660
Premises and equipment, net		3,508		3,582
Accrued interest receivable		621		644
Other real estate owned		300		352
Other assets		3,034		3,402


Total Assets	$	168,243	$	159,903


LIABILITIES

Deposits
Noninterest bearing demand	$	26,532	$	27,316
Interest bearing
Demand		21,978		17,381
Savings		16,272		15,802
Time deposits over $100,000		27,198		21,934
Other time deposits		44,694		49,581


Total Deposits		136,674		132,014

Accrued expenses and other liabilities		1,402		1,473
Long term debt		12,000		8,500


Total Liabilities		150,076		141,987


STOCKHOLDERS’ EQUITY

Common stock; $.50 par value, authorized 5,000,000, outstanding 1,029,466 shares		515		515
Retained earnings		17,516		17,300
Accumulated other comprehensive income, net		136		101


Total Stockholders’ Equity		18,167		17,916


Total Liabilities and Stockholders’ Equity	$	168,243	$	159,903

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except share and per share data)

(UNAUDITED)


	Three Months Ended March 31,
	2010		2009
Interest and Dividend Income:
Loans including fees	$	2,181	$	2,159
Interest on securities - taxable		52		147
Interest on securities - nontaxable		35		9
Interest on deposits and federal funds sold		32		55
Dividends		13		—

Total Interest and Dividend Income		2,313		2,370


Interest Expense:
Deposits		469		748
Long term debt		6		63

Total Interest Expense		475		811


Net Interest Income		1,838		1,559
Provision for loan losses		376		175

Net interest income after provision for loan losses		1,462		1,384


Noninterest Income:
Service charges and fees		210		223
Other income		108		53
Gain on security transactions		—		133

Total Noninterest Income		318		409


Noninterest Expense:
Salaries and benefits		572		554
Occupancy expenses		100		95
Equipment expenses		124		145
Other expenses		442		376

Total Noninterest Expenses		1,238		1,170


Income before Income Taxes		542		623
Income Tax Expense		171		206


Net Income	$	371	$	417


Per Share Data
Net income, basic and diluted	$	0.36	$	0.41

Dividends	$	0.15	$	0.15


Weighted Average Shares Outstanding, Basic and Diluted		1,029,466		1,020,581

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, 2008	$	509	$	16,460		$	(164	)	$	16,805
Comprehensive Income
Net Income				417						417
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $3)							6
Reclassification adjustment for gains included in net income (net of tax effect of $45)							(88	)		(82	)

Total Comprehensive Income										335
Stock issued for compensation		1		67			—			68
Cash Dividends		—		(153	)		—			(153	)

BALANCE MARCH 31, 2009	$	510	$	16,791		$	(246	)	$	17,055


BALANCE DECEMBER 31, 2009	$	515	$	17,300		$	101		$	17,916

Comprehensive Income
Net Income				371						371
Changes in unrealized gains (losses) on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $19)							35			35

Total Comprehensive Income										406

Stock issued for compensation		—		—			—			—
Cash Dividends		—		(155	)		—			(155	)

BALANCE MARCH 31, 2010	$	515	$	17,516		$	136		$	18,167

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)


	Three Months Ended March 31,
	2010			2009
Cash Flows from Operating Activities:
Net income	$	371		$	417
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		376			175
Depreciation and amortization		92			102
Gain on sale of securities		—			(133	)
Net amortization on securities		8			9
Stock issued for compensation		—			68
(Gain) on sale of other real estate		(7	)		—
Net change in:
Accrued interest receivable		23			(20	)
Other assets		349			46
Accrued expense and other liabilities		(71	)		1


Net Cash Provided by Operating Activities		1,141			665


Cash Flows from Investing Activities:
Net change in federal funds sold		600			(1,750	)
Net change in interest bearing deposits		(9,851	)		3,438
Net change in restricted securities		(103	)		108
Proceeds from maturities and sales of securities available for sale		2,488			4,633
Purchase of securities available for sale		(3,500	)		(5,942	)
Net (increase) decrease in loans		(2,075	)		40
Proceeds from sale of other real estate		148			—
Purchase of bank premises and equipment		(18	)		(83	)


Net Cash Provided by (Used in) Investing Activities		(12,311	)		444


Cash Flows from Financing Activities:
Net change in:
Demand and savings deposits		4,283			3,606
Time deposits		377			(819	)
Proceeds from borrowings		13,500			—
Curtailments of borrowings		(10,000	)		(2,600	)
Dividends paid		(155	)		(153	)


Net Cash Provided by Financing Activities		8,005			34


Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents		(3,165	)		1,143
Cash and Cash Equivalents, beginning of year		5,252			2,401


Cash and Cash Equivalents, End of Period	$	2,087		$	3,544


Supplemental Disclosure of Cash Paid
During the Period for Interest	$	500		$	860

Supplemental Disclosure of non-cash activity:
Unrealized gain (loss) on securities available for sale	$	54		$	(131	)
Loans transferred to other real estate owned		89			100

See Notes to Consolidated Financial Statements

PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 March 31, 2010 and the results of operations for the three month period ended March 31, 2010 and March 31, 2009. The notes included herein should be read in conjunction with the notes to financial statements included in the 2009 annual report to stockholders of Pioneer Bankshares, Inc. (the “Company”) and its Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission. The results for the three month period ended March 31, 2010 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.

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

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.

The accounting standard relating to Stock Compensation 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. All outstanding shares are fully vested and all compensation expense relating to outstanding stock options under this plan have been previously recorded. There is no additional compensation expense expected to be booked relating to this plan.

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 March 31, 2010:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Intrinsic Value of Unexercised In-the-Money Options (In Thousands)
Options outstanding, 12/31/09	6,400	$	16.58	4.00
Options Granted	—
Options Exercised	—
Options Forfeited	—
Options outstanding, 3/31/10	6,400	$	16.58	3.75

Options exercisable, 3/31/10	6,400	$	16.58	3.75	$	—

NOTE 2

INVESTMENT SECURITIES:

The amounts at which investment securities are carried in the consolidated balance sheets and their approximate market values at March 31, 2010 and December 31, 2009 follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
March 31, 2010

Available for Sale

U.S. government and agency securities	$	3,500	$	—	$	—		$	3,500

Mortgage-backed securities		3,291		218		—			3,509

State and municipals		4,288		153		—			4,441

Corporate Securities		484		34		—			518

Equity securities		2,301		76		(288	)		2,089

	$	13,864	$	481	$	(288	)	$	14,057


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

Available for Sale

U.S. government and agency securities	$	2,000	$	—	$	—		$	2,000

Mortgage-backed securities		3,778		203		—			3,981

State and municipals		4,294		152		(7	)		4,439

Corporate Securities		485		33		—			518

Equity securities		2,301		65		(305	)		2,061

	$	12,858	$	453	$	(312	)	$	12,999

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 March 31, 2010, management has determined that the unrealized losses in the investment portfolio are temporary. Management does not expect to be required to sell these securities before such time that they recover in value and will continue to monitor the securities in a loss position for future impairment. Securities in an unrealized loss position at March 31, 2010 and December 31, 2009, by duration of the unrealized loss are shown in the following table.

NOTE 2

INVESTMENT SECURITIES (continued):

As of March 31, 2010, there were 6 securities in the portfolio with unrealized losses, which were considered to be temporary. The schedule of losses on theses securities is as follows:

Unrealized Losses


		Municipal Securities		Equity Securities			Total

Less than 12 Months	Fair Value	$	—	$	—		$	—
	Unrealized Losses		—		—			—

More than 12 Months	Fair Value		—		970			970
	Unrealized Losses		—		(288	)		(288	)

Total	Fair Value		—		970			970
	Unrealized Losses		—		(288	)		(288	)

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

Unrealized Losses


		Municipal Securities			Equity Securities			Total

Less than 12 Months	Fair Value	$	409		$	—		$	409
	Unrealized Losses		(7	)		—			(7	)

More than 12 Months	Fair Value		—			952			952
	Unrealized Losses		—			(305	)		(305	)

Total	Fair Value		409			952			1,361
	Unrealized Losses		(7	)		(305	)		(312	)

The Bank also holds additional investments in Federal Home Loan Bank of Atlanta (“FHLB”) in the form of FHLB stock, which is a membership requirement. Loan advances from FHLB are also subject to additional stock purchase requirements, which are generally redeemed as outstanding loan balances are repaid, subject to FHLB’s quarterly excess capital evaluation process. During the third quarter of 2009, FHLB announced that it will not repurchase activity-based excess capital stock outstanding, but will continue to evaluate excess capital stock repurchases on a quarterly basis going forward. FHLB stock is generally viewed as a long term investment and is considered to be a restricted security, which is carried at cost, because there is no market for the stock other than FHLB or other member institutions. As of March 31, 2010, the Bank’s investment in FHLB stock totaled $815,400. Management’s evaluation of FHLB stock for impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Although FHLB’s stock dividends were temporarily suspended for the fourth quarter of 2008 and the first quarter of 2009, dividend payments were declared for the period ending June 30, 2009, September 30, 2009 and December 31, 2009. Management’s evaluation of FHLB stock as of March 31, 2010 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)
	March 31, 2010			December 31, 2009
Mortgage loans on real estate
Construction loans	$	7,991		$	7,826
Agricultural		3,822			3,806
Equity lines of credit		1,874			1,788
Residential 1-4 family		47,256			47,400
Second Mortgages		4,064			3,998
Multifamily		3,547			3,571
Commercial		38,041			35,641

Total real estate loans		106,595			104,030

Commercial and industrial loans		5,905			6,426
Consumer installment loans
Personal		15,651			15,669
Credit cards		599			681

Total consumer installment loans		16,250			16,350
All other loans		192			253

Gross Loans		128,942			127,059

Less unearned income on loans		(406	)		(454	)

Loans, less unearned discount		128,536			126,605

Less allowance for loan losses		(2,266	)		(1,945	)


Net Loans Receivable	$	126,270		$	124,660

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 March 31, 2010 and the year ending December 31, 2009 is as follows:


	March 31, 2010			December 31, 2009
	(In Thousands)
Balance, beginning of period	$	1,945		$	1,651
Provision charged to operating expenses		376			1,260
Recoveries of loans charged off		48			194
Loans charged off		(103	)		(1,160	)

Balance, end of period	$	2,266		$	1,945

The total amount of impaired loans was $2.5 million as of March 31, 2010 and $2.2 million as of December 31, 2009. As of March 31, 2010 there were specific valuation allowances of approximately $929,000 compared to specific valuation allowances at December 31, 2009 of $624,000.

NOTE 5

EARNINGS PER SHARE:

The following shows the weighted average number of shares as of March 31, 2010 and 2009, 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.


	March 31, 2010			March 31, 2009
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	1,029,466	$	0.36	1,020,581	$	0.41

Effect of dilutive securities:
Stock Options	—			—

Diluted earnings per share	1,029,466	$	0.36	1,020,581	$	0.41

Stock options representing 6,400 and 7,200 shares were not included in computing diluted EPS because their effects were anti-dilutive for the reporting period ending March 31, 2010 and March 31, 2009, respectively.

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 March 31, 2010, the total outstanding borrowings with FHLB were $12.0 million, which mature through March 1, 2013. The interest rate on this fixed-rate loan is 1.14%.

NOTE 7

OTHER EXPENSES:

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


	Three Months Ended March 31,
	2010		2009
	(In Thousands)

ATM Service Fees	$	25	$	30
Director Fees		30		30
FDIC Assessment Fees		55		22
Professional Fees		90		54
Supplies and Printing		23		27
Telephone Expense		30		29
Sales & Franchise Taxes		48		20
Other		141		164

Total	$	442	$	376

NOTE 8

FAIR VALUE MEASUREMENT:

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

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

Fair Value Hierarchy

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


Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.

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

Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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

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

The following table presents the balances of financial assets measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009:


			Fair Value Measurements Using
	Balances Outstanding		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	(In Thousands)		(Level 1)		(Level 2)		(Level 3)
As of March 31, 2010
Available-for-sale securities	$	14,057	$	—	$	14,057	$	—


As of December 31 2009
Available-for-sale securities		12,999	$	—	$	12,999	$	—

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

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

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

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

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

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


	Balances Outstanding		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	(In Thousands)		(Level 1)		(Level 2)		(Level 3)
Assets as of March 31, 2010
Impaired Loans, Net of allowance	$	1,583	$	—	$	713	$	870

Other Real Estate Owned	$	300	$	—	$	300	$	—


Assets as of December 31, 2009
Impaired Loans, Net of allowance	$	1,613	$	—	$	936	$	677

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

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

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

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

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

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

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

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

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

At March 31, 2010 and December 31, 2009, the fair value of loan commitments and stand-by letters of credit was immaterial. Therefore, they have not been included in the following table.

Estimated fair value and the carrying value of financial instruments at March 31, 2010 and December 31, 2009 are as follows:


	March 31, 2010				December 31, 2009
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(In Thousands)
Financial Assets

Cash and due from banks	$	2,087	$	2,087	$	5,252	$	5,252

Interest bearing deposits in other banks		16,575		16,537		6,724		6,769

Federal funds sold		900		900		1,500		1,500

Securities available for sale		14,057		14,057		12,999		12,999

Loans, net		126,270		127,864		124,660		126,297

Accrued interest receivable		621		621		644		644

Financial Liabilities

Demand Deposits:

Non-interest bearing		26,532		26,532		27,316		27,316

Interest bearing		21,978		21,978		17,381		17,381

Savings deposits		16,272		16,272		15,802		15,802

Time deposits		71,892		73,620		71,515		73,098

Borrowings		12,000		12,098		8,500		8,497

Accrued interest payable		387		387		412		412

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

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 $371,000 for the first quarter of 2010, as compared to $417,000 for the first quarter of 2009. Total earnings per share for the quarter ended March 31, 2010 were $0.36 compared to $0.41 for the first quarter of 2009. Core earnings, excluding non-recurring gains on securities on a tax equivalent basis from the prior year, have shown an increase of approximately $42,000 or 12.66%. Core earnings per share as of March 31, 2010 were $0.36 compared to $0.32 for the same period last year.

The Company had asset growth of approximately $8.3 million during the first quarter of 2010. Investments in securities available for sale increased by $1.1 million for the period ending March 31, 2010, as compared to total securities available for sale at December 31, 2009. Investments in interest bearing deposits increased by $9.9 million for the first quarter of 2010 and investments in Federal Funds Sold decreased by approximately $600,000 for the period ending March 31, 2010, as compared to balances as of December 31, 2009.

The Company’s loan portfolio increased by approximately $1.6 million or 1.29% during the first quarter of 2010. The deposit portfolio increased by $4.7 million or 3.53% during the same period, with the majority of this growth being in demand deposit accounts. The Company’s capital position as of March 31, 2010 was approximately $18.2 million, or 10.8% as a percentage of total assets.

The Company’s book value as of March 31, 2010 was $17.65 per share, as compared to a book value of $17.40 per share as of December 31, 2009. This represents an increase of 1.44%. Shareholder dividend payments for the first quarter of 2010 were $0.15 per share, and were the same as the dividend amount paid for the first quarter of 2009.

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 accounting standards: 1) Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable, and 2) 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. The accounting standards for Business Combinations, Goodwill and Other Intangible Assets require 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. The provisions of these accounting standards discontinued the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, which must be performed at least annually or more frequently if certain impairment indicators are in evidence. The accounting standards relating to Goodwill also require that reporting units be identified for the purpose of assessing potential future impairments.

Goodwill is included in other assets and totaled $360,000 at March 31, 2010 and December 31, 2009. Goodwill is no longer amortized, but instead is tested for impairment at least annually.

Results of Operations

Net Interest Income

Total interest income decreased $57,000 or 2.41% during the first quarter of 2010 as compared to the same period for 2009. Total interest expense decreased $336,000 or 41.43% during the three month period ending March 31, 2010, as compared to the same period of 2009. The decreases in interest income and interest expense resulted in a net interest income increase of $279,000 or 17.90% for the period ending March 31, 2010 compared to the period ending March 31, 2009. This net increase is primarily attributed to reduced interest expense on deposits as a result of the current low interest rate environment. The reduced interest income it also attributed to lower market rates for investments and other earning assets.

The average outstanding loan balances as of March 31, 2010 totaled $128.0 million, as compared to $120.5 million as of March 31, 2009. The average yield on loan balances outstanding has decreased from 7.17% as of March 31, 2009 to 6.82% as of March 31, 2010. 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 6.45% as of March 31, 2009 to 6.22% as of March 31, 2010, and is attributed to the previously mentioned factors.

The Company’s cost of liabilities decreased from 2.88% as of March 31, 2009 to 1.67% as of March 31, 2010. 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 increased to 4.96% as of March 31, 2010 compared to 4.25% as of March 31, 2009.

Noninterest Income

During the first quarter of 2010, non-interest income decreased by $91,000 or 22.25%, when compared to the same period last year. This decrease in non-interest income is primarily related to securities gains taken during the first quarter of 2009. There were no securities gains taken during the first quarter of 2010. Income from securities gains is generally considered to be non-recurring and may fluctuate with market conditions.

Other income for the first quarter of 2010 increased by $55,000, as a result of commissions earned on increased non-deposit investment activities processed through the Bank’s investment subsidiary, Pioneer Financial Services, LLC.

Service charge income decreased by approximately $13,000 or 5.83%. This decrease is attributed to management’s proactive collection efforts of overdraft balances resulting in a reduced volume of overdraft fee income.

Noninterest Expense

During the first quarter of 2010, non-interest expense increased by $68,000 or 5.81% in comparison to the same period last year. The primary factors contributing to this increase were FDIC insurance assessment fees, professional fees related to increased audit and consulting expenses, and increased salary and benefit expenses related to nominal pay increases.

The Bank’s deposits are generally insured by the FDIC for a maximum of $100,000 per depositor. However, in the fourth quarter of 2008, the FDIC insurance limits were raised to $250,000 per depositor. This increase in FDIC coverage will remain in effect through December 31, 2013. The Bank generally pays a quarterly statutory assessment for this insurance coverage and must comply with the rules and regulations of the FDIC. Each depository institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. The FDIC has recently required all financial institutions to prepay deposit insurance premiums through December 2012. The total prepaid FDIC premium paid by the bank under this arrangement included quarterly assessments for December 2009, and all of 2010, 2011, and 2012. The portion of FDIC assessment fee expensed for the first quarter of 2010 was approximately $55,000 compared to $22,000 for the same period last year.

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 March 31, 2010, the fair market value of securities available for sale was approximately $193,000 more than the net amortized cost 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 and does not expect to be required to sell these securities for operational cash flow purposes. Management continually monitors any 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 approximately $1.2 million during the first quarter of 2010. 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, 14.86% (based on market value) are invested in equities, most of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The equity securities generally include common stocks, which are purchased with the objective of generating additional 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 portion of these loans are made to borrowers who are employed by businesses outside the service area.

During the first quarter of 2010, net loans increased by approximately $1.6 million or 1.29%. The increase in loan volume was primarily in the category of commercial real estate 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 $2.0 million at March 31, 2010 compared to $1.6 million at December 31, 2009. This represents an increase of approximately $400,000 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 March 31, 2010 was $2.5 million, and has increased by approximately $275,000 from the total of impaired loans at December 31, 2009. Management has placed approximately $1.6 million of the Bank’s impaired loans in a nonaccrual status as of March 31, 2010. This amount is also included in the nonaccrual loan totals discussed above. Impaired loans not in nonaccrual status as of March 31, 2010 were approximately $894,000. Specific allocations have been made to the allowance for loan loss account of approximately $929,000, as of March 31, 2010, 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 March 31, 2010 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 $2.3 million, at March 31, 2010, increased by approximately $321,000 from its level at December 31, 2009. The increase in the allowance balance is primarily attributed to specific allocations related to impaired loans, as well as, non-performing assets, including nonaccruals, past dues, and classified loans. The increase in non-performing assets is partially attributed to the deterioration that has occurred in the overall economic environment during the past two years and the impact this has had on the borrower’s ability to pay.

Management has made additional allocations based on the declining economic trends, concentrations of credit and increases in non-performing assets, as a means of providing sufficient funding for possible losses. The increased allowance allocations noted above have 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 1.76% and 1.54% of total loans at March 31, 2010 and December 31, 2009, 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 March 31, 2010.

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 March 31, 2010 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Management’s practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

The provision expense related to the allowance for loan loss as of March 31, 2010 was $376,000 as compared to $175,000 for the same period last year. This increase of $201,000 is directly related to the increased loan portfolio allocations previously discussed.

Management’s evaluation of the allowance for loan losses as of March 31, 2010 and December 31, 2009 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 quarter of 2010, the Company had purchases relating to premises, equipment or other fixed assets of approximately $18,000. These purchases were primarily related to in-house software and equipment upgrades.

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.

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

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 quarter of 2010, total deposits increased by approximately $4.7 million or 3.53% with the increases being primarily in demand deposit accounts. Non interest-bearing demand deposits decreased by $784,000 or 2.87%, while interest-bearing demand deposits increased by $4.6 million or 26.45%. Savings deposit accounts increased by approximately $470,000 or 2.97%, while time deposits increased by approximately $377,000 or 0.53%.

The Company monitors its deposits carefully on an on-going basis in order to provide adequate funding for investment and loan opportunities.

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. As of March 31, 2010, the total outstanding borrowings with FHLB were $12.0 million, which mature through March 1, 2013. The interest rate on this fixed-rate loan is 1.14%. Additional information relating to the Bank’s borrowing activities is included in Note 6 of the financial statements included in this report. The scheduled repayments and maturities of outstanding FHLB borrowings as of March 31, 2010 are shown in TABLE II of 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 asset growth, shareholder dividends, and ongoing operational needs.

As of March 31, 2010 and December 31, 2009, the Company’s total capital-to-asset ratios were 10.80% and 11.20%, respectively. The Company’s Tier 1 risk-based capital ratio was 14.45% and the total risk-based capital ratio was 15.70% as of March 31, 2010. The Bank’s Tier 1 risk-based capital ratio was 11.91% and total risk-based capital ratio was 13.16% as of March 31, 2010. The capital ratios for both the Company and the Bank exceed the well-capitalized regulatory guidelines as of March 31, 2010 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 March 31, 2010 is considered to be 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 March 31, 2010, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 36.94% for the one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 43.69% at December 31, 2009. 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 March 31, 2010.

Recent Accounting Pronouncements

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

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

In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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

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

In February 2010, the FASB issued Accounting Standards Update No. 2010-08, “Technical Corrections to Various Topics.” ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s 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)


	Three Months Ended March 31, 2010						Three Months Ended March 31, 2009
	Average Balance		Income/ Expense		Rates		Average Balance		Income/ Expense		Rates
Interest Income
Loans ¹
Commercial	$	7,023	$	127	7.23	%	$	6,778	$	119	7.02	%
Real estate		104,729		1,650	6.30	%		97,510		1,609	6.60	%
Installment		15,634		377	9.65	%		15,567		401	10.30	%
Credit card		619		27	17.45	%		611		30	19.64	%

Total Loans		128,005		2,181	6.82	%		120,466		2,159	7.17	%

Federal funds sold		2,808		2	0.28	%		2,873		2	0.28	%
Interest Bearing Deposits		7,753		30	1.55	%		8,546		53	2.48	%
Securities
Taxable		5,198		54	4.16	%		12,472		137	4.39	%
Nontaxable ²		6,498		70	4.31	%		3,094		28	3.62	%


Total earning assets		150,262		2,337	6.22	%		147,451		2,379	6.45	%


Interest Expense
Demand deposits		18,881		35	0.74	%		12,989		33	1.02	%
Savings		15,919		10	0.25	%		15,916		44	1.11	%
Time deposits		70,925		424	2.39	%		75,802		671	3.54	%
Borrowings		8,112		6	0.30	%		7,882		63	3.20	%


Total Interest Bearing Liabilities	$	113,837	$	475	1.67	%	$	112,589	$	811	2.88	%


Net Interest Income			$	1,862					$	1,568


Net Interest Margin					4.96	%					4.25	%

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

MARCH 31, 2010

(Dollar Amounts in Thousands)


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

Loans ¹	$	12,462		$	3,858		$	66,031		$	46,185		$	—		$	128,536
Interest bearing bank deposits		8,075			5,250			3,250			—			—			16,575
Investment securities ²		3,500			—			1,950			6,518			2,089			14,057
Restricted stock		—			—			—			—			891			891
Federal funds sold		900			—			—			—			—			900


Total		24,937			9,108			71,231			52,703			2,980			160,959


Sources of Funds:

Interest bearing demand deposits		21,978			—			—			—			—			21,978
Regular savings		16,272			—			—			—			—			16,272
Certificates of deposit $100,000 and over		6,938			14,601			5,659			—			—			27,198
Other certificates of deposit		10,301			19,416			14,977			—			—			44,694
Borrowings		1,000			3,000			8,000			—			—			12,000


Total	$	56,489		$	37,017		$	28,636		$	—		$	—		$	122,142


Discrete Gap	$	(31,552	)	$	(27,909	)	$	42,595		$	52,703		$	2,980		$	38,817

Cumulative Gap	$	(31,552	)	$	(59,461	)	$	(16,866	)	$	35,837		$	38,817

Ratio of Cumulative Gap To Total Earning Assets at March 31, 2009		-19.60	%		-36.94	%		-10.48	%		22.26	%		24.12	%


Ratio of Cumulative Gap To Total Earning Assets at December 31, 2009		-28.19	%		-43.69	%		-14.38	%		21.57	%		23.83	%

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 March 31, 2010, 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 2010.

Item 3.

Defaults Upon Senior Securities.

Not Applicable

Item 4.

Reserved.

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).

32		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:	May 14, 2010		Thomas R. Rosazza
			President and Chief Executive Officer

Date:	May 14, 2010	By:	/s/ LORI G. HASSETT
			Lori G. Hassett
			Vice President and Chief Financial Officer