UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended June 30, 2010
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 0-30541
PIONEER
BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
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Virginia
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54-1278721
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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263 East Main Street
P. O. Box 10
Stanley, Virginia 22851
(Address of principal executive offices) (Zip code)
(540) 778-2294
(Registrants 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.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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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 issuers classes of common stock, as of the latest practicable date:
Common shares
outstanding as of August 13, 2010 were 1,032,418.
PIONEER BANKSHARES, INC.
INDEX
2
Part I - Financial Information.
Item 1. Financial Statements
PIONEER BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
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June 30,
2010
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December 31
2009
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(Unaudited)
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(Audited)
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ASSETS
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Cash and due from banks
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$
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3,720
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$
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5,252
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Interest bearing deposits in banks
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11,401
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6,724
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Federal funds sold
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200
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1,500
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Securities available for sale, at fair value
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13,899
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12,999
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Restricted securities
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1,004
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788
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Loans receivable, net of allowance for loan losses of $2,288 and $1,945 respectively
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128,267
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124,660
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Premises and equipment, net
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3,442
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3,582
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Accrued interest receivable
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667
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644
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Other real estate owned
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300
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352
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Other assets
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3,108
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3,402
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Total Assets
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$
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166,008
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$
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159,903
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LIABILITIES
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Deposits
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Noninterest bearing demand
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$
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25,184
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$
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27,316
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Interest bearing
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Demand
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20,452
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17,381
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Savings
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16,037
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15,802
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Time deposits over $100,000
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29,227
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21,934
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Other time deposits
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44,455
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49,581
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Total Deposits
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135,355
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132,014
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Accrued expenses and other liabilities
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1,248
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1,473
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Long term debt
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11,000
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8,500
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Total Liabilities
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147,603
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141,987
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STOCKHOLDERS EQUITY
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Common stock; $.50 par value, authorized 5,000,000, 1,032,418 and 1,029,466 shares outstanding, respectively
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516
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515
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Retained earnings
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17,819
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17,300
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Accumulated other comprehensive income, net
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70
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101
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Total Stockholders Equity
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18,405
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17,916
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Total Liabilities and Stockholders Equity
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$
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166,008
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$
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159,903
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See Notes to Consolidated Financial Statements
3
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, except Per Share Data)
(UNAUDITED)
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Three Months Ended
June 30,
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2010
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2009
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Interest and Dividend Income:
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Loans including fees
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$
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2,192
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$
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2,161
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Interest on securities - taxable
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51
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96
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Interest on securities - nontaxable
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35
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27
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Interest on deposits and federal funds sold
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39
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48
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Dividends
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14
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12
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Total Interest and Dividend Income
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2,331
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2,344
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Interest Expense:
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Deposits
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420
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656
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Long term debt
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43
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59
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Total Interest Expense
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463
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715
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Net Interest Income
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1,868
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1,629
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Provision for loan losses
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122
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250
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Net interest income after provision for loan losses
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1,746
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1,379
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Noninterest Income:
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Service charges and fees
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219
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246
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Other income
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67
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56
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Gain (loss) on securities transactions
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(54
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)
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Total Noninterest Income
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232
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302
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Noninterest Expense:
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Salaries and benefits
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632
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548
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Occupancy expenses
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84
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82
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Equipment expenses
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141
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148
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Other expenses
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531
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461
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Total Noninterest Expenses
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1,388
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1,239
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Income before Income Taxes
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590
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442
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Income Tax Expense
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177
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137
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Net Income
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$
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413
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$
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305
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Per Share Data
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Net income, basic and diluted
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$
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0.40
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$
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0.30
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Dividends
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$
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0.15
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$
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0.14
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Weighted Average Shares Outstanding, Basic and Diluted
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1,030,181
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1,021,644
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See Notes to Consolidated Financial Statements
4
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, except Per Share Data)
(UNAUDITED)
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Six Months Ended
June 30,
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2010
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2009
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Interest and Dividend Income:
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Loans including fees
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$
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4,373
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$
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4,320
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Interest on securities - taxable
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103
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243
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Interest on securities - nontaxable
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70
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36
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Interest on deposits and federal funds sold
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71
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103
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Dividends
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27
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12
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Total Interest and Dividend Income
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4,644
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4,714
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Interest Expense:
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Deposits
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889
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1,404
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Long term debt
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49
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122
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Total Interest Expense
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938
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1,526
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Net Interest Income
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3,706
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|
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3,188
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Provision for loan losses
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498
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425
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Net interest income after provision for loan losses
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3,208
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2,763
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Noninterest Income:
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Service charges and fees
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429
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469
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Other income
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175
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109
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Gain (Loss) on security transactions
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(54
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)
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133
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|
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|
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Total Noninterest Income
|
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|
550
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|
711
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Noninterest Expense:
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|
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Salaries and benefits
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1,204
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1,102
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Occupancy expenses
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|
184
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|
|
|
177
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Equipment expenses
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|
265
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|
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293
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Other expenses
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|
973
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|
837
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|
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|
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Total Noninterest Expenses
|
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|
2,626
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|
|
|
2,409
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Income before Income Taxes
|
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|
1,132
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|
|
|
1,065
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Income Tax Expense
|
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|
348
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|
|
|
343
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|
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|
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Net Income
|
|
$
|
784
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|
$
|
722
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|
|
|
|
|
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|
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Per Share Data
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|
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Net income, basic and diluted
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$
|
0.76
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|
|
$
|
0.71
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Dividends
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$
|
0.30
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$
|
0.29
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Weighted Average Shares Outstanding, Basic and Diluted
|
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|
1,029,849
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1,021,115
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|
|
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See Notes to Consolidated Financial Statements
5
PIONEER BANKSHARES, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In Thousands)
(UNAUDITED)
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Common
Stock
|
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Retained
Earnings
|
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Accumulated
Other
Comprehensive
Income (Loss)
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Total
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BALANCE DECEMBER 31, 2008
|
|
$
|
509
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$
|
16,460
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$
|
(164
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)
|
|
$
|
16,805
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Income
|
|
|
|
|
|
722
|
|
|
|
|
|
|
|
722
|
|
Changes in unrealized gains (losses) on securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Unrealized holding gains arising during the period (net of tax effect of $28)
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|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
Reclassification adjustment for gains included in net income (net of tax effect of $45)
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|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
(40
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Comprehensive Income
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|
|
|
|
|
|
|
|
|
|
|
|
682
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|
Stock issued for compensation
|
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|
2
|
|
|
77
|
|
|
|
|
|
|
|
79
|
|
Cash Dividends
|
|
|
|
|
|
(296
|
)
|
|
|
|
|
|
|
(296
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JUNE 30, 2009
|
|
$
|
511
|
|
$
|
16,963
|
|
|
$
|
(204
|
)
|
|
$
|
17,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2009
|
|
$
|
515
|
|
$
|
17,300
|
|
|
$
|
101
|
|
|
$
|
17,916
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
784
|
|
Changes in unrealized gains (losses) on securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during the period (net of tax effect of $36)
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
Reclassification adjustment for losses included in net income (net of tax effect of $18)
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
753
|
|
Stock issued for compensation
|
|
|
1
|
|
|
44
|
|
|
|
|
|
|
|
45
|
|
Cash Dividends
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JUNE 30, 2010
|
|
$
|
516
|
|
$
|
17,819
|
|
|
$
|
70
|
|
|
$
|
18,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
6
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
784
|
|
|
$
|
722
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
498
|
|
|
|
425
|
|
Depreciation and amortization
|
|
|
182
|
|
|
|
207
|
|
Loss (Gains) on sale of securities
|
|
|
54
|
|
|
|
(133
|
)
|
Net amortization on securities
|
|
|
14
|
|
|
|
5
|
|
Stock issued for compensation
|
|
|
45
|
|
|
|
79
|
|
(Gain) on sale of other real estate
|
|
|
(7
|
)
|
|
|
(24
|
)
|
Net change in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(23
|
)
|
|
|
29
|
|
Other assets
|
|
|
312
|
|
|
|
(191
|
)
|
Accrued expense and other liabilities
|
|
|
(225
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
1,634
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Net change in federal funds sold
|
|
|
1,300
|
|
|
|
(2,800
|
)
|
Net change in interest bearing deposits
|
|
|
(4,677
|
)
|
|
|
2,963
|
|
Net change in restricted securities
|
|
|
(216
|
)
|
|
|
4
|
|
Proceeds from maturities and sales of securities available for sale
|
|
|
6,483
|
|
|
|
10,944
|
|
Purchase of securities available for sale
|
|
|
(7,500
|
)
|
|
|
(11,413
|
)
|
Net (increase) in loans
|
|
|
(4,194
|
)
|
|
|
(5,395
|
)
|
Proceeds from sale of other real estate
|
|
|
148
|
|
|
|
124
|
|
Purchase of bank premises and equipment
|
|
|
(42
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(8,698
|
)
|
|
|
(5,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Demand and savings deposits
|
|
|
1,174
|
|
|
|
2,972
|
|
Time deposits
|
|
|
2,167
|
|
|
|
2,133
|
|
Proceeds from borrowings
|
|
|
16,000
|
|
|
|
3,500
|
|
Curtailments of borrowings
|
|
|
(13,500
|
)
|
|
|
(3,200
|
)
|
Dividends paid
|
|
|
(309
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
5,532
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,532
|
)
|
|
|
410
|
|
Cash and Cash Equivalents, beginning of year
|
|
|
5,252
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$
|
3,720
|
|
|
$
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Paid
|
|
|
|
|
|
|
|
|
During the Period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,071
|
|
|
$
|
1,684
|
|
Income taxes
|
|
$
|
472
|
|
|
$
|
447
|
|
|
|
|
Supplemental Disclosure of non-cash activity:
|
|
|
|
|
|
|
|
|
Unrealized (loss) on securities available for sale
|
|
|
(49
|
)
|
|
|
(58
|
)
|
Loan balances transferred to OREO
|
|
|
89
|
|
|
|
100
|
|
See Notes to
Consolidated Financial Statements
7
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, 2010 and the results of operations for the six month periods ended June 30, 2010 and June 30, 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 six month period ended June 30, 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 Companys 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 Companys history and expectation of dividend payments.
The following summarizes the stock options outstanding as of June 30, 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
|
|
800
|
|
|
12.75
|
|
|
|
|
|
Options Forfeited
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, 6/30/10
|
|
5,600
|
|
$
|
17.13
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, 6/30/10
|
|
5,600
|
|
$
|
17.13
|
|
4.00
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
8
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, 2010 and December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
(In Thousands)
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
4,000
|
|
$
|
1
|
|
$
|
|
|
|
$
|
4,001
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
2,977
|
|
|
210
|
|
|
|
|
|
|
3,187
|
|
|
|
|
|
State and municipals
|
|
|
4,283
|
|
|
119
|
|
|
(6
|
)
|
|
|
4,396
|
|
|
|
|
|
Corporate Securities
|
|
|
482
|
|
|
37
|
|
|
(2
|
)
|
|
|
517
|
|
|
|
|
|
Equity securities
|
|
|
2,065
|
|
|
77
|
|
|
(344
|
)
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,807
|
|
$
|
444
|
|
$
|
(352
|
)
|
|
$
|
13,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 2
|
INVESTMENT SECURITIES (continued):
|
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 issuers 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, 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 as of June 30, 2010 and
December 31, 2009, by duration of the unrealized loss are shown in the following table.
As of June 30, 2010, there were 9
securities in the portfolio with unrealized losses, which were considered to be temporary. The schedule of losses on these securities is as follows:
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
Securities
|
|
|
Equity
Securities
|
|
|
Corporate
Securities
|
|
|
Total
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
Fair Value
|
|
$
|
408
|
|
|
$
|
70
|
|
|
$
|
31
|
|
|
$
|
509
|
|
|
|
Unrealized Losses
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
More than 12 Months
|
|
Fair Value
|
|
|
|
|
|
|
717
|
|
|
|
|
|
|
|
717
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
Total
|
|
Fair Value
|
|
$
|
408
|
|
|
$
|
787
|
|
|
$
|
31
|
|
|
|
1,226
|
|
|
|
Unrealized Losses
|
|
|
(6
|
)
|
|
|
(344
|
)
|
|
|
(2
|
)
|
|
|
(352
|
)
|
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 subject to additional stock purchase requirements, which are generally redeemed as outstanding loan
balances are repaid, subject to FHLBs quarterly excess capital evaluation process. For the second quarter of 2010, FHLB announced that it will repurchase activity-based excess capital stock outstanding, with additional evaluations for the
repurchase of excess capital stock to continue 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. For the period ended June 30, 2010, the Banks investment in FHLB stock totaled
$927,900.
Managements evaluation of FHLB stock for impairment is based on the ultimate recoverability of par value rather than
recognizing temporary declines in value. Although FHLBs stock dividends were temporarily suspended for the fourth quarter of 2008 and the first quarter of 2009, dividend payments were resumed for the period ending June 30, 2009, and have
continued to be paid on a quarterly basis through June 30, 2010.
Managements analysis of the FHLB stock as of June 30, 2010
did not consider this investment to be other than temporarily impaired, and therefore, no impairment has been recognized.
10
Loans outstanding are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
Mortgage loans on real estate
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$
|
5,461
|
|
|
$
|
7,826
|
|
Agricultural
|
|
|
3,777
|
|
|
|
3,806
|
|
Equity lines of credit
|
|
|
1,765
|
|
|
|
1,788
|
|
Residential 1-4 family
|
|
|
47,774
|
|
|
|
47,400
|
|
Second Mortgages
|
|
|
4,151
|
|
|
|
3,998
|
|
Multifamily
|
|
|
3,510
|
|
|
|
3,571
|
|
Commercial
|
|
|
41,922
|
|
|
|
35,641
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
108,360
|
|
|
|
104,030
|
|
|
|
|
Commercial and industrial loans
|
|
|
5,643
|
|
|
|
6,426
|
|
Consumer installment loans
|
|
|
|
|
|
|
|
|
Personal
|
|
|
16,027
|
|
|
|
15,669
|
|
Credit cards
|
|
|
623
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
Total consumer installment loans
|
|
|
16,650
|
|
|
|
16,350
|
|
All other loans
|
|
|
297
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
130,950
|
|
|
|
127,059
|
|
|
|
|
Less unearned income on loans
|
|
|
(395
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
Loans, less unearned discount
|
|
|
130,555
|
|
|
|
126,605
|
|
|
|
|
Less allowance for loan losses
|
|
|
(2,288
|
)
|
|
|
(1,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Receivable
|
|
$
|
128,267
|
|
|
$
|
124,660
|
|
|
|
|
|
|
|
|
|
|
Pioneer Banks 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 six month period ended June 30, 2010 and the year ending December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
(In Thousands)
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,945
|
|
|
$
|
1,651
|
|
Provision charged to operating expenses
|
|
|
498
|
|
|
|
1,260
|
|
Recoveries of loans charged off
|
|
|
90
|
|
|
|
194
|
|
Loans charged off
|
|
|
(245
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
2,288
|
|
|
$
|
1,945
|
|
|
|
|
|
|
|
|
|
|
The total amount of impaired loans was $2.3 million as of June 30, 2010 and $2.2 million as of December 31, 2009.
As of June 30, 2010 there were specific valuation allowances of approximately $883,000 compared to specific valuation allowances at December 31, 2009 of $624,000.
11
NOTE 5
|
EARNINGS PER SHARE:
|
The following shows
the weighted average number of shares for the six month period ending June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2010
|
|
Six Months Ended
June 30, 2009
|
|
|
Shares
|
|
Per Share
Amount
|
|
Shares
|
|
Per Share
Amount
|
|
|
|
|
|
Basic earnings per share
|
|
1,029,849
|
|
$
|
0.76
|
|
1,021,115
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
1,029,849
|
|
$
|
0.76
|
|
1,021,115
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average number of shares for the three month period
ending June 30, 2010 and 2009, 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, 2010
|
|
Three Month Ended
June 30, 2009
|
|
|
Shares
|
|
Per Share
Amount
|
|
Shares
|
|
Per Share
Amount
|
|
|
|
|
|
Basic earnings per share
|
|
1,030,181
|
|
$
|
0.40
|
|
1,021,644
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
1,030,181
|
|
$
|
0.40
|
|
1,021,644
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
Stock options representing 5,600 and 6,400 shares were not included in
computing diluted EPS because their effects were anti-dilutive for the reporting period ending June 30, 2010 and June 30, 2009, respectively.
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, 2010, the total outstanding borrowings with FHLB were $11.0 million, which mature through March 1, 2013. The interest rate on
this fixed-rate loan is 1.14%.
12
Other expenses in the
consolidated statements of income include the following components:
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
|
(In Thousands)
|
ATM Service Fees
|
|
$
|
52
|
|
$
|
60
|
Director Fees
|
|
|
61
|
|
|
60
|
FDIC Assessment
|
|
|
111
|
|
|
105
|
Professional Fees
|
|
|
193
|
|
|
145
|
Supplies and Printing
|
|
|
78
|
|
|
78
|
Telephone Expense
|
|
|
61
|
|
|
47
|
Sales & Franchise Taxes
|
|
|
102
|
|
|
42
|
Other
|
|
|
315
|
|
|
300
|
|
|
|
|
|
|
|
Total
|
|
$
|
973
|
|
$
|
837
|
|
|
|
|
|
|
|
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 Companys 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.
|
13
NOTE 8
|
FAIR VALUE MEASUREMENT (Continued):
|
The following describes the valuation techniques used by the Company to measure certain financial assets
and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale
: Securities
available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent
valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value
of identical or similar securities by using pricing models that considers observable market data (Level 2).
The following table presents the
balances of financial assets measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Balances
Outstanding
(In Thousands)
|
|
Quoted Prices
in Active
Markets
for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Description
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
13,899
|
|
$
|
|
|
$
|
13,899
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loans collateral (if the loan is collateral dependent). Fair value of the loans 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.
14
NOTE 8
|
FAIR VALUE MEASUREMENT (Continued):
|
The following table summarizes the Companys assets that were measured at fair value on a
nonrecurring basis during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balances
Outstanding
(In Thousands)
|
|
Quoted Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets as of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans, Net of allowance
|
|
$
|
1,430
|
|
$
|
|
|
$
|
535
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
15
NOTE 8
|
FAIR VALUE MEASUREMENT (Continued):
|
At June 30, 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 June 30, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
|
(In Thousands)
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,720
|
|
$
|
3,720
|
|
$
|
5,252
|
|
$
|
5,252
|
|
|
|
|
|
Interest bearing deposits in other banks
|
|
|
11,401
|
|
|
11,405
|
|
|
6,724
|
|
|
6,769
|
|
|
|
|
|
Federal funds sold
|
|
|
200
|
|
|
200
|
|
|
1,500
|
|
|
1,500
|
|
|
|
|
|
Securities available for sale
|
|
|
13,899
|
|
|
13,899
|
|
|
12,999
|
|
|
12,999
|
|
|
|
|
|
Loans, net
|
|
|
128,267
|
|
|
129,896
|
|
|
124,660
|
|
|
126,297
|
|
|
|
|
|
Accrued interest receivable
|
|
|
667
|
|
|
667
|
|
|
644
|
|
|
644
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
|
25,184
|
|
|
25,184
|
|
|
27,316
|
|
|
27,316
|
|
|
|
|
|
Interest bearing
|
|
|
20,452
|
|
|
20,452
|
|
|
17,381
|
|
|
17,381
|
|
|
|
|
|
Savings deposits
|
|
|
16,037
|
|
|
16,037
|
|
|
15,802
|
|
|
15,802
|
|
|
|
|
|
Time deposits
|
|
|
73,682
|
|
|
74,921
|
|
|
71,515
|
|
|
73,098
|
|
|
|
|
|
Borrowings
|
|
|
11,000
|
|
|
11,065
|
|
|
8,500
|
|
|
8,497
|
|
|
|
|
|
Accrued interest payable
|
|
|
279
|
|
|
279
|
|
|
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 Companys overall interest rate risk.
16
Item 2. Managements 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 Companys and the Banks 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 $784,000 for the period ending June 30, 2010, as compared to $722,000 for the same period of 2009, which represents an increase of 8.59%. Total earnings per share as of June 30, 2010 were $0.76 compared to $0.71 for the
same period last year.
The Company had asset growth of approximately $6.1 million during the first six months of 2010. Investments in
securities available for sale increased by approximately $900,000 for the period ending June 30, 2010, as compared to total securities available for sale at December 31, 2009. Investments in interest bearing deposits increased by $4.7
million for the period ending June 30, 2010 and investments in Federal Funds Sold decreased by approximately $1.3 million for the period ending June 30, 2010, as compared to balances as of December 31, 2009.
The Companys loan portfolio has increased by approximately $3.6 million or 2.89% during the first six months of 2010. The deposit portfolio
increased by $3.3 million or 2.53% during the same period, with the majority of this growth being in interest bearing demand deposit accounts. The Companys capital position remains strong as of June 30, 2010 at $18.4 million, or 11.09% as
a percentage of total assets.
The Companys book value as of June 30, 2010 was $17.83 per share, as compared to a book value of
$17.40 per share as of December 31, 2009. This represents an increase of 2.47%. Shareholder dividend payments for the first two quarters of 2010 totaled $0.30 per share compared to $0.29 per share for the same period last year. This represents
a year-to-date increase of 3.45% for the companys shareholders.
Management recognizes that prevailing economic conditions may have the
potential to adversely impact the Companys 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 Companys 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.
17
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 borrowers
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 June 30, 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 $70,000 or 1.48% during the first six months of 2010 as compared to the same period for 2009. Total interest expense
decreased $588,000 or 38.53% during the six month period ending June 30, 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 $518,000 or 16.25% for
the period ending June 30, 2010 compared to
18
the period ending June 30, 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 June 30, 2010 totaled $128.3 million, as compared to $124.7 million as of December 31, 2009. The average yield on loan balances outstanding has decreased from 7.13% as of June 30, 2009 to 6.79% as of June 30, 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 6.36% as of June 30, 2009 to 6.12% as of
June 30, 2010, and is attributed to the previously mentioned factors.
The Companys cost of liabilities decreased from 2.72% as of
June 30, 2009 to 1.61% as of June 30, 2010. This is attributed to managements proactive re-pricing efforts to reduce interest expense on deposit products in conjunction with lower market rates.
The Companys overall net interest margin increased to 4.90% as of June 30, 2010 compared to a net interest margin of 4.31% at June 30,
2009.
Noninterest Income
During the first half of 2010, non-interest income decreased by $161,000 or 22.64%, when compared to the same period last year. This decrease in
non-interest income is primarily the result of losses on the sale of equity securities in the amount of $54,000 compared to gains in the prior year of $133,000. Gains and losses on securities are generally considered to be non-recurring and may
fluctuate with market conditions.
Service charge income decreased by approximately $40,000 or 8.53%. This decrease is attributed to
managements proactive collection efforts of overdraft balances resulting in a reduced volume of overdraft fee income. Management anticipates possible further reductions in service charge income for the remainder of 2010 as a result of recent
regulatory requirements relating to overdraft fees on consumer checking accounts.
Noninterest Expense
During the first half of 2010, non-interest expense increased by $217,000 or 9.01% 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 Banks 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 on a temporary basis. However, recent legislation has made this increase in FDIC coverage permanent for bank depositors. 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. During the
4
th
quarter of 2009, the FDIC 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 half of 2010 was approximately $111,000 compared to $105,000 for the same period last year.
Financial Condition
Securities
The Companys
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
19
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, 2010, the fair market value of securities available for sale was approximately $92,000 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 $1.1 million during
the first half 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, 12.94% (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, the City of
Harrisonburg, 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 half of 2010, net loans increased by approximately $3.6 million or 2.89%. The increase in loan volume was primarily in the categories of
residential and commercial real estate loans. A schedule of loans by type is shown in Note 3 of 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 still accruing, and restructured loans. Non-accrual
loans are loans on which interest accruals have been suspended or discontinued permanently. Non-accrual loans and loans 90 days or more past due and still accruing were approximately $2.8 million at June 30, 2010 compared to $1.6 million at
December 31, 2009. This represents an increase of approximately $1.2 million and is mainly attributed to certain commercial and residential 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.
Restructured loans are loans on which the original interest rate or repayment terms have changed due to financial hardship. The total amount of loans
classified as restructured as of June 30, 2010 was approximately $913,000 compared to $777,000 as of December 31, 2009. These restructured loans consist primarily of residential mortgage loans on which the reduced interest rates, although
modified, remain at or above current market pricing. The majority of these restructured loans are in compliance with the modified payment terms and were not delinquent as of June 30, 2010. Management has evaluated the value of collateral
related to these accounts and has made appropriate specific allocations to cover potential losses associated with restructured loans.
20
Impaired loans are those loans which have been identified by management as problem credits due to various
circumstances concerning the borrowers 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 Banks allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of June 30, 2010 was
$2.3 million, and has increased by approximately $76,000 from the total of impaired loans at December 31, 2009. Management has placed approximately $1.6 million of the Banks impaired loans in a nonaccrual status as of June 30, 2010.
This amount is also included in the nonaccrual loan totals discussed previously. Impaired loans not in nonaccrual status as of June 30, 2010 were approximately $687,000. Specific allocations have been made to the allowance for loan loss account
of approximately $883,000, as of June 30, 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 June 30, 2010 that are not included in the past due or non-accrual loans referred to above.
Allowance for Loan Losses
Managements 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 borrowers 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 managements 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 June 30, 2010, increased by approximately $343,000 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 borrowers ability to pay.
21
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 1.75% and 1.54% of total loans at June 30, 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 June 30, 2010.
The
allowance is deemed to be within an acceptable range based on managements 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,
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. Managements 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, 2010 was $498,000 as compared to $425,000 for the same period last year. This increase of $73,000 is directly related to the increased loan portfolio allocations previously discussed.
Managements evaluation of the allowance for loan losses as of June 30, 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 half of 2010, the Company had purchases relating to premises, equipment or other fixed assets of approximately $42,000. 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 institutions 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 Companys main source of funds is customer deposits received from individuals, governmental entities and businesses located
within the Companys service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Companys total deposit portfolio has historically remained relatively stable; however, these balances
fluctuate with normal daily activity.
22
During the first half of 2010, total deposits increased by approximately $3.3 million or 2.53% with the
increases being primarily in interest bearing demand deposit accounts and time deposits. Non interest-bearing demand deposits decreased by $2.1 million or 7.80%, while interest-bearing demand deposits increased by $3.1 million or 17.67%. Savings
deposit accounts increased by approximately $235,000 or 1.49%, while time deposits increased by approximately $2.2 million or 3.03%.
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 June 30, 2010, the total outstanding borrowings
with FHLB were $11.0 million, which mature through March 1, 2013. The interest rate on this fixed-rate loan is 1.14%. Additional information relating to the Banks 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 June 30, 2010 are shown in TABLE II of this report.
Capital
The adequacy of the
Companys 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
June 30, 2010 and December 31, 2009, the Companys total capital-to-asset ratios were 11.09% and 11.20%, respectively. The Companys Tier 1 risk-based capital ratio was 14.62% and the total risk-based capital ratio was 15.87% as
of June 30, 2010. The Banks Tier 1 risk-based capital ratio was 12.19% and total risk-based capital ratio was 13.44% as of June 30, 2010. The capital ratios for both the Company and the Bank exceed the well-capitalized regulatory
guidelines as of June 30, 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 Companys ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Companys 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, 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 Banks 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.
23
As of June 30, 2010, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 40.97% 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 Companys 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, 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 transferors continuing involvement, if any, in transferred financial assets. The adoption of the new guidance did not have a material impact on the Companys 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
Companys 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 Companys 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 statementssubsequent 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 Companys 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 Companys
consolidated financial statements.
24
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 Companys 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 SECs 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 Companys consolidated financial statements.
In July
2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance will significantly expand the existing requirements and will lead to
greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods
ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance rollforward and modification disclosures, will be required for periods beginning after December 15,
2010. The Company is currently assessing the impact that ASU 2010-20 will have 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.
25
TABLE I
PIONEER BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(On a Fully Tax Equivalent Basis)
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2010
|
|
|
Six Months Ended
June 30, 2009
|
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Rates
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Rates
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,817
|
|
$
|
234
|
|
6.87
|
%
|
|
$
|
6,832
|
|
$
|
231
|
|
6.76
|
%
|
Real estate
|
|
|
105,622
|
|
|
3,332
|
|
6.31
|
%
|
|
|
97,925
|
|
|
3,228
|
|
6.59
|
%
|
Installment
|
|
|
15,723
|
|
|
754
|
|
9.59
|
%
|
|
|
15,747
|
|
|
803
|
|
10.20
|
%
|
Credit Card
|
|
|
614
|
|
|
53
|
|
17.26
|
%
|
|
|
613
|
|
|
58
|
|
18,92
|
%
|
Federal funds sold
|
|
|
2,350
|
|
|
3
|
|
0.26
|
%
|
|
|
2,306
|
|
|
3
|
|
0.26
|
%
|
Interest Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,030
|
|
|
68
|
|
1.36
|
%
|
|
|
9,217
|
|
|
100
|
|
2.17
|
%
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,777
|
|
|
106
|
|
3.67
|
%
|
|
|
10,284
|
|
|
233
|
|
4.53
|
%
|
Nontaxable
2
|
|
|
6,347
|
|
|
141
|
|
4.44
|
%
|
|
|
6,259
|
|
|
85
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
153,280
|
|
|
4,691
|
|
6.06
|
%
|
|
|
149,183
|
|
|
4,741
|
|
6.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
19,872
|
|
|
67
|
|
0.67
|
%
|
|
|
14,101
|
|
|
71
|
|
1.01
|
%
|
Savings
|
|
|
16,165
|
|
|
26
|
|
0.32
|
%
|
|
|
16,126
|
|
|
74
|
|
0.92
|
%
|
Time deposits
|
|
|
70,331
|
|
|
796
|
|
2.26
|
%
|
|
|
74,549
|
|
|
1,259
|
|
3.38
|
%
|
Borrowings
|
|
|
9,998
|
|
|
49
|
|
0.98
|
%
|
|
|
7,354
|
|
|
122
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Liabilities
|
|
$
|
116,366
|
|
$
|
938
|
|
1.61
|
%
|
|
$
|
112,130
|
|
$
|
1,526
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
26
PIONEER BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(On a Fully Tax Equivalent Basis)
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
2010
|
|
|
Three Months Ended
June 30,
2009
|
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Rates
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Rates
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,613
|
|
$
|
107
|
|
6.47
|
%
|
|
$
|
6,883
|
|
$
|
112
|
|
6.51
|
%
|
Real estate
|
|
|
106,506
|
|
|
1,682
|
|
6.32
|
%
|
|
|
98,337
|
|
|
1,619
|
|
6.59
|
%
|
Installment
|
|
|
15,812
|
|
|
377
|
|
9.54
|
%
|
|
|
15,926
|
|
|
402
|
|
10.10
|
%
|
Credit card
|
|
|
609
|
|
|
26
|
|
17.08
|
%
|
|
|
614
|
|
|
28
|
|
18.24
|
%
|
Federal funds sold
|
|
|
1,897
|
|
|
1
|
|
0.21
|
%
|
|
|
1,746
|
|
|
1
|
|
0.23
|
%
|
Interest Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,282
|
|
|
38
|
|
1.24
|
%
|
|
|
9,882
|
|
|
47
|
|
1.90
|
%
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,252
|
|
|
52
|
|
3.33
|
%
|
|
|
8,356
|
|
|
96
|
|
4.60
|
%
|
Nontaxable
2
|
|
|
6,296
|
|
|
71
|
|
4.51
|
%
|
|
|
5,206
|
|
|
57
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
156,267
|
|
|
2,354
|
|
5.91
|
%
|
|
|
146,950
|
|
|
2,362
|
|
6.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
20,853
|
|
|
32
|
|
0.61
|
%
|
|
|
15,200
|
|
|
38
|
|
1.00
|
%
|
Savings
|
|
|
16,409
|
|
|
16
|
|
0.39
|
%
|
|
|
16,333
|
|
|
30
|
|
0.73
|
%
|
Time deposits
|
|
|
69,743
|
|
|
372
|
|
2.13
|
%
|
|
|
73,309
|
|
|
588
|
|
3.21
|
%
|
Borrowings
|
|
|
11,863
|
|
|
43
|
|
1.45
|
%
|
|
|
6,832
|
|
|
59
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Liabilities
|
|
$
|
118,868
|
|
$
|
463
|
|
1.56
|
%
|
|
$
|
111,674
|
|
$
|
715
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
$
|
1,891
|
|
|
|
|
|
|
|
$
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
27
TABLE II
PIONEER BANKSHARES, INC.
INTEREST SENSITIVITY ANALYSIS
JUNE 30, 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
|
|
$
|
10,971
|
|
|
$
|
7,413
|
|
|
$
|
65,527
|
|
|
$
|
46,644
|
|
|
$
|
|
|
|
$
|
130,555
|
Interest bearing bank deposits
|
|
|
901
|
|
|
|
5,250
|
|
|
|
5,250
|
|
|
|
|
|
|
|
|
|
|
|
11,401
|
Investment
securities
2
|
|
|
3,000
|
|
|
|
|
|
|
|
2,449
|
|
|
|
6,135
|
|
|
|
2,315
|
|
|
|
13,899
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
1,004
|
Federal funds sold
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,072
|
|
|
|
12,663
|
|
|
|
73,226
|
|
|
|
52,779
|
|
|
|
3,319
|
|
|
|
157,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
20,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,452
|
Regular savings
|
|
|
16,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,037
|
Certificates of deposit $100,000 and over
|
|
|
7,147
|
|
|
|
16,566
|
|
|
|
5,514
|
|
|
|
|
|
|
|
|
|
|
|
29,227
|
Other certificates of deposit
|
|
|
7,336
|
|
|
|
20,540
|
|
|
|
16,579
|
|
|
|
|
|
|
|
|
|
|
|
44,455
|
Borrowings
|
|
|
1,000
|
|
|
|
3,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,972
|
|
|
$
|
40,106
|
|
|
$
|
29,093
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
121,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discrete Gap
|
|
$
|
(36,900
|
)
|
|
$
|
(27,443
|
)
|
|
$
|
44,133
|
|
|
$
|
52,779
|
|
|
$
|
3,319
|
|
|
$
|
35,888
|
|
|
|
|
|
|
|
Cumulative Gap
|
|
$
|
(36,900
|
)
|
|
$
|
(64,343
|
)
|
|
$
|
(20,210
|
)
|
|
$
|
32,569
|
|
|
$
|
35,888
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Cumulative Gap To Total Earning Assets at June 30, 2010
|
|
|
-23.49
|
%
|
|
|
-40.97
|
%
|
|
|
-12.87
|
%
|
|
|
20.74
|
%
|
|
|
22.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
28
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 issuers 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 issuers 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 Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures are adequate and effective. There were no changes in the Companys internal control over financial reporting during the quarter ended June 30,
2010, that has materially affected, or is reasonably likely to materially affect, the Companys 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
29
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).
|
30
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, 2010
|
|
|
|
Thomas R. Rosazza
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
By: /s/ LORI G. HASSETT
|
Date: August 13, 2010
|
|
|
|
Lori G. Hassett
|
|
|
|
|
Vice President and Chief Financial Officer
|
31
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