- Annual Report (10-K)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

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

For the Fiscal Year Ended December 31, 2008

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

Commission file number: 0-30541

Pioneer Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Virginia

54-1278721

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (540) 778-2294

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.50 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨

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

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

The aggregate market value of the voting stock held by non-affiliates based on the last reported sales price of $16.00 per share as of March 25, 2009 was $14,337,056.

The number of shares outstanding of the registrant’s common stock is 1,020,914 as of March 25, 2009.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 13, 2009 are incorporated by reference into Part III of this Form 10-K.

Form 10-K

TABLE OF CONTENTS


			Page

PART I

	Item 1.	Business.	3

	Item 1A.	Risk Factors.	9

	Item 1B.	Unresolved Staff Comments.	9

	Item 2.	Properties.	9

	Item 3.	Legal Proceedings.	9

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

PART II

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	10

	Item 6.	Selected Financial Data.	11

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	11

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	25

	Item 8.	Financial Statements and Supplementary Data.	25

	Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.	53

	Item 9A.	Controls and Procedures.	53

	Item 9B.	Other Information.	53

PART III

	Item 10.	Directors, Executive Officers, and Corporate Governance.	54

	Item 11.	Executive Compensation.	54

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	54

	Item 13.	Certain Relationships and Related Transactions, and Director Independence.	54

	Item 14.	Principal Accounting Fees and Services.	55

PART IV

	Item 15.	Exhibits, Financial Statement Schedules.	55

SIGNATURES			56

PART I

Item 1.

Business.

General

Pioneer Bankshares, Inc. (the “Company”), a Virginia one bank holding company headquartered in Stanley, Virginia, was incorporated under the laws of the Commonwealth of Virginia on November 4, 1983. The Company’s wholly-owned subsidiary, Pioneer Bank, Inc. (the “Bank”) was established as a national bank in 1909. The Bank converted from a national bank to a state chartered bank, effective April 1994, and changed its name to Pioneer Bank, effective April 1999.

In October 2000, the Bank acquired Valley Finance Service, Inc. (“VFS”), a small loan company located in Harrisonburg, Virginia. In January 2002, the assets of VFS were merged into the Bank and the subsidiary license for this company was dissolved. VFS now operates as a division and branch of the Bank offering consumer loan services.

Pioneer Bank also owns and operates two subsidiaries, one of which is Pioneer Financial Services, LLC. Income received from insurance services and non-banking investment services is handled through Pioneer Financial Services, LLC. The second subsidiary owned by Pioneer Bank is Pioneer Special Assets, LLC. This subsidiary is generally used in conjunction with certain foreclosed properties, in which there are environmental or other significant liability circumstances, of which none existed as of December 31, 2008 and 2007. Foreclosures of this type are handled directly through Pioneer Special Assets, LLC in an effort to minimize the risk of liability to the Bank.

The primary assets of the Company consist of all of the stock of the Bank, real estate holdings leased to the Bank, a portfolio of equity investment securities, and minimal cash accounts.

The Bank is engaged in the general commercial banking business, primarily serving the counties of Page, Greene, Rockingham, and Albemarle, as well as the Cities of Harrisonburg and Charlottesville, Virginia. In addition, the close proximity and mobile nature of individuals and businesses in adjoining Virginia counties and nearby cities places these markets within the Bank’s targeted trade area. The Bank also anticipates serving some individuals and businesses from other areas, including, but not limited to, the counties surrounding Page County.

The Bank offers a full range of banking and related financial services focused primarily towards serving individual consumers, small to medium size commercial businesses, and the professional community. The Bank strives to serve the banking needs of its customers while developing personal, hometown relationships. The Bank’s Board of Directors and management believe that the marketing of customized banking services will enable the Bank to continue its position in the financial services marketplace.

The Bank provides individual consumers, professionals and small and medium size commercial businesses in its market area with responsive and technologically advanced banking services. These services include competitively priced loans that are based on deposit relationships, easy access to the Bank’s decision-makers, and quick and innovative action necessary to meet a customer’s banking needs. The Bank’s capitalization and lending limit enables it to satisfy the credit needs of a large portion of the targeted market segment. In the event there are customers whose loan requirements exceed the Bank’s lending limit, the Bank will seek to arrange such loans on a participation basis with other financial institutions. The Board of Directors and management believe the Bank’s present capitalization will support substantial growth in deposits and loans.

Location and Market Area

The Bank currently operates full service branches in Stanley, Luray, Shenandoah, Harrisonburg, Stanardsville, and Charlottesville, Virginia. Management will continue to investigate and consider other possible sites that would enable the Bank to profitably serve its chosen market area.

The opening of additional banking offices by the Bank requires prior regulatory approval, which takes into account a number of factors, including, among others, a determination that the Bank has capital in an amount deemed necessary to warrant additional expansion and a finding that the public interest will be served. While the Bank plans to seek regulatory approval at the appropriate time to establish additional banking offices in various parts of the Bank’s market area, there can be no assurance when or if the Bank will be able to undertake such expansion plans.

Banking Services

The Bank accepts deposits, makes consumer and commercial loans, issues drafts, and provides other services customarily offered by a commercial banking institution, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour automated teller machines. The Bank is a member of the Federal Reserve System and deposits are insured under the Federal Deposit Insurance Act to the limits provided thereunder.

The Bank offers a full range of short-to-medium term commercial and consumer loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans generally include secured and unsecured loans for financing automobiles, residential financing, home improvements, education, and personal investments.

The Bank’s lending activities are subject to a variety of lending limits imposed by state law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), in general the Bank is subject to a loan-to-one borrower limit of an amount equal to 15% of the Bank’s capital and surplus in the case of loans which are not fully secured by readily marketable or other permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit. The Bank may establish relationships with correspondent banks to sell interests or participations in loans when loan amounts exceed the Bank’s legal limitations or internal lending policies.

Other bank services include internet banking, ATM/Debit Cards, safe deposit boxes, issuance of cashier’s checks, certain cash management services, traveler’s checks, direct deposit of payroll and social security checks and automatic drafts for various accounts. The Bank’s Visa check cards and ATM debit cards can be used by bank customers throughout the United States. The Bank also offers MasterCard and VISA credit card services. Additionally, the Bank offers a “Bounce Protection” program which provides overdraft privileges on checking accounts up to predetermined amounts, subject to overdraft fees. The Bank is also licensed to sell property/casualty and life/health insurance, and investment securities, and does so through its investment subsidiary, Pioneer Financial Services, LLC.

The Bank does not have trust powers and does not anticipate obtaining trust powers. If the Bank decided to establish a trust department in the future, the Bank could not do so without the prior approval of the Virginia State Corporation Commission. In the interim, the Bank may contract for the provision of trust services to its customers through outside vendors.

Competition

The banking business is highly competitive. The Bank competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the western Virginia market area and elsewhere.

The Bank’s service area is a highly competitive, highly branched banking market. Competition in the market area for loans to small to medium size businesses and individuals, the Bank’s target market, is intense, and pricing is important. Most of the Bank’s competitors have substantially greater resources and lending limits than the Bank and offer certain services, such as extensive and established branch networks, that the Bank does not expect to provide or will not provide in the near future. Moreover, larger institutions operating in the western Virginia market area have access to borrowed funds at a lower cost than are available to the Bank. Also, deposit competition among institutions in the market area is strong.

Employees

As of December 31, 2008, the Company had 51 full-time equivalent employees. None of the employees are represented by any collective bargaining agreements and relations with employees are considered to be good.

Supervision and Regulation

Set forth below is a summary of statutes and regulations affecting the Company and the Bank. Federal and state laws and regulations provide regulatory oversight for virtually all aspects of both of their operations. This summary is qualified in its entirety by reference to these statutes and regulations.

Supervision and Regulation of the Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and is supervised and subject to examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company and the Bank are also subject to Virginia laws that regulate banks and bank holding companies. Virginia’s banking laws are administered by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Commission”). The Company and the Bank are also affected by rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”). The various laws and regulations administered by all of these regulatory agencies affect corporate practices, expansion of business, and provisions of services. Also, monetary and fiscal policies of the United States directly affect bank loans and deposits and may affect our earnings. The future impact of these policies and of continuing regulatory changes in the financial services industry cannot be predicted. The supervision, regulation and examination of the Bank are intended primarily for the protection of depositors rather than our stockholders.

As a bank holding company, the institution is required to file with the Federal Reserve periodic reports and any additional information the Federal Reserve may require. The Company also must provide the Commission with information regarding itself and the Bank. The Federal Reserve examines the Company periodically and may examine its subsidiaries. The Commission also may examine the Company.

A bank holding company is required to obtain prior approval from the Federal Reserve before acquiring control of substantially all the assets of any non-affiliated bank or more than 5% of the voting shares of any bank it does not already own, or before it merges or consolidates with another institution or engages in any business other than banking or managing, controlling or furnishing services to banks and other subsidiaries, and a limited list of activities closely related to or incidental to banking. Similarly, approval of the Virginia Bureau of Financial Institutions is required for certain acquisitions of other banks and bank holding companies.

The Federal Reserve will approve the ownership by a bank holding company of shares in a company engaged in activities determined by order or regulation to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In other words, regulatory involvement, and approval, is required for the Company to engage in non-banking activities.

The Company would be compelled by the Federal Reserve to invest additional capital in the event the Bank experiences either significant loan losses or rapid growth of loans or deposits. The Federal Reserve requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries.

Company Capital Guidelines. The Company operates under the capital adequacy guidelines established by the Federal Reserve. Under the Federal Reserve’s current risk-based capital guidelines for bank holding companies, the minimum required ratio for total capital to risk weighted assets the Company is required to maintain is 8%, with at least 4% consisting of Tier 1 capital. Tier 1 capital consists of common and qualifying preferred stock, certain other qualifying instruments, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets. These risk-based capital guidelines establish minimum standards, and bank holding companies generally are expected to operate well above the minimum standards.

Financial Modernization Legislation. A bank holding company generally is restricted to activities related or incidental to banking. In the past, bank holding companies were specifically prohibited from engaging in the issue, flotation, underwriting, public sale, or distribution of third party securities. Limits also were placed on underwriting and selling insurance. The permitted activities with respect to bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which became effective in March 2000. This act repealed the banking/securities industry anti-affiliation rules and permits the common ownership of commercial banks, investment banks, and insurance companies under the structure of a financial holding company. Under this law, a bank holding company can elect to be treated as a financial holding company, which may engage in any activity that the Federal Reserve determines is financial in nature. A financial holding company also may engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of the related depository institutions or the financial system generally.

In order for a bank holding company to qualify as a financial holding company, all of its depository subsidiaries ( i.e. , banks and thrifts) must be well capitalized and well managed, and must meet their Community Reinvestment Act, or CRA, obligations, as explained below. The bank holding company also must declare its intention to become a financial holding company to the Federal Reserve and certify that it meets the requirements. Banks and thrifts acquired by a financial holding company within 12 months prior to the date on which the election is filed may be excluded from this test if they have less than a satisfactory CRA rating, but they must submit a plan to the applicable federal banking agency describing how the CRA rating will be brought into conformance.

The act also establishes a system of functional regulation for financial holding companies and banks providing regulation of securities by the Securities and Exchange Commission and state securities regulators, regulation of futures by the Commodity Futures Trading Commission, and regulation of insurance activities by the state insurance regulators. Banks may sell title insurance only when specifically permitted under applicable state law.

The Company does not currently intend to become a “financial holding company” under the terms of this law, but may consider doing so at some point in the future.

Emergency Economic Stabilization Act of 2008. In accordance with its stated purpose of restoring liquidity and stability to the financial system of the United States, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (“TARP”), under which the U.S. Department of the Treasury (“Treasury”) is authorized to purchase preferred stock from qualified financial institutions. The Company meets the requirements to be considered a qualified financial institution.

Under TARP, for organizations like the Company, the federal government’s purchase limitation is generally defined as 3% of risk-weighted assets. The terms of the preferred stock generally provide that: (i) cumulative dividends will be paid at a rate of 5% for the first five years and 9% thereafter; (ii) any increase in the dividend rate paid on common stock during the first three years will require the consent of the Treasury; (iii) any repurchase of common stock will require the consent of the Treasury; (iv) conditions and limitations will be placed on executive compensation; and (v) the Treasury will receive warrants, with a term of 10 years, to purchase a number of shares of common stock having an aggregate market price equal to 15% of the preferred stock amount on the day of investment.

The Company gave consideration to applying for the Treasury’s capital purchase program during 2008. After performing a detailed capital and cost analysis, the Company decided not to participate in the TARP program at this time.

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

Supervision and Regulation of the Bank

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

The Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. The Bank operates under the supervision of, and subject to regulation and examination by, the Commission and the Federal Reserve. The Bank is also subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and the establishment of branch offices. Federal and state bank regulatory agencies also have the general authority to eliminate dividends paid by insured banks if such payment is deemed to constitute an unsafe and unsound practice. As the Bank’s primary federal regulator, the Federal Reserve has the authority to impose penalties, initiate civil and administrative actions and take other steps to prevent the Bank from engaging in unsafe and unsound practices. The amount of dividends payable by the Bank will depend upon its earnings and capital position, and is limited by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. No dividend may be declared or paid that would impair a bank’s paid-in capital. Both the Commission and the Federal Reserve have the general authority to limit dividends paid by the Bank if such payments are deemed to constitute an unsafe and unsound practice.

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

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

Capital Resources

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

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

The Federal Reserve also has adopted regulations which supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to average total consolidated assets (“Leverage ratio”) of 4%. The Federal Reserve has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a “tangible Tier 1 leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total assets. The Bank’s capital ratios significantly exceed all requirements at December 31, 2008.

Deposit Insurance

The Bank’s deposits are generally insured by the FDIC for a maximum of $100,000 per depositor. However, in the fourth quarter of 2008, the FDIC insurance limits were raised to $250,000 per depositor. This increase in FDIC coverage will remain in effect through December 31, 2009. The Bank pays a quarterly statutory assessment for this insurance coverage and must comply with the rules and regulations of the FDIC. Each depository institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. The FDIC is currently in the process of re-evaluating the assessment premiums, which will likely increase the bank’s FDIC insurance expense

Effect of Governmental Monetary Policies

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. The operations of the Bank will be affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates money, credit conditions and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future.

SEC Filings

A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, excluding exhibits, as filed with the Securities and Exchange Commission can be obtained without charge by writing to Pioneer Bankshares, Inc., Attn: Thomas R. Rosazza, President and Chief Executive Officer, at 263 East Main Street, P.O. Box 10, Stanley, Virginia 22851. This information may also be accessed, without charge, by visiting the SEC’s Electronic Data Gathering and Retrieval Service EDGAR website at www.sec.gov.

Item 1A.

Risk Factors.

Not Applicable

Item 1B.

Unresolved Staff Comments.

Not Applicable

Item 2.

Properties.

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

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

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

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

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

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

Valley Finance Service operates as a division/branch of Pioneer Bank and was relocated during the third quarter of 2008 into the Harrisonburg branch facility in an effort to improve operating efficiency and reduce overhead expenses.

The Bank’s data processing center facility is located next to the Bank’s main office in Stanley, Virginia. The data processing center building has approximately 25,760 square feet and was originally purchased on September 8, 1970, with recent renovations being completed in 2005.

The Bank also operates a branch facility in downtown Charlottesville, Virginia. This branch is a leased facility. This office was opened in March 2005 and primarily offers commercial loans and small business accounts. The branch is located at 257 Ridge McIntire Road, Charlottesville, Virginia.

Item 3.

Legal Proceedings.

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not Applicable

PART II

Item 5.

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

The Common Stock of the Company trades on the OTC Bulletin Board under the symbol “PNBI.OB” and transactions generally involve a small number of shares. The Bank’s transfer agent is Registrar and Transfer Company, 10 Commerce Drive, Cranford Drive, Cranford, New Jersey, 07016-3572. The following table shows actual trade prices (without commissions) reported to Scott & Stringfellow, Inc. Other transactions may have occurred which were not included in the table.

COMMON STOCK TRADE PRICES


2008	High		Low
First Quarter	$	27.00	$	24.00
Second Quarter		28.10		19.05
Third Quarter		24.00		17.50
Fourth Quarter		20.00		17.75

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

There were 1,017,170 and 1,011,481 shares of the Company’s Common Stock outstanding at the close of business on December 31, 2008 and 2007 respectively. There were 522 and 500 shareholders of record as of December 31, 2008 and 2007, respectively.

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


Declared Date	Record Date	Payment Date	Per Share Amount
3/13/08	3/21/08	3/31/08	$	.15
6/12/08	6/20/08	6/30/08		.14
9/08/08	9/18/08	9/29/08		.14
12/11/08	12/18/08	12/30/08		.14

Total for 2008			$	.57


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

Total for 2007			$	.56

The Company’s ability to pay dividends is subject to certain restrictions imposed by the Federal Reserve and capital requirements of Federal and Virginia banking statutes and regulations. Additionally, the Company intends to follow a policy of retained earnings sufficient for the purpose of maintaining net worth and reserves of the Bank at adequate levels and to provide for the Company’s growth and ability to compete in its market area.

Stock Repurchases

The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase. There were no repurchase transactions during 2008.

Item 6.

Selected Financial Data.

The following is selected financial data for the Company for the years ending December 31, 2008 and 2007. This information has been derived from audited financial information included in Item 8 of this Form 10-K.

FINANCIAL HIGHLIGHTS

(In thousands, except for per share information)


	2008			2007
Results of Operations
Interest and dividend income	$	10,399		$	10,764
Interest expense		3,756			3,908

Net interest income		6,643			6,856
Provision for loan losses		548			309

Net interest income after provision for loan losses		6,095			6,547
Noninterest income		511			1,278
Noninterest expense		4,990			5,180

Income before income taxes		1,616			2,645
Income tax expense		505			893

Net Income	$	1,111		$	1,752


Financial Condition
Assets	$	156,110		$	151,825
Deposits		128,978			127,355
Loans, Net		119,225			125,611
Stockholders’ Equity		16,805			16,275

Per Share Data
Net income per share, basic	$	1.09		$	1.73
Net income per share, diluted		1.09			1.73
Dividends per share		.57			.56
Book value per share		16.52			16.09

Performance Ratios
Return on average assets ¹		0.67	%		1.12	%
Return on average equity ¹		6.45	%		10.97	%
Dividend payout ratio		52.12	%		32.31	%
Average equity to average assets ¹		10.42	%		10.24	%

¹	Ratios are based primarily on daily average balances

Item 7.

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

The following is management’s discussion of the financial condition and results of operations on a consolidated basis for the two years ended December 31, 2008 and 2007, respectively, for the Company. The consolidated financial statements of the Company include the accounts of the Company, the Bank, and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC, each of which is a wholly-owned subsidiary of the Bank. This discussion should be read in conjunction with the audited consolidated financial statements and related notes of the Company presented elsewhere herein.

Forward Looking Statements

The report on Form 10-K contains forward-looking statements with respect to the Company’s and the Bank’s financial condition, results of operations and business. These forward-looking statements involve certain risks and uncertainties. When used in this report or future regulatory filings, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive office, the words or phrases “will likely result,” “are expect to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution the readers and users of this information not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors including regional and national economic conditions, changes in the levels of market rates of interest, credit risk and lending activities, and competitive and regulatory factors could affect the financial performance of the Company and the Bank and could cause actual results for future periods to differ materially from those anticipated or projected.

The Company and the Bank do not undertake and specifically disclaim any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

General

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: 1) Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable and can be estimated and 2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the market and the loan balance.

Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance include internally generated loan review reports, past due reports, historical loan loss experience and the financial condition of individual borrowers.

This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates the risk elements involved in loans relative to their collateral value and maintains the allowance for loan losses at a level which is adequate to absorb credit losses inherent in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting policy, which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

Goodwill

Goodwill is evaluated on an annual basis for impairments in value and adjusted accordingly. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

Goodwill is included in other assets and totaled $360,000 for the reporting periods ending December 31, 2008 and 2007. Goodwill is no longer amortized, but instead is evaluated for impairment at least annually. There were no impairment charges recognized for the 2008 and 2007 reporting periods.

Financial Overview

The Company had total asset growth during 2008 of approximately $4.3 million. This asset growth is primarily attributed to increased investment activities in available for sale securities and CD’s at the bank level of approximately $10.4 million. The Company’s loan portfolio decreased by $6.4 million or 5.08% during 2008. The decrease in the loan portfolio was mainly in the areas of construction loans, residential second mortgages, and personal installment loans and is also attributed to consumer refinancing activities. The deposit portfolio grew by $1.6 million or 1.27% during 2008, with the majority of this growth being in savings accounts and time deposits. Outstanding borrowings increased by $2.5 million or 36.23% during 2008. The Company’s capital position at December 31, 2008 was $16.5 million, or 10.54% as a percentage of total assets.

The Company’s net earnings were $1.111 million for the year ended December 31, 2008, compared to $1.752 million for 2007. This represents a decrease of approximately $641,000 or 36.59%. The decrease in net income is primarily attributed to losses on the sale of equity securities during the fourth quarter of 2008. Earnings per share were $1.09 for the year ended December 31, 2008, compared to $1.73 for 2007.

The Company’s book value as of December 31, 2008 was $16.52 per share, as compared to a book value of $16.09 per share as of December 31, 2007. This represents an increase of 2.67%. Additionally, shareholder dividend payments for 2008 were increased by 1.79%, as compared to the prior year.

Results of Operations

Net Interest Income

Net interest income decreased $213,000 or 3.11% in 2008. The decrease in net interest income for 2008 is primarily attributed to the decline in loan volume during the year resulting from loan payoffs and refinancing activities. Interest income on loans decreased by $501,000 or 5.12% while interest expense on deposits and borrowings also decreased by $152,000 or 3.89%, when compared to prior year. The decline in net interest income has been impacted by market rates and the recent economic downturn.

Interest income on securities available for sale increased by $166,000 or 36.64% in 2008 compared to an increase in the prior year of $157,000 or 54.90%. The average yields on securities decreased from 5.09% in 2007 to 4.77% in 2008. The decrease in average yield on securities is attributed to reinvestment activities during the year at lower market rates. Management makes every effort to maintain a diversified investment strategy as a means of safeguarding the investment portfolio and maintaining adequate cash flow to support future lending activities.

Interest income on federal funds sold and other deposits was $418,000 in 2008, compared to $395,000 in 2007. This increase of $23,000 is primarily attributed to an increased volume of investment activity in Certificate of Deposits.

The net interest margin on earning assets on a tax equivalent basis decreased from 4.74% in 2007 to 4.41% in 2008, as a result of lower market rates and the decline in income related to loans.

Interest expense on deposits decreased by $232,000 or 6.53% in 2008. This decrease is related to repricing activities of time deposits maturing in the current year at lower market rates. The average interest rate paid on deposits decreased from 3.64% in 2007 to 3.17% in 2008.

Interest expense on borrowings increased by $80,000 or 22.47%, which is primarily attributed to new advances obtained at fixed low interest rates early in the year for investment purposes. These funds were generally placed in matching term investment instruments, at a rate of interest higher than the borrowing rate. The average interest rate paid on borrowings decreased from 3.71% in 2007 to 3.42% in 2008.

Yields on total loans decreased from 7.82% in 2007 to 7.57% in 2008. The yield on commercial and agricultural loans decreased from 8.88% in 2007 to 7.96% in 2008. Commercial and residential real estate loan yields have decreased from 7.11% in 2007 to 6.97% in 2008. Installment loan yields have decreased from 11.29% in 2007 to 10.57% in 2008.

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(ON A FULLY TAXABLE EQUIVALENT BASIS)

(In Thousands )

Table I


	2008							2007
	Average			Income/ Expense		Average Rates Earned/ Paid		Average			Income/ Expense		Average Rates Earned/ Paid
ASSETS
Loans: ¹
Commercial	$	7,630		$	607	7.96	%	$	8,529		$	757	8.88	%
Real estate		98,087			6,834	6.97	%		100,274			7,125	7.11	%
Installment		16,246			1,717	10.57	%		15,732			1,776	11.29	%
Credit card		557			118	21.18	%		555			119	21.44	%

Total Loans		122,520			9,276	7.57	%		125,090			9,777	7.82	%
Federal funds sold		3,535			66	1.87	%		3,476			170	4.89	%
Interest bearing deposits		9,925			352	3.55	%		4,475			225	5.03	%
Securities
Taxable		12,352			651	5.27	%		9,570			527	5.51	%
Nontaxable ²		2,972			80	2.69	%		2,639			94	3.56	%

Total Earning Assets		151,304			10,425	6.89	%		145,250			10,793	7.43	%

Allowance for loan losses		(1,582	)						(1,483	)
Nonearning assets		15,550							12,184

Total Assets	$	165,272						$	155,951


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Interest bearing demand deposits	$	16,078		$	83	0.52	%	$	11,019		$	53	0.48	%
Savings		15,689			180	1.15	%		13,157			134	1.02	%
Time deposits		73,079			3,057	4.18	%		73,407			3,365	4.58	%

Total Deposits		104,846			3,320	3.17	%		97,583			3,552	3.64	%
Borrowings		12,763			436	3.42	%		9,595			356	3.71	%

Total Interest Bearing Liabilities		117,609			3,756	3.19	%		107,178			3,908	3.65	%

Noninterest bearing deposits		29,471							31,613
Other liabilities		966							1,189

Total Liabilities		148,046							139,980

Stockholders’ equity		17,226							15,971

Total Liabilities and Stockholders’ Equity	$	165,272						$	155,951

Net Interest Earnings				$	6,669						$	6,885

Net Yield on Interest Earning Assets						4.41	%						4.74	%

¹	Nonaccrual loans are included in computing the average balance.

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

The total tax equivalent adjustment was approximately $25,000 for 2008 and $29,000 for 2007.

Table II

PIONEER BANKSHARES, INC.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

(On a fully tax equivalent basis)

(Dollars in thousands)


	2008 Compared to 2007 Increase (Decrease)									2007 Compared to 2006 Increase (Decrease)
	Volume			Rate			Total			Volume			Rate			Total
Interest Income
Loans
Commercial	$	(80	)	$	(70	)	$	(150	)	$	197		$	21		$	218
Real estate		(155	)		(136	)		(291	)		367			179			546
Installment		58			(117	)		(59	)		139			(27	)		112
Credit Card		—			(1	)		(1	)		(8	)		(1	)		(9	)

Total Loans		(177	)		(324	)		(501	)		695			172			867

Federal funds sold		3			(107	)		(104	)		(49	)		(8	)		(57	)

Interest bearing deposits in banks		274			(147	)		127			(57	)		23			(34	)

Investments
Taxable		153			(29	)		124			7			147			154
Nontaxable		12			(26	)		(14	)		17			(17	)		—

Total Securities		165			(55	)		110			24			130			154

Total Earning Assets	$	265		$	(633	)	$	(368	)	$	613		$	317		$	930

Interest Expense
Demand deposits	$	24		$	6		$	30		$	(6	)	$	4		$	(2	)
Savings		26			20			46			(1	)		53			52
Time deposits		(15	)		(293	)		(308	)		476			399			875

Total Deposits		35			(267	)		(232	)		469			456			925

Borrowings		118			(38	)		80			(273	)		(31	)		(304	)

Total Liabilities		153			(305	)		(152	)		196			425			621

Net Interest Earnings	$	112		$	(328	)	$	(216	)	$	417		$	(108	)	$	309

Note: Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the total change and the volume change.

Non-interest Income and Expense

Non-interest income decreased from $1.2 million in 2007 to $511,000 in 2008. This represents a 60.02% decrease. The primary factor affecting this change was losses on securities of $553,000 compared to gains in the prior year of $315,000. Losses incurred were related to the declining market value of equity securities held at the holding company level. Management executed the sale of certain securities in a loss position during the fourth quarter of 2008 as a result of its impairment analysis related to these securities. Additional sales were executed in an effort to reduce concentration levels in certain funds or stocks that may be dependent upon the housing market.

Service charge income increased by $112,000 or 13.91%. when compared to the prior year, and was the result of scheduled fee increases relating to minimum deposit requirements, overdraft fees, paper statement fees and other services.

Non-interest expense decreased by $190,000 or 3.67% from 2007 to 2008. Salaries and benefits decreased by $122,000 or 4.79% in 2008 compared to 2007. The decrease in salaries and benefits is the result of management’s efforts to control expense through staff reductions and decreased hourly schedules. Equipment expenses decreased by $87,000 or 11.71% in 2008 compared to 2007 as a result of normal depreciation fluctuations. Total other expenses increased by $43,000 from 2007 to 2008, which is the net result of increases and decreases in various operating costs.

Financial Condition

General Uncertainties and Trends

Management is of the opinion that loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not (i) represent or result from trends or uncertainties which are reasonably expected to materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits which any available information causes serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Management recognizes that prevailing economic conditions have the potential to adversely impact the Company’s operational results, including future earnings, liquidity, and capital resources. The continued deterioration in the credit and housing markets, increasing unemployment within our service area, and other economic and market factors are monitored closely by management in an effort to promptly identify specific trends that could have a direct material effect on the Company.

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

Securities

Securities as of December 31, 2008 totaled $16.0 million, which is a 36.25% increase over the December 31, 2007 balance of $11.7 million. This increase is attributed to increased investment activities in available for sale securities and certificates of deposits at the bank level.

The Company maintains an adequate level of securities to provide for liquidity and as security for public indebtedness. A schedule of securities including the carrying amount and estimated market value of securities by contractual maturity is shown in a note to the consolidated financial statements. Management’s philosophy is to keep the maturities of investments relatively short which allows the Company to better match deposit maturities with investment maturities and thus react more quickly to interest rate changes.

At December 31, 2008, the Company had investments in equity securities consisting primarily of common and preferred stocks and corporate bonds with a cost of $2.7 million and an estimated market value of $2.1 million. The equity securities generally include common stocks and corporate bonds, which are purchased with the objective of generating additional interest or dividend income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

The Bank’s total investment portfolio at December 31, 2008 has a cost of $12.8 million and an estimated fair market value of $13.1 million. These investments include U.S. government and agency securities, state and municipal securities, and fixed mortgaged-backed securities.

The schedule below summarizes the book value of the portfolio by maturity classification and shows the weighted average yield in each group on a tax equivalent basis as of December 31, 2008 and December 31, 2007:


	2008 Book Value		Weighted Average Yield		2007 Book Value		Weighted Average Yield
(In Thousands)
Securities available for sale
Maturing within one year	$	997	5.23	%	$	1,781	4.77	%
Maturing after one year But within five years		1,714	5.81	%		4,284	5.40	%
Maturing after five years But within ten years		900	4.63	%		514	6.00	%
Maturing after 10 years		9,194	5.24	%		1,734	5.51	%
Equity Securities		2,693				2,756

Total securities available for sale	$	15,498	5.27	%	$	11,069	5.32	%

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

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

Loan Portfolio

Total net loans decreased during 2008 from $125.6 million at December 31, 2007 to $119.2 million at December 31, 2008. This is a decrease of $6.4 million or 5.08%. The decrease in the loan portfolio was mainly in the areas of construction loans, residential second mortgages, and personal installment loans and is also attributed to consumer refinancing activities.

Loans are stated at their face amount, net of unearned discount, and are classified shown in the following schedule:


	December 31, 2008			December 31, 2007
	(In Thousands)
Mortgage loans on real estate:
Construction loans	$	9,447		$	12,979
Agricultural		4,267			4,573
Equity lines of credit		1,927			2,431
Residential 1-4 family		41,618			41,579
Second mortgages 1 - 4 family		3,788			5,055
Multifamily		4,144			3,946
Commercial		34,022			32,332

Total real estate loans		99,213			102,895
Commercial and agricultural loans		5,701			7,204
Consumer installment loans:
Personal		15,665			17,165
Credit cards		645			587

Total consumer installment loans		16,310			17,752
All other loans		362			323

Gross Loans		121,586			128,174
Less unearned income on loans		(710	)		(990	)

Loans, less unearned discount		120,876			127,184
Less allowance for loan losses		(1,651	)		(1,573	)

Net Loans Receivable	$	119,225		$	125,611

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

The Bank’s residential real estate loans, including equity lines of credit and second mortgages totaled $47.3 million as of December 31, 2008. This represents a decrease of approximately $1.7 million in the residential loan portfolio over the previous year. Residential real estate loans are generally made for a period not to exceed 30 years and are secured by first deed of trust, which do not exceed 80% of the appraised value. If the loan to value ratio exceeds 80%, the Company requires additional collateral or guarantees. For a majority of the real estate loans, interest is adjustable after each three or five year period. Fixed rate loans are generally made for a fifteen-year period. In addition, the Bank makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 80% of the appraised value. Home equity loans are made on a 10-year revolving line of credit basis.

The Bank’s commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $51.9 million as of December 31, 2008. This represents a decrease of approximately $2.0 million in the commercial real estate portfolio when compared to the prior year. The decrease in commercial real estate loans is related to refinancing activities in the current economic downturn. Management has established specific lending criteria relating to commercial loans and considers the risk of loss in this loan category to moderate.

The Bank’s consumer loan portfolio decreased $1.4 million to a total of $16.3 million at December 31, 2008. This decreased is attributed to consumer refinancing activities and regular loan repayment schedules.

A schedule of remaining maturities of selected loan categories as of December 31, 2008 is as follows:


	At December 31, 2008
	(In Thousands)
	Less than One Year		One to Five Years		Greater than Five Years		Total
Commercial and Agricultural	$	1,858	$	3,207	$	636	$	5,701
Real estate construction		4,735		4,247		465		9,447

Total Maturities of Selected Loans	$	6,593	$	7,454	$	1,101	$	15,148


For maturities over one year:
Fixed rates	$	8,156
Variable rates		399

	$	8,555

At December 31, 2008 construction loans were 7.92% percent of total net loans and commercial and agricultural loans were 4.78% of total net loans.

Risk Elements in the Loan Portfolio

The following schedule outlines the non-accrual, restructured, and other non-performing risk elements in the loan portfolio as of December 31, 2008 and December 31, 2007:


	2008			2007
	(In Thousands)
Non-accrual Loans	$	1,466		$	297
Loans Past Due 90 days or more		539			89

Total non-performing assets	$	2,005		$	386

Allowance for loan losses to total loans		1.37	%		1.24	%

Non-performing Assets to total loans		1.68	%		0.30	%

Non-accrual loans are loans on which the interest accruals have been suspended or discontinued as a result of the borrower’s financial difficulties and delinquency status. Interest accruals are continued on past due, secured loans until the principal and accrued interest equal the value of the collateral and on unsecured loans until the financial condition of the creditor deteriorates to the point that any further accrued interest would be determined to be uncollectible. The impact on interest income with these accounts being in nonaccrual status was minimal for both reporting periods presented.

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

Impaired loans are those loans which have been identified by management as problem credits due to various circumstances concerning the borrower’s financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Bank’s allowance for loan loss is made for an impaired loan. Impaired loans not included in the non-accrual totals with specific allocations as of December 31, 2008 totaled approximately $697,000 compared to $489,000 for the prior year. Impaired loans and other potential problem loans are monitored closely on an on-going basis and allocations are made in accordance with the Company’s allowance for loan loss calculations. Management monitors all past due accounts carefully for any anticipated losses and makes appropriate allocations of funds for potential losses as they are identified.

Loan Losses and Allowance For Loan Losses

The following schedule outlines the activity in the allowance for loan loss account as of December 31, 2008 and December 31, 2007:


	2008			2007
	(In Thousands)
Beginning balance	$	1,573		$	1,476
Provision charged to expense		548			309

Loan losses:
Commercial		98			181
Installment		319			283
Real estate		354			—
Credit card		10			10

Total Loan Losses		781			474

Recoveries:
Commercial		6			63
Installment		138			199
Real estate		167			—
Credit card		—			—

Total Loan Recoveries		311			262

Net Loan Losses		470			212

Balance at End of Period	$	1,651		$	1,573

Net Loan Losses as a Percent of Average loans		0.38	%		0.17	%

A breakdown of the allowance allocations by loan type are presented below for December 31, 2008 and December 31, 2007:


	December 31, 2008						December 31, 2007
	Amount		Percent of Allowance		Percent of Average Loans		Amount		Percent of Allowance		Percent of Average Loans
	(In Thousands)
Analysis of Ending Balance
Commercial	$	324	19.63	%	6.23	%	$	256	16.27	%	6.82	%
Real estate		598	36.22	%	80.06	%		433	27.53	%	80.16	%
Installment		704	42.64	%	13.26	%		853	54.23	%	12.58	%
Credit card		25	1.51	%	0.45	%		31	1.97	%	0.44	%

Total	$	1,651	100.00	%	100.00	%	$	1,573	100.00	%	100.00	%

Allowance for loan losses as a percent of year end loans			1.37	%					1.24	%

Management’s analysis process for evaluating the adequacy of the allowance for loan loss is a continual process, which is monitored at least quarterly, or more frequently, as needed. The evaluation process consists of regular periodic reviews of the loans outstanding by loan type. Specific reviews and allocations are made for loans that have been identified as potential loss, in which the borrower’s financial condition has substantially weakened or habitual past due payment activity has occurred. Specific reviews and allocations are also made for various sectors of the loan portfolio that have been identified as higher risk categories. Historical loss ratios are applied to the remaining loan portfolio by loan type, based on the most recent loss trends. Management takes into consideration expected recoveries from prior charge offs as part of its allowance and funding calculation.

Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Allocation factors relating to identified loan concentrations and loan growth trends are included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss and funding provision considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a level which is adequate to absorb credit losses considered to be inherent in the loan portfolio. Management engages the services of an outside loan review firm periodically to evaluate the loan portfolio, provide an independent analysis of significant borrowers, and to assist in identifying potential problem credits. The independent loan review report is used by management as an additional tool for monitoring and minimizing risks that may be inherent in the loan portfolio. Management has also implemented an internal loan review process for the purpose of identifying and monitoring possible loan losses in the portfolio. Other factors considered in management’s evaluation process are changes in lending policies, procedures and underwriting criteria; changes in the nature and volume of the loan portfolio; the experience, ability, and depth of lending management or other lending personnel; the volume and severity of past dues, non-accruals, and classified loans; and other external or regulatory requirements. Regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting principle which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

The provision for loan losses and changes in the allowance for loan losses are shown in note 7 of the financial statements included in this report.

The allowance for loan loss balance of $1.651 million at December 31, 2008, increased by approximately $78,000 from its level at December 31, 2007. The increase in the allowance balance is primarily attributed to specific allocations related to impaired loans and an increased percentage of non-performing assets, including nonaccruals, past dues, and classified loans. The increase in non-performing assets is partially attributed to a declining economic environment. Management has made additional allocations based on the declining economic trends and increases in non-performing assets, as a means of providing sufficient funding for possible losses. The cumulative balance in the allowance for loan loss account was equal to 1.37% and 1.24% of total loans at December 31, 2008 and December 31, 2007, respectively. The increase in the percentage of allowance to total loans is considered to be directionally consistent with trends in the portfolio.

The allowance is deemed to be within an acceptable range based on management’s evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account as of December 31, 2008 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Management’s practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

Loan charge offs for 2008 increased by $307,000 compared to the prior year, and loan loss recoveries increased by $49,000. This resulted in an overall increase of $258,000 in net loan charge offs for the period ending December 31, 2008 as compared to December 31, 2007. The increase in charge offs is primarily related to losses incurred on specific commercial and residential properties, which had collateral that was not readily marketable due to zoning violations. Additionally, the sale of these properties was impacted by the downturn in the housing market and other economic factors.

The provision expense related to the allowance for loan loss for 2008 increased by $239,000 as compared to 2007. This increase is directly related to the increased charge offs and additional allocation made for non-performing and impaired loans.

Management’s evaluation of the allowance for loan losses as of December 31, 2008 and December 31, 2007 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

Premises, Equipment, and Software

The Bank had purchases and investments related to premises improvements, new equipment and software upgrades during 2008 totaling $215,000. These included the replacement of core data processing servers, related equipment and software upgrades, and miscellaneous computer purchases.

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

The Valley Finance Service operation was relocated to the Harrisonburg branch facility during the third quarter of 2008 in an effort to reduce overhead in the form of lease expense and improve operational efficiency.

Deposits

The Company’s total deposits as of December 31, 2008 were $129.0 million compared to $127.4 million at December 31, 2007. This increase of $1.6 million or 1.27% was primarily in the categories of interest bearing demand deposits, savings accounts, and time deposits. Total interest bearing demand deposits totaled $12.4 million as of December 31, 2008 compared to $10.2 million at December 31, 2007.

Demand deposits consist of checking accounts including standard consumer accounts, NOW accounts, and money market (MMDA) accounts. The Company’s demand deposits have historically remained relatively stable; however, these balances fluctuate with normal daily activity.

Total savings deposits as of December 31, 2008 were $15.9 million compared to $12.3 million as of December 31, 2007. This represents an increase of approximately $2.5 million or 18.7%. These accounts consist of passbook savings accounts and statement savings accounts. Management does not expect any major changes in the savings deposit portfolio in the near future.

Time accounts in the form of certificates of deposit instruments represent approximately 54.31% of the Bank’s total deposits. Total time deposits were $75.7 million as of December 31, 2008 compared to $70.3 million at December 31, 2007. Time deposits are generally classified in two major categories for FDIC insurance purposes, as well as other accounting and regulatory purposes: 1) those time deposits with a balance greater than $100,000, and 2) those time deposits with a balance of $100,000 or less. The Company’s total time deposits greater than $100,000 increased during 2008 by approximately $1.1 million compared to the prior year. Time deposits with a balance greater than $100,000 represent 22.37% of the Bank’s total time deposit portfolio. Total time deposits with balances of $100,000 or less increased by approximately $4.2 million during 2008, as compared to 2007. The increases in time deposits is partially attributed to consumer demand for stability in their banking relationships and management’s attempt to attract new depositor’s with limited promotional interest rates periodically during the year.

The maturity schedule as of December 31, 2008 for certificates of deposit over $100,000 are shown below:


Maturity
Less than 3 months	$	4,184
3 to 12 months		7,432
1 to 3 years		1,995
Over 3 years		3,310

Total	$	16,921

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $62.4 million and $60.7 million as of December 31, 2008 and 2007, respectively. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by first lien 1-4 family residential mortgages totaling $41.6 million at December 31, 2008. On some fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may pay back all or part of the advance without a prepayment penalty.

At December 31, 2008, the total fixed-rate borrowings with FHLB were $9.4 million and mature through January, 2010. The interest rates on the fixed-rate notes payable ranges from 3.14% to 3.92%. At December 31, 2007, the total outstanding fixed-rate borrowings with FHLB was $6.9 million.

The contractual maturities of FHLB advances as of December 31, 2008 are as follows:


	(In Thousands)
	Fixed Rate
Due in 2009	$	4,400
Due in 2010		5,000

Total	$	9,400

Analysis of Capital

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to its size, composition, quality of assets and liability levels, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

The Federal Reserve, Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.00%, of which at least 4.00% must be Tier 1 capital, composed of common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain goodwill items.

The Company’s capital ratios exceed regulatory requirements and are considered to be in the well capitalized category under the regulatory framework. Total consolidated capital as a percentage of risk-weighted assets was 15.5% at December 31, 2008. The ratio of Consolidated Tier 1 Capital to risk-weighted assets was 14.3% as of December 31 2008 compared to 13.4% at December 31, 2007.

The following schedule shows a comparative breakdown of the Company’s capital as of December 31, 2008 and December 31, 2007:


	2008			2007
	(In Thousands)
Tier 1 capital
Consolidated Risk-weighted assets	$	116,402		$	119,023


Consolidated Tier 1 capital
Common stock	$	509		$	506
Retained Earnings		16,460			15,805
Goodwill excluded		(360	)		(360	)

Total Tier 1 capital		16,609			15,951

Consolidated Tier 2 capital
Allowance for loan losses (1)		1,455			1,488

Total risk-based capital	$	18,064		$	17,439


Consolidated total risk-based capital ratio		15.5	%		14.7	%
Consolidated Tier 1 risk-based capital ratio		14.3	%		13.4	%
Consolidated Leverage ratio		10.1	%		10.2	%

(1)

Limited to 1.25% of gross risk-weighted assets

Interest Sensitivity and Liquidity

At December 31, 2008, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 33.89% for the one-year re-pricing period compared with a negative Gap Sensitivity Ratio of 39.65% at December 31, 2007. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. Management constantly monitors the Company’s interest rate risk and believes that the current position is an acceptable risk for a growing community bank, which operates primarily in a rural environment.

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash and due from banks, interest-bearing deposits in financial institutions, securities purchased under agreements to resell, federal funds sold, securities available for sale, and loans and investments maturing within one year.

Liquidity as of December 31, 2008 remains adequate. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Bank was a seller of federal funds for most of 2008 and 2007. The Bank’s membership in the Federal Home Loan Bank System also provides liquidity, as the Bank can borrow money that is repaid over a ten-year period and can use the money to make fixed rate loans. The matching of the long-term loans and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Bank reviews its interest rate gap periodically and makes adjustments as needed.

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

The following table reflects the Company’s interest sensitivity and interest rate risk position as of December 31, 2008:


(In Thousands)	1 - 90 Days			91 - 365 Days			1 to 5 Years			Over 5 Years			Not Classified		Total
Uses of Funds:
Loans	$	12,243		$	9,356		$	56,768		$	42,509		—		$	120,876
Interest Bearing Bank deposits		11,896			—			—			—		—			11,896
Investment Securities		—			1,035			1,718			10,318		2,145			15,216
Restricted Stock		—			—			—			—		792			792
Federal Funds Sold		100			—			—			—		—			100

Total		24,239			10,391			58,486			52,827		2,937			148,880

Sources of Funds:
Demand Deposits
Interest bearing		12,377			—			—			—		—			12,377
Savings accounts		15,866			—			—			—		—			15,866
Time Deposits:
Over $ 100,000		4,184			7,432			5,305			—		—			16,921
Other certificates		16,702			24,124			17,909			—		—			58,735

Total deposits		49,129			31,556			23,214			—		—			103,899

Borrowings		2,600			1,800			5,000			—		—			9,400

Total		51,729			33,356			28,214			—		—			113,299

Discrete Gap		(27,490	)		(22,965	)		30,272			52,827		2,937			35,581

Cumulative Gap		(27,490	)		(50,455	)		(20,183	)		32,644		35,581

Ratio of Cumulative Gap to Total Earning Assets		-18.46	%		-33.89	%		-13.56	%		21.93	%	23.90	%

Off-Balance Sheet Commitments

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The notes to the Consolidated Financial Statements contain further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements. The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

Recent Accounting Pronouncements

Accounting pronouncements are established by various accountancy governing bodies to provide guidance in the principles and practices used for maintaining accurate and consistent accounting records. The Company has established monitoring procedures for the review of new accounting pronouncements relating to the banking industry, in order to ensure that all transactions are in compliance with GAAP. Recent accounting pronouncements considered to be applicable to the Company are included in Note 1 of the Consolidated Financial Statements within this report.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable

Item 8.

Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Report of Independent Registered Public Accounting Firm		26

Consolidated Balance Sheets as of December 31, 2008 and 2007		27

Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006		28

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006		29

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		30

Notes to Consolidated Financial Statements		31

LOGO

To the Board of Directors

Pioneer Bankshares, Inc.

Stanley, Virginia

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the consolidated balance sheets of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2008, 2007 and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Bankshares, Inc. and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008, 2007 and 2006, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of Pioneer Bankshares, Inc. and subsidiary internal control over financial reporting as of December 31, 2008 included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

LOGO

Winchester, Virginia

March 25, 2009

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(In Thousands, except share and per share data)


	2008			2007
ASSETS
Cash and due from banks	$	2,401		$	6,106
Interest-bearing deposits in other banks		11,896			1,600
Federal funds sold		100			300
Securities available for sale, at fair value		15,216			11,069
Restricted securities		792			680
Loans receivable, net of allowance for loan losses of $1,651 in 2008 and $1,573 in 2007		119,225			125,611
Bank premises and equipment, net		3,790			4,056
Accrued interest receivable		720			758
Other assets		1,970			1,645

Total Assets	$	156,110		$	151,825

LIABILITIES

Deposits
Noninterest bearing	$	25,079		$	33,423
Interest bearing
Demand		12,377			10,238
Savings		15,866			13,367
Time deposits over $100,000		16,921			15,822
Other time deposits		58,735			54,505

Total Deposits		128,978			127,355

Accrued expenses and other liabilities		927			1,295
Borrowings		9,400			6,900

Total Liabilities		139,305			135,550

STOCKHOLDERS’ EQUITY

Common stock; $.50 par value, authorized 5,000,000 shares; outstanding – 1,017,170 and 1,011,481 shares in 2008 and 2007, respectively		509			506
Retained earnings		16,460			15,805
Accumulated other comprehensive (loss), net		(164	)		(36	)

Total Stockholders’ Equity		16,805			16,275

Total Liabilities and Stockholders’ Equity	$	156,110		$	151,825

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(In Thousands, except per share data)


	2008			2007		2006
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	9,276		$	9,777	$	8,910
Interest on securities – taxable		597			443		286
Interest on securities – nontaxable		22			10		10
Deposits and federal funds sold		418			395		486
Dividends		86			139		142

Total Interest and Dividend Income		10,399			10,764		9,834

INTEREST EXPENSE:
Deposits		3,320			3,552		2,627
Borrowings		436			356		660

Total Interest Expense		3,756			3,908		3,287

NET INTEREST INCOME		6,643			6,856		6,547
PROVISION FOR LOAN LOSSES		548			309		233

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,095			6,547		6,314

NONINTEREST INCOME:
Service charges on deposit accounts		917			805		784
Commission income		73			69		40
Other income		74			89		70
Gains (losses) on security transactions		(553	)		315		293

Total Noninterest Income		511			1,278		1,187

NONINTEREST EXPENSES:
Salaries and employee benefits		2,423			2,545		2,366
Occupancy expenses		358			382		375
Equipment expenses		656			743		792
Supplies and printing		131			125		137
Directors fees		170			172		184
Legal fees		100			123		31
Professional fees		173			193		170
Telephone		149			109		159
Other expenses		830			788		780

Total Noninterest Expenses		4,990			5,180		4,994


INCOME BEFORE INCOME TAXES		1,616			2,645		2,507
INCOME TAX EXPENSE		505			893		845

NET INCOME	$	1,111		$	1,752	$	1,662

PER SHARE DATA:
Net income, basic and diluted	$	1.09		$	1.73	$	1.64

Dividends	$	0.57		$	0.56	$	0.51

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(In Thousands)


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

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


BALANCE DECEMBER 31, 2006	$	506	$	14,615		$	97		$	15,218

Comprehensive Income
Net Income				1,752						1,752
Changes in unrealized gains on securities, net of taxes
Unrealized holding gains arising during the period (net of tax effect of $29)							62
Reclassification adjustment for gains included in net income (net of tax effect of $120)							(195	)		(133	)

Total Comprehensive Income										1,619
Cash Dividends				(566	)					(566	)
Stock Based Compensation (net of tax $2)				4						4


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

Comprehensive Income
Net Income				1,111						1,111
Changes in unrealized gains on securities, net of taxes
Unrealized holding losses arising during the period (net of tax effect of $296)							(471	)
Reclassification adjustment for losses included in net income (net of tax effect of $210)							343			(128	)

Total Comprehensive Income										983
Cash Dividends				(579	)					(579	)

Stock issued for compensation		3		123						126


BALANCE DECEMBER 31, 2008	$	509	$	16,460		$	(164	)	$	16,805

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


	(In Thousands)
	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,111		$	1,752		$	1,662
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		548			309			233
(Gain) loss on security transactions		553			(315	)		(293	)
Net amortization (accretion) on securities		—			(9	)		23
Deferred income tax (benefit)		(49	)		(76	)		(80	)
Depreciation		481			546			546
Stock based compensation		126			4			2
Loss of sale on other real estate		33			—			—
Net change in:
Accrued interest receivable		38			(52	)		(139	)
Other assets		(168	)		97			(225	)
Accrued expenses and other liabilities		(368	)		360			195

Net Cash Provided by Operating Activities		2,305			2,616			1,924

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits in other banks		(10,296	)		3,782			(436	)
Net change in federal funds sold		200			400			2,550
Net change in restricted securities		(112	)		184			152
Proceeds from maturities, sales, and principal payments of securities available for sale		17,764			14,964			18,111
Proceeds from principal payments of securities held to maturity		—			1			4
Purchase of securities available for sale		(22,679	)		(12,027	)		(20,423	)
Net decrease (increase) in loans		5,449			(7,098	)		(10,363	)
Proceeds on sale of other real estate		335			—			—
Purchase of bank premises and equipment		(215	)		(124	)		(443	)

Net Cash Provided By (Used in) Investing Activities		(9,554	)		82			(10,848	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand and savings deposits		(3,706	)		2,538			(4,003	)
Time deposits		5,329			39			15,068
Proceeds from borrowings		21,501			2,000			5,000
Curtailments of borrowings		(19,001	)		(5,800	)		(8,800	)
Dividends paid		(579	)		(566	)		(517	)

Net Cash Provided By (Used in) Financing Activities		3,544			(1,789	)		6,748

CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents		(3,705	)		909			(2,176	)
Cash and cash equivalents, beginning of year		6,106			5,197			7,373

Cash and Cash Equivalents, End of Year	$	2,401		$	6,106		$	5,197


Supplemental Disclosure of Cash Paid During the Year for:
Interest	$	3,903			3,682			3,182
Income taxes		788			811			925
Supplemental Disclosure of non-cash activity:
Unrealized gain (loss) on securities available for sale		(214	)		(224	)		194
Other real estate acquired in settlement of loans		389			—			—

See Notes to Consolidated Financial Statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of Pioneer Bankshares, Inc. (“Company”), and its subsidiary Pioneer Bank (“Bank”), conform to accounting principles generally accepted in the United States of America and to accepted practice within the banking industry. A summary of significant accounting policies is as follows:

Consolidation Policy – The consolidated financial statements of the Company include the Bank and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC which are wholly-owned subsidiaries of the Bank. All significant inter-company balances and transactions have been eliminated.

Use of Estimates – In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.

Securities – Investment securities which the Company intends to hold until maturity or until called are classified as held to maturity. These investment securities are carried at cost. Restricted securities include the Bank’s investments in Federal Reserve Bank stock and FHLB stock and are carried at cost.

Securities which the Company intends to hold for indefinite periods of time, including securities used as part of the Company’s asset/liability management strategy, are classified as available for sale. These securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of stockholders’ equity until realized. At December 31, 2008 and 2007, the Company classified all securities as available for sale.

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

Loans Receivable – Loans receivable are intended to be held until maturity and are shown on the consolidated balance sheets net of unearned interest, the allowance for loan losses, and deferred loan fees and costs. Interest is computed by methods which generally result in level rates of return on principal. Interest income is generally not recognized on non accrual loans and payments received on such loans are applied as a reduction of the loan principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

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

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

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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

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

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

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

Foreclosed Assets – Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Bank Premises and Equipment – Land values are carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over estimated useful lives ranging from 3 to 40 years, generally on a straight-line method.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.

Financial Instruments – In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for other loans. Commitments to extend credit are generally made for a period of one year or less and interest rates are determined when funds are disbursed. Collateral and other security for the loans are determined on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily represent future cash requirements.

Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.

Advertising Costs – The Company follows the policy of charging the production costs of advertising to expense as incurred. Advertising expense amounted to $36,462, $53,918, and $59,501 for the years ended December 31, 2008, 2007, and 2006, respectively.

Earnings Per Share – Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Stock Compensation Plans – Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement 123R (Revised 2004), Share-Based Payment (“SFAS 123R”). This revised accounting principle requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. Additional information related to the Company’s stock option plan can be found in Note 15 of this financial report.

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

The fair value of each previously issued stock option grant was estimated at the grant date using the Black- Scholes option-pricing model. The estimates were calculated using the following weighted-average assumptions for stock options granted in 2007 and 2006 respectively: Dividend rate of 2.99% and 3.07%, price volatility of 21.41% and 14.58%, risk-free interest rate of 5.23% and 5.13%, and expected lives of 10 years. There were no new stock options granted during 2008.

Recent Accounting Pronouncements – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Company adopted SFAS 159 effective January 1, 2008. The Company decided not to report any existing financial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards 141(R), “Business Combinations” (“SFAS 141(R)”). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Recent Accounting Pronouncements – (continued)

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

In December 2007, the SEC issued Staff Accounting Bulletin 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Implementation of SAB 110 did not have a material impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Company on January 1, 2009.

In April 2008, the FASB issued FASB Staff Position (“FSP”) 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the assets under SFAS 141(R). FSP 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP 142-3 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provision of SFAS 162 to have any impact on the consolidated financial statements.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement 133 and FASB Interpretation 45; and Clarification of the Effective Date of FASB Statement 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Company on December 31, 2008 and is not expected to have a material impact on the consolidated financial statements.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Recent Accounting Pronouncements – (continued)

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Company’s consolidated financial statements.

In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the consolidated financial statements.

NOTE 2

NATURE OF OPERATIONS:

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

NOTE 3

CASH AND DUE FROM BANKS:

The Bank is required to maintain average reserve balances based on a percentage of deposits. The average balance of cash, which the Federal Reserve Bank requires to be on reserve, was $1.1 million at December 31, 2008 and $1.2 million at December 31, 2007.

NOTE 4

DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:

The Bank had cash deposited in and federal funds sold to other banks, most of which exceed federally insured limits, totaling approximately $728 thousand and $1.2 million at December 31, 2008 and 2007, respectively.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5

INVESTMENT SECURITIES:

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
December 31, 2008
Available for Sale
U.S. government and agency securities	$	2,496	$	42	$	—		$	2,538
Mortgage-backed securities		9,194		239		—			9,433
State and municipals		1,115		—		(15	)		1,100
Equity securities		2,693		53		(601	)		2,145

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


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

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

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


	2008			2007			2006
	(In Thousands)
Gains	$	175		$	459		$	407
Losses		(728	)		(144	)		(114	)

Net Gains (Losses)	$	(553	)	$	315		$	293

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5

INVESTMENT SECURITIES (Continued):

The amortized cost and fair value of investment securities at December 31, 2008, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Securities Available for Sale
	Amortized Cost		Fair Value
	(In Thousands)
Due within one year	$	997	$	1,035
Due after one year through five years		1,714		1,719
Due five years through ten year		900		884
Due after ten years		9,194		9,433

		12,805		13,071
Equity securities		2,693		2,145

	$	15,498	$	15,216

Investment securities with a book value of $1.2 million at December 31, 2008 and $713,000 at December 31, 2007 were pledged to secure public deposits and for other purposes required by law.

Management recognizes that current economic conditions and market trends may result in other than temporary impairment classifications for certain securities or equity investments. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As of December 31, 2008, management has determined that the unrealized losses in the investment portfolio are temporary. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value. Management will continue to monitor the securities in a loss position for future impairment. Securities in an unrealized loss position at December 31, 2008 and 2007, by duration of the unrealized loss are shown below.

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

LOSSES


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

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


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

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5

INVESTMENT SECURITIES (Continued):

As of December 31, 2007, there were 21 securities in the portfolio that have unrealized losses, which are considered to be temporary. The schedule of unrealized losses on these securities is as follows:

LOSSES


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

More than 12 Months	Fair Value		—		273			—			273
	Unrealized Losses		—		(5	)		—			(5	)


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

NOTE 6

LOANS:

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


	December 31, 2008			December 31, 2007
	(In Thousands)
Mortgage loans on real estate:
Construction loans	$	9,447		$	12,979
Agricultural		4,267			4,573
Equity lines of credit		1,927			2,431
Residential 1-4 family		41,618			41,579
Second mortgages 1-4 family		3,788			5,055
Multifamily		4,144			3,946
Commercial		34,022			32,332

Total real estate loans		99,213			102,895
Commercial and agricultural loans		5,701			7,204
Consumer installment loans:
Personal		15,665			17,165
Credit cards		645			587

Total consumer installment loans		16,310			17,752
All other loans		362			323

Gross Loans		121,586			128,174
Less unearned income on loans		(710	)		(990	)

Loans, less unearned discount		120,876			127,184
Less allowance for loan losses		(1,651	)		(1,573	)

Net Loans Receivable	$	119,225		$	125,611

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6

LOANS (continued):

The Bank grants commercial, real estate and consumer installment loans to its customers. Collateral requirements for loans are determined on a case by case basis depending upon the purpose of the loan and the financial condition of the borrower. The ultimate collectability of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of its market service area.

The Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. The residential real estate loans, including equity lines of credit and second mortgages totaled $47.3 million as of December 31, 2008 as compared to $49.1 million at December 31, 2007. The small business commercial real estate loans, including construction accounts, agricultural real estate, multifamily dwellings, and other business properties totaled $51.9 million as of December 31, 2008 as compared to $53.8 million at December 31, 2007. Management has established specific lending criteria relating to real estate lending and considers the risk of loss in these loan categories to be moderate.

Deposit accounts reclassified as loans totaled $176,000 and $162,000 as of December 31, 2008 and 2007, respectively.

The following is a summary of information pertaining to impaired loans for the years ended December 31, 2008 and 2007:


	2008		2007
	(In Thousands)
Impaired loans with a valuation allowance	$	2,122	$	786
Impaired loans without a valuation allowance		—		—

Total impaired loans	$	2,122		786

Valuation allowance related to impaired loans	$	362		111

Average investment in impaired loans	$	2,098		348

Interest income recognized on impaired loans	$	134	$	48

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

Loans past due greater than 90 days and still accruing interest at December 31, 2008 and 2007 totaled $539,000 and $87,000, respectively. The increase in loans past due greater than 90 days and still accruing interest as compared to the prior year is attributed to certain real estate loans in which the borrower’s have provided specific payment plans to bring the accounts current. Management continually monitors these accounts and would place the accounts in nonaccrual status if the payment plans are not adhered to. Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 as of December 31, 2008 amounted to $41,000. There were no nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 as of December 31, 2007. The impact on interest income with these accounts being in nonaccrual status was minimal for both reporting periods presented.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7

ALLOWANCE FOR LOAN LOSSES:

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


	(In Thousands)
	2008			2007			2006
Balance at beginning of year	$	1,573		$	1,476		$	1,332
Provision charged to operating expense		548			309			233
Recoveries of loans charged off		311			262			335
Loan charge-offs		(781	)		(474	)		(424	)

Balance at end of year	$	1,651		$	1,573		$	1,476

NOTE 8

BANK PREMISES and EQUIPMENT:

Bank premises, equipment and computer software included in the financial statements at December 31, 2008 and 2007 are as follows:


	2008		2007
	(In Thousands)
Land	$	691	$	691
Land improvements and buildings		4,449		4,454
Furniture and equipment		4,514		4,418
Computer software		1,197		1,179

		10,851		10,742
Less accumulated depreciation		7,061		6,686

Net	$	3,790	$	4,056

Depreciation and amortization related to bank premises, equipment and software included in operating expense for 2008 was $481,000. Depreciation and amortization expenses for 2007 and 2006 were $546,000.

NOTE 9

LEASE COMMITMENTS:

The Company has an annual lease commitment relating to its Charlottesville branch location. The lease agreement term for this office expires November 30, 2012 and provides the Company an option of extending the renewal thereafter. The following is a schedule of future estimated minimum lease requirements under the agreements:


	(In Thousands)
2009	$	22
2010		23
2011		23
2012		24
2013		25


Total	$	117

Lease expense, included in occupancy expense, was $ 38,430, $52,439, and $51,561 for the years ended December 31, 2008, 2007, and 2006, respectively. The decrease in lease expense is attributed to the relocation of the Valley Finance operations.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10

DEPOSITS:

The Bank’s total deposit portfolio consists primarily of demand checking accounts, savings accounts and time deposit accounts. Total deposits were $129.0 million and $127.4 million as of December 31, 2008 and 2007, respectively.

The Bank has one business customer with deposit balances exceeding 5% of total deposits as of December 31, 2008. The total deposit balances related to this customer as of December 31, 2008 were $8.6 million or 6.65% of total deposits.

At December 31, 2008, time deposit scheduled maturities (in thousands) are as follows:


2009	$	52,441
2010		8,028
2011		3,673
2012		10,909
2013		605

Total	$	75,656

NOTE 11

BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total assets, subject to certain eligibility requirements. This represents a total credit line of approximately $62.4 million and $60.7 million as of December 31, 2008 and 2007, respectively. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by first lien 1-4 family residential mortgages totaling $41.6 million at December 31, 2008. 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 repay all or part of the advance without a prepayment penalty.

At December 31, 2008, the fixed-rate borrowings with FHLB totaled $9.4 million and mature through January, 2010. The interest rates on the fixed-rate notes payable ranges from 3.14% to 3.92%. At December 31, 2007, the total outstanding fixed-rate borrowings with FHLB were $6.9 million.

The contractual maturities of FHLB advances as of December 31, 2008 are as follows:


	(In Thousands)
	Fixed Rate
Due in 2009	$	4,400
Due in 2010		5,000

Total	$	9,400

NOTE 12

DIVIDEND LIMITATION ON SUBSIDIARY BANK:

The principal source of funds of the Company is dividends paid by the Bank. The amount of dividends the Bank may pay is regulated by the Federal Reserve. As of December 31, 2008, the maximum amount of dividends the Bank can pay to the Company is $2.3 million or 13.53% of the consolidated net assets, without requesting permission from the Federal Reserve Bank.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13

INCOME TAXES:

The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2005. The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no material impact on the financial statements.

The components of income tax expense are as follows:


	2008			2007			2006
	(In Thousands)
Current income tax expense	$	554		$	969		$	925
Deferred income tax (benefit)		(49	)		(76	)		(80	)

Income Tax Expense	$	505		$	893		$	845

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


	2008			2007			2006
	(In Thousands)
Income taxes computed at the applicable federal income tax rate	$	549		$	900		$	852
Increase (decrease) resulting from:
Tax-exempt income and dividends		(16	)		(18	)		(18	)
State income taxes		(32	)		14			18
Other		4			(3	)		(7	)

Income Tax Expense	$	505		$	893		$	845

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


	2008		2007
	(In Thousands)
Deferred Tax Assets:
Provision for loan losses	$	416	$	325
Deferred compensation		43		50
Prepayment penalties (FHLB)		13		26
Securities available for sale		118		31
Other		19		28

Total	$	609		460

Deferred Tax Liabilities:
Depreciation		11		13
Cash surrender value of life insurance		35		31
Other		66		55

Total		112		99

Net Deferred Tax Asset	$	497	$	361

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14

REGULATORY MATTERS:

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to the bank holding company.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008 and 2007, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2008, the most recent notification from the bank’s primary federal regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

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


	Actual				For Capital Adequacy Purposes					Minimum To Be Well Capitalized
	Amount		Ratio		Amount		Ratio			Amount		Ratio
	(in thousands)
As of December 31, 2008:
Total Capital to Risk Weighted Assets:
Consolidated	$	18,064	15.5	%	$	9,312	³	8.0	%		N/A	N/A
Pioneer Bank	$	14,296	12.7	%	$	9,043	³	8.0	%	$	11,304	³ 10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	16,609	14.3	%	$	4,656	³	4.0	%		N/A	N/A
Pioneer Bank	$	12,880	11.4	%	$	4,522	³	4.0	%	$	6,782	³ 6.0	%
Tier I Capital to Average Assets:
Consolidated	$	16,609	10.1	%	$	6,611	³	4.0	%		N/A	N/A
Pioneer Bank	$	12,880	8.3	%	$	6,202	³	4.0	%	$	7,753	³ 5.0	%
As of December 31, 2007:
Total Capital to Risk Weighted Assets:
Consolidated	$	17,439	14.7	%	$	9,522	³	8.0	%		N/A	N/A
Pioneer Bank	$	13,256	11.5	%	$	9,224	³	8.0	%	$	11,530	³ 10.0	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	15,951	13.4	%	$	4,761	³	4.0	%		N/A	N/A
Pioneer Bank	$	11,813	10.3	%	$	4,612	³	4.0	%	$	6,918	³ 6.0	%
Tier I Capital to Average Assets:
Consolidated	$	15,951	10.3	%	$	6,238	³	4.0	%		N/A	N/A
Pioneer Bank	$	11,813	7.8	%	$	6,094	³	4.0	%	$	7,617	³ 5.0	%

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15

STOCK OPTION PLAN:

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

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

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


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Intrinsic Value of Unexercised In-the-Money Options (In Thousands)
Options outstanding, 12/31/07	7,900	$	16.32	5.1
Options Granted	—		—
Options Exercised	700		18.00
Options Forfeited	—		—

Options outstanding, 12/31/08	7,200	$	16.16	4.5

Options exercisable, 12/31/08	7,200	$	16.16	4.5	$	11

The intrinsic value of stock options exercised in 2008 was $4,000. There were no stock options exercised in 2007.

(1)

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. This amount changes based on market value of the Company’s stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Back-Scholes option pricing model.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16

EARNINGS PER SHARE:

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.


	2008			2007			2006
	Shares	Per Share Amount		Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	1,015,243	$	1.09	1,011,481	$	1.73	1,011,481	$	1.64

Effect of dilutive securities:
Stock Options	286			644			1,902

Diluted earnings per share	1,015,529	$	1.09	1,012,125	$	1.73	1,013,383	$	1.64

For 2008 and 2007, stock options representing 7,200 and 3,900 average shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.

NOTE 17

OFF-BALANCE SHEET COMMITMENTS:

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


	2008		2007
	(In Thousands)
Unfunded lines of credit (commercial and personal)	$	6,036	$	4,127
Loan commitments and letters of credit (commercial and personal)		6,480		6,741
Credit card unused credit limits		1,323		1,378

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the counter-party.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit generally are un-collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments for which collateral is deemed necessary.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18

TRANSACTIONS WITH RELATED PARTIES:

During the year, executive officers and directors (and companies controlled by them) were customers of and had transactions with the Company in the normal course of business. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Deposit account balances of executive officers and directors totaled $1.5 million and $1.9 million as of December 31, 2008 and 2007, respectively. Loan transactions to such related parties are shown in the following schedule:


	2008			2007
	(In Thousands)
Total loans, beginning of year	$	598		$	797
New loans		384			—
Payments		(189	)		(199	)

Total loans, end of year	$	793		$	598

NOTE 19

FAIR VALUE MEASUREMENTS:

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

In February of 2008, the FASB issued Staff Position No. 157-2 (“FSP 157-2”) which delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Thus, the Company has only partially applied SFAS 157. Those items affected by FSP 157-2 include other real estate owned (OREO), goodwill and core deposit intangibles.

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

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


Level 1	–	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2	–	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3	–	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

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

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

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:

Fair Value Measurements at December 31, 2008 Using

Description

Balance as of
December 31,
2008

Quoted Prices in
Active Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(Level 1)

(Level 2)

(Level 3)

Assets

Available-for-sale securities

15,216

—

15,216

—

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

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

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

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

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


			Carrying value at December 31, 2008
Description	Balance as of December 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of allowance	$	1,760	$	—	$	873	$	887

Statement of Financial Accounting Standards No. 107 (“SFAS 107”) “Disclosures About the Fair Value of Financial Statements” defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Company’s financial instruments lack an available trading market; significant estimates, assumptions and present value calculations are required to determine estimated fair value.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

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

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

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

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

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

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

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

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

At December 31, 2008 and 2007, the fair value of loan commitments and stand-by letters of credit were immaterial. Therefore, they have not been included in the following table.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19

FAIR VALUE MEASUREMENTS (continued):

Estimated fair value and the carrying value of financial instruments at December 31, 2008 and 2007 are as follows (in thousands):


	2008				2007
	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
	(In Thousands)
Financial Assets
Cash and due from banks	$	2,401	$	2,401	$	6,106	$	6,106
Interest bearing deposits in other banks		12,045		11,896		1,603		1,600
Federal funds sold		100		100		300		300
Securities available for sale		15,216		15,216		11,069		11,069
Loans, net		118,272		119,225		128,854		125,611
Accrued interest receivable		720		720		758		758
Financial Liabilities
Demand Deposits:
Non-interest bearing		25,079		25,079		33,423		33,423
Interest bearing		12,377		12,377		10,238		10,238
Savings deposits		15,866		15,866		13,367		13,367
Time deposits		76,848		75,656		71,278		70,327
Borrowings		9,408		9,400		6,814		6,900
Accrued interest payable		619		619		767		767

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

NOTE 20

BENEFIT PLANS:

The Bank has a 401(k) Profit Sharing Plan covering full-time employees who have completed 180 days of service and are at least 21 years of age. Employees may contribute compensation subject to certain limits based on federal tax laws. The Bank makes discretionary matching contributions of up to 3 percent of an employee’s annual compensation contributed to the Profit Sharing Plan. Additional amounts may be contributed, at the option of the Bank’s Board of Directors. Employer contributions vest to the employee over a six-year period, and employees become 100% vested in his/her seventh year of full-time employment. For the years ended December 31, 2008, 2007 and 2006, total expense attributable to this 401(k) plan amounted to $35,651, $29,884 and $36,569, respectively.

The Bank also provides a cafeteria insurance plan including medical, life, and long-term disability coverage for eligible employees. The net expense attributable to this insurance plan was approximately $ 180,000, $182,000, and $160,000 for the years ending December 31, 2008, 2007, and 2006, respectively.

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21

PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

BALANCE SHEETS


	December 31,
	2008			2007
	(In Thousands)
ASSETS
Cash and cash equivalents	$	257		$	546
Investment in subsidiary		13,416			12,265
Securities available for sale		2,144			2,756
Bank premises and equipment, net		645			671
Other assets		439			88

Total Assets	$	16,901		$	16,326

LIABILITIES
Accrued expenses	$	16		$	16
Other liabilities		80			35

Total Liabilities		96			51

STOCKHOLDERS’ EQUITY
Common stock		509			506
Retained earnings		16,460			15,805
Accumulated other comprehensive income (loss), net		(164	)		(36	)

Total Stockholders’ Equity		16,805			16,275

Total Liabilities and Stockholders’ Equity	$	16,901		$	16,326

STATEMENTS OF INCOME

Years Ended December 31, 2008, 2007 and 2006


	2008			2007			2006
	(In Thousands)
INCOME
Dividends from subsidiary	$	576		$	1,258		$	544
Interest income		21			29			21
Dividend income		32			55			55
Security gains (losses)		(694	)		315			293
Rent income		83			83			83
Other income		7			8			3

Total Income		25			1,748			999

EXPENSES
Compensation expense		82			39			3
Occupancy expenses		35			35			37
Equipment expense		1			1			1
Other operating expenses		195			153			74

Total Expenses		313			228			115

Net income (loss) before income tax expense and undistributed income of subsidiary		(288	)		1,520			884
INCOME TAX EXPENSE		333			(84	)		(113	)

Net income before undistributed income of subsidiary		45			1,436			771
Undistributed income of subsidiary		1,066			316			891

NET INCOME	$	1,111		$	1,752		$	1,662

PIONEER BANKSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21

PARENT CORPORATION ONLY FINANCIAL STATEMENTS (Continued):

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2008, 2007 and 2006


	2008			2007			2006
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,111		$	1,752		$	1,662
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed subsidiary income		(1,066	)		(316	)		(891	)
Deferred income tax (benefit)		—			(4	)		—
(Gain) loss on security sales		694			(315	)		(293	)
Depreciation		26			26			26
Stock based compensation		126			4			2
Net change in:
Other assets		(211	)		(11	)		—
Accrued expenses and other liabilities		45			(109	)		100

Net Cash Provided by Operating Activities		725			1,027			606

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		2,217			4,583			2,463
Purchase of securities available for sale		(2,652	)		(5,044	)		(2,460	)

Net Cash Provided by (Used in) Investing Activities		(435	)		(461	)		3

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(579	)		(566	)		(517	)

Net Cash Used in Financing Activities		(579	)		(566	)		(517	)

Net Increase (Decrease) in Cash and Cash Equivalents		(289	)		—			92
Cash and Cash Equivalents, Beginning of Year		546			546			454

Cash and Cash Equivalents, End of Year	$	257		$	546		$	546

Item 9.

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

Not Applicable

Item 9A.

Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934), as amended (the “Exchange Act”) as of December 31, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the year ended December 31, 2008 that have materially affected or are reasonable likely to materially affect the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

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

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2008, as such term is defined in the Exchange Act Rules 13a-15(f).

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

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

/s/ THOMAS R. ROSAZZA

Thomas R. Rosazza

President and Chief Executive Officer

/s/ LORI G. HASSETT

Lori G. Hassett

Vice President and Chief Financial Officer

Item 9B.

Other Information.

Not Applicable

Part III

Item 10.

Directors, Executive Officers, and Corporate Governance.

Other than as provided below, all required information on (i) the directors and executive officers of the Company, (ii) compliance by Company directors and executive officers with Section 16(a) of the Securities Exchange Act of 1934, (iii) the Company’s Code of Ethics and (iv) the Company’s Audit Company is detailed in the Company’s 2009 definitive proxy statement for the annual meeting of shareholders (“Definitive Proxy Statement”), which is expected to be filed with the Securities and Exchange Commission within the required time period, and is incorporated herein by reference. The following provides information on executive officers who are not directors of the Company and are not included in the Definitive Proxy Statement:


Executive Officer	Age	Principal Occupation During Past Five Years
Lori G. Hassett	42	Vice President/Chief Financial Officer, Pioneer Bankshares, Inc. and Pioneer Bank

Item 11.

Executive Compensation.

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

Item 12.

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

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

Equity Compensations Plan Information

The following table sets forth information as of December 31, 2007 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance:


	Number of Securities to be issued upon exercise of outstanding options, warrants, and rights (a)	Weighted- average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) ) (c)
Equity Compensation plans approved by security holders	7,200 shares	$	16.16	0
Equity Compensation plans not approved by security holders
Total	7,200 shares	$	16.16	0

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

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

Item 14.

Principal Accounting Fees and Services.

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

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a)

(1)

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

(2)

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

(3)

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


Exhibit No.		Description of Exhibit
3.1		Articles of Incorporation of Pioneer Bankshares, Inc. (incorporated by reference to Exhibit 3.1 of Pioneer Bankshares, Inc.’s Form 10-K filed May 2, 2000, as amended).

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

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

21		List of subsidiaries.

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

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

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

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

(b)

Exhibits

See Item 15(a)(3) above

(c)

Financial Statement Schedules

See Item 15(a)(2) above

SIGNATURES

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


		Pioneer Bankshares, Inc.

Date: 3/25/09	By:	/s/ THOMAS R. ROSAZZA
		Thomas R. Rosazza
		President and Chief Executive Officer

Date: 3/25/09	By:	/s/ LORI G. HASSETT
		Lori G. Hassett
		Vice President and Chief Financial Officer

SIGNATURES

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


Signature	Title	Date

/s/ ROBERT E. LONG	Director	3/25/09
Robert E. Long

/s/ KYLE MILLER	Director	3/25/09
Kyle Miller

/s/ PATRICIA G. BAKER	Director	3/23/09
Patricia G. Baker

/s/ DAVID N. SLYE	Director	3/26/09
David N. Slye

/s/ HARRY F. LOUDERBACK	Director	3/23/09
Harry F. Louderback

/s/ LOUIS L. BOSLEY	Director	3/25/09
Louis L. Bosley

/s/ MARK N. REED	Director	3/25/09
Mark N. Reed

/s/ E. POWELL MARKOWITZ	Director	3/23/09
E. Powell Markowitz

/s/ THOMAS R. ROSAZZA	President, Chief Executive Officer and Director	3/25/09
Thomas R. Rosazza
Thomas R. Rosazza

/s/ LORI G. HASSETT	Vice President, Chief Financial Officer	3/25/09
Lori G. Hassett	Vice President, Chief Financial Officer